Claims Journal Magazine - Sample Issue

Gulf Oil Spill One Year Later ‘Fraud Dog’ Puts Claims on TV Inside the Disaster Blaster What to Know About Bad Faith

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Fall 2011 SAMPLE ISSUE

CLAIMS REVIEW

IDEA EXCHANGE

SPECIAL REPORT

8

Only 1 in 5 Med Mal Cases Pays

23

9

26 Board Members Face 14

Americans Want New Teen Driver Requirements

9

U.S. Seeks to Make Country ‘Weather Ready’

10 Drop in Workers’ Comp Costs Reflects Recession

10 Insurers Report Rising

Inside the Disaster Blaster Claims from Foreclosure, Bankruptcy, More

12

Gulf Oil Spill One Year Later Dollars & Sense: Oil Spills

15

Mitsui & Co. to Pay BP $1.1B

30 Post-Loss Assignments 15

BP Gulf Oil Claims Fund to Be Audited

of Claims

42 The Future in Auto 15 Claim Prevention

43 New Predictive Model Targets High Cost Workers’ Comp Claims

16

44 What’s All the Fuss 40 San Francisco 1906

18

Florida Eyes Cash Checking Firms

20 Red Light Cameras Reduce Crashes in Texas

20 S. Carolina Law Curbs Copper Theft

22

Small Changes Could Prevent Twister Damage

about Hurricane Models?

6 Opening Note 32 People 38 Business Moves 46 Recalls 50 Claims Journal Online 51 Calendar of Events 54 Final Offer

Punitive Damage Claims for Gulf Oil Spill Move Ahead

Asbestos Claims ‘Fraud Dog’ Bringing Insurance Cases to TV

CLAIMS DEPARTMENTS

34 Workplace Injuries in a 24/7 Mobile World

Earthquake: What If It Happened Today?

48 What Every Adjuster 41 Should Know About Bad Faith

52

How to Navigate Claims Negotiations

California Earthquake Authority Bond Issue a ‘First Step’

54 Final Offer: Storms

That Shatter Lives Hold Lessons for Insurers

28 Dollars & Sense 37 Snapshot: Joplin, Then and Now

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Insurance Journal, The National Property/Casualty Magazine (ISSN: 00204714) is published semi-monthly by Wells Publishing, Inc., 3570 Camino del Rio North, Suite 200, San Diego, CA 92108-1747. Periodicals Postage Paid at San Diego, CA and at additional mailing offices.

SUBSCRIPTION RATES: $7.95 per copy, $12.95 per special issue copy, $195 per year in the U.S., $295 per year all other countries. DISCLAIMER: While the information in this publication is derived from sources believed reliable and is subject to reasonable care in preparation and editing, it is not intended to be legal, accounting, tax, technical or other professional advice. Readers are advised to consult competent professionals for application to their particular situation. Copyright 2011 Wells Publishing, Inc. All Rights Reserved. Content may not be photocopied, reproduced or redistributed without written permission. Insurance Journal is a publication of Wells Publishing, Inc. POSTMASTER: Send change of address form to Insurance Journal, Circulation Department, PO Box 9049, Maple Shade, NJ 08052 ARTICLE REPRINTS: For reprints of articles in this issue, contact Rhonda Brown at 1-866-879-9144 ext. 194 or rbrown@fostereprints.com. Visit insurancejournal.com/reprints for more information.

4 Claims Journal | Fall 2011

OPENING NOTE

The New Magazine

T Mitch Dunford CEO Wells Publishing mdunford@claimsjournal.com

he new Claims Journal magazine is where property/casualty insurance claims professionals will be turning for news and trends affecting their industry and their jobs.

Claims Journal magazine will specialize in national and state news, where the events, economies, laws and rulings that affect claims practices and payments take place. The coverage will include key court rulings, jury verdicts, major loss events, product recalls, economic trends, laws and regulations. Also, business moves, people and promotions, and industry events will be featured.

Claims Journal magazine will not just report on national news and trends, but also on what is happening across states in every region of the country, where claims professionals work and deal with local situations, laws, regulations and economics.

Each issue of Claims Journal magazine will present special features such as Coverage Corner, with expert coverage analysis; Fraud Focus on fraud, research, trends, investigations and busts; Snapshot, a photo feature documenting a claim case from pre-loss condition to complete restoration or rehabilitation; Profiles and Best Practices, with management advice, best practices and lessons from the field; and Dollars & Sense, highlighting interesting claims numbers, dollars, findings, figures, quotes.

With its own editorial staff and the contributions of experts from the claims industry, Claims Journal magazine will provide analysis and commentary on a wide range of topics of interest to claims professionals including accident reconstruction, appraisals, outsourcing and technology, arbitration, disaster recovery, litigation management and subrogation.

The magazine is the newest point of pride within the Wells Publishing network that includes Insurance Journal magazine, www.InsuranceJournal.com, MyNewMarkets.com and the Academy of Insurance. Wells Publishing is well-known for its innovation in providing information where and when people want it, whether online, over mobile devices, by email or in print, audio and video. Once again, with Claims Journal magazine, Wells Publishing is taking information to insurance professionals how, when and where they want to receive it.

Andrea Ortega-Wells, editor-in-chief of the award winning Insurance Journal magazine, will serve in the same role for Claims Journal magazine, making sure that the magazine is produced on schedule with the best content possible.

Denise Johnson, associate editor of www.ClaimsJournal.com, will serve as editor of Claims Journal magazine.

Johnson brings years of property/casualty claims management experience, having worked for several national and regional carriers. Since joining www.Claims Journal.com in 2010, Johnson has overseen that Web site’s content and authored numerous popular articles. Her work has spurred new readership and interest throughout the claims industry.

Get ready to be informed, educated, challenged — and even entertained — as Claims Journal magazine comes onto the scene. Check your office mailbox for the first issue coming soon.

Claims Journal magazine is the newest point of pride within the Wells Publishing network.

Contributors: Kevin Davis, Moira Herbst, Denise Johnson, Tim Kirn, Kenneth St. Onge, Steven Plitt, Robert Redfearn Jr., Julie Rochman, Andrew Simpson, Andrea Ortega-Wells 6 Claims Journal | Fall 2011

CLAIMS REVIEW | NEWS & TRENDS

Only 1 in 5 Medical Malpractice Cases Pays

O

ne in 5 malpractice claims against doctors leads to a settlement or other payout, according to the most comprehensive study of those claims in two decades.

But while doctors and their insurers may win most of these challenges, that’s still a lot of fighting. About 1 in 14 doctors gets sued annually, and most physicians and virtually all surgeons will face at least one malpractice lawsuit in their careers, the study found.

That represents a significant emotional cost for doctors, said study co-author Amitabh Chandra, an economist and professor of public policy at the Harvard Kennedy School of Government. “They hate having their name dragged through the local newspaper and having to go to court,” he said.

The study seems to support a common opinion among doctors that most malpractice lawsuits are baseless. But the authors said the truth is more complicated. They noted earlier research in New York that concluded just a tiny fraction of the patients harmed by medical mistakes file claims.

Trial lawyers say cost is a barrier to bringing a claim to court. There are very high upfront costs for hiring expert witnesses and preparing a case. Doctors, hospitals and their 8 Claims Journal | Fall 2011

insurers often have significant money and legal firepower. Some states also cap malpractice awards. Usually, only strong cases with high expected payouts are pursued.

Given the expense and difficulties in winning, it’s doubtful most claims are filed on a greedy whim, the researchers said.

“A lawyer would have to be an idiot to take a frivolous case to court,” Chandra said.

For the study, the research team turned to one of the nation’s largest malpractice insurers, analyzing data for about 41,000 physicians who bought coverage from 1991 to 2005. Researchers could only get data after agreeing not to identify the insurer.

The insurer represents about 3 percent of the nation’s doctors, but it operates in 50 states. Average payouts were about the same as seen in the government-created National Practitioner Data Bank, which records payouts but does not record all claims filed.

The study found: • About 7.5 percent of doctors have a claim filed against them each year. That finding is a little higher than a recent American Medical Association survey, in which 5 percent of doctors said they had dealt with a malpractice claim in the previous year.

• Fewer than 2 percent of doctors each year

were the subject of a successful claim in which the insurer had to pay a settlement or court judgment.

• About 19 percent of neurosurgeons and heart surgeons were sued every year, making them the most targeted specialties. Only about 3 percent of pediatricians and psychiatrists face a claim each year.

• When pediatricians did pay a claim, it was more than other doctors. The average pediatric claim was more than $520,000, while the average was about $275,000.

“Jurors’ hearts cry out for injured patients, especially when kids are involved,” Chandra said. The amount also is higher because more years of suffering are involved than if the victim is middle-aged or elderly, experts said.

The study, which was published by the New England Journal of Medicine, was funded by the RAND Institute for Civil Justice.

Chandra also received funding from the National Institute on Aging, which is interested in malpractice as a possible driver of health care costs.

The study echoes earlier research on which specialists get sued most often, said Dr. Sidney Wolfe, director of Public Citizen’s Health Research Group, a Washington, D.C.based consumer advocacy group. CJ

Americans Say ‘Yes’ to New Requirements for Teen Drivers

N

early six in 10 Americans favor a federal law to establish minimum requirements and driving restrictions for teen drivers.

A recent national survey from Allstate Insurance shows that support for a national graduated driver licensing (GDL) law corresponds with low opinions about teen driving skills, which received the lowest ranking among all ages surveyed.

Currently, the Safe Teen and Novice

Driver Uniform Protection (STANDUP) Act is pending in Congress as part of a broader bill, Mariah’s Law, named after an Arkansas teen killed in a crash involving texting.

STANDUP calls for uniform standards that restrict night driving, limits the number of passengers in a teen’s car, prohibits the use of cell phones while driving, and issues permits and licenses with specific age requirements and through a gradual, multiphased process. CJ

U.S. Seeks to Make Country ‘Weather Ready’

N

oting that the United States has experienced $35 billion in economic losses due to disasters already this year, the federal government is embarking upon a plan it hopes will save lives and protect property from severe weather events.

The goal of the initiative by the National Oceanic and Atmospheric Administration (NOAA) and its National Weather Service (NWS) is to make the country “weatherready,” as communities nationwide become increasingly vulnerable to tornado outbreaks, heat waves, flooding, active hurricane seasons, and solar storms that threaten electrical and communication systems.

NOAA said the United States has experienced nine disasters in 2011, each with an economic loss of $1 billion or more, tying the record set in 2008. The latest event to surpass the $1 billion price tag is this summer’s flooding along the Missouri and Souris rivers in the Midwest. This year’s losses so far have amounted to $35 billion.

“Severe weather represents a very real threat to public safety that requires additional robust action,” said Jack Hayes, NWS director.

With other government agencies, researchers, and the private sector, NWS aims to: • Improve precision of weather and water forecasts and effective communication

’

of risk to local authorities; • Improve weather decision support services with new initiatives such as the development of mobile-ready emergency response specialist teams; • Develop innovative science and technological solutions such as the nationwide implementation of Dual Pol radar technology, Integrated Water Resources Science and Services, and the Joint Polar Satellite System; • Strengthen joint partnerships to enhance community preparedness; • Work with weather enterprise partners and the emergency management community to enhance safety and economic output and manage environmental resources.

The NWS also will be testing communitybased projects, from emergency response to ecological forecasting, in the Gulf Coast, South and Mid-Atlantic to enhance the agency’s preparedness efforts.

Munich Reinsurance America said the number of natural disasters has tripled in the past 20 years, and 2010 was a record breaker with about 250. CJ

Dollars & Sense $34 Billion

Catastrophe modeling company RMS estimates that insured losses from the Japan earthquake and tsunami are up to $34 billion for the global insurance industry as of March 11.

11%

Eleven percent of new homes built on brownfield land have suffered problems as a result of the land the property is built on, affecting a total of 74,000 homes in the past 10 years, according to a report by home insurer LV=.

$215 Million

The amount sought by a Lloyd’s of London Syndicate 3500 in a federal lawsuit against Saudia Arabia, several Saudi charity and financial organizations, and prominent Saudi individuals over 9/11 terror attacks. The insurer says the Saudi defendants bear primary responsibility for the attacks and for $215 million the insurer paid in claims.

$20 Million

A Fredericksburg, Va., man is suing Allergan Inc., the maker of the drug Botox, for more than $20 million claiming injections to relieve writer’s cramp in his right hand left him brain-damaged and totally disabled.

$18 Billion

The current debt of the National Flood Insurance Program.

Fall 20116 9 Claims Claims Journal Journal | Winter| 2012

CLAIMS REVIEW | NEWS & TRENDS

Drop in Workers’ Comp Costs Reflects Recession

By Andrea Wells

T

he number of workers covered by workers’ compensation insurance dropped by 4.4 percent in 2009, the biggest decrease in two decades.

Also, according to a report by the nonprofit National Academy of Social Insurance, employer costs for benefits fell by 7.6 percent to $73.9 billion in 2009, reflecting the overall decline in employment.

“When the Great Recession hit, employers paid less in workers’ compensation costs because there were fewer workers to cover,” said John F. Burton Jr., chair of the panel that oversees the report.

Burton said that although the drop in employer costs represents the biggest decrease in the past two decades, benefits increased slightly by 0.4 percent to $58.3 billion, reflecting in part benefits provided in 2009 to workers injured in prior years.

Total benefits paid to injured workers in 2009 increased in 23 states and the District of Columbia, while declined in the remaining 27 states, compared to the previous year.

Payments for medical care declined for

the first time in a decade by 1.1 percent to $28.9 billion, although they continued to make up roughly half of total workers’ compensation benefits. Cash benefits to injured workers increased nationally by 1.9 percent to $29.4 billion.

Employers paid a total of $73.9 billion nationwide for workers’ comp, with a cost of $1.30 per $100 of payroll, the lowest in the past 30 years.

A total of 4,551 fatal work injuries occurred in 2009, a 12.7 percent decrease from the number reported in 2008, and the lowest since 1992.

The report, “Workers’ Compensation: Benefits, Coverage and Costs, 2009,” provides data on workers’ comp benefits for the nation, states, the District of Columbia, and federal programs. The report has been produced annually by the Washington, D.C.based National Academy of Social Insurance since 1998.

Among the other trends identified by the report: • Workers’ comp covered an estimated 124.9 million workers in 2009, a decrease of 4.4 percent from the previous year due to the recession, which began in 2007. Aggregate wages of covered workers fell by 4.7 percent in 2009.

• Measured as a percentage of the wages of covered workers, benefits paid to workers increased, whereas employer costs fell in 2009. As a share of covered wages, employers’ costs in 2009 were lower than in any year since 1980. CJ

Workers’ Compensation Benefits, Coverage and Costs for 2009 Aggregate Amounts

2009

% Change

Covered workers (in thousands) Covered wages (in billions) Workers’ comp benefits paid (in billions) Medical benefits Cash benefits Share of medical benefits in total Employer costs

124,856 $5,675 $58.3 28.9 29.4 50% $73.9

-4.4 -4.7 0.4 -1.1 1.9 -1.5 -7.6

Source: NASI, Workers’ Compensation: Benefits, Coverage and Costs, 2009.

10 Claims Journal | Fall 2011

Insurers Report Rising Asbestos Claims

A

sbestos-related claims against MetLife Inc. rose 11 percent in the first half of the year, the company said recently, mirroring recent comments by other large insurers who have experienced more claims than they expected.

MetLife, the largest U.S. life insurer, received 2,306 asbestos-related claims in the first half of 2011, up from 2,076 in the same period of 2010, the company said in a quarterly filing with the Securities and Exchange Commission.

MetLife’s new asbestos claims had dropped at a steady pace from 2003 through 2010, falling 40 percent over the period.

MetLife has one of the longest and most complicated histories when it comes to asbestos and the insurance industry. Lawsuits have alleged that MetLife employees knew of the insulating material’s harmful health effects as early as the 1920s — claims the company has rejected.

This year, both American International Group Inc. and Hartford Financial Services have made substantial additions to their asbestos reserves, given an increase in claims and claim severity.

The industry argues that many of the new claims stem from plaintiffs’ lawyers becoming more effective at suing people who are only peripherally connected to asbestos victims.

Late-night cable television is flooded with ads from asbestos lawyers, and ”mesothelioma” is among the most valuable of advertising keywords on Google.

Yet even as claims rise, doctors say the actual incidence of asbestos-linked diseases like the lung cancer mesothelioma is declining.

Doctors are being more aggressive in treating the cases that do pop up however, which also contributes to elevated costs for insurers.

Ratings agency A.M. Best has said it expects the industry to ultimately face $75 billion in exposure to asbestos claims, and it has argued that some companies are still not fully reserved for claims they may experience. CJ

Copyright 2011 Reuters.

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SPECIAL REPORT

Gulf Oil Spill O n e Ye a r L a t e r Feinberg Defends BP Claims Fund Even as It Faces Legal Challenges

O

n the one-year anniversary of the Gulf oil spill, BP Plc is facing challenges to its effort to contain another kind of disaster: mass litigation.

The oil giant last June established a $20 billion compensation fund for victims such as shrimpers, fishermen and property owners, with certain incentives for those who agreed not to sue the company and partners.

In an interview, Kenneth Feinberg, who oversees the fund, said it is “working as intended.” Some 280,500 claimants have applied for the final phase of the process, of whom roughly 126,500 have been paid for a total of about $1.3 billion. Virtually all claims from an earlier, emergency phase have been resolved for a total of $2.6 billion.

“The sheer volume of claims processed demonstrates the success of the program, and the fact that almost $4 billion has gone out in less than nine months,” Feinberg said.

However, Feinberg is under attack from Mississippi Attorney General Jim Hood, other Gulf-state officials, victims’ advocacy groups and plaintiffs’ lawyers, who allege that he is distributing the money slowly and unfairly. Hood told Reuters that he is considering suing Feinberg for failing to turn over fund-related documents in response to

12 Claims Journal | Fall 2011

a February subpoena seeking “unfettered access” to fund records.

This spring, Hood filed a notice in New Orleans federal court seeking an independent, court-appointed audit of the fund, known as the Gulf Coast Claims Facility. Hood accuses Feinberg of delaying or denying awards to victims — especially those who don’t give up their rights to sue the company and its partners.

According to Reuters calculations of claims processed by the Gulf Coast Claims Facility, awards have been paid to about 17 percent of these so-called “interim” claimants, for a total of $83.3 million. By comparison, awards have been paid to 67 percent of claimants who have signed away their rights to litigate, for a total of $1.18 billion.

Hood argues that the fund is processing fewer interim claims and is instead “using its resources to extract releases from claimants” through what is known as the “Quick Pay” option. Under this option, individuals who received emergency money in the first phase are eligible to receive $5,000, and businesses are eligible to receive $25,000, in exchange for an

agreement not to sue BP and its partners.

Feinberg disputed the idea that the claims facility is pushing claimants to take the Quick Pay option. “I categorically disagree with the proposition advanced by some that there is institutional favoritism in favor of Quick Pay,” he said. “I have not heard the 110,000 people who took it complaining.” He said many claimants chose the option because they feel adequately compensated or cannot document or prove any additional damage.

In a response to Hood’s subpoena, Feinberg argued that further intervention would slow claims processing. The matter is currently before Judge Carl J. Barbier of the Eastern District of Louisiana. In February, Barbier brought the Gulf Coast Claims Facility under court supervision and ordered Feinberg to stop calling it “completely independent” of BP. Legal experts say Barbier could order changes to legal release forms signed by some claimants or call for an audit of the fund. “I wouldn’t be surprised if (Barbier) is inclined to get even further involved if he is presented with additional examples of fundamental unfairness,” said David A. Logan, dean of Roger Williams University

School of Law in Bristol, R.I. Victims’ advocacy groups say some claimants who suffered similar losses are not receiving the same treatment. “There is an inconsistency in result despite similar or identical fact situations,” said John Jopling, an attorney for the Mississippi Center for Justice, a group receiving funding from the Gulf Coast Claims Facility to assist claimants who don’t have lawyers.

Eddie Patingo, a ship fitter for Edison Chouest Offshore in Gulfport, Miss., said that in the wake of the oil spill, his average work week shrank from 52 hours to 40, and over the course of three months he lost $8,800 in pay. He submitted a claim for emergency funding in September, which he said was denied. He submitted another claim in January and said he has not yet heard back. Patingo said he works alongside 200 people doing the same work and who faced similar losses, and he estimates that 175 have been compensated and 25 have not. “We’re all in the same situation and only some of us have been paid. How does that happen?” he asked.

Feinberg acknowledged in an April 19 news conference that there have been “too many” inconsistent claims awards, and that the fund is working to resolve that problem.

“It rankles me when claimants say, ‘I received x and my neighbor received x plus y; we were in the same job, location, etc.,’” he said. ”There may be some very valid reasons for discrepancies, like documentation of the next-door neighbor. But we try to make right by the neighbor and fix the payment.”

Fishermen and others operating on a cash basis complain they cannot produce the proof required to have a claim approved.

“The document list the fund requires is in many instances nonsensical, and is clearly drawn up by people who don’t understand the shrimping, oyster or crab businesses,” said Gerard Nolting, an attorney with Faegre & Benson LLP, who represents hundreds of clients submitting claims to the Gulf Coast

Claims Facility, most of them VietnameseAmericans. ”They’re asking for documents these people never generate or keep,” such as profit-and-loss statements, Nolting said.

Feinberg said he is willing to talk with claimants and attorneys about how they can prove their lost profits or earnings, but he refuses to pay claims with no documentation.

Nolting said he is not yet prepared to assess Feinberg and the fund. “It’s too early to be judging the fund; you don’t review a movie after watching 15 minutes of it,” he said. CJ

Copyright 2011 Reuters.

Claims Journal | Fall 2011

13

SPECIAL REPORT | GULF SPILL

$2.017B

The $5 billion that has been paid to date by the GCCF can further be broken down by state as follows:

$1.518B

OIL SPILL CLAIMS

$5 BILLION

T

he Gulf Coast Claims Facility set up to handle claims from the BP oil disaster has paid out $5 billion after one year of operation.

It has paid 204,434 individual and business with a total of 359,441 claims.

Established by the Obama Administration and oil giant BP four months after the explosion of the Deepwater Horizon Oil Rig in the Gulf of Mexico, the GCCF has spent the past year distributing monies from a $20 billion fund set up by oil giant BP. The explosion on the Deepwater Horizon drilling rig on April 20, 2010, killed 11 workers and spilled nearly 5 million barrels of oil into the Gulf. Among the Gulf states, Louisiana suffered the most damage as 650 miles of its coastline were spoiled. The GCCF monies have gone to claimants primarily in Alabama, Florida, Louisiana, Mississippi and Texas.

There have been a total of 305,000 claims denied seeking Emergency Payments (from 278,359 claimants); • 125,000 claims denied seeking Interim/Final Payments (from 98,794 claimants); • 14,000 claims denied (from 11,137 claimants) because submitted documentation confirmed that no losses were sustained.

Source: GCCF data

Emergency Payments $2,583,413,488.07 Quick Payments $1,212,705,000.00 Final Payments $901,301,057.23 Interim Payments $296,871,189.31 Final $558,203,349.32 Payments Offers

$862M

$387M

$139M

FLORIDA 150,920

LOUISIANA 115,702

ALABAMA 53,681

MISSISSIPPI 30,193

OTHER 3,552

$122M

TEXAS 3,493

Number of claims filed

SPECIAL REPORT | GULF SPILL

Mitsui & Co. to Pay BP $1.1 Billion

B

P Plc celebrated a key victory in its battle to share the cost of the Gulf of Mexico oil spill when partner Mitsui & Co. agreed to pay $1.1 billion toward the cleanup bill and possibly billions more in fines.

Japanese trading house Mitsui’s exploration unit MOEX owned 10 percent of the Macondo well but had sought to avoid paying its share of the costs. Mitsui & Co. initially said BP’s negligence exempted it from this obligation.

MOEX has dropped this claim, and analysts said this weakened the case of 25 percent well shareholder Anadarko Petroleum, which also has invoked the same argument.

“This is the first recognition by one of the partners that actually … blame is shared and should be shared, and therefore the costs should be shared as well,” Societe Generale analyst Irene Himona said.

“It is very significant because clearly now it means that BP can try and ensure that everybody else who is involved will also meet their obligations,” she added.

BP has estimated the cost of capping the well, cleaning up the damage from America’s largest ever offshore oil spill and compensating those affected will be more than $41 billion.

This suggests the Japanese company is paying less than one-third of its potential liability in respect of the cleanup and compensation costs. On this basis, Anadarko could be liable for almost $2.7 billion.

However, one source close to the matter said BP was likely to seek a higher rate of recovery from Anadarko than it received from Mitsui using the argument that the latter company did not have a direct liability to pay because it invested through MOEX, which had few assets. CJ

Copyright 2011 Reuters

BP Gulf Oil Claims Fund to Be Audited

A

n independent audit will be performed on the Gulf Coast Claims Facility, the $20 billion fund set up to compensate victims of last year’s BP oil spill in the Gulf of Mexico, U.S. Attorney General Eric Holder said.

In a letter to the fund’s administrator, Kenneth Feinberg, Holder stressed that the goal is to balance the need for resolving claims quickly and fairly along with the need to start an audit before the end of the year.

Holder said the fund’s “highest priority” should be to achieve speed and fairness.

Holder made a June 30 trip to the Gulf Coast in which he heard concerns from Alabama officials and residents about the transparency of the claims process.

In his letter, the attorney general said Feinberg agreed to an audit, a step that Holder has been urging for some time.

In response, Feinberg said the audit will

begin this year but won’t disrupt “the timely processing of claims.” He said the audit “is something we have always considered we would do.”

To date, the fund has paid $4.7 billion to 198,475 claimants. The total number who have sought money stands at 522,506, many with multiple claims. In all, the fund has nearly 1 million claims and continues to receive thousands of claims each week.

Feinberg also oversaw payouts from the victims compensation fund that was set up after the Sept. 11, 2001, terrorist attacks. The procedures to implement the 9/11 fund’s activities were audited, said Deborah Greenspan, the fund’s deputy.

Feinberg said the 9/11 claims themselves were not audited because of confidentiality requirements and proprietary information.

He noted that the 9/11 fund did issue a final report that laid out overhead costs and expenses related to claims. CJ

Punitive Damage Claims for Gulf Oil Spill Move Ahead

By Moira Herbst

P

laintiff lawyers claimed a victory recently when a U.S. federal judge overseeing hundreds of lawsuits against BP and others over last year’s big oil spill in the Gulf of Mexico allowed much of the case to move ahead, including punitive damages claims.

“We are very pleased with the ruling,” said Stephen Herman, a lead attorney for the plaintiffs, who include more than 100,000 individuals, businesses and property owners alleging spill-related losses. “The court agreed with us on all major points.”

A spokeswoman for BP, the main defendant, said the company had no comment.

The ruling by U.S. District Judge Carl Barbier in New Orleans allows claims for punitive damages under general maritime law to move forward. BP and other defendants had asserted in court filings that the Oil Pollution Act does not allow plaintiffs to collect

punitive damages.

The ruling dismissed some claims against BP and its co-defendants, including state law claims, which Barbier said are “preempted by maritime law.” It also dismissed general maritime negligence claims against defendants Anadarko and Mitsui’s MOEX Offshore.

The judge also ruled that plaintiffs “have plausibly alleged” Oil Pollution Act claims related to the drilling moratorium and a Gulf Coast cleanup program set up in the wake of the oil spill. Oil Pollution Act claims against Anadarko were kept in the litigation.

The ruling applies to non-governmental claims of economic loss and property damage. It does not cover claims brought by state and local governments that are also included in the consolidated litigation.

The case is In Re: Oil Spill by the Oil Rig

“Deepwater Horizon” in the Gulf of Mexico on April 20, 2010, U.S. District Court, Eastern District of Louisiana, No. 2:10-md-02179. CJ

Copyright 2011 Reuters.

Claims Journal | Fal 2011

15

CLAIMS REVIEW | FRAUD FOCUS

‘Fraud Dog’ Bringing Insurance Cases to TV

Fraud Dog cast on location: Mike Marks, Linda Webb and Leigh Ann Mills

By Denise Johnson

I

nsurance fraud is so big it could be getting its own reality television show.

The show, called the “Fraud Dog,” is in pilot production, and will star Linda Webb, a former AIG insurance claim executive and white collar crime detective turned claims consultant in Florida.

Similar in format to the “America’s Most Wanted” TV series, Webb’s 30-minute reality show will highlight actual fraud cases through re-enactments.

Her production company has already completed some filming in Chicago and New York and is in talks to determine when and where the show will air.

“We sent it out to multiple networks and we’re waiting now to finalize the contracts on which network it’s going to be on,” Webb told ClaimsJournal.com.

Webb hopes the television show catches on because she believes the nation is not taking fraud seriously enough — and needs to understand how fraud affects every business and citizen, not just insurance companies.

“I really firmly believe that America needs to wake up, and not only do we need to wake up about fraud, but we need everybody’s help … We all need to unite, we need to join forces, and we need everybody’s help.”

She believes the only way to stop fraud is by engaging the public.

“Education breeds prevention; it breeds awareness,” Webb said.

The goal is for the viewer to gain a better understanding of how a fraudulent claim might take place.

“Each show will be dedicated to a different type of fraud scam, and when you get done with the television show, you’re going to know how the fraud occurs, how to be aware of it, and how to … not be a victim of it,” according to Webb.

For example, she just filmed a chiropractic fraud episode in Chicago. “A doctor that’s a certified fraud exam-

Webb says the nation needs to understand how fraud affects every business and citizen.

16 Claims Journal | Fall 2011

iner walked us through all the different fraudulent practices that are done in the chiropractic field,” Webb said.

Webb has a background in fighting crime and fraud. A stint early in her career as a white collar crime detective led in 1994 to a fraud investigator position with American International Group. Webb stayed with AIG, moving up the ranks, finishing as an assistant vice president of the global fraud investigation division. She left AIG in 2007 to work for Medicare as a private contractor.

Now, Webb investigates claims for workers’ compensation insurer Patriot National Insurance Group and conducts multi-line property/casualty investigations as the president of Contego Services Group, based in Ft. Lauderdale, Fla. Webb thinks the image of a dog fighting fits her. “I’m always a dog with a bone.

I’m never going to stop until I solve the crime,” she said.

The crime she wants to solve is huge.

Insurance fraud is an $80 billion a year industry, according to the Coalition Against Insurance Fraud (CAIF).

While fraud’s costly impact on the continued on page 18

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Fraud Dog, continued from page 16

insurance industry can’t be ignored, it’s not the only industry affected. “It’s really important that we reach out and get everybody’s help because fraud continues to morph every single day and it’s going to hit every single business — not just the insurance world but every business,” Webb said.

Fraud’s international reach also can’t be ignored. Webb said organized crime rings operating outside the United States funnel people into the country to stage accidents.

To document the international ties, Webb already is planning to take the “Fraud Dog’s” filming overseas in seasons two and three.

Adapting to Patterns Webb believes claims investigators need to keep up with the changing world of fraud. “We need to do a better job of link analysis and figuring those fraud patterns out, those fraud trends. That’s the only way we’re going to be able to stop it,” she said.

To Webb, 9/11 was a turning point for insurance carrier special investigation units (SIUs). In the years prior to the attacks on the World Trade Center, she said it became increasingly common to find links to outside companies in fraud cases. Some of the resulting claims from 9/11 showed links to terror cells, which she said was an eyeopening realization into the careful planning that went into some of the fraudulent claims.

Webb closely watches trends in fraud, including what is happening with shell companies, labor brokering, improper premium reporting, organized crime rings and generational fraud.

Insurers should not underestimate organized fraud rings. They test and research to determine if insurers have an SIU unit, and they can be persistent. She cited her work with an organized crime operation in Florida: “I shut them down by identifying the agents that were potentially involved.

So then what they did is they went through the use of retail agents, and then they 18 Claims Journal | Fall 2011

spread … out so that I wouldn’t find the pattern, and then they tried it again.”

Adjusters and investigators should consider that those engaged in fraud are likely to target several industries and have multiple schemes going at any given time, according to the claims expert. “I really believe that the fraudsters move faster, morph faster and they cross different businesses,” Webb said.

“In other words, they might do insurance fraud one day, and then they move to mortgage fraud, and then they move to Internet fraud and cyber fraud.”

At the corporate level, Webb contends that the silo management ideology needs to go. “If you had fraud in one particular department, nobody … saw it. The ability to activate a department from any direction is key,” she said, “front to back and back to front, in what I call the integrated team relationship.”

In her view, a good fraud fighting team has a wide knowledge of diverse businesses and networks with other fraud investigators.

Unleash the SWARM Drawing on her experience, Webb has developed a proprietary fraud-fighting system called SWARM — swift working assessment with rapid methodology.

SWARM reflects Webb’s appreciation of how widespread fraud is and that it demands a comprehensive attack. In her work with Patriot National, as soon a new claim report activates it, SWARM works to dispatch an integrated team with people from Patriot’s underwriting, premium, subrogation, claims and legal teams.

“Everybody from the front of the business to the back of the business is activated in the insurance world,” Webb said. “Then all of them collectively funnel information back to the SIU, and the SIU goes out and investigates.”

In the past, the average dispatch time between when a claim was reported and a claims investigation was triggered could be up to three weeks. With SWARM techniques administered at Patriot National, Webb said the dispatch time is approximately three minutes.

Faster response time is crucial when gathering facts and talking to witnesses, she said.

According to Webb, SWARM also has improved Patriot’s closure rating. In terms of tracking the workers’ compensation tail on catastrophic claims, Patriot National is trending toward a six- to eight-year tail, versus the NCCI average of 16 to 20 years. Also, Patriot is managing an 86 percent closure ratio in the first 12 months, 92 percent closure ratio by 18 months and a 99 percent closure ratio within 36 months. “That just shows you the fact that there’s not a long legacy tail in claims,” Webb said.

Her system also assesses how the fraud developed. “That is where you have to go back to the front end of the company; you have to go back to underwriting and say, ‘Where did we fail here? How did that happen in the first place?’” Webb said.

Finally, her system is geared to referring cases to law enforcement. “SWARM works because we don’t only identify the fraudster … we make the referral to law enforcement,” Webb said. CJ

Florida Eyes Cash Checking Firms

F

lorida officials want an investigation into the role of check cashing services in helping construction subcontractors avoid paying their share of workers’ compensation premiums.

Florida Chief Financial Officer Jeff Atwater said this workers’ compensation premium fraud scheme is “highly organized and orchestrated by individuals who know the construction and subcontracting industry.” Florida requires most individuals in the construction industry to be covered by workers’ compensation.

Atwater has named a working group of officials to come up with recommendations by the end of the year.

According to investigators, organized crime groups set up fake companies and obtain a minimal workers’ compensation policy. Uninsured subcontractors then pay them a fee to use the workers’ compensation policy, which enables them to avoid purchasing required coverage. The uninsured subcontractors use the certificate of insurance to show general contractors they have insurance and often get a job because they can underbid projects by removing most of their workers’ compensation costs. The organized crime groups then use cash checking companies to cash the checks made out to the fake company by subcontractors. CJ

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Red Light Cameras Reduce Crashes in Texas

R

ed-light crashes fell 25 percent at hundreds of Texas intersections after traffic cameras were installed, researchers said in what was called the first statewide study of its kind.

The Texas Transportation Institute (TTI) suggested its findings again showed the effectiveness of installing cameras to deter red-light runners. Yet backlash toward the cameras remains high, including in Houston, where drivers voted to end the city’s red-light cameras in a November referendum. A federal judge later struck down the ballot measure, and Houston turned the cameras back on.

According to crash data analyzed by the TTI and released in the report, accidents fell by 28 percent at 31 intersections in Houston where the cameras had been up and running for two years.

At least three dozen Texas cities use red-light cameras, the TTI report said. CJ

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S. Carolina Law Curbs Copper Theft

S

outh Carolina law enforcement officers hope a new state law will cut down on thieves destroying air-conditioning units, farm equipment and other property to sell the copper inner parts for scrap.

As of August 17, scrap copper sellers and recyclers must have permits from their local sheriff to legally sell or buy the metal.

To buy, metal recyclers must make a copy of a seller’s permit.

They also must record information on each sale, including the seller’s photograph and license plate number, the date and amount paid, and a description of the metal. The law also bars cash for copper. Payments must be by check, providing further record of the transaction.

Copper theft calls have become frequent in counties across the state, as the metal’s rising value made it easy money for petty thieves and drug addicts. But investigating the crime is difficult, especially if thieves melt the metal to remove any identifiers before selling it, officers say.

Thieves often collect less than $100, after destroying property worth thousands of dollars.

The average cost to replace a church’s loss for busted air conditioning units is $6,000, said Matthew Quinton of Southern Mutual Church Insurance Co., which began tracking copper thefts separately in 2006.

In 2007, the Columbia, S.C.-based company — which covers about 7,700 churches in the Carolinas, Georgia and Tennessee — continued on page 22

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Copper Theft, continued from page 20

Small Changes Could Prevent Twister Damage

A

paid $406,000 in copper theft claims. The amount dipped in 2009 to $366,000, but skyrocketed to $1.2 million in 2010. From January through July this year, claims have already climbed to more than $1.1 million, Quinton said. CJ

study of tornado destruction in Tuscaloosa, Ala., found that minor changes in construction — i.e. better shingles, more anchors and thicker vinyl siding — could have prevented much of the damage to houses on the fringes of the twister.

Researchers said nothing could have saved structures in the direct path of the EF-4 tornado, which generated winds up to 190 mph. It was one of the strongest twisters to hit the state during the severe weather that killed more than 240 people on April 27.

“The winds are so high that a wood-frame structure is not going to withstand them. In those cases, you need a safe room,” said researcher Andy Graettinger of the University of Alabama. “But the vast majority of the area (experienced) lower wind speeds that you can engineer for. You need to have the roof tied to the walls and the walls tied to the foundation to prevent major damage.”

Homeowners on the fringes of the tornado would have been spared some damage with different home construction methods or improvements, Graettinger said. In some cases, he said, homes could have been saved from catastrophic damage by metal clips or straps that cost about $1 each. CJ

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Inside the Disaster Blaster

Industry’s $40M Research Center May Someday Lead to Lower Catastrophe Claims

By Kenneth St. Onge

F

or those who question the intelligence of insurance companies, here’s a new industry development that should answer those questions once and for all: The insurance industry is ecstatic because it just dropped $40 million on a three-bedroom house that fell down in approximately 12 minutes.

And guess what? They couldn’t be happier. Just for good measure, insurers promptly spent another $200,000 to blow down two more identical houses — just to make sure things were built incorrectly the first time around. They even invited the media to witness the final, spectacular collapse.

Cheap thrills are great, and cheap disasters even better.

Welcome to the future of insuring Americans’ homes. Agents: Be excited.

The houses in question — the last of which met its quick demise on a sunny, October afternoon inside a massive, cement building in northwestern South Carolina — hold the promise of drastically reshaping the economics of the property insurance industry, which in 2009 spent $26 billion repairing and rebuilding wind-damaged homes in the United States.

The unpredictable Mother Nature is a constant concern for insurers’ balance sheets, as she brings with her the prospect of unexpectedly large claims from disasters wreaked across a geographic scale.

Comparatively, $40 million and a slew of destroyed homes are peanuts.

Only the gods control the wind. Insurers and homeowners carry but a single defensive weapon in their battle to thwart wind-driven catastrophe claims: better construction. Bolstering the collective power of that one defense is the only true method of battling catastrophe claims, according to the industry. That, in a nutshell, is the significance of the Institute for Business and Home Safety’s (IBHS) Research Center in South Carolina, where the industry-funded, pricey destruction of homes is ongoing. It’s innovative in that, until now, no one has really been able to demonstrate the effectiveness of construction techniques. With the research center’s completion, that’s all changed.

One hundred and five fans — each spanning five-andhalf feet and generating 300 horsepower — line the walls of the six-story, 21,000-square foot test chamber at the research center. Their combined force generates wind speeds higher than 90 miles per hour, or roughly the force of winds in a category three hurricane. The chamber is capable of holding nine, 2,300- square foot homes, and pummeling them with punishing winds to test how well each stands up. But on the fall afternoon, when the most recent test was conducted, it held just two.

The houses were built from plans to an actual house in Illinois, a region plagued by frequent, damaging windstorms.

One was built to conventional standards, using techniques and materials commonly applied throughout most of the country. continued on page 24

The results of a catastrophic strength wind test on a typical home versus a HBHS-fortified standard home.

Source: Institute for Business and Home Safety Claims Journal | Fall 2011

23

IDEA EXCHANGE | BEST PRACTICES

Disaster Blaster, continued from page 23 The other, however, is where the real magic lay. It was built using IBHS’s so-called “fortified” standards, which include metal strapping on joints, a second water barrier on the roof, enhanced decking material and specialized fasteners for attaching siding.

“Strikingly, the difference behind these two is really a short list — it’s only about a $3,000 difference,” said Anne Cope, research director for IBHS. But as the fans started blowing, the real difference became obvious.

The two houses stood side-by-side in the chamber, each facing the wind. As 90-mile per hour blasts struck them, the conventional house began to show its weaknesses. Siding flew off; a front window collapsed. During the final part of the test —when doors were opened to show the effects of pressurization inside a house during a windstorm — structural failure knocked the conventional house to the ground in mere seconds.

The fortified house was left relatively unscathed, despite the intense winds and open door.

The difference? “Choice of products,” Cope said. “The products that are on the house that is still standing were wind-rated products, and the products that are on the house that’s gone were just regular, entry-level products. The biggest difference, though, is in the strapping. The fortified home has straps that tie the load path from the roof all the way down through the building to the foundation, and that’s what really made the difference. The house that’s gone was not strapped to its foundation, and when it failed, that’s exactly what happened.”

In the future, IBHS will add capabilities for even faster wind speeds, hail and wildfire — further pushing the envelope in terms of testing defenses that homeowners and insurers can use to protect their key assets.

“The insurance industry picks up the pieces of people’s lives every year,” said Julie Rochman, IBHS president and CEO. “We spend billions of dollars in claims, paying people for small events, as well as the really large, named events. Hundreds of people’s lives are lost, in some cases, thousands. We can do better. In this country, we tend to put the pieces back in the same places in the same way time after time after time. So if we can educate ourselves about how to do better, we can change the dynamic of the way we rebuild, design, repair and maintain houses and businesses.”

The cost difference to build the two houses is only about $3,000.

Learning From Cars Rochman, a former exec at the Insurance Institute of Highway Safety (IIHS), knows first-hand the impact of such research.

The IIHS — a similar, industry-funded organization that tests cars for safety and damage resistance — is a major player in getting carmakers to optimize life-saving and claims-reducing features.

That experience — a key mission for the research center — was a main driver to bring Rochman in as IBHS head three years ago.

Her hope is that the research center can generate the same type of impact on the construction industry as the IIHS does on carmakers.

24 Claims Journal | Fall 2011

“Property insurance is one of those areas where loss costs continue to be through the roof,” she said. “With investments being what they are today, the way to get to profitability, the way to keep a robust, healthy private insurance market is to lower losses. And what we’re going to try to do here is save the industry — and therefore our policyholders — millions of dollars in natural hazard losses every year.”

Kevin Kelso, chief marketing officer for Farmer’s Insurance and IBHS chair, said it’s important that the insurance industry conduct this research and help set improvements for how houses are built.

Research and testing “is a long-standing practice of the insurance industry,” he said. “We’ve had spectacular success on the automobile safety side. The standards that have come out of the IIHS testing have been really influential in improving the quality of car construction. We believe that the same thing is possible with home construction. And with the growing level of housing that’s being built in vulnerable areas, it’s more important than ever that we have housing that can withstand the things that we know perfectly well are going to happen.”

The Property Casualty Insurers Association of America (PCI) hailed the center’s opening as “a landmark occasion for property/casualty insurers and the millions of American homes and businesses we protect.

“This pioneering research will help protect families and enable consumers to build stronger homes and businesses,” said PCI President and CEO David Sampson.

Added Leigh Ann Pusey, president and CEO of the American Insurance Association: “The research conducted in this center will help improve construction and structural design methods, and ultimately reduce losses to businesses and homeowners around the country.”

So what does that mean for agents? As the frontline between consumers and the industry, Rochman said it’s important that agents and brokers “use this information to talk to their policyholders and customers about what they can do to raise the quality level of construction where they live or where they work.”

“Everybody deserves a safe home,” she said. “Everybody deserves a business that can withstand damage so that jobs aren’t lost and the tax base isn’t ruined. A lot can be learned here, and we hope to push this information out as widely as we can so everybody can use it.” CJ

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Board Members Face Claims from Foreclosure, Bankruptcy, Discrimination

By Kevin Davis

I

t’s called “sleep insurance” for a reason.

Directors and officers (D&O) liability insurance helps community association board members sleep well at night without worrying that their personal assets are at risk because of a decision or action — or inaction — they make on behalf of the association.

When board members join a community association board, they are volunteering their time and effort, and taking on the responsibility of making decisions for the association. Board members are required to interpret and enforce the association’s governing documents. They have a fiduciary duty to make decisions as a reasonably prudent person and to make decisions they believe to be in the best interest of the association.

26 Claims Journal | Fall 2011

Even with the best efforts, these actions can lead to potential lawsuits alleging breach of contract, breach of fiduciary duty, employment or housing discrimination, slander or libel, or a host of other potential claims. Lawsuits can seek monetary or nonmonetary relief. A good D&O policy will cover both.

Most states require associations to indemnify board members for decisions they make on behalf of associations. Indemnification is an agreement to provide financial reimbursement to an individual board member or association in case of a specific type of loss.

That means that if directors and officers are sued, the insurance company will pay legal fees or assume the defense. Should they lose the court case, the insurer will pay any judgment or settlement. Not only state laws, but most association-governing documents also require board members to be indemnified.

The “insured” in a D&O policy is typically the community association as an entity and any subsidiary of the association. “Insured persons” are commonly defined as those who act in the capacity of past, present, duly elected or appointed officers, directors, trustees, employees, volunteers or committee members. Spouses of insured persons also are covered, which is not always known. Often the community manager is covered under the policy as well.

If a board member is accused of intentionally dishonest or fraudulent acts, a majority of D&O stand-alone policies will provide a defense for the insured persons. Coverage is terminated if it is proven that the allegation is true. A good stand-alone policy will continue coverage until a court or other body makes final judgment.

Any theft loss is generally covered by a fidelity or

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“employee dishonesty” policy, which is separate from a D&O policy.

Common Claims Community associations face a variety of claims these days. However, there are several types of claims commonly seen.

Following are some examples that illustrate why D&O insurance is so important.

Foreclosure and bankruptcy. One of the fastest growing areas for claims is the wrongful foreclosure of individual units. This has caused a financial burden for many associations that are now being sued for breach of fiduciary duty for failure to maintain the property and mismanagement of funds. A current claim involves a bankruptcy alleging the board conspired with the property manager to defraud the association out of thousands of dollars.

Breach of fiduciary duty. When associations hold elections, problems can arise. Claims have been filed where losing candidates sue over the election process.

In one claim, the candidate demanded a new election, alleging the election was conducted improperly.

Insured v. insured. Another claim seen quite often is “insured versus insured.” A good example of this is when a unit owner sends a letter to the president of the board of directors demanding that the board use “all means available” to stop improper actions of a board member. The letter alleges the board member is using association funds to pay personal debts and other expenses not authorized by the association. The unit owner demands that the association recover the allegedly misappropriated funds, as well as fees and costs. He files a lawsuit in the name of the association and for the benefit of its members. Sometimes even board members sue other board members.

Many D&O policies specifically exclude coverage of “insured v. insured” claims.

Yet it is a potentially costly liability facing associations. A board member’s legal expenses won’t be covered if such claims are excluded.

Breach of contract. When boards terminate contracts with vendors, they can be sued for breach of contract. If things go wrong and board members need to break

a contract, they are left vulnerable to a lawsuit.

Employment discrimination. When associations decide to terminate employees, problems can arise. Even if there is just one employee, there is a potential for litigation. Wrongful termination, sexual harassment and discrimination are seen all of the time in the community association world.

One way for clients to avoid some of those commonly seen pitfalls is to hire professionals who specialize in community associations. A professional manager can help to ensure that board members are making day-to-day decisions in a prudent manner. CJ

Davis is president of Kevin Davis Insurance Services in Los Angeles.

Claims Journal | Fall 2011

27

CLAIMS REVIEW | DOLLARS & SENSE

$250 Million

The initial estimate of insured losses from a week of Texas wildfires. The Insurance Council of Texas offered the estimate for more than 180 wildfires reported statewide for the week after Labor Day.

$125 Million

The number of employees in the United States covered by workers’ compensation, according to the National Academy of Social Insurance.

U.S. Weather Disasters in 2011

$50 Million

The cost of medical care for the San Francisco Giants fan brutally beaten outside Dodger Stadium, according an estimate included in papers filed in Los Angeles Superior Court. The fan, Bryan Stow, and his children have brought a lawsuit against Dodgers owner Frank McCourt and 13 others in the franchise. Stow suffered a traumatic brain injury when he was attacked March 31 following the Dodgers’ home opener against the Giants. He underwent a life-saving procedure and was put in a coma for several weeks.

$1 Million

The amount a Jefferson County, Ala., jury has ordered a funeral home to pay for switching of identities of two women prior to family viewings in 2009.

46

The average number of tornadoes that Arkansas has had each year during the past 10 years, according to the National Weather Service. There were 39 tornado deaths from 2001 to 2010.

Top Stolen Cars According to the National Insurance Crime Bureau, the most stolen vehicles in the nation in 2010 were: • 1994 Honda Accord • 1995 Honda Civic • 1991 Toyota Camry • 1999 Chevrolet Pickup (Full Size) • 1997 Ford F150 Series/Pickup • 2004 Dodge Ram • 2000 Dodge Caravan • 1994 Acura Integra • 2002 Ford Explorer • 1999 Ford Taurus 28 Claims Journal | Fall 2011

A record 10 weather disasters in the United States have each caused at least $1 billion in damage:

Hurricane Irene, which struck on August 20-29. Damages and deaths are still being tallied, but loss estimates are adding up to more than $7 billion and close to 50 deaths from Vermont to North Carolina.

Upper Midwest flooding, much of the summer. The Missouri and Souris Rivers overflowed in Montana, North Dakota, South Dakota, Nebraska, Iowa, Kansas and Missouri. Damages: $2 billion.

Mississippi River flooding, spring and summer.

Damages neared $4 billion as the river flooded from Tennessee south. Spillways were opened that flooded rural areas but saved cities along the river.

Drought and heat wave continues in Texas, Oklahoma and neighboring states. Damage has passed the $5 billion mark.

Tornadoes hit the Midwest and Southeast, May 22-27.

The toll: 177 dead, more than $7 billion in losses. One tornado killed more than 140 people in Joplin, Mo., making it the deadliest twister since records were started in 1950.

Tornadoes in the Ohio Valley, Southeast and Midwest on April. 25-30, devastating the city of Tuscaloosa, Ala. Toll:

32 deaths and more than $9 billion in damages.

Tornadoes hit from Oklahoma to Pennsylvania, April 14-16. Toll: $2 billion in damage and 38 deaths, mostly in North Carolina.

Outbreak of 59 tornadoes in Midwest and Northeast, April 8-11. Dam-

ages: $2.2 billion. No deaths.

Outbreak of 46 tornadoes in Central and Southern states, April 4-5.

Toll: Nine deaths and $2.3 billion in damages.

Blizzard stretching from late January until after Groundhog Day, February 2, paralyzed cities from Chicago to the Northeast. Toll: 36 deaths and more than $2 billion in damages. CJ

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Post-Loss Assignments of Claims Under Insurance Policies I

n the settlement of lawsuits involving insured claims, it is not uncommon that one condition of the settlement is that the defendant assign his or her claims under all applicable insurance policies to the party that filed suit.

Frequently, the defendant, particularly when the defendant is an individual, has a limited ability to pay a judgment, and so insurance coverage offers the best opportunity for a recovery by the suing party. Usually, settlements are made without serious thought being given to whether the defendant’s claim against its insurer is assignable; the assumption being that it is assignable.

However, insurance policies generBy Robert Redfearn Jr. ally have anti-assignment clauses that prohibit the assignment of the policy, or an interest in the policy, without the insurer’s consent. These clauses come into play in determining the validity or enforceability of the assignment of a claim under an insurance policy and should be considered when such an assignment is part of a settlement.

When considering the enforceability of anti-assignment clauses in insurance policies, the courts generally draw a distinction between an assignment made prior to the occurrence of a covered loss (a pre-loss assignment) and an assignment made after the occurrence of a covered loss (a post-loss assignment).

In analyzing pre-loss assignments, the courts recognize that requiring an insurer to provide coverage to an assignee of its policy prior to the occurrence of a covered loss would place the insurer in the position of covering a party with whom it had not contracted nor been allowed to properly underwrite to assess the risks posed by that potential insured and, accordingly, determine the appropriate premium to charge for the risks being undertaken or choose to decline coverage.

Post-loss assignments take place after the insurer’s obligations under its policy have become fixed by the occurrence of a covered loss. Thus, the risk factors applicable to the assignee are irrelevant with regard to the covered loss in question. The majority of the courts enforce anti-assignment clauses to prohibit or restrict preloss assignments but refuse to enforce anti-assignment clauses to prohibit or restrict post-loss assignments.

Katrina Cases The Louisiana Supreme Court, which had not previously addressed the enforceability of anti-assignment clauses for post-loss assignments, recently was confronted with this issue in the In re: Katrina Canal Breaches Litigation litigation involving consolidated cases arising out of Hurricane Katrina. The issue arose as a result of a lawsuit brought by the State of Louisiana as the assignee of claims under numerous insurance policies as part of the “Road Home” Program. The program was set up following Hurricanes Katrina and Rita to distribute federal funds to homeowners suffering damage.

30 Claims Journal | Fall 2011

In return for receiving a grant of up to $150,000, homeowners were required to execute a Limited Subrogation/Assignment agreement, which provided in pertinent part: “I/we hereby assign to the State of Louisiana … to the extent of the grant proceeds awarded or to be awarded to me under the [Road Home] Program, all of my/our claims and future rights to reimbursement and all payments hereafter received or to be received by me/ us: (a) under any policy of casualty or property damage insurance or flood insurance on the residence, excluding contents (“Residence”) described in my/our application for Homeowner’s Assistance under the Program (“Policies”): (b) from FEMA, Small Business Administration, and any other federal agency, arising out of physical damage to the Residence caused by Hurricane Katrina and/or Hurricane Rita.”

Pursuant to these Limited Subrogation/Assignments, Louisiana sued more than 200 insurance companies to recover funds dispensed under the Road Home Program. The suit was removed to Federal Court under the Class Action Fairness Act, and the insurers filed motions to dismiss, arguing that the assignments to the state were invalid under the anti-assignment clauses in the homeowner policies.

On appeal, the U.S. Fifth Circuit Court of Appeals certified this question to the Louisiana Supreme Court: “Does an anti-assignment clause in a homeowner’s insurance policy, which by its plain terms purports to bar any assignment of the policy or an interest therein without the insurer’s consent, bar an insured’s post-loss assignment of the insured’s claims under the policy when such an assignment transfers contractual obligations, not just the right to money due?”

In answering the question, the Louisiana Supreme Court began by noting that, as a general matter, contractual rights are assignable unless the law, the contract terms or the nature of the contract preclude assignment. Specific to the certified question, Louisiana Civil Code article 2653 provides that a right “cannot be assigned when the contract from which it arises prohibits the assignment of that right.”

The Louisiana Supreme Court observed that the language of article 2653 is broad and, on its face, applies to all assignments, including post-loss assignments of insurance claims. The Court, therefore,

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construed the issue confronting it as whether Louisiana public policy would enforce an anti-assignment clause to preclude post-loss assignments of claims under insurance policies.

In addressing the public policy question, the Court recognized the distinction between pre-loss and post-loss assignments discussed by courts from other states, and noted the prevailing view was that anti-assignment clauses were invalid and/or unenforceable when applied to post-loss assignments. “[W]hile the Louisiana legislature has clearly indicated an intent to allow parties freedom to assign contractual rights, by enacting La. C.C. art. 2653, it has also clearly indicated an intent to allow parties freedom to contractually prohibit assignment of rights. We recognize the vast amount of national jurisprudence distinguishing between pre-loss and post-loss assignments and rejecting restrictions on post-loss assignments, however we find no public policy in Louisiana favoring assignability of claims over freedom of contract,” the Court stated.

The Court refused to invalidate the enforceability of the anti-assignment clauses to the post-loss assignments before basing it on public policy, adding that public policy determinations are better suited to the legislature.

Nonetheless, after having recognized the general enforceability of anti-assignment clauses to post-loss assignments, the Court placed limits on when those clauses are applicable, stating that to be applicable, they “must clearly and unambiguously express that the non-assignment clause applies to post-loss assignments.” The Court refused “to formulate a test consisting of specific terms or words,” which would satisfy this condition and remanded the case to the federal courts to determine whether the individual anti-assignment clauses in the policies were sufficiently clear and explicit to be enforced with respect to post-loss assignments at issue.

form or scope of the legal questions certified.”

The Court’s opinion was not intended to be limited to only post-loss assignments involving the assignment of contractual obligations.

Louisiana has departed from the majority view in holding that as a matter of general law, anti-assignment clauses are not inherently void with regard to post-loss assignments. However, in practical application, the results of individual cases may be consistent with the majority rule of not enforcing anti-

assignment clauses with regard to post-loss assignments because Louisiana courts may be reluctant to find that anti-assignment clauses are sufficiently “clear and explicit” unless they specifically state that they apply to post-loss assignments, notwithstanding the state Supreme Court’s unwillingness to “formulate a test consisting of specific terms or words.” CJ

Redfearn Jr. is a partner in Simon, Peragine, Smith & Redfearn. E-mail: redfearnjr@spsr-law.com.

A Broad Application

The Court’s opinion appears to apply broadly to all post-loss assignments irrespective of what rights are being assigned; yet the certified question was narrower and asked only about the applicability of a post-loss assignment where the assignment “transfers contractual obligations, not just the right to money due.”

The Louisiana Supreme Court observed that in certifying the question to it, the Fifth Circuit “disclaimed any intent” that the Court “confine its reply to the precise Claims Journal | Fall 2011

31

CLAIMS DEPARTMENTS | PEOPLE

The Hartford named David A. Carter senior vice

president of property insurance for commercial markets.

Carter has more than 25 years of insurance experience primarily focused on commercial markets. Most recently, he served as vice president – property, Travelers Commercial Accounts. He has held leadership roles at The Travelers Companies Inc. for more than 17 years. He started his career as a property underwriter for Aetna.

David A. Carter

CNA Select Risk appointed Carol Stark vice president of casualty and programs, which includes excess and surplus (E&S) business, as well as wholesale property accounts.

Stark has 21 years of business experience, including five years practicing insurance legal defense; eight years in insurance claims management at Zurich; and eight years of underwriting experience at Zurich and AIG/Chartis.

Prior to joining CNA, she served as vice president and casualty manager for Chartis’ Global, WorldSource Division.

Vanessa Elkins-Rogers

Paul Davis National, the large loss specialists for Paul Davis Restoration, named Lloyd Swiggum president of the company. He will oversee the commercial and industrial property damage restoration organization and assist customers following flooding, fires, earthquakes, tornadoes, wind damage and other catastrophic events.

Previously, Swiggum served as president for a Ft. Worth, Texas-based global disaster recovery company that specialized in structural and content cleaning.

The Canadian branch of XL Insurance Co. Ltd., part of the insurance underwriting operations of XL Group plc, appointed Michael Baxter vice president of property.

Reporting to Joseph Tocco, head of XL Insurance’s North America Property unit, Baxter will be responsible for managing XL Insurance’s Canadian property business, including energy and construction-related property coverages. He is based in XL’s Toronto office.

Baxter previously held leadership positions with Swiss Re Corporate Solutions, Arch Insurance Group, Marsh Canada Ltd. and Starr Technical Risks Agency.

Crawford & Co., a global independent provider of claims management solutions, announced that Vanessa Elkins-Rogers will serve as vice president of vendor

management. She will be responsible for directing multiple corporate support functions, including purchasing and vendor, real estate and fleet management.

Elkins-Rogers comes to Crawford with more than 20 years of experience in accounting and procurement management. Most recently, she served as director of sourcing and supply chain operations for retail and financial markets at Johnson Controls.

Lori Dickerson Fouché is the newly appointed president and CEO of Fireman’s Fund Insurance Co.

She succeeds Michael LaRocco, who left the company to pursue other professional opportunities.

Fouché joined Fireman’s Fund in February 2006 and most recently served as president of commercial insur-

32 Claims Journal | Fall 2011

ance. Previously, she was chief operating officer for Fireman’s Fund’s specialty business. Prior to Fireman’s Fund, Fouché was senior vice president, private company product manager at Chubb & Son. She also served as a management consultant at The Parthenon Group.

Jeffrey B. Gould was elected secretary of the National Association of Public Insurance Adjusters (NAPIA).

Gould is vice president of American Claims Management Services, a public adjustment and loss consulting firm headquartered in Towson, Md., that serves clients nationwide.

Gould has been a member of the NAPIA board for three years. He became a public adjuster in 1994 and joined American Claims Management Services after serving five years as assistant legislative auditor for the Maryland General Assembly.

Ken Russo joined American Safety Insurance as vice president - excess casualty underwriting, and will be responsible for the expansion of ASI’s excess casualty products.

Russo has 40 years of experience in the casualty underwriting market. Prior to joining ASI, he was responsible for establishing the excess and surplus lines division of Hartan Specialty Programs. He previously was vice president- excess/umbrella at Investors Underwriting Managers, where he was responsible for production, underwriting and new coverage development for specialty risks.

Berkley Technology Underwriters LLC announced it will offer coverage worldwide to the technology marketplace, including property, casualty and professional liability on both an admitted and non-admitted basis. Also, the company named Matthew A. Mueller president.

Mueller has more than 30 years of experience in the property and casualty insurance industry, including more than 25 years focusing on risks in the technology sector.

Berkley Technology Underwriters, headquartered in Minneapolis, will write business on behalf of W. R. Berkley Corp.-member insurance companies.

Roxanne Mitchell was appointed president of XL Insurance’s Excess & Surplus lines unit, reporting to Seraina Maag, chief executive, North America Property & Casualty.

Mitchell joins XL Insurance from Lexington Insurance, where she served as zonal executive for the company’s Midwest region, overseeing 100 employees in five offices servicing 14 states.

During her 20 years with Lexington, Mitchell held several underwriting management positions, beginning with her appointment as casualty manager in Boston.

Her 30-year insurance career began as a claims adjuster, before a switch to underwriting with companies such as Intercontinental Insurance, a managing general agency, and American Universal, a Canadian Universal affiliate, in Boston. CJ

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SPECIAL REPORT | WORKERS’ COMPENSATION

34 Claims Journal | Fall 2011

E

mployers who supply their employees with company cell phones, laptops, BlackBerries, iPads and other portable devices could be in for a surprise if an employee is injured while using the device when off-site or off-the-clock.

Insurance claims professionals say claims made by workers injured while doing things where the relation to their employment is unclear are on the rise, and the increasing use of mobile devices is challenging traditional notions of work-related injuries.

At this year’s Risk and Insurance Management Society (RIMS) meeting in Vancouver, these experts advised employers and risk managers to establish clear rules on employees’ use of mobile devices to mitigate injury claims.

“It used to be easy, working 9 to 5. We knew what everything was about, we knew what workers’ comp was, we knew what compensability was. Things have changed,” said Charles Martin, head of the claims consulting practice for global insurance broker Marsh.

Picture a woman behind the wheel of a car. She has a laptop open on the passenger seat, a GPS on her windshield, another portable device open on the dashboard, a smart phone in her hand and earphones plugged in her ears.

This picture portrays an extreme situation, but even if this woman has only one device operating, what happens if she is injured in an accident and files a workers’ compensation claim? Is the claim compensable?

Where was she going? Where was she coming from? Was she on her way to the office? On her way to daycare to pickup the kids? On her way to a client? What is she doing? Checking e-mail? Listening to a conference call? Dialing her husband? Getting directions?

Or picture a man walking down the street after leaving the office. He is totally engrossed in checking e-mail and texting on his BlackBerry and is oblivious to the upcoming crosswalk. He stumbles when he hits the curb, falls down and is hit by a car.

“These are real issues. People do this kind of stuff all the time and it really has presented a lot of very serious hazards out there and in the workplace. This isn’t just about driving while texting or looking on a computer, but driving presents some of the most serious exposures that are out there for the industry,” said Maureen McCarthy, Liberty Mutual, manager of workers’ compensation and managed care.

There have always been employers on the road, but they tended to have defined routes or assignments years ago. If they needed to make a call, they used a pay phone, which hardly exist anymore.

“It wasn’t always like this. When I started working a few decades ago, things were pretty simple. You went to an office, a physical location. You had to go there. Your work was there, your file cabinets were there, your boss was there. Conference calls were unheard of. The workplace was very different. Everything was very much defined. Typically you would have a time period within which you had to be there,” McCarthy said.

Marsh’s Martin agrees that compensability was more easily determined when the workspace was more clearly defined.

“You knew that if you were in your cubicle and you were injured, then you were likely going to have a compensable loss,” Martin said.

Of course, a lot of people have abandoned their cubicles. In 2009, there were 17.2 million people working from home. That number is expected to double by 2012.

McCarthy and Martin say the challenge is not just that more people are working from home. With mobile devices, people can — and increasingly do— work from many locations: houses, cars, clients’ locations, subways, libraries, bars, airports, parks, even the beach.

Insurers are also concerned with what employees are doing when they are not in the office. Are they checking e-mail when on vacation, home due to sickness, or at their kid’s birthday party? Are they are taking conference calls in the car while driving?

Are they simultaneously walking and texting or phoning?

Research by contact manager program Xobni showed that 59

People now work from houses, cars, clients’ locations, subways, libraries, bars, airports, parks, even the beach.

continued on page 36

Smart Phones, Unsafe Drivers

W

hile 8 in 10 drivers say it is never safe to text, e-mail or use a smart phone, a large percentage use various features on their smart phones when operating their vehicles, according to the GMAC Insurance National Drivers Test.

Even with a number of states banning handheld cell phones and texting, nearly 50 percent of drivers admit to making phone calls while driving, and about 15 percent of drivers admit to sending and reading text messages while driving.

Other findings include: • While stopped at a red light, almost two-thirds of drivers admitted to making phone calls, and 8 in 10 drivers admitted to sending and checking for text messages.

• Fifty percent of drivers say they make phone calls while driving in slow traffic or while driving on the open highway.

• Ten percent of drivers admitted to sending and reading e-mails, or using their downloaded applications on their smart phones while operating their vehicles.

• About 3 percent of drivers use their smart phones to take pictures, and some even update their Twitter and Facebook pages while on the road.

• Less than 1 percent of all drivers say they received a ticket or a warning for using a mobile device or a smart phone in the past year.

• Eight in 10 drivers reported never being distracted or even coming close to having an accident as a result of using their mobile device while driving.

• Fifty percent of drivers say they have completely eliminated all smart phone activities while driving. CJ Claims Journal | Fall 2011

35

SPECIAL REPORT | WORKERS’ COMPENSATION continued from page 35 percent of Americans check work e-mail while on vacation. A poll of risk managers in the RIMS audience found that 50 percent have taken a conference call in their car.

“I do it, but preach against it, but I find it’s a necessary evil,” said one risk manager. Seventy-nine percent said they bring their laptop on vacation; even more — 87 percent — said they check e-mail while home sick.

People feel compelled to do these things for a variety of reasons, according to McCarthy. Some feel their employer expects them to be available to answer e-mail while home or away from work. Others blame pressure from working for international firms in a 24/7 global economy. Others blame the expectations of clients or just society in general.

In her own research, McCarthy said she found very little evidence that management is mandating these kinds of behaviors.

“It’s all self-imposed. It can be boss-to-boss, it can be employee-toemployee, group-to-group, and it’s creating a tremendous amount of tension in the workplace, particularly where companies are on the one hand urging folks to explore and feel comfortable having the proper work-life balance and then, on the other hand, they are giving them all these devices that they can take home when they are theoretically off work,” she said.

Some of the behavior is generational and cuts both ways, suggested one risk manager. “With younger workers there is a blurring of personal and professional.

There are kids who are on Facebook in the office,” he said. “It extends the other way, too, where they will check into work while not in the office. The younger culture seems to do both. The boundaries don’t seem as clear.”

Even if management does not encourage the behavior, management could still have some responsibility if it is happening, just as it might in harassment situations.

“If it’s going on in an organization, then as an employer sometimes you’re owning it, too, if people are working all over the place doing all sorts of things,” McCarthy said.

There is not yet much case law to go on in judging the compensability of these type of claims. But the fact courts have not yet gotten involved means employers have an opportunity to define the rules themselves, the experts said.

“The good news in all of this is that because it’s so new, we get a chance to write the book. As employers and as risk managers, we get to lead that charge,” said Michael Liebowitz, who is New York University’s director of risk management and insurance.

“Ultimately the courts are going to start opining on this … they are going to force us down a path. But we have an opportunity today to change the rules or create them,” Liebowitz said.

He said the answer is for employers to have contracts with employees that define the course and scope of the rules on the use of mobile technology.

In establishing rules, employers need to consider their own toler-

ance for risk.

“How much risk is your organization willing to accept by delivering these devices to employees with the hope of getting higher productivity?”

Risk managers might need to collaborate with their human resources departments to define risk tolerance. “When does work culture go from healthy and productive to unhealthy and non-productive? When does that happen?” Liebowitz asked.

While an employer can’t mandate work-life balance, an employer can work to influence it in part by establishing best practices for mobile devices. “It’s a matter of creating the culture,” said one risk manager.

Liebowitz agreed.

“We are coming to a pivotal point where we need to take the bull by the horns. We need to establish some very hard and fast rules, and we need to communicate them clearly. There needs to be ramifications, and there needs to be a partnership with HR and employment lawyers to make sure these rules stick and they do work,” he said.

McCarthy said the current claims situation with mobile workers reminds her of about 20 years ago when employers started to crack down on after-work activities that might involve alcohol.

“After some very horrible accidents, employers quickly understood that they needed to clearly distinguish between what events were sponsored by the company and what events were not sponsored by the

Employers must define the course and scope of their employees’ use of mobile technology.

36 Claims Journal | Fall 2011

company. They also had to be very clear to not implicitly or explicitly support an activity that was being organized by a subgroup within the office,” McCarthy said.

Laws didn’t mandate that; it came about in response to situations occurring.

“That’s sort of where we are with mobile devices. If you put rules and laws and contacts in place around some of this, it makes it easier for people to try to strike the work-life balance,” the Liberty Mutual executive said. CJ

CLAIMS REVIEW | SNAPSHOT

Joplin: Then and Now

A scene taken on May 28, 2011 (above), and again on July 21, 2011 (below) showing progress made in Joplin, Mo., nearly two months after a tornado destroyed a large swath of the city and killed 159 people. In the photo above, Patrick O’Banion salvages items from his devastated home in a neighborhood now mostly cleared of debris. CJ (AP Photo/Charlie Riedel)

Claims Journal | Fall 2011

37

CLAIMS DEPARTMENTS | BUSINESS MOVES

which has been designed as an environmental insurance product to help meet the environmental risk management needs of a project contractor. CPL ProjectProtect was developed for environmental risks that project contractors may encounter when implementing a construction project, such as risk related to silt and sediment run-off.

Coverage provided by CPL ProjectProtect enhances the Chartis insurers’ Contractors Pollution Liability (CPL) policy. CPL protects contractors against liability for third-party claims for bodily injury, property damage and environmental damage resulting from pollution conditions caused by the performance of covered operations.

Unitrin, Kemper Unitrin Inc. is conducting business under its new name, Kemper Corp.

Purchased in 2002, the Kemper personal lines business represents the company’s largest business unit with just under $1 billion in total earned premiums in 2010.

A study of the Kemper brand revealed a 30 percent greater awareness of the Kemper name over Unitrin among consumers surveyed.

Unitrin has worked to redefine itself from a holding company with an eclectic portfolio of companies and investments to a straightforward insurance provider with more than $8 billion in assets.

Progressive Progressive Insurance announced it is looking to fill 101 new positions in sales, service, and claims at its Austin, Texas, contact center.

New hires will sell policies, answer customer questions and help customers file claims after car accidents. Many open positions call for bilingual reps fluent in both English and Spanish. Jobs require a minimum of two years’ post-secondary education or two years’ work experience in a customerservice environment.

All positions offer paid training, a benefit for candidates looking to begin new careers as licensed insurance representatives.

Some positions offer flexible scheduling options, such as the opportunity to work four, 10-hour days with three days off instead of a typical five-day work week.

Marsh To support clients in managing the claims process, Marsh has formed a new Global Claims Practice that harnesses its international claims expertise and experience.

38 Claims Journal | Fall 2011

David Pigot, head of claims for the International Division and EMEA region of Marsh, was named global head of claims and will lead the new practice from London.

Pigot, who joined Marsh in 2004, has more than 30 years of insurance industry experience, including 24 years as an international claims adjuster at Toplis & Harding and Cunningham Lindsey International.

Argo Surety Argo Surety, a member of Argo Group International Holdings, established a presence in the Chicago area by appointing Dan Carlson vice president for North Central and Western U.S. regions. In addition, the company is offering up to $50 million in aggregate surety bond capacity for qualifying clients.

Carlson joins Surety Underwriting Vice President Mark Farina and a commercial surety team, where he will build and manage the infrastructure for underwriting and marketing commercial surety, as well as assist in developing a national plan for operations within the company’s commercial surety platform.

Carlson has more than 25 years of commercial surety experience. For the past eight years, he served as senior regional vice president for Zurich Surety.

Argo Surety specializes in commercial and contract surety bonds, providing coverage for licenses and permits, court costs and other miscellaneous needs.

Chartis Chartis expanded NextGen Protection, a suite of environmental insurance products for project contractors, offered through its Environmental division.

The latest product in the NextGen Protection suite is CPL ProjectProtect,

Interboro, OneBeacon’s AutoOne OneBeacon Insurance Group said it is selling its high risk personal auto insurance business, AutoOne, to Interboro Holdings Inc. of New York.

AutoOne, formed in 2001, serves the automobile assigned risk insurance markets primarily in New York and New Jersey.

OneBeacon said it expects to record a charge of approximately $28 million pre-tax ($18 million after tax) in its third quarter financial statements reflecting the estimated loss on the sale of AutoOne. OneBeacon said it will transfer AutoOne Insurance Co. and AutoOne Select Insurance Co., including the assets, liabilities (including loss reserves and unearned premium reserves), and the equity capital of the business to the new Mineola, N.Y.-based owner. It will also transfer staff, systems and office space in Melville, N.Y. Interboro Insurance sells auto and home insurance. CEO David Nichols said the deal gives his company potential for growth in upstate New York and in New Jersey, as well as provides more auto business to help balance its growing homeowners book of business. He said the company hopes to use the AutoOne network of brokers to help it expand.

The transaction is expected to close in the fourth quarter of 2011.

OneBeacon said the sale does not affect its specialty insurance operations.

“This transaction allows us to continue our focus on our higher performing specialty operations, while aligning AutoOne with an owner committed to serving the personal automobile insurance market,” said OneBeacon CEO Mike Miller.

Interboro was formerly Interboro Mutual, which was placed in rehabilitation by state regulators in 2004. It emerged from insolvency in 2007. CJ

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SPECIAL REPORT | EARTHQUAKES

San Francisco 1906 Earthquake: What If It Happened Today?

S

eismologists predict a major earthquake, similar in size to the 1906 quake, can hit the San Francisco area at any time. With inflation and exposure added, the total property loss if such an event occurred today could be well more than $200 billion, and the insured loss would range between $30 billion to $60 billion.

“The likelihood that there will be a major earthquake along the San Andreas Fault in California is very high,” said Markus Treml, natural catastrophe expert and seismologist at Allianz Re. “According to a scientific study in 2008, the chance of having one or more magnitude 6.7 or larger earthquakes in the San Francisco region over the next 30 years is greater than 63 percent; for the whole state, it is greater than 99 percent.”

For this reason, Fireman’s Fund, one of the main California insurers in 1906 and a major property insurer today, has compared the change in population, values, and losses to form a picture of what the 1906 earthquake might look like today.

“The potential cost of earthquakes has been growing because of increasing urban development in seismically active areas,” said Doug Franklin, chief risk officer of Fireman’s Fund, a U.S. subsidiary of Allianz, one of the world’s largest insurers.

An earthquake today would affect more people: San Francisco has doubled in size since 1906, and Northern California as a whole has increased in population from 1 million to more than 15 million.

However, insurers today are better prepared: In 1906, 27 percent of Northern California’s population was concentrated in San Francisco — today it is only 6 percent. Today’s more geographically-diverse 40 Claims Journal | Fall 2011

population helps spread the potential risks for insurers.

Insurers have also been improving their underwriting to more broadly diversify their portfolios, and they have put greater emphasis on adequate reinsurance.

In 1906, the total property loss was $525 million and the insured loss was $235 million. Today, this ratio for the exact same earthquake as happened in 1906 would be lower.

However, fewer people and businesses have been purchasing earthquake insurance. A 2006 poll by the Insurance Information Network of California and Fireman’s Fund, found that only 22 percent of Californians consider themselves to be prepared or very prepared for a disaster in their area.

“Only about 12 percent of homeowners in California purchase earthquake coverage,” Franklin said. “Despite California’s history of catastrophic earthquakes, wildfires and floods, many people feel that the West Coast offers them a relatively safe environment.”

Since the recent earthquake in Japan, A.M. Best reports a few thousand more earthquake policies have been purchased.

Experts believe that proper prevention, preparation and information are key to decreasing potential losses. Fireman’s Fund employs a significant number of risk prevention experts who help customers improve their buildings to keep risks as low as possible.

“The risks that earthquakes mean for society, including loss of lives, injury and economic loss, can be greatly reduced by better planning and mitigation practices beforehand, and providing timely information to improve response after they occur,” Franklin said. CJ

California Earthquake Authority Bond Issue a ‘First Step’

By Tim Kirn

C

alifornia Earthquake Authority (CEA) officials said in August that their recent $150-million bond issue is a first step in diversifying risk so that the CEA can expand earthquake coverage in the state.

“It is just a step, and we need to keep at it,” said Glenn Pomeroy, CEO of the CEA. Pomeroy said his major goal with the CEA is to expand the number of homes it covers. Currently, the CEA accounts for 70 percent of residential earthquake policies sold in California, but only 12 percent of households have earthquake insurance.

He would like the CEA to “develop more affordable insurance while remaining sustainable in the event of a big earthquake,” he said.

The CEA recently announced that it will institute a 12 percent rate reduction, starting Jan. 1, 2012.

The bond issue, the sale of which was completed in August, was not large in the scheme of the CEA plan, but it was an important first effort.

The issue was the first time the CEA has accessed the capital markets.

Prior to this, the CEA went to the traditional, reinsurance markets when it needed to transfer some of its risk. But the CEA knew there was demand.

The Japanese issue earthquake bonds, and, in this country, insurers sell bonds to back hurricane insurance.

Actually, the demand in the bond sale outstripped the supply, according to a CEA statement. “We knew there was appetite out there for earthquake risk in the capital market,” Pomeroy said.

The bonds came from an arrangement CEA entered into with Embarcadero Reinsurance Ltd., a special purpose, reinsurance vehicle established in Bermuda for this bond sale, and for others with the CEA. The sale of the bonds — three-year catastrophe bonds, paying a floating rate of 6.6 points above one-year U.S. Treasury money-market funds — was led by Deutsche Bank Securities.

The CEA intends to have more, similar bond issues in the future, perhaps every four to six months, said Tim Richinson, chief financial officer.

What could really make a difference for the earthquake insurer, however, is a bill currently being considered in the U.S. Congress, the Earthquake Insurance Affordability Act, sponsored by Sen. Diane Feinstein, D-Calif., Pomeroy said.

The bill would give CEA access to post-event federal loan guarantees it could use following an earthquake. That would allow CEA to issue bonds in the aftermath of an earthquake, which in turn would mean CEA would not have to use the reinsurance market so much, saving it money. CEA could pass that savings on to its customers, Pomeroy said.

Presently, CEA has about $9 billion in claims-paying capability, of which about $3 billion comes from reinsurance. But, that reinsurance is expensive.

In the 14 years it has been in existence, the CEA has paid about $2.8 billion to reinsurers, according to the organization’s figures.

The proposed federal legislation would allow CEA to keep about half of the current $3 billion out of the reinsurance market, Pomeroy said. That would make a much bigger difference to CEA’s plans to expand than the $150-million bond issues, he added.

“A diverse set of risk-transfer tools, which includes not only reinsurance and catastrophe bonds but also post-earthquake federal loan guarantees, will help us make earthquake insurance more affordable and more widely used,” CEA said in a statement. CJ

IDEA EXCHANGE | TECHNOLOGY & TOOLS

The Future in Auto Claim Prevention

By Denise Johnson

W

hile some high tech devices such as cell phones and text messaging lead to driver distractions, other technology can curtail the problem. Enhanced electronics like navigation, forward and backward collision warning devices, and adaptive headlamps are giving way to a reduction in auto claims, some say.

In a 2010 report on the potential safety benefits of vehicle-tovehicle communications, the National Highway Traffic Safety Administration (NHTSA) estimates intelligent vehicles could help in as many as 4.3 million crashes annually.

“Intelligent vehicles are the next frontier of collision avoidance innovations that could revolutionize the driving experience and hold the potential of helping reduce many crashes,” said Sue Cischke, group vice president, Ford Sustainability, Environment and Safety Engineering.

Ford is conducting research using so-called

intelligent vehicles that use Wi-Fi and GPS to wirelessly talk to each other and to detect dangerous situations.

“Intelligent vehicles could help warn drivers of numerous potential dangers such as a car running a red light but blocked from the view of a driver properly entering the intersection,” said Paul Mascarenas, chief technical officer and vice president, Ford Research and Innovation.

Ford’s plan is to work on an advanced wireless globally standardized platform that will allow vehicle-to-vehicle communication to reduce crashes.

Though intelligent vehicles are a thing of the future, driver assistance technology utilizing forward looking radar, lane departure warning systems, and blind spot detection currently available in cars today have already been shown to reduce crashes.

“There’s just a lot of technology like that where automakers are trying to use advanced sensors and electronics to give drivers information about the dangers they may be getting into and alert them to the fact they may need to make some changes,” says Adrian Lund, president of the IIHS. A new study by the Highway Loss Data Institute (HLDI) found that crash avoidance technology in Volvo XC60 SUVs prevented one out four rear end crashes.

The technology, called City Safety, uses an infrared laser sensor embedded in the

windshield to monitor the area in front of the vehicle during speeds of 2 to 19 miles per hour. It will automatically brake to avoid front to rear crashes. The findings suggest significant savings to insurers is on the horizon, considering the estimated 1.7 million rear end collisions in 2010 reported by the NHTSA. “It’s showing a 27 percent reduction in property damage liability claims which means that people with that system or cars with that system are filing 27 percent fewer such claims. That’s a big deal to the insurance industry,” says Lund.

Another tool making headway in auto claims prevention is red light cameras.

The IIHS reports that red light running killed 676 people and injured an estimated 113,000 in 2009.

In a 2010 telephone survey by the AAA Foundation for Traffic Safety, 93 percent of drivers said it’s unacceptable to go through a red light, though onethird reported doing so.

Despite conflicting views on red light cameras, research suggests their use results in fewer crashes. IIHS researchers found that in the 14 cities that had cameras during 2004-2008, the combined per capita rate of fatal red light running crashes declined 35 percent, compared to previous years. CJ

Google Secretive About ‘Super Safe’ Robot Car Crash

By Timothy F. Kirn

L

ast month, an astute observer was driving in Mountain View, Calif., when he came across a multiple car fender-bender. According to later reports, a Toyota Prius had hit a Prius, and that Prius hit an Accord, which hit an Accord, which hit a Prius.

Being astute, this observer recognized one of the cars and snapped a picture with his cell phone. He then sent the picture to Jalopnik, an automobile blog, where he or she remained anonymous.

The reason the photograph was notable?

Google’s Robot Prius The first Prius was Google’s self-driving automobile. Hence, the picture was thought to be a piece of history: the first public crash of an autonomous, robot car.

Google, which has been secretive about the car, later said that the car was not being driven in autonomous mode when the accident occurred, that an employee was driving, and then said nothing more. But the irony was clear.

Google has presented the car as super safe. Google says the car, which drives by computer, GPS, and a complicated system of laser and imaging

42 Claims Journal | Fall 2011

systems, does away with human error. It has said the car could cut automobile fatalities in half.

So what will robot cars mean for automobile insurance?

Nobody knows.

“We’re interested in it,” said Dick Luedke, State Farm spokesperson. “We’re following it. But it is a little hard to talk about something that does exist.”

Currently, the cars — Google supposedly has six, autonomous Priuses and one autonomous Audi — are legal to drive because a person sits in the driver seat to take control should something go awry. Law enforcement officials have said that as long as someone is ready to take over, the system is not legally different from cruise control. Others have noted, however, that the cars really are out in front of the law at present.

But Google and some others remain convinced that it is just a matter of time before autonomous cars rule the road. They say cars will move faster and with greater efficiency, and that there will be able to be more cars on the road, traveling more closely together, because the machines can respond more quickly than human drivers. They say there will be no more distracted driving and no more drunk driving problems. CJ

IDEA EXCHANGE | TECHNOLOGY & TOOLS

Insurer’s New Predictive Model Targets High Cost Workers’ Comp Claims

By Denise Johnson

W

orkers’ compensation giant Liberty Mutual has developed a new predictive model that lets it more quickly identify and manage high-cost workers’ compensation claims that typically make up about 20 percent of all workers’ compensation claims.

The new model is designed to help Liberty’s claims professionals identify claims that are potentially going to cost a lot and then bring the right resources to each one of these claims at the right time. The company should then be able to close these claims faster, thereby lowering overall claim costs.

The predictive model will be used to look at claims monthly and pickup changes in each claim’s profile that can negatively impact that claim’s development, such as emerging medical and non-medical factors.

Liberty Mutual has been using predictive models on workers’ compensation claims since 2004. Other workers’ compensation insurers, organizations and claims consultants also have been using models for several years.

Liberty Mutual’s latest proprietary model incorporates more data, enables more sophisticated multivariate analysis and supports better decision making than its previous versions, according to George Neale, general manager of claims for Liberty Mutual’s Commercial Markets strategic business unit.

“We looked retrospectively at a lot of claims that we would consider adversely developed or had poor outcomes. We found that the recognition of those claims was really slow,” Neale said.

According to the company’s researchers, broader data, incorporating psychosocial factors and co-morbid medical conditions, can help predict a workers’ compensation claim’s duration and cost.

Also, the new model reflects that the home environment, personal issues and employer-employee relationship can all affect the outcome of a work injury. “One of the biggest issues that we run into is certainly employee motivation,” Neale said.

Other potential risk factors that are weighed include existing medical conditions such as hypertension, obesity and diabetes. The model also considers that healing periods across the country can differ, which can affect the costs and period in which a claim must remain open.

Frequent model runs allow the risk of cost escalation to be continually assessed throughout the life of a claim. “We actually have five modeling stages,” Neale said. The five stages are intake, six months, 12 months, 18 months and 24 months.

Controlling claim costs is important because the average cost of a workers’ compensation claim has been growing faster than inflation. During the past 10 years, the average indemnity cost of a loss time claim grew 47 percent, from approximately $15,200 to $22,300, according to the National Council on Compensation Insurance (NCCI).

That’s an average annual increase of roughly 4 percent.

The medical portion of lost time claims grew even faster — at a rate of 6.9 percent per year — over the past 10 years, going from $14,200 in 2000 to $27,700 in 2010, according to NCCI. In addition to providing the obvious benefits of cost reduction and earlier file closings, the model has the potential to benefit employers by reducing their premium. “The losses that you have go directly to determining the premium levels,” Neale said.

The latest model’s development began in late December 2010.

The data employed comes from a variety of systems including the carrier’s own claims database, its own Research Institute, and an in-house medical loss database. The company said it evaluated more than 825,000 lost time claims and 140 million individual medical billing transactions. To validate the accuracy of the updated model, developers ran more than 200,000 lost time claims through it.

Liberty Mutual has also The average cost of a developed related resources for use by adjusters. These include workers’ compensation early alert, medical referral tools claim has been growing and a dashboard, providing faster than inflation. claims information flagged by importance.

Involving policyholders and in-house regional medical directors in the treatment protocol helps get employees back to work.

“Once people are back to work, a lot of the … additional medical treatment falls into line at that point because you’re getting back to being productive; you’re getting your life back to what it was before,” Neale said.

Getting a worker back to work and to maximum medical improvement as soon as possible benefits all involved, Neale added. Not only does the worker benefit, but also the policyholder benefits by getting back a productive employee. CJ

Claims Journal | Fall 2011

43

IDEA EXCHANGE | TECHNOLOGY & TOOLS

What’s All The Fuss About Hurricane Models?

W

hen it comes to revised hurricane models, AIR Worldwide CEO Ming Lee has one basic question, “What really is all this big fuss about?”

Lee, whose Boston company launched the catastrophe modeling industry in 1987, is referring to the fuss largely caused by a competitor, California-based RMS, whose revisions contained in its hurricane model, version 11, have indicated a need for sizable rate changes in some areas. The new RMS model includes a number of significant changes, but none has caused more of a stir than its increase in loss projections in inland areas in Florida and elsewhere, along with its indication that coastal exposure has slightly decreased.

Some in the industry have predicted that the RMS model 11 will lead reinsurers and insurers to revise rates and underwriting. Some have predicted that the new model, along with recent catastrophes around the globe, could trigger an end to the prolonged soft market.

Still others have suggested that the RMS release has shaken insurer confidence in the use of catastrophe models.

Standard & Poor’s Ratings Services placed its ratings on 17 natural peril catastrophe bonds on CreditWatch with negative implications because of the new RMS model.

“AIR’s view of U.S. hurricane risk has not changed, and therefore, we’re not quite sure what all the fuss is about surrounding the other model change,” Lee said. “And not only is it Ming Lee, because our view of the risk hasn’t changed, but CEO for Air also because 20 of the top 25 residential insurers Worldwide in Florida use the AIR hurricane model to manage their hurricane risk, which once again begs to question, ‘What really is all this big fuss about?’”

According to Lee, insurance companies should both employ common sense and ask a lot of questions about any hurricane model that changes dramatically from one version to the next.

“As a currency, just like the U.S. currency or other monetary currencies, the value of the currency is really based on the confidence that you all have in those results. [Insurers] need to understand what changes have taken place in the science,” he said. “And they should demand that the model components obey basic physical expectations of the underlying hazard, that those components be independently evaluated.”

For example, Lee suggests a number of questions. What is the relative hurricane frequency in Florida versus New England? What’s the relative frequency of category three, four and five storms, relative to category one and two storms? How has a model been peer-reviewed and validated?

“You would assume that with all models out there, you’ve got [a] common sense understanding of the risk. But recent evidence demonstrates that you might not be able to assume this whole model, and you really need to be able to perform some of the due diligence on your own and really ask many of the basic questions about the model,” Lee said.

In fact, Lee maintains, if a model changes dramatically, that

should be a red flag to users. “[I]f you’ve got the model right and the model is robust, then you should not be seeing dramatic changes without very good explanations,” he said.

It’s not that AIR never changes its hurricane model. In fact it does, regularly. But, according to Lee, AIR takes an incremental approach.

“Our practice in the past has been to regularly update the model to incorporate the latest science and engineering research, rather than to unleash a mass update once every five years or so. A part of that learning comes from our practice of performing real-time loss estimates after working at the science of the problem,” he said.

Thus, AIR recently modified its calculations on wind speeds.

“We had a lot more, good quality wind observations, both from hurricane-hunter aircraft at the flight level, as well as at the surface level. We had wind speed data at the surface level that was previously unavailable. So that gave us a better understanding of the structure of hurricanes and helped us to better estimate local wind speeds,” Lee said.

AIR has also updated what Lee calls the “vulnerability components” in its model, based on multi-year, peer-reviewed study of the evolution and the enforcement of building codes at the state and local levels, “and what impact those building codes have on vulnerability.”

Lee said AIR applies data from a “core, robust foundation” and its work goes through a peer review process.

“We have actually quite a large number of reviewers outside of AIR, in academia, as well as in government, the weather service.

We do a hazard component. It has a component that’s always the

‘You should not be seeing dramatic changes without very good explanations.’

44 Claims Journal | Fall 2011

This NASA satellite image, obtained by Reuters on September 2, 2011, and taken August 31, 2011, shows the Hudson River (C) flowing into New York Harbor, filled with sediment from upriver streams and rivers affected by the rains of Hurricane Irene. REUTERS/NASA/Handout

vulnerability component of the model,” he said.

According to the AIR leader, the validation process is what distinguishes competitors in the modeling business. “[E]very company starts with the same raw data relative to ... how many hurricanes have there been, where the hurricanes made may have been, how all that data fits in. And that fundamental science data there is the same, even though we will end up with different results,” he said. “Now, in part that’s because there is some difference in scientific judgments in the models of components. But in part it’s just because the validation process is different in different companies. I think that that is … one of the differences in the approach that we have.”

Lee said AIR provides real-time loss estimates of events as a service to its clients, but each one is also a test of its model and part of a process that helps it incrementally improve its model. “[W]hen we do the real-time estimates, it’s an opportunity for us to test the model. And it’s an opportunity for us to learn and improve on what we were doing, which is what we have done, especially when you break those losses not only looking at the industry, but you look at it by region, you look at it by line of business or by company. And the difference between the models and the actual losses actually will teach you a lot about hurricane modeling or, for that fact, if this is for a different peril, about the modeling for another peril.”

The RMS revision in particular has drawn attention to how models cope with inland penetration of storm tracks.

AIR’s hurricane model in the United States is based on historical data dating back to 1900. Lee said that since 1900, there have been 65 documented events that caused significant inland losses.

So, following its incremental approach, AIR has accounted for inland losses for many years in its model. That has led AIR over the years to add inland states subject to storm losses including Arkansas, Kentucky, Ohio, Oklahoma and Tennessee, in addition to the coastal states. In 2010, it added Illinois, Indiana and Missouri, bringing the total number of states modeled in the United States in the AIR U.S. hurricane model to 29 states.

“So this is nothing new. We’ve been doing it since inception, because this is just the nature of hurricanes, what hurricanes have done in the United States and what we have experienced,” Lee said.

Lee said some carriers and rating agencies may be misapplying cat models.

For one, carriers should not look at any specific number out of a model and then manage to it, he said. “One needs to embrace the fact that there’s uncertainty in nature. There is, by virtue of the uncertainty in the nature and by virtue of the fact that we don’t know everything, that’s the reason why we build models.

Models are still models. So you need to view model results through the lens of uncertainty,” Lee said.

Carriers should also look at ranges of outcomes and test their decisions based on some what ifs, “to take into account the uncertainty in the model output, but really, uncertainty in terms of what really is going to happen in nature,” he added.

Lee offers similar advice to rating agencies.

“Part of my comment would really be the same to the rating agencies as to the companies, which is the rating agencies also should not be asking for and looking at point estimates, what is

the 1 in 100 or what is the 1 in 250,” he said.

“And in fact, many rating agencies do that. I think they should get away from that practice and instead also embrace the fact that there is uncertainty in the models, in the model output, and there is uncertainty in terms of what Mother Nature is going to do. So they ought to allow for and have a better understanding of uncertainty in the questions that they ask and how they interpret the responses from companies to the questionnaires that they have.”

Lee does not think rating agencies are allowing for enough uncertainty.

“I think they’re being a little bit too deterministic and very specific in the numbers. They both — company executives and rating agencies — gravitate to some specific numbers, and they call them PMLs [probable maximum loss], and that is actually poor practice. If the rating agencies would embrace uncertainty more, I think company executives would follow suit,” he said.

At the same time, Lee said, carrier executives should be aware that rating agencies do not require them to utilize any particular cat model and also do not mind if carriers switch or emphasize one model more than others.

“They don’t require any particular brand of model. And for those companies who change or are thinking of changing their reliance on one model over one that they have been using, if they want to switch, there … isn’t necessarily a barrier that the rating agencies are putting up there. But some companies kind of perceive that,” he said.

Lee said this misperception is pretty widespread “but the reality of it is that if you have a good explanation and you can demonstrate that you really have taken ownership of the catastrophe risk management process and you understand what the models are doing and what the model output means, then it’s perfectly OK to be weighting one model over another model.” CJ

‘You need to view model results through the lens of uncertainty.’

Listen to the three-part interview with AIR’s Ming Lee on www.InsuranceJournal.TV. Part 1: ‘What’s All the Fuss?’

Part 2: What Carriers, Rating Agencies Should Ask About Cat Models Part 3: The Expanding Use of Catastrophe Models Claims Journal | Fall 2011

45

CLAIMS DEPARTMENTS | RECALLS

GM Recalls 16,000+ Chevy and Buicks in U.S. and Canada

By Ben Klayman General Motors Co. is recalling 16,198 Chevrolet Impala and Buick LaCrosse cars in the United States and Canada to address sensor and power steering problems. The company said it knows of no injuries or crashes related to the recalls.

GM is recalling 11,905 2012 Impalas to inspect for proper installation of the power steering hose. The company said the hose, if misrouted, could be damaged and spray fluid onto hot engine parts to create a potential for a fire.

The Detroit-based company said the defect was discovered during production at the Oshawa, Ontario, Canada, plant, where the car is built.

Dealers will replace the hose and add abrasion protection if the hose is not properly routed.

Of the total Impalas affected by the recall, 10,334 are in the United States and the rest are in Canada.

GM also said it is recalling 4,293 2012 LaCrosses to reprogram the electronic brake control module because an incorrect calibration may cause the electronic stability system to improperly detect a sensor malfunction and fail to illuminate a warning light. The company said if a sensor malfunctions, the driver would have difficulty in maintaining the car’s driving path and speed. GM said dealers will reprogram the module.

Of the total LaCrosses affected by the recall, 4,077 are in the United States and the rest are in Canada.

Copyright 2011 Associated Press. All rights reserved. This material may not be published, broadcast, rewritten or redistributed.

Poultry Maker Expands Chicken Recall to Nuggets A voluntary recall of thousands of pounds of ready-to-eat chicken has been expanded over concerns that the meat could be contaminated with bacteria that can cause food poisoning.

Colorado-based Pilgrim’s Pride announced the recall now includes about 7,000 pounds of Pilgrim’s Pride Brand Fully Cooked Chicken Breast Nuggets that were shipped to dozens of Dollar General stores in West Virginia, Tennessee, Virginia, Ohio, Kentucky, Indiana, Georgia, Florida and Alabama.

The recall began over fears that more than five tons of ready-to-eat chicken were potentially tainted by Listeria monocytogenes.

46 Claims Journal | Fall 2011

The Centers for Disease Control and Prevention classifies listeriosis as a serious infection that primarily affects older adults, pregnant women, newborns and adults with weakened immune systems.

Pilgrim’s said it is not aware of any reported illnesses.

The newly recalled product was sold in two-pound bags and carries the best-by date of June 2, 2012, and UPC number 77013 16224. It was produced in the Pilgrim’s plant in Mt. Pleasant, Texas. Pilgrim officials said the company is working closely with Dollar General to locate all of the recalled product.

The U.S. Department of Agriculture’s Food Safety and Inspection Service announced the recall of two of the company’s products. The first was nearly 400 pounds of Fully-Cooked Grilled Chicken Breast Fillets with Rib Meat made at Pilgrim’s plant in Waco, Texas, and distributed through Columbus, Ohio. Also, recalled was nearly 11,000 pounds of Sweet Georgia Brand Fully-Cooked Breaded White Chicken Nuggets Shaped Patties produced at Pilgrim’s plant in Mt. Pleasant and sent to distribution centers in New Jersey and Texas. The problem was discovered during on-site internal testing at each plant.

Consumers may contact Pilgrim’s at 1-800-321-1470.

Copyright 2011 Associated Press. All rights reserved. This material may not be published, broadcast, rewritten or redistributed.

Honda Recalls 1.5 Million Cars In U.S. Honda Motor Co. Ltd will recall 1.5 million cars and small SUVs in the United States to repair software that controls the automatic transmission, the automaker said.

Kyodo news agency in Japan reported that another 760,000 Honda models were recalled in China, and that worldwide, some 2.49 million vehicles have been recalled.

That global total includes 135,142 vehicles in Canada.

Without updating the software, the automatic transmission in these vehicles could be damaged if the driver quickly shifted between gears. That might cause the engine to stall or make it difficult to put the car into park. If the transmission were quickly shifted between the reverse, neutral and drive positions, the automatic transmission secondary shaft bearing could be damaged.

The recall affects four-cylinder Accord cars for the model years 2005 to 2010. The recall also affects the CR-V crossover for the model years 2007 to 2010,and the small SUV Element for the model years 2005 to 2008.

Copyright 2011 Reuters.

Ford to Recall 1.1.M Pickups for Gas Tank Problem

By Tom Krishner

Ford is recalling more than a million pickup trucks because their gas tanks can fall off and cause fires.

The recall covers 1.1 million F-150, F-250 and Lincoln Blackwood pickups. The models involved were sold in cold-weather states where road salt can cause metal straps holding up the tanks to rust. If the straps break, the tanks can hit the ground, rupture and catch fire.

Regulators began investigating the problem in September.

The defect has been blamed for eight fires, three of which spread to the rest of the truck. One person was injured, suffering first- and second-degree burns, Ford Motor Co. spokesman Wes Sherwood said.

The recall adds to the list of problems with the F-Series

pickup, traditionally America’s best-selling vehicle. The pickups have been involved in three recalls going back to 2008, involving millions of vehicles. Regulators have become more aggressive since being criticized last year for a slow response to Toyota’s sudden acceleration problems.

The latest Ford pickup recall involves certain 1997 through 2004 Ford F-150 models, as well as some 1997 through 1999 model year F-250 pickups. Also affected are Lincoln Blackwood pickups from the 2002 and 2003 model years.

Ford sold more than 264,000 of the F-Series trucks during the first six months of this year. The company would not say how much money the recall would cost. The nation’s largest single recall involved 7.9 million Ford vehicles in 1996 to replace an ignition switch.

Earlier in the year, F-Series pickups were the subject of sniping between the government and Ford because of air bags that could deploy at the wrong time. Ford announced in February that it would fix 150,000 F-150s for that problem, but under pressure from regulators, the company expanded the recall to 1.2 million trucks in April. In that case, there were 98 reported injuries because of the problem.

Other recent F-Series recalls include: • December 2010: About 15,000 of the trucks and some Ford crossover vehicles were recalled for problems with electrical systems that could short and cause fires.

• May 2008: More than 655,000 F-150 and Lincoln Mark LT pickup trucks were recalled to fix a defective hose that could affect the vehicles’ braking power.

• Ford also recalled more than 10.4 million vehicles in several increments from 1999 to 2007 because a faulty cruise-control switch could cause fires. The recalls covered more than a dozen vehicles built from 1992 to 2004, including some F-Series models.

straps arrive, Sherwood said. They also can contact Ford at 1-866-4367332.

The trucks originally were sold or are now registered in Connecticut, Delaware, Illinois, Indiana, Iowa, Kentucky, Maine, Maryland, Massachusetts, Michigan, Minnesota, Missouri, New Hampshire, New Jersey, New York, Ohio, Pennsylvania, Rhode Island, Vermont, West Virginia, Wisconsin and Washington, D.C. CJ

Copyright 2011 Associated Press. All rights reserved. This material may not be published, broadcast, rewritten or redistributed.

Settle Claims Payments in Half the Time

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To fix the latest problem, Ford will notify owners to bring their trucks to dealers.

Mechanics will replace the straps with new ones coated to resist corrosion.

People with questions should contact their dealer, who can install a cable to hold the tanks in place until the replacement

Contact us today to learn how easy it is to introduce Purchase Log into your current claims management system.

1-877-865-4244 www.wrightexpress.com/claims

Claims Journal | Fall 2011

47

IDEA EXCHANGE | BEST PRACTICES

Essentials: What Every Claim Adjuster Should Know About Bad Faith

M

any adjusters don’t have a clear understanding of what constitutes insurance bad faith. The tort of common law bad faith is an outgrowth of judicial concern that the insurance industry could employ improper economic motivation to delay or refuse to pay valid insurance claims.

There are several standards used to describe the requirements to establish bad faith misconduct. In a majority of states, bad faith involves a combination of negligence and intentional misconduct.

Regarding the negligence aspect, the question centers upon whether the insurBy Steven Plitt ance company acted unreasonably toward its insured. This part of the analysis is based upon a simple, objective negligence standard.

The second aspect of bad faith is concerned with whether the insurance company acted knowing that it was being unreasonable and by proceeding forward with the conduct, purposefully decided to be unreasonable. In a majority of states, both of these elements must be established before a claim for bad faith will be successful.

Where the insurance company acts reasonably there can be no bad faith in the majority of states. Mere negligence or inadvertence is not sufficient to establish a claim for bad faith.

One court has observed: “Insurance companies, like other enterprises and all human beings, are far from perfect. Papers get lost, telephone messages misplaced and claims ignored because paperwork was misfiled or improperly processed.

Such isolated mischances may result in a claim being unpaid or delayed. None of these mistakes will ordinarily constitute a breach of the implied covenant of good faith and fair dealing …” Rawlings v. Apodaca, 151 Ariz. 149, 157, 726 P.2d 565, 573 (1986).

The following states utilize that standard, which requires negligence and knowing unreasonableness: Arizona, Colorado, Iowa, Kentucky, Mississippi, Nebraska, Nevada, Oklahoma, Oregon, Pennsylvania, Puerto Rico, Rhode Island, South Carolina, South Dakota, Texas, Vermont, Wisconsin and Wyoming.

A few states use a negligence standard, which requires a claimant to show that the insurance company’s refusal to honor its contractual obligation was without any reasonable justification. The ultimate question under this standard is whether, at the time the insurance company denied the claim, there existed a set of facts or circumstances known to the insurance company that created a bona fide dispute and therefore a meritorious defense to the claim. Under this type of negligence standard, the insured need not show that the insurance company had a conscious awareness of wrongdoing or that it engaged in unjustifiable conduct, nor that the company had an evil motive or intent to harm the insured. Instead, any unreasonable delay in payment of benefits or a decision not to pay a claim may be sufficient to support a claim for bad faith. The

48 Claims Journal | Fall 2011

courts in Delaware, Hawaii, Utah, Virginia and Washington have utilized this negligence standard.

Virginia utilizes a comprehensive list of criteria to determine whether an insurance company has committed bad faith. In evaluating whether an insurance company has committed bad faith in Virginia, the law requires consideration

of “whether reasonable minds could differ in the interpretation of policy provisions defining coverage and exclusions; whether an insurer has made a reasonable investigation of the facts and circumstances underlying the insured’s claim; whether the evidence discovered reasonably supports a denial of liability; whether it appears that the insurer’s refusal to pay was used merely as a tool in settlement negotiations; and whether the defense the insurer asserts at trial raises an issue of first impression or a reasonably debatable question of law or fact.”

Nationwide Mutual Ins. Co. v. St. John, 259 Va. 71, 524 S.E.2d 649, 650-51 (2000).

In all states, a plaintiff must prove that the insurance company’s claim professional did something more egregious than make a simple mistake.

The remaining states have adopted various standards for determining whether an insurer and its claim professionals have committed insurance bad faith. As an example, in Arkansas, bad faith occurs when an insurance company engages in “affirmative misconduct … without a good faith defense,” that is “dishonest, malicious and oppressive in an attempt to avoid its liability under an insurance policy.”

Aetna Cas. & Surety Co. v. Broadway Arms Corp., 281 Ark. 128, 664 S.W.2d 463, 465 (1984). The insurer’s conduct in Arkansas must be “carried out with a state of mind characterized by hatred, ill will, or a spirit of revenge.” See, e.g., Columbia National Ins. Co. v. Freeman, 347 Ark. 423, 64 S.W.3d 720 (2002).

In Louisiana, bad faith requires proof that the insurance company’s conduct was “arbitrary, capricious or without probable cause.” The phrase “arbitrary, capricious and without probable cause” has been found to be synonymous with the term “vexatious.”

In order to establish a vexatious refusal to pay, the insured must prove an unjustified refusal to pay without reasonable or probable cause or excuse. Louisiana Maintenance Services, Inc. v. Certain Underwriters at Lloyd’s of London, 616 So.2d 1250 (La. 1993). In Louisiana, more than mere negligence or inadvertence is necessary to establish bad faith. Coker v. Morris, 855 So.2d 916 (La. App. 2nd Cir. 2003).

In Massachusetts, to establish bad faith, there must be a showing of conduct that is “immoral, unethical, oppressive or unscrupulous,” which “causes substantial injury.” The conduct must rise to the level of “rascality that would raise the eyebrow of someone inured to the rough and tumble world of commerce.” Linkage Corp. v. Trustees of Boston University, 425 Mass.

1, 679 N.E.2d 191 (1997).

The North Carolina courts have established a three-prong test for party bad faith that requires a showing of: (1) a refusal to pay after recognition of a valid claim; (2) bad faith, i.e., a decision not based on honest disagreement or innocent mistake; and (3) aggravating conduct such as fraud, malice, gross negligence, insult, rudeness, oppression, or wanton and reckless

disregard of rights. Lovell v. Nationwide Mutual Ins. Co., 108 N.C.App. 416, 424 S.E.2d 181 (1993).

When the standards used by each state are carefully analyzed, mere mistake or inadvertence is insufficient to establish bad faith. Upon close examination, bad faith requires some degree of affirmative and intentional misconduct, or knowing unreasonableness.

In the daily discourse of claim handling, file diaries can be missed or overlooked, and delays can occur without purpose or intent. Sometimes the best defense in a bad faith lawsuit is to document, with candor, lapses or mistakes that have occurred in the claim process. As an example, in one claim file there was a two and one-half month gap in the claim notes where no activity had occurred on the claim. The claim adjuster candidly documented that the lack of activity on the file was a mistake and that she had simply missed the file diary. As with many honest mistakes, the claim notes did reveal greater vigilance after the mistake had been admitted.

Given the above standards that are used to decide whether bad faith has occurred in the various states, it is important that each adjuster document and populate their claim file entries with descriptions of their thought process in processing the claim forward. As an example, instead of saying “requested additional records,” it would be better for the claim adjuster to state “requested additional records predating the accident because of the question of preexisting degeneration in the lumbar spine.” Explaining in the claim note entry why something may be of significance or meticulously documenting follow-up communications with claimant’s counsel that help explain the delay can be invaluable allies in any bad faith lawsuit, because of the claim note entry’s ability to explain on a contemporaneous basis what was happening and why it was happening.

Each claim representative should consider the following standards when formulating a claim note entry explaining a significant issue or development in the claim process: Delays should be explained. The need for additional medical documentation should be explained with a description of why there is a need for additional records linked to a specific medical condition. A simple claim note indicating that the file has been checked to see if plaintiff’s counsel has provided the additional information requested can be significant in demonstrating diligence and reasonable delay. CJ

In a majority of states, bad faith involves a combination of negligence and intentional misconduct.

Plitt is a licensed insurance agent and an attorney with the Phoenix law firm of Kunz Plitt Hyland Demlong & Kleifield practicing in the field of insurance law. Phone: 602-331-4600. His column, Essentials, appears periodically on ClaimsJournal.com and InsuranceJournal.com.

Claims Journal | Fall 2011

49

CLAIMS DEPARTMENTS | CLAIMS JOURNAL ONLINE

Features podcasts, video interviews and feedback exclusively on www.ClaimsJournal.com Legitimate Beef?

Does a man who is suing the White Castle hamburger chain, claiming the booths in one of its restaurants are too small, have a legitimate beef? Martin Kessman said in his federal lawsuit that he was embarrassed in 2009 when he tried squeezing his 6-foot (1.83-meter), 290-pound (132-kilogram) frame into the seating at a White Castle in New York state. He said he slammed his knee into a metal post under the table and was in pain. The lawsuit claims the restaurant could not accommodate a customer of Kessman’s stature, in violation of the Americans With Disabilities Act. The suit seeks an unspecified financial judgment.

ClaimsJournal.com readers were not very sympathetic: • First of all he needs to lose weight and second of all he can

start by not going to hamburger joints.

• Exactly what is his disability? Being too fat to fit in a booth? I go to a restaurant for lunch that has a bar area. My friends and I sit at the bar because the service is much faster. I am 5’2″ and made a comment to my friend the other day that I needed a booster seat because the bar is so much higher than the bar stools… maybe I should sue the restaurant because I look like Kilroy while trying to eat my lunch…it’s really embarrassing…give me a break!

• He has no case. The condition was open and obvious and I doubt this was his first visit there. He insisted on trying to jam his fat ass into a booth anyway. He has no disability other than being a jerk.

How Technology Is Changing Accident Reconstruction

Despite detailed accident reports, witness accounts and damage photos, accident reconstruction can be tricky business. That’s where the annual ARC-CSI Crash Conference, held in Las Vegas, comes in. Live, full scale crash tests and technical presentations by experts provide in-depth collision reconstruction and investigation education.

Managing the Risks of Outdoor Summer Festivals

Crowd control, stage collapse, food safety – these are concerns facing carriers that insure summer festivals. In a recent interview with Claims Journal, Paul Holehouse, senior risk control consultant for Fireman’s Fund Entertainment, and Jerid Schmickle, director of underwriting, discussed the carrier’s behind the scenes preparation for the recent 2011 Lollapalooza concert in Chicago, Ill.

Claim System Implementation: What to Expect and How to Prepare

News Tips

Bill Garvey of Eastern Shore Consulting talks with George Grieve, CEO of CastleBay Consulting, and discusses the nuts and bolts of claim system implementation from how to resource the project to rolling out the new solution.

Have a news tip? Tell us.

Do you have the inside scoop on a story or topic for Claims Journal? Let us know! CJ respects your anonymity.

Managing Stress in the Workplace

Event Calendar

Dr. David Price, forensic clinical psychologist and neuropsychologist, discusses how to overcome stressful situations in the workplace in an interview with Claims Journal’s Denise Johnson.

50 Claims Journal | Fall 2011

Do you have an event for claims industry professionals? Post your event online at claimsjournal.com.

CLAIMS DEPARTMENTS | CALENDAR OF EVENTS PLRB/LIRB Large Loss Conference Educational and networking conference designed for senior claims adjustors and managers, and technical adjusting staff. Topics relate to large and complex property and casualty subjects and are organized into three tracks: 1) Commercial Lines Property Claims 2) Personal Lines Property Claims 3) Casualty Claims September 26–28, 2011 Chicago, IL Contact: www.plrblargeloss.org for details and to register.

NAIIA Regional Meeting – Eastern States The meeting includes a networking cocktail party and educational sessions.

September 28-30, 2011 Brewster, MA Contact Bob Herrington, RVP at 716-667-6004 or e-mail rheringt@ albertfstager.com to register. Web site: www.naiia.com.

International Marine Claims Conference

September 2011 PLRB/LIRB Central Regional Adjusters Conference One of a series of regional claims adjuster conferences held in the United States. Attendees can network with industry peers while taking part in educational sessions designed to improve knowledge of core claims issues. Scheduled sessions include Defective Construction Claims, Ethical Claim Challenges, Medicare Compliance and Mandatory Reporting and Business Writing Skills.

September 7-8, 2011 Indianapolis, IN Contact: www.plrb.org

Construction Defect Claim Manager Association Fall Meeting A member-only meeting held in conjunction with the MC Consultants’ seminar. Meeting topics will include mediation alternatives and attorney insight.

September 7, 2011, 12 p.m. to 2:30 p.m.

San Diego, CA Contact: www.cdcma.us or Lee Wright at 615-986-5008.

MC Consultants’ 17th Annual West Region Construction Defect The annual conference will address construction defect, coverage, and litigation management issues the insurance industry will face within the next 12 to 24 months.

September 7-9, 2011 San Diego, CA Contact: www.mcconsultants.com/about/seminars or Steve Buckley at 760-930-9966.

Claims Conference of Northern California The conference provides a networking and educational event for insurance claims professionals. Choose from three educational tracks: 1) Liability 2) Property 3) Auto Track one session topics include controlling litigation expenses, collateral source rule developments and catastrophic injury defense.

Track two session topics include asbestos and lead, mining the Web for evidence and residential restoration.

Track three session topics include black box technology, mechanical failure investigations involving product liability cases, the Medicare mystery and fraudrelated auto accident reconstruction and investigation.

September 8-9, 2011 Sacramento, CA Contact: www.claimsconference.org for details and to register.

NAIIA Regional Meeting – Western States The meeting includes a networking cocktail party on September 14 and educational sessions on September 15 and 16.

September 14-16, 2011 San Diego, CA Contact: www.naiia.com, Bill McKenzie, RVP, at 619-282-6822 or e-mail walshadj@sbcglobal.net to register.

An international educational and networking conference for marine insurance claims specialists focusing on such topics as German and U.S. Hull clauses, Nordic claims handling developments, Iran sanctions update, China shipbuilding challenges and a collision scenario workshop.

September 28-30 Dublin, Ireland Contact: www.marineclaimsconference.com for details.

October 2011 First Party Claims Conference A two day educational and networking event offering more than 40 speakers, sponsors and exhibitors for first-party property insurance claims professionals. The 2011 program includes sessions on estimating techniques, benefits and pitfalls in the appraisal process, storm imagery, collapse coverage, contingent business interruption, and crime coverage claims.

October 17-19, 2011 Providence-Warwicke, RI Contact: www.firstpartyclaims.com/courses to register.

CLM Litigation Management Institute Certification program designed to provide comprehensive understanding of litigation management. The program is geared toward attorneys and those with at least 15 years of experience in litigation management. The program is limited to 100 participants. Attendees are eligible for education credit.

October 28-30, 2011 New York, NY Contact: www.litmgmt.org for details or to register.

November 2011 PLRB/LIRB Western Regional Adjusters Conference One of a series of regional claims adjuster conferences held in the United States. Network with peers while taking part in educational sessions designed to improve knowledge of core claims issues. Scheduled sessions include Animal Liability Claims, Defective Construction Claims, Conflicts of Law, Ethical Claim Challenges, Condominium Loss Adjustments and Business Writing Skills.

November 8-9, 2011 Sacramento, CA Contact: www.plrb.org for more details.

LEA Regional Claim Seminar The Loss Executives Association 2011 Claims Seminar is open to senior commercial property claim professionals, managers, senior officers and field staff.

Attendees will take part in the adjusting procedure of a mock claim and trial involving a large loss sustained by a commercial manufacturing operation.

November 15, 2011 Chicago, IL Contact: www.lossexecutives.com for details. To register, contact Wayne Klocko at 781-891-0230 ext. 27030 or at Wayne.Klocko@LibertyMutual.com.

Claims Journal | Fall 2011

51

IDEA EXCHANGE | BEST PRACTICES

How to Navigate Claims Negotiations

By Denise Johnson

W

hether working on a first- or third-party claim, an adjuster will undoubtedly run into a situation where resolution is stalled. Adjusters use negotiation techniques to resolve such claims, and it is important for them to hone these skills throughout their career, as emphasized in a recent presentation at the 2011 Property Loss Re-

52 Claims Journal | Fall 2011

search Bureau/Liability Insurance Research Bureau (PLRB/ LIRB) Conference in Nashville, Tenn.

Developing trust, knowing the details of the file and good listening skills are fundamental to being a good negotiator, according to industry veterans. In addition, timing may be the most misunderstood part of the process.

During a session, titled “Negotiating Tools to Settle Any Case,� presenters Neil Santolucito, a senior claim representative with United Fire Group; Daniel LeRose, a commercial

lines property manager at Liberty Mutual Agency Markets; and Peter J. Hood, an attorney at Neilsen, Zehe, Antas, P.C., offered adjusters a host of negotiation tools that can be used in a number of claim scenarios.

According to those experts, there are a number of key items that adjusters need to consider when dealing with a claims negotiation, including: • Determining when to begin the process and how to develop the claim; • Considering all factors associated with the claim; • Managing the negotiation process; • Identifying and utilizing strategies to best aid the presentation; and • Maintaining control of the process.

Negotiation should be thought of as a process, and claim files have three distinct phases within the process: • Initial investigation and handling, • Maintenance, and • Settlement.

The Process Begins

the strengths and weakness of the file.

Adjusters should prepare well in advance of the negotiation by determining each party’s “aspiration” (best outcomes). The same principle applies to each party’s “reservation point” (minimum acceptable outcome). Next, adjusters should consider each party’s ATNA (alternatives to negotiation) and each party’s BATNA (best alternatives).

Santolucito also advised adjusters not to forget to address quasi-monetary issues, such as annuities and structured settlements, subrogation apportionment agreements, immediate payment, wire transfer, and expensive litigation in their evaluations.

Being prepared also means researching the mediator, adverse party and the adverse attorney ahead of time, and especially prior to settlement discussions.

While there are multiple benefits of good preparation, the most obvious is the development of a carefully planned strategy that should, in turn, lead to the best results.

Adjusters should develop positive relationships with claimants before an attorney is involved with the claim.

Santolucito, a seasoned claims handler with 28 years of experience, pointed out that the negotiation process begins immediately upon receipt of a claim at the first notice of loss.

It’s vital for an adjuster to develop a positive relationship with the claimant before he or she retains an attorney, according to Santolucito. Developing trust is as easy as knowing the details of the claim and of the insured or claimant. It’s also dependent upon keeping commitments, such as phone appointments.

If an attorney already has been retained, rather than wait for a demand package before beginning an investigation and evaluation, the adjuster should make contact at the first notice of the loss. Santolucito recommended calling the attorney and sending a follow-up letter requesting documentation and a face-to-face meeting with the claimant. This “establishes direction for negotiation prior to the settlement phase,” he said.

Strategy Adjusters should identify the immediate issues and the key documents needed to evaluate and resolve those issues. They also should forecast other issues that may arise. Santolucito noted that distinguishing between primary and secondary issues is important. Primary issues are the recognizable ones, such as property damage and medical bills. Secondary issues including loss and sorrow have a more intrinsic value. Listening skills prove invaluable because secondary issues will become much more important than the primary issues during final negotiations.

Know the Pros and Cons Because the negotiation process continues through all phases of the claim, it is important for adjusters to understand

Maintaining Control

Adjusters can maintain control of negotiations by regularly reviewing a file and any changes.

The presenters at the PLRB seminar offered some strategies and techniques for maintaining control, including: • Breaking the high-low trap; • Recognizing the pros and cons of brackets (break it by offering a theory of why the claim is valued the way it is); • Identifying whether to resolve large or small items first; • Admitting and addressing obvious weaknesses in each party’s case; and • Avoiding discussion of issues that must remain off the table.

Another tip provided by the presenters: Adjusters should not avoid the big ticket items. It’s best to get them out of the way initially because this can lead to quicker resolution of the less important items, they said.

Finally, the presenters advised adjusters to remember that empathy carries weight in the negotiation process.

Adjusters must recognize that it’s not always about the money; rather an apology, a letter of recommendation, or a confidentiality agreement may be what is needed for closure to occur, the presenters said.

If there is no settlement, the adjuster should determine if the parties can agree to anything, even if it’s just another attempt. Then, review what headway was made and where differences remain.

If settlement is accomplished, the adjuster should get the basics in writing and lay out any contingencies before leaving, knowing full well that subsequent issues such as payment terms, release language and court costs can delay the actual settlement. Regardless of the outcome, good adjusters learn from the process and move on. CJ Claims Journal | Fall 2011

53

IDEA EXCHANGE | FINAL OFFER

Storms That Shatter Lives Hold Lessons for Insurers

By Julie Rochman

I

t used to be the low-frequency, high-severity events that kept U.S. property insurance producers, carriers, and reinsurers up at night. These big cats have become part of our collective history — Hurricanes Andrew, Katrina, Ike and Wilma, and the Loma Prieta and Northridge earthquakes. Tragically, these massive natural events still come along every few years and devastate cities or entire regions.

We cannot stop Mother Nature from doing her worst, but sometimes mega-disasters help strengthen us for the future. In fact, one positive outcome of low-frequency, high-severity cats is the distinct learning that comes in their aftermath. Researchers conduct real world, post-disaster studies of homes and commercial buildings to evaluate how they responded to various levels of natural force and stresses. In some cases, residents and policymakers in affected jurisdictions have taken significant steps toward mitigating future loss from mega-cats by enacting better building codes (as Florida did after Andrew, Louisiana did after Katrina and California did after Northridge). Other positive outcomes include creation of government-sponsored retrofit grant programs that provide much-needed funds for homeowners and business-owners to improve and strengthen their structures.

In the past few years, without a significant land-falling hurricane or major earthquake, there still have been lots of sleepless nights for insurance industry executives.

The reason?

High-frequency types of weather events are causing more damage than ever before. In 2010, several strong inland storms produced hurricane-force winds and large hailstorms in unusual places. Tornadoes occurred at rare times and in atypical places, such as Orange County, Calif. (January), Brooklyn/Queens, N.Y.

(September), Illinois and Wisconsin (November), and Oregon (December). Also during 2010, the largest hailstone on record was found in South Dakota (8 inches in diameter, weighing in at nearly two pounds.). According to Munich Re’s “Natural Catastrophe Year in Review,” for the third year in a row, thunderstorms caused more than $9 billion in insured losses in the United States, and multiple severe winter storms caused $2.6 billion in insured losses.

Unfortunately, 2011 is shattering more lives, property and loss records as higher frequency types of storms continue to be very severe as well. Wildfires burned from border to border in Texas and in other states in an unusually early 2011 rampage, destroying dozens of homes. On April 27, 2011, the largest one-day outbreak of tornadoes in U.S. history occurred. Sadly, these storms were killers. More than 350 people died in these storms — the second highest loss of lives on record from a single outbreak.

The question now is whether the essential lessons regarding loss reduction that we have learned from the infamous named cats will arise from these recent, serial disasters. The lessons need to be learned and mitigation solutions applied so that everyone, including residents and insurers in the affected areas, can look forward to more robust communities.

Public policy improvements to get people to protect themselves and increase the chances of community recovery are essential.

Proven examples include better building codes, more rigorous and universal enforcement of codes, incentives for retrofitting or building to code or code-plus standards, and community-based initiatives.

These steps also make good economic sense. According to the Multi-Hazard Mitigation Council, every dollar invested in natural hazard loss mitigation returns $4 to society. This is a tremendous cost/benefit ratio, particularly in an era of tight budgets at every level of the economy.

In addition, now is the time to create a true chain of value around betterdesigned and better-built properties.

Community leaders, financial institutions, and the business community all have a deep interest in making sure that homes are not essentially disposable and residents are not in town only until a catastrophe strikes. Additionally, the private insurance markets in hazard-exposed areas will be healthier and more competitive if we can reduce losses and make communities more resilient.

If we have learned one lesson over the past few years, it is that California earthquakes and Gulf Coast hurricanes still loom, but the geographic spread of natural hazards that cause catastrophic, record-level losses has never been broader because of weather and demographic trends. Insurers must heed these winds of change and be at the forefront of efforts at the federal, state and local levels to apply the lessons from cats of every magnitude to prevent loss of life and property throughout our nation. CJ

Public policy improvements to get people to protect themselves and increase the chances of community recovery are essential.

54 Claims Journal | Fall 2011

Rochman is president and CEO of the Insurance Institute for Business & Home Safety. Web site: DisasterSafety.org.

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