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AGENCY OPTIONS Social Networks, Finance & Staff

INSURANCE AGENT FRAUD Investigators On Alert

CHINESE DRYWALL Builders Face Huge Insured Losses


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Inside This Issue June 15, 2009 • Vol. 87, No. 12 • West Region

N28 | International Report Air France Crash Claims Could Top $1 Billion N29 | Closer Look: Construction Contractor’s General Liability Coverage Limitations

WEST COVERAGE

N12 Special Report: Top 100 Agency Profile Diversification Spurs San Antonio’s SWBC to Great Heights

NATIONAL COVERAGE N1 | Special Report: Agency Options - Financing InsurBanc’s Pettinicchi on Managing an Agency in a Troubled Economy N4 | Special Report: Agency Options - Networks Social Networking for Fun and Profit N12 | Special Report: Top 100 Profile Diversification Spurs San Antonio’s SWBC to Great Heights N16 | Special Report: Agency Options - Networks Assurex Global is the Globalized Broker

8

| Insurance Agents, Brokers: Beware of Scam Fraudsters Trying to Steal Agents’ Personal Information

8

| Regulator: California Workers’ Comp Insurance Rating Bureau Needs to Address Challenges WCIRB Says Changes Already Underway Before Audit Was Completed

10 | Nevada Governor Signs Bill to Change Insurance Department Funding Monies Move From General Fund to New Fund for Insurance Administration and Enforcement 10 | California Senate Passes Insurance Fraud Bill Informants Would Be Protected From Civil Liability

16 | Chinese Drywall: Builders, Subs Face Huge Insured Losses Policy Exclusions Are a Problem, But Builders Can Be Protected 18 | Pressure Is On to Catch a Few Bad Apples Fraud Investigators on Alert to Prevent Property/Casualty Agent Abuses From Spreading

N24 | Closer Look: Construction Risk Management Considerations for Projects on Standstill

20 | Agents Can Help Fight Insurance Fraud Agents on Front-Line May See Things That Would Raise Questions

4 | INSURANCE JOURNAL-WEST REGION June 15, 2009

22 | Construction on an Annual Policy Coverage Triggers, Products/Completed Operations and the Importance of Maintaining Continuity 24 | Insurance in Times of Financial Crisis Legal Issues to Be Aware of With EPL, D&O and Fiduciary Liability Insurance N10 | Growing Your Property Casualty Agency Take Advantage of Bad Times by Hiring a Marketing Major N32 | Closing Quote: Risk, Reward and Reflection Lessons Gained from the Current Economic Storm

DEPARTMENTS 6 12 14 N8

Opening Note People Business Moves MyNewMarkets

10 | Oregon Workers’ Comp Payments Up 3.4% Medical Costs Increasing At Greater Pace Than Indemnity Portion

N22 | Special Report: Agency Options - Staffing How to Make Telecommuting Work for Your Staff

N26 | Sotomayor Shows Record of Favoring Insurers Attorney Finds Rulings to be ‘Very InsurerFriendly’

IDEA EXCHANGE

16 Chinese Drywall: Builders, Subs Face Huge Insured Losses Policy Exclusions Are a Problem, But Builders Can Be Protected

24 Insurance in Times of Financial Crisis Legal Issues to Be Aware of With EPL, D&O and Fiduciary Liability Insurance www.insurancejournal.com


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Idea Exchange Opening Note

Finding Fraudsters

I

nsurance fraud has become a nationwide problem, and experts say it’s a problem that has the potential to get worse as people look for ways to cut down on their expenses as the economy tightens. “The special agents at NICB have been seeing some effect from the current economic situation on insurance fraud,” said Mike McKee, senior special agent for the National Insurance Crime Bureau. And with anywhere from $80 billion to $200 billion lost to fraud each year, affecting all lines of the insurance business — property, casualty, health, life and disability — it’s no wonder that states are concerned with combatting it. When people are in economic straits, they try to unload valuable assets. This applies to insurance too, as state insurance department fraud units have noticed jewelry and cars “go missing” in recent months. “Desperate consumers also are torching homes — seeking an insurance bailout from foreclosure or general financial distress,” McKee provided as an example. Questionable claims and thefts are not restricted to personal assets either. In the commercial insurance area, McKee said insurance fraud is on the rise in theft of cargo from inland marine type trucking companies, electronics are being stolen off of the trucks, and semi-precious metals such as copper are being ripped out of walls. With insurance agents and brokers on the front lines of insurance transactions, they can alert investigators to potenWhat seems tial problems early in the process. Fraud experts suggest agents and brokers verify consumers’ identities when they are too good purchasing insurance, inspect the condition of vehicles before to be true they are insured, and keep a watchful eye on people who they’ve placed coverage for that may be having economic often is. problems if all of a sudden they place a claim. “What seems too good to be true often is,” said National Association of Insurance Commissioners CEO Dr. Therese M. (Terri) Vaughan. Keeping an eye out for potential wrongdoings applies to insurance agency employees as well. Because insurance agency personnel have access to clients’ confidential financial information, it’s important for insurance agencies to scrutinize their employees prior to employment, recommended Ted Clark, anti-fraud division director for the Kansas Department of Insurance. Background checks should extend not just to senior management, but across all lines of employees down to janitors and office assistants. “Those agents who are living on the moral margins have much more motive to try to rescue their sagging finances by milking unsuspecting clients,” said Jim Quiggle, communications director for the Coalition Against Insurance Fraud. Fraud investigators are quick to point out that the incidence of insurance agents themselves committing fraud is rather small, compared to the total types of fraud. “But unfortunately those unscrupulous agents that do [commit fraud] give everyone who is an agent or broker a bad name,” Goldblatt said. “It’s serious if for no other reason than it really puts the spotlight on how trusting the system is. If you can’t trust your agent, who can you trust?” To read more about insurance fraud trends, see pages 18-21 of this issue. Patricia-Anne Tom West Editor ptom@insurancejournal.com

Publisher Mark Wells Chief Executive Officer Mitch Dunford

EDITORIAL Editor-in-Chief Andrea Ortega-Wells | awells@insurancejournal V.P. Content/ and Interim Midwest/Southeast Editor Andrew Simpson | asimpson@insurancejournal.com East Editor Kenneth J. St. Onge | kstonge@insurancejournal.com South Central Editor Stephanie K. Jones | sjones@insurancejournal.com West Editor Patricia-Anne Tom | ptom@insurancejournal.com MyNewMarkets Associate Editor Chris Boggs | cboggs@insurancejournal.com International Editor Charles E. Boyle | cboyle@insurancejournal.com Columnists Susan Henry, Alan Shulman Contributing Writers Gary Grindle, Timothy Kania, Gerald F. Ladner, Brian Martin, John Sadler, Danielle Thorsteinson

SALES V.P., Sales & Marketing Julie Tinney (800) 897-9965 x148 jtinney@insurancejournal.com West Dena Kaplan (800) 897-9965 x115 dkaplan@insurancejournal.com South Central Eric Jeter (281) 655-0234 ejeter@insurancejournal.com

Midwest Lauren Knapp (800) 897-9965 x161 lknapp@insurancejournal.com Southeast Howard Simkin (800) 897-9965 x162 hsimkin@insurancejournal.com East Dave Molchan (800) 897-9965 x145 dmolchan@insurancejournal.com

MARKETING Marketing Administrator Gayle Wells | gwells@insurancejournal.com Advertising Coordinator Erin Burns | eburns@insurancejournal.com (619) 584-1100 x120 New Markets Sales Manager Kristine Honey | khoney@insurancejournal.com Classified and Ancillary Sales Manager Nicola Coghill | ncoghill@insurancejournal.com (619) 584-1100 x125 New Media Producer Chad Reese | creese@insurancejournal.com

DESIGN/WEB Vice President/Design Guy Boccia | gboccia@insurancejournal.com Vice President/Technology Joshua Carlson | jcarlson@insurancejournal.com Graphic Designer Jamie Bethell | jbethell@insurancejournal.com Web Developer Jeff Cardrant | jcardrant@insurancejournal.com Web Developer Chris Thompson | cthompson@insurancejournal.com

A D M I N I ST R AT I O N Accounting Manager Megan Sinclair | msinclair@insurancejournal.com

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 2009 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

6 | INSURANCE JOURNAL-WEST REGION June 15, 2009

FOR QUESTIONS REGARDING SUBSCRIPTIONS: please call 856-380-4176 or email subscribe@insurancejournal.com. You may subscribe or change your address online at insurancejournal.com/subscribe. 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.


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West Coverage Snapshot

Insurance Agents, Brokers: Beware of Scam L icensed insurance agents and brokers in California, Colorado and Nevada are being warned to beware of a scam targeting them. The Nevada Division of Insurance, California Department of Insurance and Colorado Division of Insurance each have received reports that individuals have been calling licensed insurance agencies and representing themselves as employees of the state’s Division of Insurance. These individuals, pretending to be Division of Insurance employees, have

requested payment for a penalty fee. The same individuals also have requested that the insurance agencies provide credit card and Social Security information over the telephone to make the penalty payment and to avoid cancellation of their license. The Insurance Commissioners of all states are warning agents and brokers that these individuals are not employees of the Division of Insurance and are attempting to scam insurance agencies for financial gain. It is not the policy, practice or procedure for the DOIs to request cred-

it card or Social Security information over the telephone, with regard to a payment. “Although we have received very few reports, this particular scam has surfaced in Colorado. These scams often travel from state to state, so it’s a good time to remind people to safeguard their personal information,” said Colorado Commissioner Marcy Morrison. “We want to be proactive and give people the information they need to avoid being taken by this type of con artist.” If agents and brokers receive a telephone call requesting that

information, they are advised not to provide the caller with any personal information including credit card or Social Security numbers, as the Division of Insurance will always be able to provide written confirmation regarding any payment request. They also should contact the local law enforcement agency and local Department of Insurance. Enforcement officials are actively investigating the scam, which first was reported California in May and appears to be spreading throughout the Western states. IJ

Regulator: California Workers’ Comp Insurance Rating Bureau Needs t By Patricia-Anne Tom

T

he California Department of Insurance has released an audit report of the state’s Workers’ Compensation Insurance Rating Bureau. Among the recommendations are that WCIRB should: • Begin to collect the detailed, transaction-level data needed to perform refined analyses of the potential impact of legislative, regulatory and judicial actions, and of why specific components of claim costs are rising or falling. • Require all insurers to submit their aggregate financial data call reports electronically and require insurers to resolve all data validation errors prior to submitting the information to the WCIRB. • Take remedial action with respect to any insurer group that is required to obtain an independent auditor’s report attesting to the insurer group’s annual aggregate data report but is unable to obtain a “clean” opinion regarding

such data report. Additionally, WCIRB’s existing remedial action procedures should be supplemented by having the WCIRB Governing Committee authorize its staff, or independent persons, to perform an on-site audit of insurers that are unable to obtain a “clean” independent audit report. • Implement a program applicable to the largest insurers whereby the senior management and the controllers attest to the effectiveness of the insurers’ statistical and financial reporting systems. • Work closely with the State Compensation Insurance Fund to assure that SCIF’s data collection and reporting system is functioning effectively. • Consider multiple projection methods when making pure premium rate determinations. • Provide a range of reasonable pure premium rate level indications to the Actuarial Committee and the Governing Committee. • Prepare and provide to the CDI a chart or side-by-side comparison

8 | INSURANCE JOURNAL-WEST REGION June 15, 2009

lished in the audit report. showing projected on-level pure “As a general observation, we premium loss ratios by accident believe the examination was thoryear using each method considough and fair, and that the recomered by the WCIRB. It would be mendations are constructive and helpful to explain why WCIRB reasonable. The believes certain WCIRB has methods are already made more reasonable progress to than others for address many of particular accithe recommendadent years. tions and we look WCIRB should forward to workdescribe the key ing with the CDI assumptions to address all underlying each remaining issues,” method, the said Robert G. extent to which Mike, WCIRB those assumppresident. tions are valid, Steve Poizner “An accurate and alternate and credible rate scenario projections for key assumptions. WCIRB application by the WCIRB is vital to a functioning workers’ compenalso should explain its rationale sation system in California. This behind the selected loss ratios by audit shows that there are many accident year. shortcomings that make this task WCIRB said a number of the difficult,” Commissioner Steve recommendations had already Poizner said. He noted WCIRB been identified and are being has committed to providing a addressed — prior to being pubwww.insurancejournal.com


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It Figures

Declarations Insurance Friendly

5 Hurricane forecasters at Colorado State University have lowered their prediction for the number of hurricanes they expect to hit the Atlantic Basin in 2009 to five, down from an April forecast of six hurricanes. The forecasters say information obtained through May indicates that the 2009 Atlantic hurricane season will be slightly less active than the average 1950-2000 season. They predicted 2009 will have 11 named storms, 50 named storm days, 20 hurricane days, 2 major (Category 3-4-5) hurricanes, and 4 major hurricane days.

to Address Challenges detailed action plan within 30 days to fix the faults. In particular, the audit report recommended that steps be taken to allow more time for pure premium rate recommendations to be reviewed before the mid-year filings are submitted to CDI. “We do not have a specific recommendation on who this should be accomplished, but options that could be considered include not submitting a midyear filing, moving the proposed effective date of the mid-year filing to a date other than July 1, and basing the primary analysis pertaining to the mid-year filings on data submitted as of an earlier date so that there is sufficient time for data review and analysis,” the report states. Recently, the WCIRB has been criticized by Commissioner Poizner for recommending rate increases, especially during a time of economic crisis. “Especially in a time when the Rating Bureau is requesting www.insurancejournal.com

unprecedented rate hikes, we must carefully scrutinize all the data involved in making this decision to ensure that any change in the benchmark is warranted. Every additional dollar spent on workers’ compensation insurance is a dollar that an employer cannot use to save or create a job. In this economy, when many small businesses are barely staying afloat, an unnecessary rate hike can mean the difference between survival and going out of business. WCIRB must take swift action to correct these issues,” the Commissioner said. To view the audit report, visit http://www.insurance.ca.gov/ 0400-news/0100-press-releases/ 0080-2009/upload/WCIRB ExaminationReport060209.pdf. To view WCIRB’s response to the report, visit https://wcirbonline. org/wcirb/resources/data_reports /pdf/090522_RGM_to_CDI_ Response_to_CDI_Exam_Report .pdf. IJ

“What I discovered in the course of looking at Judge Sotomayor’s overall body of opinions on coverage issues was far more interesting than any one case. Judge Sotomayor has been very, very insurer-friendly during her time on the bench.” — Philadelphia based insurance attorney Randy J. Maniloff on his review of Supreme Court nominee Judge Sonia Sotomayor’s insurancerelated opinions. Her insurance opinions could make the case that she’s not as “liberal” as everyone thinks, Maniloff said.

Consumer Questions “It is very difficult for consumers to figure out if they are being gouged or not. You have to trust your state regulator.” — J. Robert Hunter, a former Texas State Insurance Commissioner who is now director of insurance at the Consumer Federation of America, a consumer advocacy group, telling an Associated Press reporter that rising prices and deductibles may lead some homeowners to question whether they’re overpaying for insurance.

State to State Scam “These scams often travel from state to state, so it’s a good time to remind people to safeguard their personal information. We want to be proactive and give people the information they need to avoid being taken by this type of con artist.” — Colorado Insurance Commissioner Marcy Morrison warning insurance agents and brokers to beware of a scam targeting them. Regulators in California, Colorado and Nevada said scammers have been posing as Department of Insurance employees and calling agents and brokers to try to get credit card and Social Security information.

Terrorism Threats “A new generation of terrorists will emerge from disaffected communities in a re-emergence of class-based politics.” — In light of the global recession, Craig Preston, executive director at Aon, noted that it’s possible that new terrorist groups could emerge in the developed world on the far right and far left of the ideological spectrum. Aon has just issued the latest version of its “Terrorism Threat Map.” The most significant change from previous maps shows a “shift in Islamist terrorist activity from the Middle East to South Asia.”

Unfortunate Losses “It is unfortunate that Fireman’s Fund employees and others suffered losses as a result of their investments with AGA, but we continue to believe that we are not responsible for these losses.” — Fireman’s Fund Insurance Co. commenting on a lawsuit in which dozens of employees and retirees are suing after they lost as much as $30 million on advice they claim came from financial advisers hired by the insurer. June 15, 2009 INSURANCE JOURNAL-WEST REGION | 9


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West Coverage News & Markets

Nevada Governor Signs Bill to Change Division of Insurance Funding

N

evada Gov. Jim Gibbons has signed a bill that will change the funding structure of the Nevada Division of Insurance and

strengthen consumer protections in the area of viatical settlements. The bill, Senate Bill 426, passed May 22 in the state Assembly with a 37-5 vote. It moves the funding of the Division of Insurance from the state’s General Fund to a newly created fund for Insurance Administration and Enforcement, allowing the Division to completely rely on a fee-based funding structure widely supported by the state’s insurance industry. “Under this new funding method, the Division will not be subjected to the whims of the economy,” Nevada Insurance Commissioner Scott J. Kipper said. “It will allow the Division to add the necessary staff to contin-

ue to adequately regulate Nevada’s insurance business, a $12 billion industry in the state.” SB426 also revises provisions regarding viatical settlements, consistent with the National Association of Insurance Commissioners Model Act. The bill: • Establishes a five-year waiting period to viaticate a life insurance policy; • Improves accountability and transparency by requiring additional notices and disclosures; • Enhances advertising and marketing guidelines for viatical and life settlement products; and • Regulates the securities side of viatical/life settlement transactions through the Office of the Secretary of State. IJ

California Senate Passes Insurance Fraud Bill

T

he California Senate has passed SB 156 to authorize the Department of Insurance or a district attorney to convene meetings with an insurance company to discuss a specific insurance fraud and would provide that any person sharing information pursuant to that authorization would be protected from civil liability. The bill noted that existing law generally provides for the prevention, detection and investigation of insurance fraud, in which insurers are required to disclose information relative to incidents of workers’ compensation fraud. The bill now moves to the Assembly. IJ

Oregon Workers’ Comp Payments Up 3.4%

O

regon’s Department of Consumer and Business Services has published a report examining trends in medical costs during 2000-2007. According to the report, for the period studied, total workers’ compensation costs increased at an average rate of 3.4 percent per year. Workers’ compensation medical payments in Oregon increased at an annual rate of 4.7 percent, roughly keeping pace with the medical care component of the Consumer Price Index. The report noted the medical portion of workers’ compensation costs has been increasing at a greater pace than the indemnity portion. As a result, the share of medical costs increased from 50.7 percent in 2000 to 54.1 percent in 2007.

Workers’ comp medical expens- insurers’ payments, but the gap provider, type of service and type es in Oregon are covered by the between the two has been narof claim. state accident insurance fund rowing in the past two years. To view the report, visit (SAIF), private insurance compaThe publication examines http://www.cbs.state.or.us/ nies, self-insured employers, or changes in costs over time broken imd/rasums/3452/07web/07_3452. the noncomplying employer prodown by type of payer, type of pdf. IJ gram. According to the report, the volume of Workers’ Compensation Costs by Year of Payment, 200-2007 payments made by SAIF and private insur(in millions of dollars ers has varied, while payments by selfinsured employers and the noncomplying employer program has remained relatively stable. From 2000-2005, the share of SAIF payments increased while the share of private insurer payments decreased. Beginning in 2003, the share of medical payments made by SAIF exceeded private

10 | INSURANCE JOURNAL-WEST REGION June 15, 2009

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West Coverage People

Richard Rohde

Jack Cooperman

Tom Elder

Jeffrey Cavignac

Neal Wolin

Teresa Long

Fair Oaks, Calif.-based Insurance Resources Consultants, an IR Group subsidiary, named Richard Rohde executive vice president and senior consultant. He will offer strategic planning and operational improvement consulting to retail agencies and managing general agents. Rohde was most recently president of the Arrowhead Commercial Business Group. Previously, he was a managing principal with Barney and Barney LLC. He also served on the board of directors of The Council of Insurance Agents & Brokers and the board of Insurance Brokers and Agents of the West. San Francisco-based Woodruff-Sawyer & Co. named Jack Cooperman vice president, business continuity and loss control. Cooperman has been in the insurance industry since 1980. His background includes working in field and managerial positions at a global property insurer and various property/casualty insurance brokers, where he was successful at driving property loss control strategies. Most recently, he was president of his own risk management consulting firm specializing in business continuity management and property loss control. Tom Elder joined the All Risks’ National Specialty Programs unit as the lead financial institutions underwriter for the new nationwide REO/Foreclosure and Lender Placed Property Insurance Program. He will target commercial banks, credit unions, savings and loans, mortgage banks, and financial institutions that service and/or invest in mortgage loans. Previously, Elder worked for MetLife Bank as a regional reverse mortgage consultant. Prior to that, he owned a mortgage company for six years. Insurance Brokers & Agents of San Diego named Jeffrey W. Cavignac its Agent of the Year, and Regina Lemanowicz San Diego Insurance Woman of the Year. Cavignac is president and principal of Cavignac & Associates, and was recognized for his years of service, dedication and commitment to the association, the insurance industry, and fellow insurance brokers and agents in San Diego. A 28-year veteran of the insurance brokerage industry, Cavignac founded Cavignac & Associates in 1992. Lemanowicz is the president of the Insurance Woman of North San Diego County, which is affiliated with the National Association of Insurance Women International. She was recognized for her significant contribution to the insurance industry, local association and community. She has been in the industry for more than 26 years and has been a member of the National Association of Insurance Women, International for seven years. Neal S. Wolin was confirmed by the U.S. Senate to serve as the deputy secretary of the U.S. Department of the Treasury. In February, Wolin was named deputy assistant to the President and deputy counsel to the

12 | INSURANCE JOURNAL-WEST REGION June 15, 2009

President for Economic Policy. Wolin served as general counsel of the Department of the Treasury from 1999 to 2001 and as deputy general counsel from 1995 to 1999. He previously served as executive assistant to the National Security Advisor, Deputy National Security Advisor and Deputy Legal Advisor to the National Security Council. From 2001 to 2008, Wolin served at The Hartford Financial Services Group Inc., most recently as president and chief operating officer for property and casualty, and previously as general counsel. Teresa Long was named director of agency services for the Institute of WorkComp Professionals (IWCP), a national network of workers’ compensation professionals. Long will be working with IWCP member insurance agencies and their workers’ compensation claims processing and injury management procedures, helping agencies arrange medical clinic relationships, developing back-towork programs, conducting seminars for employers and providing training for IWCP’s nearly 1,000 Certified WorkComp Advisors. Long was most recently vice president of risk management for Unisource Administrators Inc. Previously, she was claims manager for Walt Disney World and vice president of Sarasota International Risk & Insurance Services. San Diego Insurance Women announced its award winners for the 2008-2009 term. The winners are: Danielle McBride - Young Professional of the Year; Rhonda Collins - Rookie of the Year; Kay Wheeler - Member of the Year for Region VIII; Pam Legge - Insurance Professional of the Year; Nancy Ladd - Underwriter of the Year & Hall of Fame Award for Region VIII; and Kathleen Kerstenbeck - Insurance Woman of the Year. The National Association of Insurance Women presented Pamela Holt with the Region VIII (North San Diego County) Hall of Fame award. The award recognizes Region VIII’s appreciation to members who have given their time and dedication to the development of their local association, state council and NAIW. Holt has worked for Hatter, Williams & Purdy Insurance in Carlsbad, Calif., for 12 years as marketing director and commercial lines supervisor. She has been a member of NAIW for 25 years. She is the past Region VIII Regional vice president. BB&T Insurance Services of California Inc. appointed John M. Nielsen vice president for its San Francisco office. Nielsen, who has more than 15 years of sales and underwriting experience, will be responsible for this office’s business development in both employee benefits and commercial casualty. He previously was vice president of Hays of California Insurance Services. Prior to that, he was vice president with Hilb, Rogal & Hobbs Inc. IJ www.insurancejournal.com


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West Coverage Business Moves

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The Hanover Specialty lines business will be a key growth engine in the next several years for Worcester, Mass.-based The Hanover, according to CEO Fred Eppinger. In the past year, revenue from specialty lines at The Hanover has grown from roughly $65 million to $500 million, fueled by a spending spree that includes the purchase or expansion of specialty products, services and companies — including last year’s acquisition of Windsor, Conn.based specialty insurer AIX Holdings. Eppinger’s plans for The Hanover coincided with A.M. Best upgrading the company’s insurer financial strength rating, to “A,â€? the third ratings firm in 15 months to do so. Considering the state of the industry as a whole, an upgrade in the current market is rare. But viewed in the context of The Hanover’s recent history, it’s nothing short of amazing. In 2003, the company sat on the verge of ruin, and Eppinger led a turnaround effort ditching The Hanover’s life insurance business to focus on property/casualty business. Eppinger and other executives began focusing more acutely on underwriting, rather than investment gains, as the key driver of The Hanover. “I made it very clear that we’re in the underwriting business,â€? Eppinger said. “Our portfolio is very conservative around investment grade bonds. Our skill is in underwriting, and notâ€? playing the market. That conservative, investment-wary approach partially laid the roots five years ago for the financial stability the company is now seeing, Eppinger said. The upgrade, he added, “is a very important mark in the journey we have made ‌ this allows us to be one the most important companies for independent agents over the next two years.â€? The company’s capital base is $1 billion stronger than in 2003 with $400 million at the holding company level, that Eppinger plans to leverage by investing in new products and services, and bringing in talent from distressed, larger competitors. Over the short term, Eppinger said The Hanover will focus on improving product offerings in specialty lines and providing greater access for agents to those markets.

Eppinger also said the company will grow in niche middle-market lines for institutions, schools and nonprofits, which have also been significant revenue drivers for the insurer. That also means growing The Hanover’s presence across the country. The company writes currently in 35 states, but lacks a physical presence in 30. “With the disruption in the industry, we have had agents ask us to expand,� Eppinger said. “Our footprint will grow.� Hub International, Rettenmier Chicago-based Hub International Ltd.’s Northwest operating unit acquired the assets of Rettenmier Benefits Group Inc., an Everett, Wash.based employee benefits consulting and insurance brokerage firm serving the Pacific Northwest. Acquisition terms were not disclosed. Rettenmier employees will join Hub Northwest and continue to operate from their current Everett office. The new location expands Hub Northwest’s presence to a new territory north of Seattle. Cincinnati Financial, Moody’s Cincinnati Financial Corp.’s lead property/casualty insurance subsidiary, Cincinnati Insurance Co., appointed Moody Insurance Agency in Denver as the first independent agency in Colorado to market its business insurance policies and services. Cincinnati Insurance executives initiated the relationship at the company’s headquarters, welcoming agency representatives Brad Moody, president, and Kim Burkhardt, director of sales development. This marks the 36th state of operation for the insurer. Cincinnati also plans to enter its 37th state, Wyoming, later this year. The company anticipates making eight independent insurance agency appointments in Colorado and Wyoming in 2009. President and CEO Kenneth W. Stecher said, “We’ve had our eye on Colorado for several years. Operating within its stable regulatory and business climate, we see Colorado as an opportunity to support our goal of growth and diversify our geographic footprint, mitigating catastrophe losses.� IJ www.insurancejournal.com


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West Coverage News & Markets

Chinese Drywall: Builders, Subs Face Huge Uninsured Losses Policy Exclusions Are a Problem, But Builders Can Be Protected By John Sadler

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eneral liability carriers specializing in contractor insurance for builders and drywall subcontractors (subs) are “sweating it out” over the potentially massive claims dollars that could be paid out in litigation, settlement, and adverse jury verdicts arising from Chinese drywall. However, due to the impact of littleknown policy exclusions and evolving case law in many states, general liability carriers may escape liability for all or a significant percentage of claims leaving builders and trade subs facing huge uninsured losses and potential bankruptcy. From the point of view of the homeowner, these claims will not likely be covered by homeowners property insurance. And unfortunately to the extent that the damages are not covered by the general liability policies of builders, subs and distributors, homeowners will incur devastating out-ofpocket losses.

Next, add damages for remediation or replacement to household contents for exposure to corrosive and foul-smelling fumes. Top this off with the possibility of bodily injury claims due to adverse health consequences to occupants due to exposure.

Pollution Liability Exclusions All contractor general liability policies include a standard exclusion for liability arising from the “actual, alleged or threatened discharge, seepage, release or escape of pollutants.” Pollutants are defined as any solid, liquid, gaseous, or thermal irritant or conPer House Damage taminant, including smoke, vapor, soot, Could Be Astronomical fumes, acids, alkalis, chemicals, and waste. There is a lot at stake for all parties Based on this broad definition, the carriers because the damages on a per house basis are will take the position that the fumes likely to be astronomical. The lawsuit papers released from Chinese drywall fall under the will allege that the fumes from the defective policy definition of pollution. Chinese drywall have Fortunately, the standard resulted in corrosion dampolicy language includes an There is a lot at ages to all metal parts of exception to the exclusion the house including electrifor pollution that results stake for all cal systems, copper piping, from the products or comparties because HVAC and other metal fixpleted operations of an tures. In addition, lawsuits insured. In other words, the the damages on will alleged that the noninsurance carrier can’t use a per house basis the pollution exclusion to metal parts of the house have been damaged by deny a claim when the polluare likely to be foul-smelling and noxious tion arises after the house astronomical. sulfur dioxide fumes. has been sold. Some experts may claim Unfortunately, many genthat the drywall can be sealed, but this eral liability policies that are sold to contracapproach is questionable and unlikely to be tors include a total pollution exclusion that accepted by homeowners. Most lawsuits will does not allow the exception that is menlikely ask for the total removal and replacetioned in the above paragraph. The presence ment of all drywall and electrical systems, of the total pollution exclusion (or similar as well as other building materials that may exclusion) on a policy will allow the insurhave been contaminated by the fumes. ance carrier to take the position of denial of 16 | INSURANCE JOURNAL-WEST REGION June 15, 2009

all damages and legal defense. The success of such a position will be determined by the allegations in a specific lawsuit, as well as case law. The successful use of the total pollution exclusion, if upheld by the courts, will have a devastating impact on all defendants. Property Damage Exclusions and Emerging Case Law In the event that the total pollution exclusion is not present on the general liability policy, or if it is not ultimately upheld by the courts, claims adjusters will have a fallback position in their quest to deny a significant percentage of Chinese drywall claims. As a result of the construction defect crisis, most general liability carriers specializing in builders insurance began to insert special policy exclusions around five years ago to escape liability for construction defect claims. The most common exclusion entitled, “Exclusion: Damage To Work Performed By Subcontractors On Your Behalf” (CG2294), virtually eliminates all property damage liability for damage to the builder’s faulty work itself (drywall) and resulting damage to the builder’s non-faulty work (corrosion to electrical systems, copper piping, HVAC and other metal fixtures). Existing case law in many states has resulted in claim denials for construction www.insurancejournal.com


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defect under the theory that property damage to a builder’s work is not considered to be an “occurrence” or accident, and thus the policy should not act as a warranty. Therefore, the result in these states is the same as the application of exclusion CG2294. However, general liability coverage under the builder’s insurance policy will still likely apply to property damage to contents and bodily injury claims by occupants. Because most lawsuit papers are likely to allege at least some covered damages, coverage will still be triggered for the entire legal defense for all claims at the expense of the insurance carrier. As concerns drywall subcontractors, their general liability policies will not cover property damage to their work (drywall) but will cover resulting property damage to other parts of the house and contents. Their policy will also cover bodily injury to occupants. In addition, their policy will likely trigger a full legal defense of all claims. Assuming that both the builder and drywall sub have general liability insurance in

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force continuously from the completion of the job to the filing of the lawsuit papers, their combined policies won’t likely cover the cost to tear out and replace the drywall. Such a repair job represents a huge undertaking and will be very expensive. U.S. Suppliers and Chinese Manufacturers U.S. suppliers of Chinese drywall will undoubtedly participate in these lawsuits with both builders and drywall subs. Plans for class action lawsuits are already under way. Under a worst case scenario, some U.S. suppliers may run out of general aggregate limits under their general liability policies, and it is unlikely that Chinese manufacturers will share in these claims due to the difficulties in enforcing judgments against foreign manufacturers. Builders Can Protect Themselves Builders are advised to protect themselves from future construction defect and pollution claims by implementing the following

practices: • Implement mandatory subcontractor agreements with all subs, including insurance requirements for general liability, hold harmless/indemnification provision, and a requirement for all subs to participate in arbitration proceedings. • If the builder’s general liability policy includes the Exclusion-Damage To Your Work Performed By Subcontractors On Your Behalf (CG2294) or a similar exclusion, find out if the insurance carrier provides a buyback for an additional premium charge. • Ask the insurance agent if any insurance carriers are available that don’t use exclusion CG2294 or have a less severe version that covers resulting property damage to the builder’s non faulty work. • Purchase a pollution liability policy. IJ Sadler is president of Sadler & Co. Inc., which has a contractor insurance division that specializes in insuring home builders, remodelers and light commercial general contractors in the Southeast. This article previously appeared in Sadler’s blog at www.contractor-insure.com.

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West Coverage News & Markets

Pressure Is On to Catch a Few Bad Apples Fraud Investigators on Alert to Prevent Property/Casualty Agent Abuses from Spreading By Andrew G. Simpson

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“Right now, we want to be vigilant With access to their clients’ confidential because everybody is experiencing the financial information, brokers are welleffects of the economic downturn ... and positioned to commit fraud if that’s what that’s when people get desperate,’’ said the route they choose. Sandy Praeger, Kansas insurance commis“[T]hey have an awful lot of information. sioner and head of the anti-fraud task force Those agents have everything they need to for the National Association of Insurance file false claims, [or] through identity theft Commissioners (NAIC). open accounts in somebody’s name. It realChallenging economic conditions can ly is important that we have people that drive producers to cut corners, take risks are licensed and are above reproach, or, worse, commit fraud. because there are a lot of They may be under personopportunities for the ‘Those agents who al financial stress or harbor unlawful person to take are living on the unrealistic financial expecadvantage,” Praeger said. tations. They may also be Sometimes it’s not the moral margins have under increasing business agent who is financially much more motive pressure to earn commisvulnerable, but the to try to rescue sions or meet quotas from agency’s client. carriers. “Virtually every small their sagging “[T]he current economic town in our state has finances by milking downturn is creating more insurance agents. So, unsuspecting problems because many they’re selling to their agents are financially hard friends and neighbors. clients.’ hit as small-business peoThese are not just arm’s ple. Those agents who are living on the length business transactions. I’m sure there moral margins have much more motive to is some pressure brought on them to — try to rescue their sagging finances by ‘Hey, you know, I had a little damage and we milking unsuspecting clients,” said Jim just had a hailstorm, so let’s see if I can’t get Quiggle, communications director for the some home repairs done that weren’t exactly Coalition Against Insurance Fraud (CAIF). caused by the hail,’” Praeger said. “Everyone is trying to shave costs at every end of the insurance transaction. It would be easy for clients to suddenly ask their agents how they can push the maralifornia officials reported that Bladimir Rivera of Los Angeles was convicted on one felony gins of legality to save money in premiums. count of impersonation an insurance agent. Investigators said that Rivera, a salesperson at And an agent whose book of business is HBR Truck Sales in Wilmington, created and issued bogus commercial truck insurance certifistruggling under the weight of the recescates. The investigation revealed that Rivera used information from legitimate insurance certifision might be sorely tempted,” Quiggle cates such as policy numbers and the name and license number of an insurance agent, who was said. not involved in the transaction. Rivera placed this information on bogus certificates. The scheme False information on applications or was discovered by the agent whose identity was stolen. claims files may be added or ignored, payIn another case, California Attorney General Jerry Brown claims a Southern California workroll figures adjusted or a fake certificates of ers’ compensation broker deliberately misclassified workers as executives to avoid paying cominsurance issued. Howard Goldblatt, direcpensation premiums. Brown claims that Contractor’s Asset Protection Association Inc., a brokertor of government affairs for CAIF, noted age based in Rancho Santa Fe, engaged in unfair competition to avoid paying premiums on how a dishonest customer can place an behalf of workers in high-risk industries. agent in an unwelcome predicament. The “ConAPA has promoted and continues to promote a scheme to evade workers’ comp insuragency may write several lines for an ance to a clientele of employers, including those in high-risk industries,” the suit alleges. IJ account — workers’ compensation, com-

hose who track insurance criminals for a living say that as the economy has worsened, insurance fraud has been on the rise — and they are on the alert for any jump in fraud by property/casualty agents and brokers. These days when preachers, judges, doctors, business owners and athletes are caught up in reported insurance scams, it’s not surprising that some unscrupulous agents and brokers exist, too. In a severe economic downturn, insurance agents can be among those who succumb to pressure to maintain their livelihood or to protect their accounts through fraudulent means. The Insurance Information Institute estimates that fraud accounts for 10 percent of the property/casualty insurance industry’s losses and loss expenses, or about $30 billion a year. Because those costs are passed along to buyers in the form of higher premiums, officials are determined to keep that figure from rising. “It has been the general experience of the bureau that as the economy goes, so goes instances of alleged or actual misrepresentations,” said Michael T Beavers, supervisor of the property/casualty agent investigation unit of the Virginia Insurance Bureau.

Recent P/C Agent - Broker Fraud Cases in California

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mercial auto, property, maybe also some personal insurance. The client then fudges the employee payroll for the workers’ compensation account. “Is the agent going to blow the whistle on the account and risk losing all this business?” he asked. The fraud cases that investigators are watching out for are not like the multi-million dollar bid-rigging or internal fraud schemes by mega-brokers that made headlines starting in 2004. Rather, investigators are looking for missteps by individual agents or smaller conspiracies where often insurers and sometimes insureds are being ripped-off. However, Goldblatt noted smaller frauds where the dollar amount is “kept below the radar” can go on for quite awhile. Fraud Types Virginia’s investigator Beavers categorizes agent-broker fraud into several categories: premium theft or diversion cases where an agent collects the premium but does not remit it to the insurance carrier, causing the policy to lapse for non-payment; cases where an agent never places the policy being paid by the client; and cases of agent misrepresentation, such as the filing of false certificates of insurance or creating bogus policies or surety bonds. Beavers and other investigators are also on the lookout for a practice known as sliding, in which an agent sells coverages or add-ons to clients without their knowledge. Investigators say premium theft or diversion schemes are the most common fraud cases among producers. “We know what they tend to do is take the premium checks that are intended to go to the insurance companies and abscond with them to embezzle them, to shift them for personal use while telling the insured they are covered,” Goldblatt said. Insureds believe they have coverage, but the insurwww.insurancejournal.com

ance companies have no information on them. The brokers typically get caught if and when the insured files a claim and discovers there is no coverage in place, he said. Policyholder premiums are not the only target; escrow accounts can also be tempting. “[Agents] might ‘borrow’ from that escrow account that they’ve been building up. For example, if they sell surplus lines, they collect the premium tax, and then remit it to the state. Some of them put it in a separate account, they’re supposed to, and then remit it all at one time. And, sometimes, unfortunately, they see the dollars there and they’re a little desperate and they think, ‘Well, I’ll just borrow from that account and then I’ll pay it back.’ That’s when they get caught,” Praeger said. Fraud is most likely to rise where premiums are going up, particularly in places and situations involving high-risk businesses and coastal areas, according to officials. “You might see agents selling bogus workers’ comp coverage, or liability, or malpractice coverage to high-risk businesses, you know, in construction, or maybe beauty shops that use a lot of chemicals, or medical professionals,” Quiggle said. “But, in particular, wherever premiums might be rising, whether it be coastal properties or some industries that are high-risk, that’s where the risk goes.” He said that smaller businesses may be more vulnerable than large businesses that continued on page 21 June 15, 2009 INSURANCE JOURNAL-WEST REGION | 19


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Agents Can Help Fight Insurance Fraud By Patricia-Anne Tom

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“Agents can certainly assist us in fraud nsurance agents can play a big role in helping states to fight insurance fraud. And with investigations,” Clark said. “In many fashions, they are the gatekeepers of information of the insurance fraud costing California alone $15 insured. Second, there are things [insurance billion each year, or $500 per resident, the cost agents] acquire as far as identification, preof which is eventually passed onto consumers, existing condition of vehicles they should provide assistance. and such, before they are In fact, because they are on ‘In many fash- insured.” the front lines of insurance Then, it’s important for transactions, agents might see ions, [agents] agents also to report any kind and hear things before the are the gateof false information they insurance company, claims receive from someone trying department or insurance inveskeepers of to purchase insurance to tigator even hears about a probinformation their state insurance fraud lem, according to Howard Schmell recomGoldblatt, director of governof the insured.’ bureaus, mended. “And then, of ment affairs for the Coalition course, agents can cooperate Against Insurance Fraud. “They with the authorities when we proceed with are the grassroots. They are in the streets, in our investigations.” the neighborhoods.” As a result, an agent may see things in a Analyzing Employees neighborhood that would raise questions Beyond scrutinizing customers, Clark and with an anti-fraud department. “They may Schmell said insurance agencies should know of someone that they’ve insured who scrutinize their own employees when is having economic problems, and all of a hiring, as well. Based on a survey of sudden there’s a claim filed by that person,” 2.6 million job applicants, 44 perGoldblatt said. cent lied about their work experiWhen that happens, there are steps an ence, 23 percent fabricated credeninsurance agent can take to help with a tials or licenses and 41 percent Department of Insurance investigation, said lied about their education. Fraud Bureau Chief Cindy Schmell of the Iowa And “past behavior is the Division of Insurance and Anti-Fraud Division best predictor of future Director Ted Clark of the Kansas Department behavior,” Schmell said. of Insurance. When you consider that “Insurance agents can help us immensely occupational fraud and with our insurance fraud investigations if they abuse costs organizations document information,” Schmell said. “For about $600 billion annuinstance, if someone comes to an agent wantally, or roughly 6 pering to purchase insurance, they can verify the cent of gross revenues, identity of that person. If they uncover someaccording to the thing that indicates the person maybe isn’t Association of Certified Fraud Examiners, and who he says he is, [the agent] can document the fact that insurance agents have access to a that and provide that to [the insurance wealth of customers’ personal information, it’s department] when we come to interview important to examine a potential employee’s them in our investigation.” track record. Clark agreed, noting agents should obtain “Agencies should screen their employees positive identification from the person proposprior to employment because there are many ing to be insured. He also recommended issues that can be addressed by pre-screening agents actually inspect vehicles prior to insuremployees,” Clark said. “One would be to ing them, to determine upfront whether there make certain that the information that the is pre-existing damage or problems with a car. 20 | INSURANCE JOURNAL-WEST REGION June 15, 2009

agency has is not subject to identity theft. Other things would be [to make certain] that the agency is less likely to have an employee that might themselves perpetuate some sort of internal theft or participate in some sort of insurance fraud scheme.” Oftentimes, companies will do background checks on senior management, but not examine other personnel such as janitors or office assistants, Schmell said. She noted it is important to evaluate all employees, looking at such areas as their criminal history, civil litigation history, collections/credit history, employment history, address history, claims history, mental illness or addition, education and professional licensure. Outside vendors can assist with researching a person’s background, Clark and Schmell said. Checking the person out on cyberspace, such as on Google, YouTube, and social networking sites like Facebook and MySpace also can provide insight on a person’s background. Nevertheless, they noted “there is no suitable substitute” for an in-person interview where employers can watch for meta-messages and ask the candidate what else they will find. “You’d be surprised what potential job applicants tell you,” Schmell said. While researching a potential employee’s background might seem like an invasion of privacy, remember that insurance agencies are entrusted with a lot of personal information, both for the insureds and insurance companies they represent, Schmell said. The law also is on the agency-employer’s side. “There is a federal law that says someone who’s been convicted of a felony for a breach of trust crime cannot participate in the business of insurance — unless they are provided a waiver by that state’s insurance commissioner,” Schmell concluded. IJ Clark, Goldblatt and Schmell were speakers at the National Association of Insurance Commissioners Insurance Fraud Seminar held in March 2009. www.insurancejournal.com


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West Coverage News & Markets Pressure Is On, continued from page 19

have their own risk management departments. Nobody’s saying that fraud by P/C agents has been or is rampant, even in this economy. Officials readily acknowledge that most agents are honest. “A vast majority of the agents and brokers that we have out there do a great job, and are pretty good about policing their own,” Praeger stressed. “[M]ost agents are honest and ethical, and treat their clients fairly. But the economy, especially, is driving too many agents who may be morally suspect off the cliff and into the financial abyss,” Quiggle said. Moreover, numbers to quantify any rise in P/C agent fraud since the economy crashed are difficult to find. It’s too soon into the downturn, plus producer cases are not separately categorized by all states or watchdogs. Ted Clark, anti-fraud division director for the Kansas DOI said his department ‘The economy, investigates only especially, is a small percentage of agent predriving too many mium theft, and agents who may finds that most be morally suspect agents are honest. off the cliff and The New York into the financial Insurance Fraud abyss.’ Bureau’s most recent report shows that out of 2,424 general insurance fraud investigations in 2008, only 119 involved agents and brokers. Out of 2,732 cases in 2007, some 131 involved agents and brokers. In Utah, 14 percent of all fraud cases involve agents. In New Jersey, out of 171 property casualty fraud cases investigated in 2008, 20 involved agents. Florida’s 2007-2008 report shows that of 1,742 cases opened (119 of them against licensees including carriers, adjusters and agents), 63 involved an agency or an agent. In Texas in 2008, out of 195 referrals for prosecution (from 379 cases opened), 15 percent were categorized as agent fraud. That was way up from 8 percent in 2007, and up a bit from 13 percent in 2006. Some of the agent-broker fraud that appears in state reports is committed by www.insurancejournal.com

agents selling annuities, life or health products, not P/C products. Officials have been cracking down in particular on sales to seniors and military families by some life and health agents. Nevertheless, officials remain vigilant against any P/C agent-broker fraud because the damage it causes affects more than just the people or firms involved in any single case. “A very small percentage of agents do this,

but unfortunately those unscrupulous agents that do, give everyone who is an agent or broker a bad name,” Goldblatt said. “It’s serious if for no other reason than it really puts the spotlight on how trusting the system is. If you can’t trust your agent, who can you trust?” IJ West Editor Patricia-Anne Tom contributed to this article.

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Idea Exchange Construction

Construction on an Annual Policy By Danielle Thorsteinson

Thorsteinson

— Kevin Prior, CEO

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Coverage Triggers, Products/Completed Operations, and the Importance of Maintaining Continuity

22 | INSURANCE JOURNAL-WEST REGION June 15, 2009

or many insurance professionals focusessential that insurance agents understand ing on construction, any in-depth dishow the products and completed operacussion of coverage triggers, prior-work tions coverage applies. Remember, regardexclusions and continuous/progressive damless of when the work is completed, the age wording is likely to cause serious confuCGL policy only responds to bodily injury sion. Of course, it doesn’t have to. Focusing or property damage that occurs during the on the basics of occurrence policies — how policy period. The products and completed coverage is triggered and, more importantly, operations coverage do not extend the polihow the products and completed operacy period or provide any kind of “tail” going tions coverage apply — allows agents to forward. Bodily injury or property damage understand how Montrose wording and arising out of past work is not covered by prior work exclusions affect coverage. Even the policy that was in place during conbetter, this understanding can enable agents struction, but rather by the policy that is in to negotiate and sell a better place when the bodily insurance product. injury or property damage As insurance The most important underoccurs. Thus, the most valustanding to have when dealable feature of products and carriers have ing with construction on an completed operations covermade clear ... annual basis is how the poliage is the coverage it procy coverage is triggered. Put vides for past, completed prior work simply, the policy applies to work that may give rise to exclusion is no bodily injury or property bodily injury (BI) or property damage (PD) that occurs durdamage in the present. You longer a term ing the policy period, providcan see how amending the with a single ed that such bodily injury or CGL policy with prior work property damage arises out of exclusions and continuous/ meaning. an occurrence. progressive damage limitaWith construction, howevtion endorsements affect the er, the policy period concept is complicated continuity of coverage over a number of because BI and PD occur over time and mulyears that an insured would otherwise tiple policy periods. As a result of several enjoy. cases where the date of the bodily injury or As insurance carriers have made clear in property damage could not be determined, the past few years, prior work exclusion is states have varying theories on how coverno longer a term with a single meaning. age is triggered. There are countless variations of this excluIn California, the “continuous trigger,” sion appearing in policies today. However, resulted from the 1995 court decision in the they generally fit into three basic categories: Montrose Chemical Corp v Admiral Insurance 1) Total Prior Work Exclusions, Co. case. The court ruled that all commer2) Prior Completed Work Exclusions, and cial general liability (CGL) policies in force 3) The occasional hybrid of the two. during the time of exposure and subsequent A total prior work exclusions generally manifestation of the bodily injury and propprecludes coverage for any work commencerty damage are triggered. Thus, gradual ing prior to the policy period. This of property damage or bodily injury can effeccourse creates problems for contractors tively trigger several policies over successive with large amounts of work carrying over policy periods. from one policy period to another. In addition to the policy trigger, it is www.insurancejournal.com


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agreement in their CGL form to include bodily injury or property damage occurring during the policy period (and for which the insured was unaware that the bodily injury or property damage began in a prior policy period) and “any continuation, change or resumption … after the end of the policy period.” That led to a policy with a known manifestation trigger. For example, water damage that occurred over six years, in theory would only trigger the policy in force when the damage first became known to the insured and, that policy would continue to provide coverage for the continuation of that water damage after policy expiration. However, before binding a policy with continuous/progressive wording, it is imperative that the insurance agent check the coverage provided on the expiring policy to ensure that its insuring agreement covers the “continuation, change and resumption” that the new policy will not. When it comes to insuring contractors on an annual basis, the importance of understanding policy triggers and how the products and completed operations coverage apply cannot be understated. Prior work exclusions and continuous/progressive damage limitations can manipulate and sometimes destroy continuity of coverage from policy period to policy period. Continuing to understand the product you are selling is the most proactive way to weather the storm. IJ

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Furthermore, completed work from years’ past is not covered. Prior completed work exclusions, on the other hand, are somewhat less restrictive. The exclusion applies only to work completed prior to the policy period but would not exclude work that began but was not completed during a prior policy period. The hybrid of the two types of exclusions is typically a prior completed work exclusion with restrictive definitions on what constitutes “completed.” In many cases, 90-day pauses in construction or certain portions being put to use before others render the construction complete, even if the owner and the contractor do not. The best scenario is not to have any of those exclusions on the policy. However, in many cases, the coverage sought by elimination of those types of exclusions is not commercially available. Unlike prior work exclusions, continuous/ progressive damage limitations do not have to be feared. However, some forensic analysis is needed. In a nutshell, bodily injury and property damage is considered continuous or progressive if it first commenced/existed prior to the policy period, whether the insured knew about it or not. By itself, this wording could be disastrous in a continuous-trigger state such as California. For example, if as a result of faulty window installations in a tract housing development, water intrusion and subsequent property damage began in a prior policy period but was not known to have occurred until the current policy period (when homeowners began seeing the damage), the current policy might exclude the loss because it first began in a subsequent policy period and, the subsequent policy might only provide coverage for the property damage that occurred during that policy period — which could be a very small portion of the loss. However, in 2004, ISO revised the insuring

Danielle Thorsteinson is a broker with Worldwide Facilities Inc. E-mail: DThorsteinson@wwfi.com. June 15, 2009 INSURANCE JOURNAL-WEST REGION | 23


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Idea Exchange Legal Beat

Insurance in Times of Financial Crisis Legal Issues To Be Aware Of With EPL, D&O and Fiduciary Liability Insurance By Brian S. Martin Martin

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he current financial crisis affects almost every aspect of our business life — that includes insurance. Businesses need to be wise consumers and aware of the legal issues covered by their coverages. Let’s take a look at employment practice liability, directors and officers liability, and fiduciary liability insurance. Employment Practice Liability Insurance The number of employment-related lawsuits has significantly increased, and award levels in this area are setting records. It has been estimated that there are more than 150,000 wrongful employment practices complaints currently filed with state agencies across the nation and the Equal Employment Opportunity Commission. With the large rise in claims, it may not be good business judgment for a company to rely merely upon losscontrol techniques like a thorough employee handbook or a “zero tolerance” policy. EPLI coverage usually works with a deductible so that smaller, expected claims do not generate adverse loss on the policy and generate higher premiums at renewal. Instead, the policy protects the company from significant financial loss from large, unexpected claims. EPLI covers discrimination, sexual harassment, breach of contract, defamation, whistle blower, retaliation, negligent hiring, negligent supervision, and negligent retention. The EPLI policy usually comes in two forms: (1) a named perils form — provides coverage only for exposures arising from events or legislation specifically named in the policy; and (2) “allrisks” form — explicitly covers all categories of employment suits. Not all EPLI policies cover third-party harassment or discrimination claims, so if a client wants such coverage, be sure the EPLI policy specifically covers it. EPLI policies generally exclude intentional conduct from coverage. This is often an issue with sexual harassment claims, but usually the exclusion only pertains to violations that 24 | INSURANCE JOURNAL-WEST REGION June 15, 2009

are proven to be intentional or deliberate by a judgment or other final adjudication. Most EPLI policies give the carrier the right to select defense counsel, but companies often have their own lawyers that are familiar with the company’s owners, employees and daily operations. The Texas Supreme Court has upheld policy provisions allowing the insurer to conduct the defense, including the right to select which attorney will defend the claim. See State Farm Mut. Auto Ins. v. Traveler, 980 S.W.2d 625, 627 (Tex. 1998). However, the insurer’s contractual right to control the defense (and therefore the right to select counsel) is, in effect, overridden by the common law where a conflict of interest exists between the insurer and the insured. There are two general views on when an insured-insurer conflict of interest exists if the insurer reserves its right to deny coverage. The minority view is that there is a conflict of interest anytime the insurer attempts to reserve its right on a question. Ranger Ins. Co. v. Rogers, 530 S.W.2d 162, (Tex.Civ.App.-Austin 1975, writ ref’d n.r.e.). This approach, also known as the “automatic conflict rule,” is criticized by many commentators as being superficial. The majority of courts adopt the view that a reservation of rights does not always create a conflict of interest. See Windt at 371. More recently, in Northern County Mutual Insurance co. v. Davalos, 140 S.W.3d 685 (Tex.2004), the Texas Supreme Court began moving away from the automatic conflict rule and saying a conflict of interest between the insurer and insured allows the insured to control the defense while the insurer remains

liable for the reasonable costs of that defense. But when the facts to be adjudicated in the liability lawsuit are the same facts upon which coverage depends, the conflict of interest will prevent the insurer from conducting the defense.” An insured that is concerned about this issue should negotiate with the carrier to put language into the policy that the insured can choose defense counsel at rates commonly used by the carrier. If a client is already in litigation and the insurer is providing a defense under a reservation in which the facts to be adjudicated are the same as the facts in the coverage dispute, then the client may have a good argument that it has the right to retain the defense counsel of its choice.

Fiduciary Liability Insurance Fiduciary liability typically involves an employee suing an employer for not offering employee options for investing in a 401K plan, and the law weighs heavily in favor of the employee in these cases. ERISA protects the interest of plan participants and their beneficiaries, and defines the liabilities and responsibilities associated with the management and administration of an employer’s health and continued on page 26 www.insurancejournal.com


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Idea Exchange Legal Beat Financial Crisis, continued from page 24

welfare, pension, profit sharing and other employee benefit plans. COBRA and the Retirement Protection Act of 1994 create additional compliance issues for fiduciaries. Finally, the increase in employee stock ownership plans creates significant liability for fiduciaries. A fiduciary liability policy can provide coverage for two broad areas: 1. Breach of fiduciary duty: Violations of the responsibilities, obligations or duties imposed upon fiduciaries by ERISA, federal or state common or statutory law, or the law of any jurisdiction in the world. 2. Sponsor organization: Any benefit program and any natural person serving as a past, present or future trustee, director, officer or employee of the sponsor organization. Fiduciary liability insurance is appropriate for any company that sponsors a retirement plan, such as a defined benefit plans (i.e. health and accident plans), regardless of the company size or number of plan participants. Directors & Officers Liability Insurance D&O insurance covers a range of indiscretions under the auspices of the term “wrongful acts.” The term is usually defined to include actual or alleged errors, misleading statements, and neglect or breach of duty. Coverage is narrowed by a list of limitations and exclusions. D&O polices protect companies and their directors and officers from liabilities arising from actions taken by the directors and officers themselves in their corporate capacities. A D&O policy will usually cover: 1. A wrongful termination lawsuit (on the grounds of a breach of an employment contract of unlawful discrimination); 2. A lawsuit alleging that a broad decision to sell an older building to purchase a new, more luxurious building was ill-advised and a waste of charitable assets; 3. A lawsuit against the directors for failing to prevent political partisan activities that resulted in the revocation of the organization’s tax-exempt status; 4. A lawsuit against the directors for failing to purchase an adequate insurance safety net; 5. A charge of neglect based upon use of targeted donations to pay general expenses or failure to prevent misappropriation of funds; and 6. Errors in a newsletter or nonprofit publication. 26 | INSURANCE JOURNAL-WEST REGION June 15, 2009

Not all policies will cover intentional wrongdoings. For example, if a company is found liable for intentionally failing to disclose or intentionally and wrongfully obtaining monies, then its D&O policy may not cover such a claim. Coverage will most likely be determined by the definition of “loss” under the policy. Recently, there has been an influx of declaratory judgments and rescission actions by insurers to rescind policies due to misrepresentations or omissions in insurance applications. Typically, before an insurance policy is created, a D&O insurer will require various types of financial information through an application process. The insurers need to review financial statements, annual reports, corporate bylaws and claims history. An insurer will rely on this information in evaluating risk and determining policy premiums. It is important that each document submitted to the insurer is accurate and that any forms filled out by corporate representatives are truthful. If any of the information the insurer relied upon in drafting the policy is found to be false or misleading, the policy could be rescinded as to every insured. Another concern is the Sarbanes-Oxley Act (SOX) signed into law in 2002. Its purpose is to protect investors by improving the accuracy and reliability of corporate financial reporting. SOX creates an independent auditing-oversight board under the Securities Exchange Commission; imposes white-collar criminal penalty enhancements for criminal fraud offenses; provides for enhanced and more extensive corporate financial disclosures and reporting; and creates an enhanced recourse procedure and safeguards for those harmed by securities fraud. Although SOX provides for heightened exposure to civil liability, the more threatening aspect of SOX is its criminal penalties. Whitecollar criminal penalties for corporate officials include: (1) increasing the maximum penalty for securities fraud to 25 years in prison; (2) increasing possible CEO and CFO penalties to

a $5 million fine and a 20-year prison term for issuing false statements to the SEC or for failing to certify financial reports; (3) increasing maximum penalties for mail and wire fraud to 20 years; (4) increasing maximum penalties for defrauding pension funds to 10 years; (5) requiring the preservation of key financial audit documents and e-mail for five years and imposing a 10-year felony for destroying these documents; and (6) imposing a maximum 10-year prison term and/or monetary fine for intentionally retaliating against corporate whistle-blowers. Further, a corporation looking to cover the risks created by SOX should be aware of the “insured v. insured” exclusion. Usually, these exclusions will state that certain claims are covered as long as they are not brought with the solicitation or assistance of any director or officer of the company. Generally, this provision will pertain to former officers and directors as well as current ones. Therefore, if a corporation lets a director go and he solicits or assists in a claim against the company, that claim will probably not be covered because of the insured versus insured exclusion. The insured v. insured exclusion was initially designed to eliminate coverage for struggles over organization control, which can be intractable. This exclusion may eliminate coverage for employment-related suits. If the nonprofit’s executive director is insured under the policy, his or her wrongful termination claim against the board members would be excluded by the insured v. insured exclusion. As we work through this financial crisis, we will see how courts deal with the increasing claims against businesses and financial institutions, and likewise how the insurance coverage issues raised by the crisis impact insurers. Following the trends should allow agents, brokers and carriers to give proper and timely advice to insureds. IJ Martin is a partner in the Insurance and Coverage section of the Houston office of Thompson, Coe, Cousins & Irons LLP. www.insurancejournal.com


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Special Report Agency Options - Financing

Managing an Agency in a Troubled Economy InsurBanc’s Pettinicchi on Agency Financing Options

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nlike many businesses, independent insurance agencies do not need to access credit on a daily basis. But when the time comes that an independent agency needs access to credit and cash, it is usually due to an event driven need, such as the working capital required to bring in producers, the money required to buy another agency or to open a branch office, or even to finance an internal perpetuation plan. So, if and when an agency needs credit, it needs to happen fast. In this interview with Insurance Journal’s Andrew Simpson, InsurBanc’s Executive Vice President and Senior Lending Officer Bob Pettinicchi offers insurance agencies tips on how they can access credit when they need it, why it’s a good time to examine banking relationships and services offered to agencies, and why now more than ever is a good time for agency owners to invest in their own agency.

payments on a timely basis gives the bank a good indication of how well a business loan will be repaid. In the case of an agency, the agency principals are really the machinery that drives that agency. We expect those agency principals to stand behind their agency. IJ: Would you ever recommend that an agency principal either loan money to its own agency or in the reverse, borrow money from its own agency? Pettinicchi: Certainly, we would recommend that they don’t borrow from their agency. Usually you would like to see an agency principal get compensated in the form of a salary or a draw, but not a loan from the agency, because that ends up being an asset that is hard to quantify; it is not a strong asset of the agency. In the case of an agency principal lending money to an agency; that’s usually regarded as a good thing. It shows that the principal believes in the agency and usually moneys that are lent to an agency, they usually stay in that agency and would be repaid after other creditors are paid. So, it is like a form of capital. great

IJ: How does an agency protect its access to credit? Pettinicchi: An agency, like other businesses, has to operate in a fiscally responsible manner by This is a maintaining a good payment time for owners IJ: What about cash manhistory on credit they have agement in these ecoobtained, maintaining good to examine nomic times? Is it more personal credit standing for their banking important for an agency the owners of the agency, to conserve cash now, adhering to best practices, and cash and what can they do to running their business like a management. improve upon that? business, collecting the Pettinicchi: This is a great receivables timely, paying time for agency owners to examine their their bills timely. banking, specifically how they manage their daily depositing to a bank and their cash IJ: How important is an owner’s own management. An agency principal should credit rating to the operation of the want to deal with a bank that is stable and business and their ability to access that provides value and services for them; capital for the business? services that they really need like cash Pettinicchi: Well, very often insurance agenmanagement, remote deposit taking, the cies don’t have a longstanding record of borability to sweep funds into investment rowing money, so when they need to borproducts (and) having ready, online access row money, a bank would not only look at to information. the financial standing of the agency, but also the financial standing of the individuIJ: Do you think these services have als that own it. Their propensity to make www.insurancejournal.com

Web Video To view the video series, Managing an Agency in a Troubled Economy, visit www.insurancejournal.tv. been taken for granted in the past or not really paid attention to? Pettinicchi: I think a lot of people take their banking relationship for granted and feel that they are getting the best deal from their bank if they are not paying much for it, or if they are getting free services. Truly nothing is free. There is a cost to everything, but a prudent agency will examine their banking relationship in the way their policyholders will examine their insurance from year to year. Don’t take the banking relationship for granted. IJ: In these times, there are bound to be more ‘no pays’ and ‘slow pays’ for agents. Any advice on how to best handle accounts receivables in this economy? Pettinicchi: Try to manage them carefully. Try not to extend terms to your clients. Avail yourselves to premium financing for those. Why be in the lending business? Leave it to the experts. IJ: Agents have probably in the past not worried too much about the financial soundness of their banks. But given the financial situation today and so much talk about banks being in trouble, has that changed? Is that something that agents should be paying a little bit more attention to? Pettinicchi: Well, you can’t help but pay continued on page N2

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attention to it because it is on the news constantly. An agency principal should want to deal with a stable institution, one that is going to be there for them, one that understands their business. Many banks right now are having significant financial problems because the quality of their loan port-

folio is not doing as well as it should because of these times. … All of our clients are independent insurance agencies located around the country. As strong as that industry is, it represents the strength of our bank. The bank is only as strong as its clients.

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IJ: So, actually having independent agents as customers insulates your bank somewhat? Pettinicchi: To a degree, yes, absolutely. IJ: The $700 billion bailout package, among other things, raised the FDIC limits. What does that mean for your customers? Pettinicchi: That means that right now the limit that was $100,000 per account has been increased to $250,000 per account. Also, the limit was completely lifted on accounts that are noninterest bearing, such as business operating accounts. So, this should give agency owners a lot more confidence to deposit money in their bank, in particular at the increased coverage level on the noninterest bearing accounts. IJ: So, that is a better situation for independent agents and customers of banks in general? Pettinicchi: Agencies may hold a significant amount of money in a fiduciary capacity. You want to make sure that that money is absolutely safe. IJ: What about investment strategies for agencies going forward, any advice? Pettinicchi: I think that agency principals might want to think a little less about taking money out of their agency so they can invest it in the stock market. … Look at opportunities to invest in their own business. If you think about it, their insurance agency is a perfect business in that they control it, they don’t have to report to the street quarterly results, and they could take a long-term perspective that many companies can’t take. If you do the right things — you adhere to best practices, you have a strong sales culture, you keep your risk low and make sure that you run your business so that you can readily access credit, you will have opportunities. IJ: Are you saying that one of the best investments for an agent might very well be his or her own business? Pettinicchi: Oh absolutely. IJ www.insurancejournal.com


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Special Report Agency Networks – Social Media

Social Networking for Fun and Profit Why Agents Should Use Twitter, LinkedIn and Facebook to Build their Brand By Ken St. Onge

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hether it’s used to market new insurance products or interface with current clients, social media is transforming the insurance industry landscape — and fast becoming a key tool for agents who want to grow their business. That’s according to two insurance industry branding gurus: Peter van Aartrik, CEO of branding and communication firm Aartrijk, and Rick Morgan, a senior associate with the firm. Recently, Morgan and van Aaartijk sat down with Insurance Journal to discuss how insurance agents can — and should — tap these technologies to change the way they interact with clients and build their businesses. Their thinking: If an agency isn’t using social media yet, it should start. Soon. At its simplest, social media refers to the use of Web sites to connect with peers, clients, competitors and the public at large. It’s a very simple concept that has very complicated and powerful implications. As a tool for insurance agents, social media can be leveraged to attract new customers, market new products and brand an agency by harnessing the power of the Web. And increasingly, as the Internet becomes more and more a part of every day, the use of social media seems likely to grow. So knowing how to use it will be a major key to any business — be it an insurance agency or otherwise — that is looking to remain relevant. “On a macro level, social media is nothing more than networking using technology,” Morgan said. “It’s the same kind of networking that we’ve all done forever ... now we’re using the Internet.” It’s powerful. At its core, Morgan said, it’s a tool that can help Main Street insurance agents return to the hallmarks of their profession: building relationships. For a long time,

independent agents “feared that relationships would go away, everything would be all about price, and insurance would become a commodity. What’s exciting about social media is that it allows agents to get back to a past time, to hook into a very human need to have trust, and do business with people with trusted relationships. This is a very exciting time, and I think it feeds right in to the independent agency world and how they want to do business.” Social Networking 101 There’s a huge range of social media sites on the Internet, but three of the most useful for insurance agents are Twitter, LinkedIn and Facebook. Although they overlap in some ways, each has its own functions, audience and niches. Facebook is probably the biggest. The site claims more than 200 million users worldwide, and is growing every day. Although it began as a site for college students to exchange photos and other information, it’s increasingly attracted an older crowd — the fastest growing demographic on Facebook, for instance, is women age 55 and older. Users can post photo galleries, connect with old friends, join groups and trade information about what they’re doing. It’s the same basic principle as another social networking site, LinkedIn. However, LinkedIn is focused largely on professionals, a fact that is underscored by the tone, look and feel of the site, which overall is more business-like. It’s most commonly used for business networking and recruitment, but users can do many of the same things Facebook offers. Twitter, the social networking site of the moment, is a little different. The site allows a

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Web Resource The podcast, Agency Management Done Right, Episode 2: Social Media, may be accessed online at www.insurance journal.tv/videos/2434 user to post short messages — 140 characters — which are available to anyone on the Internet, and are delivered immediately to the user’s “followers.” People can post links to articles, photos or anything else they want. Users build a following by continually posting content and links to share with others. Which one should an agent use? “I wouldn’t say one is better than the other for an agency,” Morgan said. “It’s extremely important for any business jumping into social media to have an overall strategy, and then to pick the tools, or choose the tools or assess the tools that make most sense for what it is they’re trying to accomplish. There’s a synergistic value that comes by using more than one. So it’s not just about picking one and saying that’s it.” Peter van Aartrijk agreed. “Maybe another way to look at it is to say: ‘What do insurance agents do now to grow their business?’ They do a lot of face-to-face and telephone work. Telemarketing. A lot of out-bound. The meeting space they’re used to, whether it’s a chamber of commerce or Kiwanis or whatever, that still exists. But social media is like that on steroids, because you can reach a lot more people a lot quicker.” Both Morgan and van Aartrijk advised agents to start by diving right in. “You can go on Twitter, Facebook or LinkedIn and very easily begin to build a presence for your agency,” van Aartrijk said. “It doesn’t take that long to set up, and once you start playing around with these things, you can see incredible implications for growing and servicing insurance, and it’s just starting to emerge.” Try not to get overwhelmed, Morgan said. “A great suggestion is for people to get started by just playing. Do it on a personal, noncontinued on page N6 www.insurancejournal.com


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Special Report Agency Networks – Social Media

Social Networking, continued from page N4

threatening basis so it doesn’t have to be, necessarily, connected to your business, which is threatening to a lot of people. Get on Facebook and put in a profile. Find out how many of your old high-school or college friends find you and connect with you, just to get a sense of how all this works.” Mixing Personal and Professional One of the concerns many social networkers have is about the implications of mixing their personal and professional lives, which can happen often in a group where clients and personal friends share information. There can also be concerns about employees getting involved in discussion boards, posting comments and sharing material that hasn’t been vetted. “This is a huge bugaboo for a lot of people, particularly corporate lawyers who are really scared, but even agency owners can be scared about what’s going on, ” van Aartrijk said. “In the old days, the corporation would be sort of defined by what it would send out. It would reach out and touch people with direct mail,

telemarketing and so on. It was very one way.” Social networking is redefining the concept of the brand. Now, the people who receive information about a business are reshaping the way that business communicates with its clients and potential clients. “It’s becoming really about the consumer, the customer, even the prospect owning your brand more than ever, and responding to it,” van Aartrijk said. The idea of consumers owning a business brand can be very powerful. For agencies that already communicate with their clients regularly through newsletters, account rounding calls, and e-mail, adding in social networking could build even more trust with clients. “Agencies can use these tools to help make their presence more viable, more aware, and more interesting,” Morgan said. Set Some Rules Agencies that want to tackle social media head-on should create an agency-wide approach for how they are going to do so, van Aartrijk said. “Take a look at the tools, experi-

ment. Bring in everybody. Everybody should be looking at what this impact could be for the agency,” he said. Agency managers should create some boundary lines, too. “There ought to be some rules about ‘what are we going to blog about, what are we going to Twitter about, what is our corporate Facebook page going to look like,’” van Aartrijk said. “You’ve got to give some thought to it.” Added Morgan: “Like anything in an agency, whether it’s technology or any other process, it needs to be managed and monitored. We’ve got procedures for phone answering and response and conversations. When e-mail came out, we did the same thing. Social media is really no different. … Part of the strategy, part of the management and part of the monitoring is all something that needs to be taken into account as companies begin to participate.” IJ This story was based on an installment in the podcast series, Agency Management Done Right, hosted by Wells Publishing CEO Mitch Dunford.

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New Markets The following markets were selected from the MyNewMarkets database of 25,000 coverages and programs. To find additional markets, or to submit markets, go to www.MyNewMarkets.com. Contractors General Liability Market Detail: London American Risk Specialists Inc. (www.londonamericantx. com) brings agents a commercial general liability (CGL) market for residential and commercial general contractors (GCs). Work done on the GC’s behalf by sub-contractors is covered in this program. Program allows the option for use of uninsured and underinsured sub-contractors. Roofing contractors, artisan contractors and general contractors are the program target classes. New ventures are eligible. Occurrence, sunset or claims made forms are available for use. Minimum premiums begin at $750 for artisan contractors and go up to $4,000 for roofing contractors. Deductibles begin at $1,000. Available Limits: $1 million to $2 million. Carriers: Unable to disclose. “A” rated by A.M. Best. Non-admitted. States: All except N.H. and N.Y. Contact: Chris Chiodetti at 713-977-7726 or email cchiodetti@londonamericantx.com.

Green Building Consultants E&O Market Detail: ELM Insurance Brokers Inc. (www.e-o.com) offers a new liability product designed for green building consultants accredited in programs such as LEED, Energy Star, Green Globe, EarthCraft, HERS and NAHBGreen. Coverage is also available to insureds who conduct green education seminars, green marketing consultants and green technical writers. Registered users of www.e-o.com or ELM Insurance can quote these products online. Minimum premiums begin at $1,300 with minimum deductibles starting at $2,500. Available Limits: $500,000 to $5 million. Carriers: Unable to disclose. “A+” rated by A.M. Best. Admitted and non-admitted. States: All. Contact: Fred Fisher at 310-322-1301 or e-mail ffisher@e-o.com.

Security Guard & Alarm Liability Market Detail: Izzo Insurance Services Inc. (www.izzoinsurance.com) brings 25 years of

specialization to agent’s security guard and alarm industry clients. Izzo offers these classes of operation primary general liability, following form umbrella coverage (including errors and omissions protection) and four workers’ compensation markets. Fidelity bonds and employment practices liability protection are also available. Minimum premiums begin at $2,500 and deductibles begin at $1,000. Available Limits: Starting at $1 million. Carriers: Unable to disclose. “A” rated by A.M. Best. Admitted and non-admitted.

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States: All except Alaska. Contact: Scott Newell at 800-800-1704 or e-mail snewell@izzoinsurance.com.

Construction Managers & Consultants E&O Market Detail: Travis-Pedersen and Associates of Arizona offers a comprehensive policy to cover construction managers and consultants. Coverage is available to cover the various services provided by construction managers and consultants including: 1) acting as the owner’s representative or agent; 2) constructability reviews; 3) value engineering; 4) schedule development; 5) establishing preliminary and working budgets; 6) consulting on design, utility and building costs; 7) reviewing contractor qual-

N8 | INSURANCE JOURNAL-NATIONAL REGION June 15, 2009

ifications; 8) monitoring contractor and design team performance; and 9) construction claims management. Available Limits: $500,000 to $5 million. Carriers: Various “A+” Rated by A.M. Best. Non-admitted. States: Ala., Alaska, Ariz., Ark., Calif., Colo., Conn., D.C., Fla., Ga., Hawaii, Idaho, Ill., Ind., Iowa, Kan., Ky., La., Maine, Md., Mass., Mich., Minn., Miss., Mo., Mont., Neb., Nev., N.J., N.M., N.Y., N.C., N.D., Ohio, Okla., Ore., Pa., S.C., S.D., Tenn., Texas, Utah, Vt., Va., Wash., W. Va., Wis., Wyo. Contact: Matt Gervin at 480-281-3850 or email mattg@travped.com.

Land Surveyors Program Market Detail: Agency Marketing Services (www.agencymarketing.com) offers a professional liability program for land surveyors and land surveying firms. Protection is available for independent surveyors, employed surveyors and surveying firms. Several carriers are part of this program. Carriers do not require a full application; the applicant only needs to answer nine questions. Minimum premiums start at $1,200 and deductibles begin at $1,000. Available Limits: $250,000 to $5 million. Carriers: Unable to disclose. “A” rated by A.M. Best. Non-admitted. States: Ala., Colo., Conn., Fla., Ga., Mich., Miss., Nev., N.J., N.C., Ohio, S.C., S.D., Texas, Vt., Va. and Wis. Contact: Keith Alexander at 800-542-2805 or e-mail kalexander@agencymarketing.com.

Bio-Fuel Manufacturers Casualty Market Detail: International Excess Agency Inc. (www.intlxs.com) offers agents access to liability protection designed specifically for manufacturers of bio-diesel. The program also allows agents to offer time element pollution liability coverage to both premises/operations and products/completed operations losses. coverage can be provided on either an occurrence or claims www.insurancejournal.com


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made coverage trigger. Defense is in addition to the coverage limits. Other unique features include: a zero deductible option; medical payments coverage; worldwide coverage for products suits; coverage for shortterm business activities and $100,000 product withdrawal expense coverage. Minimum premiums begin at $15,000. Available Limits: Up to $2 million. Carriers: General Star. “A++� rated by A.M. Best. Admitted and Non-admitted. States: All. Contact: Kenneth Kukral at 216-797-9700 or e-mail kkukral@intlxs.com.

Pharmaceutical & Medical Device Manufacturing Market Detail: MarketScout (www.marketscout.com) provides access to coverage for companies in the life sciences industry including those involved in pharmaceutical, biotechnological and medical device

manufacturing. We offer flexible options, which allow us to adapt to this fast-paced and rapidly changing field. Products available include: general liability with products coverage; automobile liability; workers’ compensation; property insurance and product recall. Targeted risks include: pharmaceutical companies with less than 50 percent in generic drug manufacturing; accounts that manufacture 25 or more products; domestic and foreign exposures; and manufacturers conducting their own clinical trials. Minimum premiums begin at $25,000 and deductibles start at $5,000. Available Limits: $1 million to $25 million. Carriers: Unable to disclose. “A� rated by A.M. Best. Non-admitted. States: All. Contact: Norman Alberigo at 972-932-4275 or e-mail nalberigo@marketscout.com.

Market Detail: Francis L. Dean & Associates Inc. (www.fdean.com) brings agents a market for general liability and participant accident insurance for motor sports facilities, race teams, special events and more. Coverage is offered on an admitted basis with immediate underwriting and policy issuance. Minimum premiums begin at $500. Available Limits: $1 million to $2 million. Carriers: Starr Indemnity & Liability. “A� rated by A.M. Best. Admitted. States: All except Calif. Contact: Michael Dean at 800-745-2409 or e-mail mdean@fdean.com. Submit your company’s property/casualty markets to the industry’s leading searchable database at www.mynewmarkets.com.

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June 15, 2009 INSURANCE JOURNAL-NATIONAL REGION | N9


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Idea Exchange Growing Your Property Casualty Agency

Take Advantage of Bad Times by Hiring a Marketing Major Enhance Your Survival by Finding Light Within the Darkness Shulman

By Alan Shulman

T

he economic landscape is mired in ty at far less cost to them than they could in darkness. Bankruptcies and foreclobetter times. It’s a win-win arrangement that sures have risen to frightening levels, may last no longer than the recession, but it’s while the stock market languishes in still well worth the hire. Here are just a few despair. The high rate of unemployment has a ways that they can help. dreadful impact on downsized employees and their families, particularly those who have no 1. These nascent experts can develop recogimmediate prospects. It also makes the world nizable local brands that are not entirely appear bleak for recent coldependent on company reprelege graduates who seek to It’s important for Agency survival sentation. enter the workforce for the your long-term survival. first time. And in our indusAccept representation as a depends on try, an increasing number of privilege, but not as your busimore than raw once proud insurers are ness identity. Look at the being bailed out by the selling skills; it 3,400 or so car dealers who American taxpayer — or askrecently fired by demands smart were ing to be. Chrysler and GM. Something similar could happen in the But as Leonard Cohen, the marketing as agency business as well. venerable poet and songwell. 2. Trained marketers writer notes, “...There is a understand the concept of the crack, a crack in everything. unique selling proposition (USP). Essentially, That’s how the light gets in.” And the light, in the USP convincingly differentiates one sellour context, is the ability of insurance agener’s offerings from another’s, motivating a cies to use aspects of this economy to their buyer to switch. This classic theory originated business advantage. in the 1940s, while print and radio were the dominant ad media. Today, there are endless Insurance as a Fallback ways to grab a prospect’s attention and to In times of unemployment, selling insurcommunicate with them, both online and off. ance looks more appealing than ever. Agencies Young grads are familiar with them all, on find a seemingly endless supply of producer both business and social levels. wannabes. But the potential problem here is 3. Too many commercial producers are disthat by the time a new agent is fully trained organized in their new business solicitation and approaches profitability, they quit, returnprocesses. Marketing majors can help agents ing to their previous career, once times get and their CSRs to logically identify and probetter. In other words, you’re just the rebound fessionally solicit and follow-up on their most boyfriend and not the groom. You can gamble salable leads. These efforts might include sales by hiring these folks to sell for you, or you can planning and tracking, marketing material hire some new college grads as short-timers to modification or development, direct marketenhance your long-term survivability. ing test campaigns, etc. 4. A large selection of agency Web sites are Hire a Marketing Major screaming for a redesign. Many haven’t been Un- or under-employed college grads, with seriously modified since the 1990s. Some, but fresh business degrees in marketing, are anxnot all, marketing grads can help agents to ious to apply their lessons to the real world. update theirs, while concurrently performing Agency offices can offer them this opportuniN10 | INSURANCE JOURNAL-NATIONAL REGION June 15, 2009

other much needed in-office services. 5. Ideally, this individual will bring real value to your office and want to make insurance his or her career — but you can’t count on it. It is wiser to presume that the recent grad will accept your job while simultaneously seeking a better-paying position elsewhere. So make certain that they invest a healthy portion of their time with you training others in the agency and leaving systematic marketing breadcrumbs for staffers to follow after their departure. Survival Time Agency survival depends on more than raw selling skills; it demands smart marketing as well. A full-time marketing professional is a desirable addition to any P/C insurance office. These professionals provide a sense of purpose and order to an agency’s promotional efforts, much like an IT pro manages your computer systems. Hiring an out-of-work grad is an affordable way to test the waters, without investing big dollars. Many are glad to work for modest pay because it gives them resumequality job experience that they can use once the economy kicks back into gear. But if the fit is right, the young expert you hired may elect to stay on and become a permanent and indispensable part of your team. IJ Shulman, CPCU, is the publisher of “Agency Ideas,” a subscription-only sales and marketing newsletter. He is also the author of the “Illustrative Insurance Sales Letter” series and other P/C sales resources. Phone: 800-724-1435. E-mail: alan@agencyideas.com. Web site: www.agencyideas.com. www.insurancejournal.com


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They

INSURANCE JOURNAL

TOP100 AGENCIES Left: Gary Dudley, president and co-founder of SWBC Right: Charlie Amato, chairman and co-founder of SWBC


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Do THAT, Too! Diversification Spurs San Antonio-Based SWBC to Great Heights By Stephanie K. Jones

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harlie Amato says Gary Dudley got him into the insurance Even so, sometimes customers’ product requests are declined because business. Dudley doesn’t deny it, and why should he? From they don’t make sense or because they would be too short lived, Dudhumble beginnings as entrepreneurial partners selling ley explained. But, he added, when a client requests a product, “we insurance out of the trunks of their cars, the two have creresearch it with a lot of other clients that we’ve had long term relationated a world-class diversified financial services company — with 13 ships with and they can be a judge, and say ‘yeah, we would like that divisions and offices throughout the United States — that generates product as well.’ Then we’ll proceed with developing that product and nearly a billion dollars in annual revenue and employs 1,250 people. building it.” There’s no doubt that with the hundreds of prodFor more than 30 years Amato and Dudley have ucts and services the company has to offer, it is operated San Antonio-based SWBC as a 50-50 partTop 100 Agency Profile diversified. Insurance agency? Check. Risk managers? nership and neither would have it any other way. Ranking No. 13 Check. Insurance company? Check. Real estate? Friends and fraternity brothers in college, Amato (ranking based on 2007 figures) Check. Technology? Check. Mortgage origination? went into banking after graduation and Dudley Check. Employee benefits and wealth management? entered the insurance business after serving in the Agency Name: Check. Plus reinsurance, equities brokerage, collecMarines, and as a coach and teacher. SWBC tion services, call center, insurance wholesaler — “I worked for a company that sold specialty Headquarters: the list goes on. products to credit unions, insurance products,” San Antonio, Texas “Everything interconnects,” Amato said. For Dudley said. “It was a small company out of Year Founded: instance, SWBC owns 51 percent of a real estate busiMichigan. And they hired Charlie. He was in San 1976 ness. We’re “an insurance agency, and we own an Antonio and I was Houston. We were basically just 2008 Total P/C Premium: insurance company, and we have money to invest,” he sales people, worked out of the trunk of our cars. $645.3 million said. “So besides putting money into CDs and stocks, That company, we determined after a short period 2007 Total P/C Premium: equity, corporate bonds, we thought real estate of time didn’t have the clients’ best interest at $481.0 million would be another investment for us, to give us anothheart. They didn’t treat their customers and 2008 Other than P/C: er option. So basically everything we do is connectemployees the way we felt like they should treat $176.5 million ed.” And, “if you think about it, all those projects them. So Charlie and I left and formed SWBC. We 2007 Other than P/C: have to be insured,” Amato added. didn’t call it that in the very beginning but that’s $232.7 million who we were.” % Commercial: 62% An REO Niche That sense of fairness and the dedication to %Personal: 15% Early on, SWBC developed a recognized expertise treating their customers and their employees with 2008 P/C Revenue: in insuring real estate owned (REO) properties — a the utmost respect remains the foundation of the $246.3 million niche that grew out of, again, clients’ interests. The company today and it has served them well — as 2007 P/C Revenue: company’s involvement in the niche began “years and has their determination to diversify the company, $158.7 million years ago as a request from some of our clients that both geographically and product-wise. Agency Principals: were starting to repossess properties,” Dudley said. SWBC’s corporate slogan, We Do That Too, “realCharles Amato, Gary Dudley Having previously written coverage through ly tells the story,” Dudley said. “When we started Number of Divisions: Lloyd’s of London, Dudley and Amato turned to we were selling insurance products to financial 13 Lloyd’s for help developing a product to protect institutions,” Dudley explained. “We started out Number of employees: financial institutions and their repossessed, unoccuwith one product. As a result of the client liking 1,250 pied properties. While it’s been a profitable business how we delivered and did what we said we were for some time, the REO sector has been a real growth area for the going to do, they’d ask us for another product.” company during the current economy and SWBC is one of the top two Most of the products and services SWBC offers have been developed agencies in the country for this type of product. at the request of a client and that makes good business sense, Amato Standard insurance companies “don’t have the appetite to insure says. After all, the more products you can sell to one client the more vacant property or empty property. So that’s why REO insurance has cost efficient those transactions become. become so popular in today’s environment — because it’s designed While diversified, all of the company’s products and divisions are related and complementary, and they all begin with the customer. continued on page N14 www.insurancejournal.com

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SWBC, continued from page N13

A Broader Mix specifically for repossessed properties that are unoccupied,” Amato While the percentage of REO business in SWBC’s property casualty explained. division increased from 17 percent in 2007 to 23 percent in 2008, com“REO was a nice, diversified part of the agency” when he joined mercial lines continue to make up the bulk of the division’s writings. the company in 2006, said Nick Grant, CEO of the Property and In 2008, commercial lines represented 62 percent of the P/C business, Casualty division of SWBC Insurance Services. By the end of that down slightly from 2007. Personal lines came in at 15 percent in 2008, year the country was headed into a difficult mortgage market, folcompared with 16 percent in 2007. lowed by the economic downturn and tightening of the credit On the commercial side the agency writes a wide variety of SIC market. codes. However, Grant said, “every agency leans towards certain “The whole mortgage industry started sliding and that’s when industries. … We do a number of banks; we’re very good at doing they started taking properties,” Grant said. “Seeing that, Gary and banks. We’ve been very successful with property managers, commerCharlie urged me to develop more of a marketing arm.” Grant then hired a producer whose “sole job is to ‘We started out with one product. As a result of the client liking cover the whole United States, reaching how we delivered … they’d ask us for another product. … So we’d out to anybody that create that product and build it for them.’ services a mortgage and may be taking properties back.” cial buildings, multi-purpose office buildings, we have great markets Some of the institutions currently being forced to take properthere. And for whatever reason the agency has gravitated toward ties back have never had to do that before, so it’s a sensitive issue, restaurants. We write a lot of the nicer, high end restaurants here in Grant said. The REO program can insure the property against hazSan Antonio and we have excellent markets in that area, as well.” ards and flood, among other things, and can be set up to do so on a The agency also serves a broad mix of small, medium and large month-to-month basis. “Our program is an extremely cost effective, business customers. user-friendly program,” Grant said. “It allows monthly billing. And “We have our share of smaller accounts,” Grant said. “We’ve been the reason I point that out is that the properties have to be successful in partnering with companies like Hartford and Travelers insured, and we believe we go about it in the most cost effective, that will make small account servicing, or what we call special efficient manner for the institutions.” account servicing, for the smaller client.” And, he added, SWBC has the ability to underwrite the program SWBC’s growth is linked to its customers’ growth, he explained, and tailor it to clients’ specific needs. and with small businesses it’s especially important to handle their accounts in a cost effective way. “We’re sensitive to that. … [We] realize that a start-up restaurant may not represent a huge premium, but then it picks up and takes off, and you’re part of the growth process.” The agency also sees growth opportunities in middle market accounts, especially in construction accounts, which is an area of special expertise for Grant. “When I came in, the agency was predominantly a white collar business, no real blue collar construction or artisan contractors, and I’d cut my teeth in this industry on construction,” Grant said. So he went on a search for the right people to help grow a concentration in construction, general contractors, subs, artisan contractors and the like. Now, SWBC has an experienced construction team that includes a producer, a CSR, and loss control and claims personnel. Grant added that SWBC writes a number of large-sized accounts, as well. Dudley and Amato “have never met anybody they didn’t think they could insure,” and that attitude filters down throughout the organization, he said. “You could be Frank’s Palette Manufacturing down the road or you could be any large corporation. They wouldn’t hesitate to ask the CEO of Southwest Airlines or anybody else — why aren’t we writing your insurance?” Whether an account is large, small or medium-sized, or whether Left to right: Nick Grant, CEO Property & Casualty Division, SWBC Insurance Services, it’s personal lines or commercial, one thing the agency strives for is to Charlie Amato, chairman and co-founder, SWBC, Gary Dudley, president and co-founder of make sure its customers’ exposures are protected appropriately. “We SWBC, Bill Pegel, CEO Financial Products, SWBC N14 | INSURANCE JOURNAL-NATIONAL REGION June 15, 2009

www.insurancejournal.com


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INSURANCE JOURNAL

TOP100 AGENCIES make every effort to get our prospects, our clients to understand that we’re not insurance sales people,” Grant said. “Our producers are people that go in and expose risk. We go to a client and look at their exposure and make sure they’re fully aware of what’s at risk. And then we provide options to insure the risk.” Embracing Technology SWBC has experienced tremendous growth since its founding in 1976, but in the past four years it has more than doubled in size. One enabling component of SWBC’s success is its total and complete embrace of technology, which both Dudley and Amato both see as yet another example of expansion into an area of business that complements the company’s existing strengths. “We’re a high technology company,” Dudley said. “We have 100 computer programmers on our staff, for instance, to design programs and keep our systems running.” SWBC in 2008 increased its technological investment by buying a stake in Pennsylvania-based Akcelerant Software LLC, which develops software, including collections software, for the financial services industry. And recently, SWBC made an additional investment to facilitate the purchase of one of Akcelerant’s Canadian competitors. “A lot of our financial institutions — credit unions and community banks — use this collections software,” Amato said. As a result of the investment, SWBC established a payment reminder services unit that makes after-hours soft collection calls for clients. The calls are made from a facility SWBC built two years ago — a spacious, light-filled, state-of-the-art contact center large enough to house 400 employees. The proprietary software tracks accounts that are past due and collection personnel make payment reminder calls. In addition, the call center staff can take payments while the customer is on the line.“The results have been remarkable,” Dudley said. “The financial institution hires us on their behalf,” he added. “We started that about two years ago before we knew what the economy was going to do, as a request from one of our clients. That has turned out be our fastest growing division.”

Basketball, Automobiles and the World

W

hile SWBC owners and founders Gary Dudley and Charlie Amato both acknowledge that the company is very much their life, they do participate in few side projects apart from SWBC. And like all other facets of their world, there are connections. The two are investors in the San Antonio Spurs basketball franchise, and Spurs’ star and point guard Tony Parker serves as a “goodwill ambassador” for SWBC, appearing in ads and marketing campaigns for the company. Dudley and Amato together also own four automobile dealerships in San Antonio, in which they employee more than 200 people. The dealerships don’t use the SWBC moniker, but in the spirit of interconnection, they do sell its products and the company handles the insurance for the dealerships’ properties. While world domination may not be the goal, expanding SWBC’s horizon is always in order, according to Amato and Dudley. SWBC owns a Bermuda-based reinsurance company, SWBC Re, and they are in the process of becoming a corporate name in Lloyd’s of London, Amato said. There’s the possibility of investing in a retail operation in London, as well. Also, says Amato, while “we’ve never taken the time to do it because we’ve been so busy, but the software that we were telling you about earlier that tracks for financial institutions? I truly feel that if we ever told that story in Europe, especially in the current economic crisis, there would be a demand for our software.” IJ

the referring employee gets $200. Once an employee successfully refers five new hires, they get an extra $1,000. So, for referring five people who are a good fit, the referring employee can make $2,000. SWBC also compensates its employees well, Amato says, “because we feel that’s the only way we can compete with the public companies. Some people here are making a lot of money and we’re proud of that. We have some people who over a period of years have made more money than Gary and I … and we love it.” SWBC encourages each of its 13 division leaders to run their units ‘We’re a high technology company. … We have 100 computer as if they owned them, Dudley programmers on our staff ... to design programs and keep said. It makes for a very entrepreneurial atmosphere and one that our systems running.’ allows the company to “turn on a dime,” as Amato says, and react An Entrepreneurial Spirit quickly and efficiently to their clients’ needs. Because SWBC is Like many business owners, Amato and Dudley are quick to credit privately held, if a manager comes to one of the owners — to distheir management team and employees for the company’s achievecuss ideas or for an investment in their division — unlike in a ments. “I’d stand up and put our 1,250 people against any company in publicly traded company, they can give that manager an immedithe country,” Dudley said. “They just have that — ‘I want to help, I ate answer. want to take care of the client’” — attitude. Amato said they’ve been encouraged to go public and have been Both Amato and Dudley stand firmly behind the notion that if “you approached by equity firms interested in investing in SWBC, but hire the right people, they hire the right people,” Dudley says. And so far they’re not interested. Going public would not fit the combelieving that talented people associate with talented people, they pany’s business model, Amato said, “because it would take some put their money where their mouth is — they pay their employees to of our entrepreneurial creativity away from us. If we want to refer potential employees to the company. form a new division and lose money for three years, that’s our If a referred employee stays on the job a minimum of six months, privilege — we can do it and we can afford it.” IJ www.insurancejournal.com

June 15, 2009 INSURANCE JOURNAL-NATIONAL REGION | N15


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Special Report Agency Networks

The Globalized Broker Network Assurex Global Struck Gold with Partners Around the World By Charles E. Boyle

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ssurex Global wasn’t fully “global” until the late 1990s, when it changed its structure to meet the challenge of an increasingly integrated insurance market. Assurex, which is actually a partnership of the top independent insurance and risk management brokers worldwide, (www.assurex.com ), was founded in 1954. Over the next 30 years or so it developed a strong presence in the United States and Canada. It also established some links with international, i.e., non-U.S, affiliates. “However, they had no shares and no voting rights,” explained John Rodwell, vice president, International Business Development, in a telephone interview. “That began to change in the late ‘90s,

as we realized we had to get bigger, or decline.” As a result, he explained, Assurex altered its basic structure. The group is set up as a corporation, with each member/partner owning shares in the enterprise, electing directors and setting group policy, as well as serving on the committees that oversee Assurex operations. Partners are selected from the most competent and dedicated independent agents and brokers, according to the group. They are committed without reservation both to their independence and to providing top quality service to their clients. Assurex members occupy a large niche, or second tier, market — between Marsh, Aon and Willis, or companies such as A.J. Gallagher and Lockton —

N16 | INSURANCE JOURNAL-NATIONAL REGION June 15, 2009

Assurex Global Year Founded: 1954 Locations: 500 offices on six continents Employees: 20,000 Annual Premium Volume: $28 billion Annual Revenue: $3.4 billion and smaller agencies. It’s a model that fits like a glove with U.S. firms in the same market — see Insurance Journal’s Top 100 Independent Agency Profiles — and it has propelled Assurex Global to the top spot as the “world’s largest privately held brokerage group,” according to its Web site. In total, Assurex has 110 partners, who collectively write more than $27 billion in premium volume from more than 500 offices in 80 countries. continued on page N18 www.insurancejournal.com


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Keeping a restaurant running smoothly is no simple task. Travelers IndustryEdgeSM covers the complexities unique to this demanding industry. Our risk control professionals understand your clients’ concerns, and can help identify and reduce exposures that could result in injuries or damage. Contact your local Travelers Commercial Accounts representative to see how our customized coverage and service can help your clients stand the heat that comes with running a kitchen. ©2008 The Travelers Companies, Inc. All rights reserved. The Travelers Indemnity Company and its property casualty affiliates. One Tower Square, Hartford, CT 06183

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Special Report Agency Networks Globalized, continued from page N16

establish a presence outside of Europe. “We The Expansion Trail were seeking an international network that The growth from being essentially a United States and Canada network to a glob- would generate cross border business,” said Flach, and “we particularly sought a partner in al one has been remarkably swift. Ten years North America.” ago the existing shareholders, realizing Enter Assurex, which was looking in the Assurex had to grow, instituted a sea change. other direction. The four companies became They contributed a substantial amount of new Assurex members in July capital, earmarked for expan1999, forming the cornersion, and began to seek likely stone of its international firms to join the network ‘We’ve become operations. from outside the United much more “Joining Assurex was States — as full partners, coabsolutely essential for our equal with existing domestic effective in terms future,” Flach continued. shareholders. of understanding “They are the same as us.” They soon struck gold. In Both the European and 1997, Aon bought the U.K.the nature of the American partners are based broker Frank B. Hall, global economy independent, dynamic, which had established a network of partners that includand the exigencies highly skilled, and focused on the welfare of ed, as they are currently of international their clients. Both cater to known, France’s Verspieren the middle market — Group, the U.K.’s HSBC trade.’ from large commercial Insurance Brokers Ltd., enterprises to smaller Germany’s Leue & Nill firms. That model has guided Assurex since its GMBH, and Italy’s GPA Pulsar. beginning, and continues to do so. “As we did not want to become part of Aon, Further expansion followed. “We now look we formed our own group,” explained Jérôme at it [Assurex presence] on a region by region Flach, directeur adjoint (assistant director) for basis,” said Rodwell. They are: The United international operations at Verspieren. Their States and Canada; Latin America; Europe; the network, Synérgie, was the largest independMiddle East and Africa (EMEA); and ent broker network in Europe, based on its Asia/Pacific. He explained that the Assurex member’s strong presence in the European board of directors now consists of representaUnion’s four largest economies. tives from each of the regions. But, the four companies realized that, if “We no longer just meet North American they were to expand further, they needed to

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Benefits of Having Partners Those “details” are an important part of what Assurex offers its members. “What’s great about Assurex is that it’s not a huge global broker,” said Ron Wanglin, chairman of Pasadena, Calif.-based Bolton & Co., a longtime Assurex member. “We can call on regional brokers across the U.S. or abroad.” Depending on what kind of business is involved, Bolton either cooperates with other Assurex partners in solving problems and placing coverage, or, usually where smaller firms are involved, gives the business to the broker who’s best placed to handle it. “We work with the client and with our partners, and we strive to be the best, but we continued on page N20

Assurex Global Partners’

Number of Asssurex Global Partners US & Canada

needs; we also see what the rest of the world needs. We’ve become much more effective in terms of understanding the nature of the global economy and the exigencies of international trade.” The Web site explains: “We can tailor client programs to meet specific regional or local needs nearly anywhere in the world. Clients deal directly with the Assurex Global partner in their own market. In turn, the partner works with other Assurex Global offices around the world to expertly serve the clients’ needs. It’s a simple way for clients to manage an often complex insurance portfolio without losing personalized, local service. We manage the diverse details so that the client doesn’t have to.”

Premium Volume (billions)

US & Canada

65

60

15.3

15

41

40

International

46

12.5

47

13.2

10.6 10

8.4

6

5.7 20

5

17

1 0

1996

2000

2004

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2008

0

1996

2000

2004

2008

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Special Report Agency Networks Globalized, continued from page N18

chart our own course,” Wanglin said. “It’s not all done in Chicago, or New York.” Part of that process, he noted, is being sure that the partners they deal with have the same high standards. One of Assurex’s greatest strengths is that it assures that each partner meets that criteria, Wanglin said, describing it as a “guaran-

tee of best practices,” adding that partners have to “live and breathe Assurex.” Partner relations within the United States are relatively simple. The language is the same and for the most part so is the legal system. Assurex domestic partners have built personal relationships with their counterparts over the

years. Beyond the United States’ shores it gets a bit more complicated. “International business requires dealing with different languages and different cultures,” said Flach. “Even if the international business language is English, each part‘It’s a question ner has their own of language, point of reference.” Over-coming those culture and barriers is part of communication.’ what Assurex does. Flach described his main activity as being a “gatekeeper.” Not so much in the sense of keeping people out, but guiding them to the right person within Verspieren who speaks their language and has the requisite expertise to handle the specific business they require. “It’s a question of language, culture and communication,” he said, adding that “Assurex is the key” to gaining the necessary understanding to be able to reach a successful conclusion. Assurex’s business model is predicated on having one firm for each country outside the United States. Rodwell explained that this prevents unnecessary competition and promotes openness. As a result, agent and broker partners in developed countries are usually a good deal larger than their U.S. counterparts. They have to be in order to have the expertise and the capacity to handle the multitude of different types of business that comes through Assurex. Verspieren employs more than 1,400 people, with offices in most major French cities, as well as branch offices in Spain and Portugal. However, another foundation of Assurex’s business model is to eschew standardization. Assurex members greatly value their independence and would resist any attempt to impose uniform procedures, modeled on the United States, or on any other type of operation. “Each region has its own approach,” Flach explained. “Just as each state in the U.S. is different, each country has its own peculiarities. Our goal is to meet those regional needs.” Selection Process and Oversight Dedication alone, however, isn’t sufficient to be admitted to one of the world’s most exclusive clubs. As the Web site says: “Every Assurex Global Partner is carefully selected following a

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rigorous (and ongoing) evaluation process.” A prospective partner is chosen by a committee when the need to expand the association becomes evident. “What we want to do is review and refine the partnership network,” said Wanglin. “We’re not interested in filling in dots on a map.” “Initially we define the need,” said Rodwell, “then we see what carriers they [a particular broker] work with. We telephone affiliates and we ask Assurex partners who, in their opinion, might fit our criteria for that region.” That’s just for openers. “We are looking for quality brokers, who are responsible and who function as we do,” said Wanglin. “Can they offer multiple coverage? What is their local reputation? How strong are their financials? Do they have broad capabilities?” Assuming a candidate meets all of the above, Assurex undertakes a comprehensive “due diligence” examination. The final step involves personal meetings with Jim Hackbarth, Assurex current president and CEO, as well as with the board of directors and the selection committees. “We’re very selective, because we realize that one bad apple can spoil the whole barrel,” said Rodwell. Once a broker has joined Assurex, however, they remain under scrutiny. “All firms are evaluated every three years,” said Rodwell. “Our evaluation committee looks at whether they are still a strong global player; are they participating with other partners? And are they helping others to become better partners?” It is essentially a “peer review” process. www.insurancejournal.com

impose them, which gives each partner more freedom as to how they serve their customers.” Transferring knowledge and expertise has never been easy — even within the same company. Assurex first tackled the problem with its United States and Canada partner network. Following its expansion those efforts took in the global partners. The association recently developed a new tool — Passport — to make it easier to transfer expertise from one region or country to another. Wanglin explained its usefulness by citing the example of Mercedes-Benz. The auto manufacturer has plants or does business in the United States, Mexico, France, Germany and Italy. “We are able to put all of the documents, policies and related information into the Passport system, so that everyone involved can Over the years, very few partners have left Assurex. “It does happen,” said Rodwell, but he receive by instant communication all of the data necessary. It doesn’t have to be shuttled could only remember three or four occasions when it has. The reasons were either financial, back and forth by e-mail or snail mail.” In another example he posited a broker who or because the firm involved lacked the same needs information on writing country club principles and dedication as the other partrisks — a field that it hasn’t worked with ners. before. “If you send out a call for information to Given the rigorous selection process, the Assurex partners on Passport, you’d have more ongoing peer reviews, as well as the twice information than you’ll ever need about country yearly board meetings, and regional meetings clubs.” The system has been in operation for between the partners, it’s not surprising that almost four years, and, Wanglin said, “we’ve so few have left. Joining Assurex is not like pretty much worked out all the bugs in it.” joining the local Lions Club. “It’s really like an That statement could apply to Assurex as extension of our own firm,” said Wanglin, we well. Its system has proven itself over time. It count on the reciprocity; we work with our combines both loyalty clients and our partners; it’s a and flexibility, and has ‘win-win’ situation. Plus avoided becoming too they’re good people; I’m ‘It works because static to accommodate happy to meet with them.” the partners are new risks, new technology, and above all new Passport to the Future committed to partners. “We’re not yet In return for that commiteach other. But at maturity, we’re still at ment Assurex partners get the development stage in more than a few business ultimately it’s a number of countries” leads. The reciprocity princiall about people.’ said Flach. ple means they can call on “The Assurex business the support of other memmodel has held up for over 50 years, through bers of the network any time they need it. generations of changes,” said Wanglin. “It While the growth in technology has made works because the partners are committed to global cooperation easier, Assurex remains a each other. But ultimately it’s all about people. people to people business. The Internet hasn’t The senior partners explain the value of done away with face to face meetings, which, Assurex to their employees, so that they Wanglin said, “happen frequently.” understand, and are engaged at various levels.” “Each country has its own needs,” he conThat commitment bodes well for Assurex’s tinued, “there are no definitive answers, therecontinued success. IJ fore we look for solutions, but we don’t June 15, 2009 INSURANCE JOURNAL-NATIONAL REGION | N21


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Special Report Agency Options - Staffing

How to Make Telecommuting Work for Your Staff Constant Communication Helps to Keep Remote Employees Motivated to Succeed Henry

By Susan Henry

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elecommuting is increasingly popular in today’s business world. It cuts operational costs for the employer, while allowing employees the convenience of working from their home offices. While telecommuting has proven valuable for many organizations, it requires a non-traditional approach to management. From communicating to measuring productivity, you must alter your management style to accommodate your off-site staff. Here are a few techniques to ensure happy and productive telecommuting employees. Telecommuting Not for Everyone Make sure those you hire are positioned to succeed. Telecommuting is not for everyone. Certain employees will thrive as telecommuters while others need more constant supervision and direction. Keep this in mind when you are hiring on new employees or transitioning current employees for telecommuting roles. In the interview, make sure that candidates have a demonstrated history of success working in an independent environment. Stress to candidates that the individual selected will be expected to work with limited direction. Entry-level employees or those who require constant supervision are not good candidates. Provide comprehensive training for the role, and lay out your exact performance and productivity expectations. Communication is vital to maintaining an effective and functional relationship with offsite employees. Make a point to talk with each of your employees at least once a day —

even if that means reserving time on your calon their own — without your feedback. endar. Do not rely solely on e-mails and Unlike a regular office environment, teleinstant messages — pick up the phone and commuters cannot go to lunch to discuss call your employees. Schedule weekly one-onwork-related issues. Give them outlets to one meetings to review performance and to communicate on a personal level. Try to get set goals and objectives for the group together face-to-face the week. This will proquarterly. If they live in the Telecommuting same area, have them assemble vide formal, uninterrupted time to go over any project once a month for a team meetis not for difficulties or general work ing or lunch. everyone. issues. Make time for casual Utilize Available Technology conversation. Personal connections play a In addition to the phone and e-mail, a large role in job satisfaction and retention. In wealth of technology is available to assist a typical office environment, these connectelecommuters. Explore your communication tions occur naturally. However, when you do options and be open to all available technolonot see each other everyday, it is easy for gy. Invest in internal systems that can track phone calls and e-mails to become strictly productivity and allow you to review workbusiness. Make a conscious effort to incorpoin-progress in real-time. This will also enable rate casual conversation into your corresponyou to observe employees’ strengths and dence. Allow time in your weekly meetings weaknesses. Take advantage of Web-based to talk about upcoming vacations, discuss a meetings and teleconferencing. Yet don’t let popular TV show, or ask about each other’s technology replace face-to-face meetings. kids. At least once a week, you should find time to check in with your virtual employees Celebrate Successes “just to chat.” Promote teamwork and a sense of unity by Promote communication among employcelebrating individual successes — both perees. Telecommuters do not connect face-tosonal and work-related. Make announceface with colleagues on a regular basis. While ments to the team in weekly meetings. it is important that they have strong working Additionally, celebrate contributions such as relationships with their managers, it is also exceeded performance objectives, met goals important that they interact with their coand acquired sales leads. Motivate employees workers. If you have a large team, schedule with monthly competitions and other incenweekly calls for the entire team. During this tives. This will also promote social interactime, each team member should give an tion and team building. update on his/her own goals and projects. While telecommuting requires the right This weekly meeting will prepare your employees and a flexible, hands-off manageemployees for the week and boost morale by ment style, it has many benefits. Make a congiving them a sense of camaraderie. scious effort to keep employees motivated, Let your team connect without you. Resist encouraged and appreciated, and you will the urge to micromanage. If you control produce a team positioned for success. IJ everything, your employees cannot have candid conversations among themselves. Have Henry is senior vice president of Jacobson Solutions, the senior-level employees pair up with newer temporary staffing division of The Jacobson Group. Phone: employees for role playing or other training 800-466-1578. E-mail: shenry@jacobsononline.com.

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The Insurance Professional’s Practical Guide to Workers’ Compensation: From History History through through Audit Audit From Author: Christopher J. Boggs, CPCU, ARM, ALCM, LPCS, AAI, APA Price: $55.00 for paperback and $49.95 for a pdf download Available at: http://ijmag.com/wcbook

Key Take-Aways

1 2 3 4

Legal and contractual concepts surrounding workers’ compensation presented in simple, non-legal terms.

Provides selected statutory information for every state.

Allows the reader to understand the framework on which workers’ compensation coverage is built.

Designed to combine statutes, common law, contracts and the human element of workers’ compensation into one resource.

I've worked in the insurance industry for almost 50 years, including periods as an underwriter, educator, agent and consultant. Of all the textbooks, reference sources, etc. that I have read on the subject of WC, these articles are by far the best I have ever encountered. Congratulations and thanks for a job well done!! Russ Taylor Risk Management Tactix Spring, TX

"A must read for everyone wishing to truly understand workers' compensation sales. Chris's writing style makes complex issues easy to understand even for beginners. This book should be the standard for our industry." Chris Burand President – Burand & Associates, LLC www.burand-associates.com Excellent book - even for those of us whose primary occupation is not in the insurance industry. This book explains insurance terminology in a way that anyone can understand. I may not understand all of the finer points of worker's compensation, but I now know what questions I need to ask! Ricky Horton, CMA Vice-President of Finance McCombs Steel Company, Inc

WORKBO

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Closer Look Construction

Construction Projects at a Standstill Risk Management Considerations to Help Protect and Preserve Properties on Hold By Timothy R. KaniaIn

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n the current economic and credit crisis, construction entities — project owners, contractors, architects, engineers, material and equipment suppliers, and end-use customers — are all facing unprecedented levels of financial uncertainty. The financial deterioration of any of those entities can create substantial challenges for the construction project at hand and, in severe cases, may impact the ability of the project to continue as scheduled. In instances where a project enters a standstill period, both a proactive approach to address exposures, and a continued focus on risk management and loss prevention practices are essential. A fully documented property conservation program implemented by the property owner and contractor can help to reduce the likelihood of property losses as the project enters the standstill phase. Documentation also can help facilitate the successful resumption of the project in due course. Winding Down The first stage of winding down should begin well before the decision to stop work at the project site is contemplated. As financial difficulties emerge, cost savings strategies such as lowering skilled labor qualifications or reducing site safety protocols can be tempting. Such measures, however, can quickly transform a well-run project into a severely stressed project. For example, accepting a low-bid labor force without paying attention to required skill sets can lead to quality control and workmanship issues that create costly work-site inefficiencies. Other cost-saving measures under consideration by the project owner may involve reducing overall management oversight at the worksite. However, this can result in problems such as an increase in workforce safety issues due to site congestion or increased property risk exposure as attention to debris cleanup, proper storage of combustibles, and maintenance and

storage of critical equipment wanes. Meanwhile, owners and contractors also have to be aware of the potential for moral hazards once the decision has been made to shut down a project. The frequency of arson, theft and water damage events may increase as workforce reductions become apparent. Therefore project oversight, including the maintenance of high loss prevention standards and proper site security, is paramount throughout the standstill transition period. Conservation Practices As soon as the decision to wind down a project has been made, it is critical to establish a written policy to address property conservation practices and establish authorities and responsibilities across the project team. Specific actions should be undertaken for the purpose of protecting property assets from the threat of accidental loss, including natural hazards exposures. The project site should be adequately secured to control site access and deter unauthorized entry. All construction debris should be removed, and prudent

N24 | INSURANCE JOURNAL-NATIONAL REGION June 15, 2009

housekeeping practices should be followed. All fire protection services should be maintained, the local fire department consulted and emergency response plans formulated. In addition, temporary measures to protect and preserve property from weatherrelated exposures should be implemented, and maintenance of critical on-site equipment should continue throughout the standstill period according to the original equipment manufacturer’s recommended maintenance and storage practices. Communication Effective communications among the various construction entities including owners, facility engineering and maintenance, finance and purchasing, suppliers and contractors can help to minimize the potential for loss during the standstill period. The project’s insurance provider should be at the top of the notification list. Proactive communication between a policyholder and its insurers reaffirms and respects the partnership created during www.insurancejournal.com


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the work site and maintain equipment can policy negotiations. This communication may also satisfy contractual obligations typ- help to facilitate the restart of construction operations. By using a well-documented ically contained under property construcand executed standstill protocol, compretion programs with respect to cessation of hensive records of site conditions, building work conditions at a project site. and equipment preservation Policy coverage warand maintenance procedures, ranties generally provide a While a standstill and incident details can be maximum cessation coverproject exposure reviewed to establish requireage period and, once the can present numer- ments to restart the works. insurer is notified and Following a lengthy standassured that the property ous challenges, still period, a comprehensive will be protected and implementing a due diligence exercise will maintained, it may be open proactive approach need to be undertaken to to negotiating extended identify the structural, eleccoverage for the standstill to protecting and and mechanical integriperiod. If a project owner preserving property trical ty of the property at the does negotiate an extension, he or she will need to can help to mitigate work site. A detailed analysis to determine appropriate provide the insurer with the risks. actions, including the repair, periodic updates on the refurbishment, or replacement of property, project status and confirm that property will also be required. This process may conservation programs are maintained. require the assistance of third-party experts, as well as may require original Restart Operations equipment manufacturers to assist in the As a project emerges from standstill, the loss prevention efforts undertaken to secure review process.

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For critical high-value equipment, project owners will need to determine what specific actions are required to reinstate the original equipment manufacturer’s warranty provisions. Upon completion of the above process, the selection process for contractors and applicable consultants can be undertaken to restart the works, develop a revised time schedule and complete the project. While a standstill project exposure can present numerous challenges, implementing a proactive approach to protecting and preserving property can help mitigate the risks. This philosophy must resonate throughout the project team from the first indication of financial distress throughout the entire standstill period. With proper adherence to a comprehensive risk management policy, the project will have the solid footing required to emerge from standstill and re-initiate the works toward a successful completion. IJ Kania is senior vice president of construction for Liberty International Underwriters.

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National Coverage News & Markets

Supreme Court Nominee Sotomayor Shows Record of Favoring Insurers Philadelphia-Based Insurance Attorney Finds Rulings to be ‘Very Insurer-Friendly’ thinks, Maniloff said. “The stereotypical view of a liberal would probably not have them being sympathetic to the insurance industry.” he Supreme Court almost never takes up There are numerous doctrines in the law of insurance related cases. Even so, President insurance coverage which, according to Obama’s recent Supreme Court nominee— Maniloff, make an insurer a seven-point underfederal appeals Judge Sonia Sotomayor — dog in every case because those doctrines typibrings a long record of decisions favoring cally favor policyholders. “That’s why insurers insurers, a possible plus for the insurance are always swimming against the tide in insurindustry, said Philadelphia based insurance ance coverage cases, because of these various attorney Randy J. Maniloff. rules on how you determine coverage that all Maniloff, who is a partner in the commerfavor the policyholder,” he cial litigation department said. of White and Williams LLP, In Maniloff’s experience, said that in his review of many courts find against Sotomayor’s insurance-relatinsurers because it’s so easy ed opinions, he discovered to point to one of the insurthat she ruled “consistentance doctrines. ly, across the board in favor In Maniloff’s review of of insurers.” Sotomayor’s insurance opinManiloff, who concenions, he found she was not trates his practice in the willing to “jump to the conrepresentation of insurers, clusion that one of these reviewed many insurancedoctrines applied and thererelated cases by Sotomayor fore coverage was owed.” and found that the overSotomayor was “extremely whelming majority of the thorough in going through cases resulted in opinions considered to be favorable Supreme Court nominee Sonia Sotomayor walks the decision to determine whether or not coverage to insurers. with U.S. Senator Arlen Specter to Specter’s Given her lengthy time hideaway office on Capitol Hill for a meeting in was owed and didn’t have that sort of knee-jerk reacon the bench, including on Washington REUTERS/Hyungwon Kang tion that coverage was owed the District Court and (UNITED STATES POLITICS) because of these doctrines Court of Appeals, Sotomayor has a long list of insurance coverage that favor insureds.” One such case Maniloff reviewed is Greenidge cases on her resume, Maniloff explained. “But v. Allstate Ins. Co., 446 F.3d 356, 364 (2d. Cir.) what I discovered in the course of looking at (Sotomayor, J.). In the opinion she wrote: Judge Sotomayor’s overall body of opinions on “Unfortunately, it was the Greenidges’ own coverage issues was far more interesting than actions, and not Allstate’s, that put them at any one case. Judge Sotomayor has been very, risk of a large adverse judgment. The law of very insurer-friendly during her time on the bad faith is not intended to reduce the incenbench.” tives of insured parties to protect their own In general, courts are not sympathetic to interests in situations where they are empowinsurers, according to Maniloff. While insurered to do so. In the instant case, the ance coverage cases rarely, if ever, make it to the Supreme Court — generally because insur- Greenidges had ample opportunity to protect their own interests. Allstate was aware of the ance is not considered a federal issue — Sotomayor’s insurance opinions could make the options available to the Greenidges, and it was also aware that the Greenidges were representcase that she’s not as “liberal” as everyone By Andrea Wells

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asserted against Maska nor reported to U.S. ed by private counsel. Allstate was therefore of forms having to be filed and whether or not Fire during the policy period.” entitled to assume that the Greenidges would they are effective, and she concluded that This appeal case involved a dispute between application of the pollution exclusion was not take steps to protect their own interests. The an insured, Maska, and two of its insurance Greenidges’ failure to do so does not convert precluded by Vermont public policy,” Maniloff carriers, Zurich Insurance Co. and United Allstate’s refusal to accept the Seay plaintiffs’ said. “When you read the decision, she cites States Fire Insurance Co., concerning coverage settlement offer into a display ‘of recklessness case after case after case — which seemingly for liability costs and related defense costs on the part of the insurer.’” support the policyholder position — and she incurred in connection with environmental This case in particular illustrates just goes through them one by one and distincontamination at Maska’s Sotomayor’s willingness to be guishes them by why they don’t apply.” manufacturing facility in extremely thorough in the Maniloff said while the Maska case isn’t a ‘Judge Bradford, Vt. analysis when finding in favor true coverage case, it did represent again the Sotomayor Maska, which manufacof the insurer, Maniloff said. thoroughness of the opinion. tured national hockey league The case involved a dispute There were at least seven cases Maniloff has been very, jerseys, used perchloroethyl- reviewed as to whether or not there was that were the most telling in her very insurerene (perc), a dry cleaning going to be $300,000 or finding in favor of insurers, he added. (See side to clean its fabrics. $600,000 available under the bar below). In all, Maniloff said Sotomayor was friendly during chemical Use of the chemical and its policy. “Allstate was adamant careful to examine the policy wording closely. her time on discharged wastewater, led to that there was only $300,000 “She goes through them, she analyzes, she a huge amount of environavailable — it went to trial and parses the policy wording and she decides the bench.’ mental contamination that the verdict came in at $2 milthat the policy language is ambiguous (or not) resulted in a multi-million lion,” Maniloff explained. in a much more detailed manner than just The question surrounded Allstate’s responsi- dollar settlement. The court determined that jumping to that conclusion or having a kneethe pollution exclusion did not apply. bility for anything more than $300,000. “The jerk reaction,” Maniloff said. “She takes that The case is not a true pollution exclusion plaintiffs had tried to get Allstate to agree to standard very seriously. That’s what I saw in a case, Maniloff said. The decision wasn’t based litigate the additional $300,000 they said was lot of these cases.” on coverage grounds but rather on grounds owed,” Maniloff said. Maniloff’s full review of Sotomayor’s insurthat certain forms had or had not been filed “It’s easy for a plaintiff to make the arguance-related opinions can be seen in his with the Vermont department of insurance. ment that an insurer didn’t do enough to pronewsletter titled, “Binding Authority” at “Vermont is unique in that regard, in terms tect the insured’s interest,” he said. “There was www.whiteandwilliams.com. IJ an opportunity according to the plaintiffs to protect the plaintiffs because they could have settled the case and then litigated the dispute and the insured would have had no personal exposure. The court ultimately said that reenidge v. Allstate Ins. Co., 446 F.3d 356 (2d. Cir.) (Sotomayor, J.) — rejected argument Allstate did not breach any duties and if anythat the insurer did not do enough to protect its insured’s interest to prevent a verdict body should have protected the interests, it’s in excess of policy limits. the insureds that should have protected their Hugo Boss Fashions Inc. v. Federal Insurance Co., 252 F.3d 608 (2d. Cir. 2001) (Sotomayor, J, own interest.” Dissenting) — strong dissent from majority opinion that adopted a test that expanded the Maniloff said the case involved coverage for a “duty to defend” under New York law. child that had been exposed to lead paint, Maska U.S. Inc. v. Kansa General Ins. Co., 198 F.3d 74 (2d. Cir. 1999) (Sotomayor, J.) — held which always adds a sympathetic factor, but that the insurer’s pollution exclusion was enforceable, despite regulatory and public policy ultimately the court ruled in favor of Allstate. challenges to it. In another case, Maniloff reviewed Maska Coregis Insurance v. American Health Foundation, 241 F.3d 123 (2d. Cir. 2001) (Sotomayor, J.) — U.S. Inc. v. Kansa General Ins. Co., 198 F.3d 74 (2d. held that no coverage owed based on a detailed analysis that the term “related to” is broader Cir. 1999) (Sotomayor, J.). In the opinion, than “arising out of.” Sotomayor wrote: Webster v. Mt. Vernon Fire Insurance, 368 F.3d 209 (2d. Cir. 2004) (Sotomayor, J.) — held that “We hold that the absolute pollution excluno coverage owed as the insurer did not violate New York’s very strict requirements of sions in the Zurich policies do not violate any Insurance Law Section 3420. established Vermont public policy, and that Mount Vernon Fire Ins. Co. v. Chios Constr. Corp., 1996 U.S. Dist. LEXIS 414 (S.D.N.Y.) Maska has waived its contention that Zurich’s (Sotomayor, J.) — held that there was “not even a metaphysical possibility” that a subconfailure to comply with the statutory filing tractor’s injury had to be paid by the general contractor’s insurer. requirements voids the exclusions. We further Noonan, Astley & Pearce v. Ins. Co. of Pa., 1994 U.S. Dist. LEXIS 3803 (S.D.N.Y.) (Sotomayor, J.) hold that coverage is not available under U.S. — no property coverage owed for disruption of an insured’s operations based on a very Fire’s Defender policy because the underlying strict interpretation of the policy’s “government agency” prohibition. IJ environmental liability claims were neither Source: Randy Maniloff, e-mail: maniloffr@whiteandwilliams.com.

Sonia Sotomayor’s Pro-Insurer Coverage Cases

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National Coverage News & Markets

Mystery Surrounds Air France Crash Liability Claims to Come Could Exceed $1 Billion, Some Experts Predict By Charles E. Boyle

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he tragic disappearance of Air France flight 447 over the Atlantic early on June 1 remains a mystery. The plane’s 216 passengers and 12 crew members perished as all contact was lost with the Airbus 330-200 in the middle of the Atlantic Ocean. The crash site was finally located on June 6. Automatic data feeds, which were accessed hours after the plane went missing, registered an “electrical fault,” and described a succession of events that could have led to the plane’s demise between 11:10 and 11:14 p.m. local time. These included: failure of onboard computer systems (which, have backups); a loss of cabin pressure; the disengagement of the plane’s autopilot, and malfunctions in the speed and stabilization monitors. Those four minutes signaled the aircraft’s probable breakup. Whatever led to the AF447 tragedy may forever remain a mystery. Modern airliners, certainly the A330 series, which has an outstanding safety record (no fatal incidents since a test flight in 1994) don’t simply disappear in mid flight. Most fatal accidents, although there have been remarkably few lately (See chart below), occur at either landing or taking off. So far, the focus of current speculation centers on the “pitot” tubes, which monitor the speed of the aircraft. Airbus had indicated that these should be replaced with a more up to date device, as there had been reports that extreme cold made the speed readings unreli-

able. But Airbus did not make the change mandatory. Paul Louis Arslanian, the head of France’s air accident investigation agency, described the cause of the crash as stemming from “a series of events.” The series of failures, as recorded from the automatic signals, do seem to show a sequence and all of them in succession could have caused the fatal crash. However, other aircraft traversed the same zone at around the same time without having significant difficulties. If the flight recorders are ever recovered, they could provide some answers. But that seems an unlikely prospect.

Victim Compensation Given the circumstances, figuring out how to compensate the families won’t be easy. There are, however, certain international conventions and treaties that will apply. France’s AXA Group is the lead underwriter, but many other insurers are also involved, as aviation coverage is routinely spread among a number of carriers. Loretta Worters, vice president-communications of the Insurance Information Institute, provided the following summary by e-mail of the general guidelines that have been established to cover aviation disasters. For the A330200, she said it is “valued at around $180 million,” with the hull of the aircraft “insured for at least $100 million, probably more.” In terms of liability claims, there are differences between international and U.S. claims. U.S. commercial airline carriers have historically settled liability claims Worldwide Scheduled Air Service Fatal Accidents, 1998-2008 against them totaling between $1.5 million and Passenger Passenger $2 million per victim (if fatalities fatalities Fatal per 100 Fatal per 100 the accident took place in aircraft million aircraft million the U.S.). accidents Passenger passenger accidents Passenger passenger Year (1) fatalities kilometers Year (1) fatalities kilometers However, liability for personal injuries and 1998 20 904 0.03 2003 7 466 0.02 deaths involving interna1999 21 499 0.02 2004 9 203 0.01 tional flights falls under 2000 18 757 0.03 2005 17 712 0.02 the Montreal Convention, 2001 13 577 0.02 2006 12 751 0.02 2002 14 791 0.03 2007 11 587 0.01 which provides that air 2008 11 439 0.01* carriers are strictly liable for proven damages up to (1) Involving a passenger fatality only. 100,000 in “special draw*The Accident Rate decreased marginally, from approx. 0.01391 in 2007 to about 0.01370 in 2008 Source: International Civil Aviation Organization. ing rights” (SDR), a mix of

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Brazilian Navy picks debris from Air France flight AF447 out of the Atlantic Ocean, some 745 miles (1,200 km) northeast of Recife. REUTERS/Brazilian Air Force/Handout

currency values established by the International Monetary Fund (IMF). It established a payout of approximately $138,000 per passenger at the time of its ratification by the United States in 2003. As of June 2009, it had risen to around $154,800. The Montreal Convention was brought about mainly to amend liabilities to be paid to families for death or injury while on board an aircraft. As of December 2008, there were 87 signatories, including the United States, European Union (EU), Canada, China, Japan, Korea and Mexico. Where damages of more than 100,000 SDR are sought, the airline may avoid liability by proving that the accident that caused the injury or death was not due to their negligence or was attributable to the negligence of a third party. This defense is not available where damages of less than 100,000 SDR are sought. The Montreal Convention also amended the jurisdictional provisions of the Warsaw Convention. It now allows the victim or their families to sue foreign carriers where they maintain their principal residence, and requires all air carriers to carry liability insurance. Those lawsuits, however, could be costly. Plaintiffs may seek between $3 million and $4 million per passenger, according to sources in the London market, which, as a center of aviation underwriting, will have some exposures. When the A330’s value is added in, the claims could exceed $1 billion. IJ www.insurancejournal.com


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Closer Look Construction

Contractor’s General Liability Coverage Limitations — A Road Filled with Landmines Grindle

By Gary Grindle

G

encon, a general contractor, was nearly finished constructing a five-story apartment building when an employee accidentally damaged a sprinkler head causing a leak. Gencon made an emergency call to the plumbing store next door, and Joe the plumber promptly arrived and quickly repaired the damaged sprinkler head before any significant water damage occurred. Unfortunately, one year after completing the project, the repair failed and the building experienced significant water damage. Gencon was sued and submitted a claim to its insurer. Much to Gencon’s dismay, the insurer denied coverage based on the fact that the faulty work was done by a Contractor’s subcontractor, Joe the general liability who policies, particularly plumber, did not have in the E&S marketinsurance that complied with place, often include the subcontraca variety of onerous tor’s warranty endorsements. limitation form on Gencon’s general liability policy. In its rush to fix the damaged sprinkler head, Gencon had failed to ask Joe the plumber for a COI. Gencon learned a hard lesson and worked with its agent to negotiate the removal of that form at its next renewal. This type of restriction is not uncommon. Contractor’s general liability policies, particularly in the excess and surplus (E&S) marketplace, often include a variety of onerous www.insurancejournal.com

endorsements. This article touches upon just a few of the more common and difficult. Remember different carriers apply different labels to many of these forms. Broadened Injury to Employee Endorsements The ISO Commercial General Liability Coverage Form (12/07) provides for an important exception to the exclusion for bodily injury to the insured’s employees (exclusion e, Section 1, Coverage A). The standard exclusion does not apply to liability assumed by the insured under an “insured contract.” It is not uncommon for carriers to attach forms that eliminate this

important exception to the employee exclusion, particularly for contractors operating in New York where “action over” claims are relatively common. These endorsements are often referred to as “labor law” exclusions, and their intent is to preclude coverage for claims by injured employees. These typically involve claims made against the general contractor and/or job owner, alleging that they violated “safe place to work” requirements (e.g., N.Y. Labor Law S240 commonly referred to as “the scaffolding act”). The general contractor or owner would then typically look to the employee’s employer (i.e., the general contractor or subcontractor) for continued on page N30

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Closer Look Construction Contractor’s, continued from page N29

coverage via the indemnification agreement in the construction agreement. The elimination of coverage for these “action over” type claims presents a major gap in coverage, and every attempt should be made to have this type of limitation removed. Classification Limitation Carriers will use this type of endorsement in an attempt to restrict coverage to the specific operations/exposure that they’ve classified and rated for on the policy. One carrier’s form reads as follows: “This insurance applies to ‘bodily injury,’ ‘property damage’ or ‘personal and advertising injury’ not otherwise excluded herein, arising out of only those operations which are described by the classification shown on the Commercial General Liability Coverage Declarations, its endorsements and supplements.” The problem with these forms is that ISO commercial lines classifications were never intended to be fully descriptive of a contractor’s operations and as a result, they leave significant room for coverage disputes in situations in which a contractor is involved in ancillary activities not clearly described by the classification itself. If possible, attempts should be made to have these limitations removed or to have the carrier utilize a manuscript form that more clearly outlines the covered activities.

It’s important to note that there are exceptions to this section; refer to the policy language for details. This is the section of the definition most applicable to contractors utilizing construction and subcontractor agreements. Carriers, particularly in the E&S markets, often attach ISO form CG2139 (10/93), Contractual Liability Limitation, which eliminates section “f.” of the definition of “insured contract.” By eliminating section “f.” most all contractual coverages are removed. There would be no coverage for liability assumed in a construction agreement or for “action over” type claims. This is a major gap in coverage and every attempt should be made to negotiate for the removal of this endorsement.

Contractual Limitation The ISO Commercial General Liability Coverage Form (12/07) provides relatively broad contractual coverage within the basic contract. Most notably, item “f.” within the definition of “insured contract” (12/07) specifies that an insured contract includes: “That part of any other Cross Suits Exclusion contract or agreement perResidential These endorsements are taining to your business sometimes very broad and (including an indemnification exclusions can be of a municipality in connecvery broad or more may exclude coverage for suits by any insured against tion with work performed for narrowly focused. any other insured. There are a municipality) under which also examples where carriers you assume the tort liability include language that precludes coverage for of another party to pay for ‘bodily injury’ or ‘propsuits by employees (with no exception for liaerty damage’ to a third person or organization. bility assumed under an “insured contract” Tort liability means a liability that would be — a major concern in states such as New imposed by law in the absence of any contract or York where employee “action over” claims are agreement.” N30 | INSURANCE JOURNAL-NATIONAL REGION June 15, 2009

common). Language that excludes coverage for suits by any insured against any other insured should be avoided, most notably because it could exclude coverage for a suit brought by any party included as an additional insured under the named insured’s policy. If this type of endorsement cannot be removed, every attempt should be made to limit its applicability to suits by one named insured against another named insured, or at least only to suits between organizations in which the named insured has a controlling interest. Exclusion – Damage to Work Performed by Subcontractors on Your Behalf ISO form CG2294 (10/01) or a carrier’s equivalent endorsement eliminates the exception to the exclusion for damage to “your work” (exclusion l., Section I, Coverage A of the Commercial General Liability Form 10/07) for work performed on the insured’s behalf by subcontractors. If your insured utilizes subcontractors, this type of restriction presents a significant gap in coverage. If your insured is a general contractor, it virtually eliminates completed operations property damage coverage, at least in terms of the work done by or on behalf of the insured. Once again, this type of restriction needs to be understood and, if subcontractors are utiwww.insurancejournal.com


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lized, every attempt should be made to negotiate for its removal. Independent Contractors Limitation/ Subcontractor Warranty Endorsements These endorsements establish minimum requirements for subcontractors relative to insurance and other risk management controls. These forms most often require at a minimum that a written indemnification agreement in favor of the insured be in place, certificates of insurance be obtained, specified insurance limits be required of the subcontractors and that the insured be named as an additional insured on the subcontractor’s general liability policy. Typically, failure to comply with the terms of these endorsements results in one of four types of penalties: 1. Coverage is nullified relative to any loss resulting from the work of the subcontractor (commonly referred to as a hammer clause); 2. A higher deductible or retained limit applies to any loss resulting from the work of the subcontractor; 3. A lower limit of liability applies to any loss resulting from the work of the subcontractor; 4. A higher rate applies to the sub cost for the subcontractor. You should work with your underwriter or wholesale broker to negotiate for the removal of these forms or the use of the least punitive version. In particular, every effort should be made to avoid the first type of penalty.

attempt to have the form removed or modified dependent upon the activities of your contractor. Total Pollution Exclusion The pollution exclusion within the ISO Commercial General Liability Coverage Form (12/07), although very restrictive, does provide limited pollution coverage. For example, coverage is not specifically precluded for injury or damage arising out of: the products and completed operations hazard, or for the accidental escape of fuels; lubricants or other operating fluids needed to perform the normal electrical, hydraulic or mechanical functions necessary for the operation of mobile equipment; and for the accidental release of gases, fumes or vapors from materials brought into a work-site in connection with operations being performed by the contractor. Additionally, for ongoing operations at an additional insured’s site, there is the following exception: “‘Bodily injury’ or ‘property damage’ for which you may be held liable, if you are a contractor and the owner or lessee of such premises, site or location has been added to your policy as an additional insured with respect to your ongoing operations performed for that addition-

al insured at that premises, site or location and such premises, site or location is not and never was owned or occupied by, or rented or loaned to, any insured, other than that additional insured.” Carriers often (E&S carriers most often) attach a “total pollution exclusion” to their policies which is much more restrictive than the standard ISO GL pollution exclusion and eliminates the exceptions to the standard exclusion noted above. If possible, this exclusion should be removed. Consideration should also be given to the purchase of a separate contractors pollution policy. Even non-environmental contractors have a need for this coverage. Conclusion Hopefully it is clear that a careful review of the terms and conditions, especially when dealing with E&S markets, is critical. These examples are only a few of the restrictive forms that agents and brokers need to be aware of in order to successfully navigate their contracting account’s coverage mine fields. IJ Grindle is vice president, sales manager and national retail coordinator at Colemont Insurance Brokers of Connecticut. E-mail: gary.grindle@colemont.com.

Residential Exclusion Residential exclusions can be very broad (e.g., all types of residential possibly including apartments) or more narrowly focused (e.g., only applicable to work involving new condominium, multi-unit habitational or tract homes). Some forms specify the maximum annual number of new starts for home builders or the maximum number of condominium units in a given project. It is critical to carefully read these forms to ensure your client’s operations do not include any of the excluded coverages. Ideally you should www.insurancejournal.com

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Idea Exchange Closing Quote

Risk, Reward and Reflection Lessons Gained from the Current Economic Storm

Ladner

By Gerald F. Ladner

T

he property/casualty business has never been easy. As history shows, the underwriting community has been successful in creating and delivering insurance products that give consumers and business owners peace of mind. Over time, the level of underwriting sophistication grew exponentially in direct response to an increasingly complex and equally unpredictable world. Survival in our business is never a guarantee. Year by year and month by month, underwriters navigate through a spectrum of hazards that range from inclement weather to market cycles that test the durability of even the most seasoned underwriters. Our collective sense of hope and optimism seems almost palpable as we prepare for the next season. We are also searching for any sign that our economy is stabilizing and just maybe we can see stronger consumer confidence with indicators pointing to a faster recovery. Over the past nine months, upheavals in our financial markets brought into focus a number of emerging risks associated with credit and the stock market. As in every crisis, underwriters by their very nature seek out the valuable lessons to be gleaned. More importantly, there is an effort to avoid repeating any of the hard and expensive lessons going forward. Are we now ready to move beyond the disbelief stage to engage in the kind of thoughtful reflection as to address the obvious — that we have become a society financially over extended and one that resides too close to the coast? Consumer and business interests have actually raised legitimate concerns about the financial services industry. There has been a serious breach of trust and a loss of confidence in a few segments not involving the highly regulated P/C industry. From the view of the shareholder, the sheer magnitude of money lost will limit options for many businesses in the short term. What is unfortunate is that a welldeserved backlash focused on the financial services industry in general, may have the potential to wash over into the P/C industry. It is highly possible that the average consumer is unaware that the P/C industry is the most highly regulated of all the members comprising the financial services sector. Although the P/C market has also been wounded by current economic conditions, this segment remains strong in comparison to banks

N32 | INSURANCE JOURNAL-NATIONAL REGION June 15, 2009

and life insurance companies. Despite this fact, we do have to come to terms that our new operating environment will have an additional layer of regulation, federal oversight, which may or may not create value in the long term. Over the years, having tracked the work of notable social trend researchers such as Madelyn Hochstein and Daniel Yankelovich, principals at DYG Inc, I’ve concluded that the P/C industry needs to take a closer look at the growing entitlement mentality infecting the American psyche. Why is there a belief Survival in that consumption should be without our business limit? How will this play out in a new age of limits when we can no longer is never a afford to subsidize or insure society’s expensive choices? Is there a possibility guarantee. that the federal government may be hard pressed to bail out Louisiana should another category 5 hurricane challenge that coast? So why is it that the homeowner who lives in a known flood zone or on the Gulf Coast expects and demands affordable property insurance? Is it possible that society no longer wants to understand the cost of its choices? If this is in fact the case, no government bailout or management of systemic risk will make a difference as we move to an economic collision that will impact our industry’s surplus. I happen to believe that we have both a professional and ethical obligation to educate and inform the public of the emerging risks, especially those risks caused by societal values and attitudes posing a threat to them and the overall economy. If 60 percent of the population is residing in coastal areas, why is it that the alarms are not blaring that climate change (for whatever reason) is becoming an increasing threat? Why are states relying upon quasi-government insurance companies such as state wind pools in Texas, Florida and North Carolina that would not meet the test for solvency? Clearly, there are no simple answers to these questions. However, if there is any lesson to be gained from the current economic storm, it is that we all need to take a closer look at these social trends. We have an opportunity to re-commit ourselves to educating the public on good public policy, not from the profit vantage point, but from what ultimately serves the common good. IJ Ladner is regional president of State Auto Insurance Cos.’ western region headquarters located in Austin, Texas. E-mail: Gerald.ladner@stateauto.com. Web site: www.stateauto.com. www.insurancejournal.com


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