Insurance Journal West 2016-06-20

WEST REGION Up Next: Passenger-carrying Drones?

Enviro Concerns for Farm Operations Calif. Workers’ Comp Advisory Rate

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Contents June 20, 2016 • Vol. 94 No. 12 • West

West W1 What Do You Get When You Combine Drones and Self Driving Cars?

W1 WHAT DO YOU GET WHEN

YOU COMBINE DRONES AND SELF-DRIVING CARS?

18 Opioid Prescriptions in Workers’ Comp Cases Decline: WCRI

W6 How Autonomous Car Sales Will Accelerate in Next Two Decades

20 Closer Look: Brokers Dealing with Soft Market, ‘Market Fatigue’ in Med Mal

W8 Map Shows Buildings That May Not Survive Quake in Oregon’s Largest City

29 CONTRACTOR’S PROFESSIONAL

MITIGATION OF DAMAGES COVERAGE

W12 Insurance Startup in California Eyeing Gig Economy Opens $2M Seed Round

30 What Agents Should Know About the Surety Bond Market

22 Closer Look: Insurer’s Hospital Claims Study Corroborates High Death Risk from Errors 23 Spotlight: 10 Things to Know About Umbrella Coverage 26 Special Report:

Construction Market Keeps Building 28 New Construction Certification Aims to Specialize the Specialist

Idea Exchange W10 Specialized Environmental Coverage Tools a Must for Today’s Farm Operations

14 Smart Choices, Luck Help U.S. P/C Insurers Stay Stable: S&P 16 How to Avoid D&O Policy Pitfalls – and Declined Claims

W4 California Commissioner Lowers Workers’ Comp Advisory Rate

W8 California Agent Pleads Guilty to Selling Bogus Bonds and Premium Theft

National

30 WHAT AGENTS SHOULD

29 Special Report: Contractor’s Professional Mitigation of Damages Coverage

KNOW ABOUT THE SURETY BOND MARKET

34 Tinker Your Way to Success 36 Minding Your Business: Catherine Oak and William Schoeffler Jr. 38 Closing Quote: Food Recalls and Nanotechnology

6 | INSURANCE JOURNAL | WEST JUNE 20, 2016

Departments 15 Declarations 15 Figures 15 InsuranceJournal.com Poll 24 Business Moves 33 MyNewMarkets

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OPENING NOTE

Write the Editor: awells@insurancejournal.com

Tech to Detect Fraud

F

Technology ‘significantly enabled’ 29 percent of the 110 fraudsters analyzed by KPMG in North America.

Publisher Mark Wells mwells@wellsmedia.com

EDITORIAL

SALES

Editor-in-Chief Andrea Wells awells@insurancejournal.com

Sales Manager Lauren Knapp (800) 897-9965 X161 lknapp@insurancejournal.com

East Editor Young Ha yha@insurancejournal.com

West Sales Dena Kaplan (800) 897-9965 X115 dkaplan@insurancejournal.com

Southeast Editor/MyNewMarkets Amy O’Connor aoconnor@insurancejournal.com

Romeo Valdez (800) 897-9965 X172 rvaldez@insurancejournal.com

Chief Content Officer Andrew Simpson asimpson@insurancejournal.com

South Central Editor/ Midwest Editor Stephanie K. Jones sjones@insurancejournal.com West Editor Don Jergler djergler@insurancejournal.com International Editor L.S. Howard lhoward@insurancejournal.com

Chief Marketing Officer Julie Tinney (800) 897-9965 X148 jtinney@insurancejournal.com

South Central Sales Mindy Trammell (800) 897-9965 X149 mtrammell@insurancejournal.com Southeast and East Sales (except for NY, PA and CT) Howard Simkin (800) 897-9965 X162 hsimkin@insurancejournal.com Midwest Sales Lisa Whalen (800) 897-9965 X180 lwhalen@insurancejournal.com

Columnists Catherine Oak

East Sales (NY, PA and CT only) Dave Molchan (800) 897-9965 X145 dmolchan@insurancejournal.com

Contributing Writers John Graham, Eric Halsey, David Krug, Kevin McPoyle, Harrison W. Scheider, William Schoeffler Jr.

Advertising Coordinator Erin Burns (619) 584-1100 X120 eburns@insurancejournal.com

IJ ACADEMY OF INSURANCE V.P. of Education Chris Boggs cboggs@ijacademy.com Online Training Coordinator Barbara Whiffen bwhiffen@ijacademy.com

ADMINISTRATION

Chief Financial Officer Mark Wooster mwooster@wellsmedia.com

MARKETING

Insurance Markets Manager Kristine Honey (619) 584-1100 X132 khoney@insurancejournal.com Social Media Manager Ly Short (619) 890-7735 Lshort@insurancejournal.com Classifieds, Jobs, Agencies Wanted/For Sale Sr. Sales & Marketing Coordinator Kelly De La Mora (800) 897-9965 X125 kdelamora@insurancejournal.com

DESIGN/WEB

Marketing Director Derence Walk dwalk@insurancejournal.com

Chief Technology Officer/ Chief Innovation Officer Joshua Carlson jcarlson@insurancejournal.com

Marketing Administrator Gayle Wells gwells@insurancejournal.com

V.P. of Design Guy Boccia gboccia@insurancejournal.com

NEW MEDIA

Senior Web Developer Chris Thompson cthompson@insurancejournal.com

New Media Producer Bobbie Dodge bdodge@insurancejournal.com Videographer/Editor Ashley Waldrop awaldrop@insurancejournal.com

CIRCULATION

Circulation Manager Elizabeth Duffy eduffy@wellsmedia.com

raudsters are more often caught by tip-offs and complaints, management review, accidentally, suspicious superiors and internal audits than by use of technology and data analytics.

According to consulting firm KPMG, North American companies are not capitalizing on the use of data analytics and technology while fraudsters are finding new ways to use technology to commit fraud.

KPMG recently asked forensic specialists worldwide for details about 750 fraudsters investigated between March 2013 and August 2015 in 81 countries. The resulting report is titled, “Global Profiles of the Fraudster.”

KPMG’s analysis revealed that proactive data analytics was not the primary means of detection in any North American frauds, and organizations only used data analytics to detect 3 percent of fraudsters worldwide.

In addition, technology “significantly enabled” 29 percent of the 110 fraudsters analyzed by KPMG in North America and 24 percent of the 750 fraudsters analyzed worldwide.

In descending order, North American frauds were most often detected by tip-offs and complaints, management review, accidentally, suspicious superiors and internal audit.

“Companies can use advanced data analytics technology to search for suspicious and unusual business activity amid millions of daily transactions,” said Phillip Ostwalt, partner and Global Investigations Network Leader at KPMG LLP. “However, many are not capitalizing on such technology while fraudsters find new ways to gain access to confidential information, manipulate accounting records and camouflage misappropriations.”

In instances where fraudsters used technology to perpetrate frauds in North America, 35 percent included creation of false or misleading information in accounting records; 29 percent involved providing false or misleading information via email or another messaging platform; and 21 percent involved abusing permissible access to comFOR QUESTIONS puter systems.

REGARDING SUBSCRIPTIONS: Call: 855-814-9547 A higher proportion of frauds aided by Outside the U.S., call 847-400-5951 or you may subscribe or change your address online at: technology may be skirting internal controls insurancejournal.com/subscribe designed to detect them, according to analysts Insurance Journal, The National Property/Casualty Magazine (ISSN: 00204714) is published semi-monthly by Wells Media at KPMG, who found that 25 percent of frauds Group, 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 significantly enabled by technology were per special issue copy, $195 per year in the U.S., $295 per year all other countries. DISCLAIMER: While the information in this pubdetected by accident rather than by other lication is derived from sources believed reliable and is subject to reasonable care in preparation and editing, it is not intended means, whereas 10 percent that did not use to be legal, accounting, tax, technical or other professional advice. Readers are advised to consult competent professionals for application to their particular situation. Copyright 2016 Wells technology were spotted by accident.

Media Group, Inc. All Rights Reserved. Content may not be photo-

Web Developer Jeff Cardrant jcardrant@insurancejournal.com Web Developer Tim Layer tlayer@wellsmedia.com

copied, reproduced or redistributed without written permission.

Insurance Journal is a publication of Wells Media Group, Inc.

Andrea Wells Editor-in-Chief

8 | INSURANCE JOURNAL | NATIONAL JUNE 20, 2016

POSTMASTER: Send change of address form to Insurance Journal, Circulation Department, PO Box 708, Northbrook, IL 60065-9967 ARTICLE REPRINTS: For reprints of articles in this issue, contact: Kelly De La Mora at 1-800-897-9965 ext. 125 or kdelamora@wellsmedia.com Visit insurancejournal.com/reprints/ for more information.

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NATIONAL | News & Markets

Commercial Insurance Pricing Inched Up in Q1: Willis Towers Watson

By Andrew Simpson

C

ommercial insurance prices increased only a bit in aggregate (less than 1 percent) during the first quarter of 2016, according to the latest Commercial Lines Insurance Pricing Survey (CLIPS).

While price changes in the first quarter for most lines of business were generally consistent with changes in the fourth quarter of 2015, commercial auto reported the largest increase of all lines.

At the same time, three lines of business — workers’ compensation, commercial property, and directors and officers liability — continued to report modest price decreases.

Most other lines reported price changes in the low single digits, according to the survey by global insurance brokerage and advisory firm Willis Towers Watson.

The survey compared prices

charged on policies underwritten during the first quarter of 2016 to those charged for the same coverage during the same quarter of 2015.

Large and mid-market accounts continue to experience an ongoing trend of mostly flat increases, as small accounts moderated to levels consistent with these larger accounts.

“The overall results in the first quarter were generally flat and about what we expected,” said Sean McDermott, director in Willis Towers Watson’s Americas Property & Casualty Insurance practice. “Despite ample capacity, price increases, albeit small, are still holding as claim cost inflation remains modest. The one outlier, commercial auto, where poor claim results have driven meaningful price increases over the past three quarters, is the line where pricing corrections continue.”

12 | INSURANCE JOURNAL | NATIONAL JUNE 20, 2016

According to the firm, CLIPS data are based on both new and renewal business figures obtained directly from carriers underwriting the business.

Data were contributed by 40 top insurers representing approximately 20 percent of the U.S. commercial insurance market (excluding state workers’ compensation funds).

In a separate report in April, Willis Towers Watson Willis predicted that some buyers might begin seeing price increases in various commercial lines of insurance this year.

Other Surveys

While no surveys show big pricing changes, the CLIPS report veers slightly from other surveys that found most commercial lines prices were still decreasing in the first quarter, albeit only moderately.

The Council of Insurance Agents & Brokers (CIAB) reported in its first quarter survey of its members, who are commercial lines agents and brokers, that commercial property/casualty rates were still decreasing across all size accounts in the first quarter of 2016, as has been the case since the first quarter of 2015. This year, first quarter rates decreased by an average of 3.7 percent, according to CIAB. According to the Commercial P/C Market Index Survey by CIAB, rate decreases in Q1 were the largest seen since the trend began, with the exception of large accounts.

While CIAB said the decline in rates was consistent across most lines, CIAB did agree with CLIPS on commercial auto, which the brokers said increased 3.6 percent in the first quarter and has been

increasing steadily since the third quarter of 2011.

MarketScout’s monthly index for January through May of this year also showed rates continuing to fall, although decreases have been shrinking.

MarketScout reported that commercial insurance prices fell 2 percent for May and April as compared to 3 percent in March and 4 percent in January and February 2016.

MarketScout CEO Richard Kerr said the market was stable in May with small movements in coverage, industry, and size classifications. Larger premium accounts were priced more aggressively.

MarketScout, a national managing general agent and wholesale broker, owns the MarketScout Exchange used by retail agents to find specialty markets. For its market barometers, MarketScout uses information from its own Exchange database of actual renewal rates quoted on risks from across the country along with in-person surveys conducted by the National Alliance for Insurance Education and Research with as many as 2,000 agents and brokers a month.

The surveys agree that commercial auto rates are going up.

The commercial auto market as a whole reported a combined ratio of 109 and an underwriting loss for the fifth consecutive year in 2015, although some individual carriers have done well, according to Fitch Ratings. Fitch says that rates for this “chronically underperforming product segment” are expected to continue rising but an underwriting profit for the segment may still be years away.

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See related articles at: ij.com/riskmanagers C ATA S T R O P H E S E R V I C E STM

National

Smart Choices, Luck Help U.S. P/C Insurers Stay Stable: S&P

G

ood news alert: the U.S. property/ casualty insurance sector “has been dealt a good hand” and remains stable due to smart choices and a little bit of luck, Standard & Poor’s said in a new report.

“The sector has foresight regarding the challenges ahead,” S&P said. “This resistance fortifies the continuation of our stable outlook on the U.S. P/C insurance sector, indicating our expectation of a relatively balanced number of upgrades and downgrades over the next 12 months.”

The rating agency said that the sector has benefited generally from “benign catastrophe events and improving frequency loss-cost trends,” factors that have led to the growth of excess organic capital and an abundance of reinsurance/third-party capital.

Sensible industry responses to this trend have prevented problems, S&P noted.

‘It is only a matter of time before the 10-plus year track record of reserve releases turns a fateful corner.’

“Such a windfall could have set the stage for irrational pricing had it not been for the industry’s staunch focus on underwriting discipline and optimization of data analytics,” the report explained. “Moreover, the prolonged low interest rate environment has not propelled the sector to chase yields with riskier asset allocations, raising the importance of underwriting profitability.”

There are a few hiccups ahead, however, S&P said.

The report noted the sector must improve its combined ratio by three points for every 100 basis point in its investment portfolio yield.

“It is only a matter of time before the

14 | INSURANCE JOURNAL | NATIONAL JUNE 20, 2016

10-plus year track record of reserve releases turns a fateful corner,” the report said.

“S&P Global Ratings believes that insurers have released most of the redundant reserves they built up during the hard market years of 2003-2007, and time will tell if reserve release from more recent accident years were premature.”

Over the next year, S&P expects M&A deals to continue at a slower pace. It also sees stable outlook for many companies.

According to the ratings agency, 85 percent of its ratings had stable outlooks as of May 20, with an additional 6 percent producing positive outlooks.

“This indicates we do not expect to take any negative ratings actions on more than 90 percent of our rated U.S. P/C customers,” S&P said.

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West

What Do You Get When You Combine Drones and Self-Driving Cars?

By Don Jergler

T

hat’s one small step for drones, and no steps needed for mankind.

Autonomous drone transport for humans. Why not?

We’re eventually getting autonomous cars so you don’t have to do the driving, and drones are all the rage — although Amazon CEO Jeff Bezos’ vision of drones delivering packages to your doorstep hasn’t come to fruition — not quite yet.

Google the phrase “Amazon Prime Air” for more on that.

So combining the two makes perfect sense.

Kicking it in a drone on the way to work, or home from a bar, is a fanciful, but not all that unlikely, futuristic scenario posed by Marik Brockman, corporate INSURANCEJOURNAL.COM

strategy executive at Walnut Creek, Calif.based CSAA Insurance Group, an AAA Insurer.

Brockman took some time to speak with Insurance Journal about the impact of technology on the insurance industry, and how the industry will be shaped by technology in five, 10, or even 20 years. The conversation was edited for brevity and clarity.

gave it that grade?

Brockman: We always refer to it as the quickening pace of change, and now the application of these technologies is coming at insurance, and really it’s attacking multiple parts of the value chain, and I think that because technology is largely an enabler until it’s a disruptor.

Now we’re seeing technologies brought together Insurance Journal: There attacking parts of the value seems to be a new technolchain, and you can call it ogies and ways to do things literally the quickening Marik Brockman popping up all over the place. pace of disruption now.

How well is the industry handling this We’re paying close attention, and as far innovation? Can you give the industry as a letter grade for the industry, I like to continued on Page W2 a letter grade, and then tell us why you JUNE 20, 2016 INSURANCE JOURNAL | WEST | W1

WEST | News & Markets continued from page W1

think this is going to sound unduly harsh, but in some respect I’ll give it a big fat C, for a couple of different reasons. It gets an A in angles of investment in core technologies that help companies run.

I don’t think the outside world always appreciates for insurance just how complex it is, and how many systems are at play. These systems have been used and added on to for four decades, five decades in some cases, it just depends on which systems you’re talking about.

Meanwhile, we’re managing millions of policies which are actually contracts, and they all have actually dozens of rating factors blended into the pricing, and all these things that make it a pretty complex industry.

So I give us a lot of credit for constantly trying to modernize. But then there’s dealing with the customer experience and bringing new technologies faster in the way that customers interact with us, and that’s when the grade starts to fall a little bit. That’s where as you talk to millennials, and I heard one millennial describe it, who by the way is launching a startup aimed right at insurance saying, “I felt like it was the darkest part of the Internet, I didn’t understand what was happening, what language was spoken, why the experience was so antiquated, and I just wanted nothing to do with it.”

Then you talk about how quickly we can adapt to some small startups that are really coming after us now, I’ll just put us right around a C right now, maybe a C+ on a good day.

IJ: Just how is insurance handling or going to handle autonomous vehicles?

Brockman: Insurance, just like financial services, are partners in helping develop not just economies, really countries’ economies in an industry, and then really people’s opportunity. We’ll always be there to help partner in the development of, in this case the evolution of, this industry. What’s tricky though, is the shift in risk from the personal liability to product liability, it’s really which carriers are involved, or how any one particular carrier tries to adapt the kinds of risks W2 | INSURANCE JOURNAL | WEST JUNE 20, 2016

that it would like to cover.

So I’d say we’re all trying to surround this, and understand it, and partner with everyone from car makers, to dryers, to other technology makers, and just understand what’s the best place for us to play, and everyone’s finding their way through this great sea change.

IJ: What other innovations do you feel will impact or maybe significantly change the insurance industry?

Bockman: If we talk first about the enablers we think about for the insurance industry, and I spend a lot of time in property and casualty now, working for a P&C carrier, I spent some time in life as well in prior years in consulting. I think some fun ones to talk about — I’d say wearable technology.

That’s really useful on the health and life side of just things that help you monitor your activity and perhaps your heart rate, and things like that. It’s keeping people active, and it kind of turned fitness into gamification.

Also much more information to use for both improving your own behavior, as well as companies using it for perhaps rating you more appropriately, or consult-

ing you more appropriately.

On the property/casualty side, we’re looking more and more closely at drone technology; the underwriting side you can survey properties much more efficiently, much more accurately, and you can survey more dimensions than a human could on their own — temperatures, and structural elements, as opposed to just what the naked eye can see. On the claims side you can assess damage in certain territories for where disasters have occurred, and which can immediately result in not just more accurate information but faster claims payout which is what we want for all of our insureds.

‘If we have autonomous cars already starting, and drones are coming, we like to think about autonomous drone travel for humans.’

IJ: How will insurance look in 5 years, or 10 years? Say, for example, in 20 years will a small business owner be buying workers’ comp on Amazon with his iPad Air 25 while riding to work in the passenger seat of his autonomous vehicle, and behind him is a paying rideshare passenger?

Brockman: That’s good, I like that scenario there, I like that a lot. Quick answer

continued on Page W12 INSURANCEJOURNAL.COM

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WEST | News & Markets

California Commissioner Lowers Workers’ Comp Advisory Rate

C

alifornia Insurance Commissioner Dave Jones adopted and issued a revised advisory pure premium rate, lowering the benchmark to $2.30 per $100 of payroll for workers’ compensation insurance.

The change is effective July 1. This is a 10.5 percent reduction compared with the average insurer-filed pure premium rate.

The commissioner adopted the recommendation of the Workers’ Compensation Insurance Rating Bureau, which filed a recommendation to lower the advisory pure premium rate mid-year. Midyear pure premium rate adjustments are not the norm. New data reflecting a significant change in underlying workers’ compensation costs is required before the commissioner will issue a mid-year adjustment.

“This is good news for California’s business economy,” Jones said in a statement. “A reduction in the pure premium rate reflects a reduction in the cost to insurers of providing workers’ compensation insurance, which should benefit employers if insurers lower their pricing. Lower costs in the workers’ compensation should be passed on to employers.”

Jones issued the mid-year advisory pure premium rate two weeks after a public hearing and review of the testimony and evidence submitted.

The mid-year pure premium advisory rate reduction is based on insurers’ cost data indicating workers’ comp insurers’ medical costs were lower in 2015.

The reductions in medical costs appear to be the result of worker’s comp reform law passed in 2012. The WCIRB

noted that not all of the cost reductions projected from SB 863 have materialized. Other costs continue to rise, but those increases were offset by the reduction in medical costs.

The WCIRB’s pure premium advisory rate filing demonstrated that workers’ comp insurers continue to charge premiums that are close to the estimated cost of providing benefits and adjusting expenses, according

to a release from the California Department of Insurance.

The rates actually charged to employers, however, are on average lower than the rates filed by insurers.

The WCIRB will evaluate workers’ comp insurance costs again in the fall of this year when it files its 2017 pure premium rate benchmark recommendation with the insurance commissioner.

Ratings Downgrades for Members of California-based CSAA: A.M. Best

A

.M. Best has downgraded the financial strength rating to A (Excellent) from A+ (Superior) and the issuer credit ratings to “a+” from “aa-” of the members of Walnut Creek, Calif.-based CSAA Insurance Group.

CSAA is an American Automobile Association Inc.

insurer. The downgraded members are: CSAA Insurance Exchange in Walnut Creek, Calif.; CSAA Affinity Insurance Co. in Glendale, Ariz.; CSAA General Insurance Co. in Indianapolis, Ind.; CSAA MidAtlantic Insurance Co. of New Jersey in Hamilton, N.J.; CSAA Mid-Atlantic Insurance Co. in Glendale, Ariz.; and CSAA Fire & Casualty Insurance Co. in Indianapolis, Ind. The companies operate under an inter-company pooling arrangement.

A.M. Best revised the outlook for each of these

W4 | INSURANCE JOURNAL | WEST JUNE 20, 2016

ratings to stable from negative.

The downgrade reflects deterioration in CSAA’s underwriting results over several consecutive years, with sizable losses reported since 2013, according to A.M. Best. CSAA’s underwriting results have been impacted by increased automobile claims frequency, most notably in California, where bodily injury and collision losses have risen.

Additionally, results in 2015 were impacted by several severe California wildfires, and as a result, CSAA’s performance metrics lag the private passenger standard auto and homeowners’ composite, as

evidenced by its five-year average total returns on revenue and equity measures, which are negative, according to A.M. Best.

Offsetting the negative rating factors is CSAA’s significant personal lines market presence in its selected territories and the benefits derived from its long association with AAA Northern California, Nevada & Utah. The stable outlook reflects A.M. Best’s comfort level regarding CSAA’s solid risk-adjusted capital position driven by its conservative reserve position and modest underwriting leverage.

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WEST | News & Markets

How Autonomous Car Sales Will Accelerate in Next Two Decades

G

lobal sales of autonomous vehicles will reach nearly 21 million vehicles by 2035, a substantial increase from previous estimates, according to a forecast from auto industry information firm IHS Automotive.

Roughly 600,000 autonomous vehicles on roads around the world by 2025, and that number that will grow substantially every year between 2025 and 2035, the forecast says.

The U.S. will lead the world in early adoption of autonomous vehicles, while Japan will simultaneously ramp up industry coordination and investment ahead of the Summer Olympics in Tokyo in 2020, IHS says.

IHS forecasts predicts that by 2035 nearly 4.5 million autonomous vehicles will be on U.S. roads.

The uptick in the expected sales numbers is driven by recent research and development by automotive original equipment manufacturing, supplier and technology companies that are investing in this area, according to IHS. W6 | INSURANCE JOURNAL | WEST JUNE 20, 2016

IHS says its new forecast is also based on recent developments and investments in this sector of the market, as well as activity within various regulatory environments.

While the forecast is for global sales of autonomous vehicles to reach nearly 600,000 units in 2025, Egil Juliussen, Ph.D. and director of research at IHS Automotive, said the new forecast also reflects a 43 percent compound annual growth rate between 2025 and 2035, which he terms “a decade of substantial growth as driverless and self-driving cars alike are more widely adopted in all key global automotive markets.”

IHS expects manufacturers to create entirely new vehicle segments in addition to adding autonomous capabilities to traditional vehicles. “ The U.S. market is expected to see the earliest deployment of autonomous vehicles as it works through challenges posed by regulation, liability and consumer acceptance, according to HIS. IHS Automotive forecasts that despite a

later start, the largest market, China, will see sales of more than 5.7 million vehicles equipped with some level of autonomy by 2035.

Major markets in western Europe will maintain industry technology leadership through the premium segment, with a little more than 3 million autonomous vehicles expected to be sold in 2035 and another 1.2 million vehicles in Eastern Europe.

IHS Automotive also forecasts more than 1 million vehicles with some level of autonomy in the Middle East and Africa in 2035, with the potential for new and innovative business models and use cases.

In Japan and South Korea collectively, IHS Automotive forecasts indicate nearly 1.2 million vehicles will be enabled with some form of autonomous driving capability by 2035. Demographics and an affinity for technology and innovative solutions help both markets, as the Japanese auto industry unites to close the gap with U.S. and European rivals and as South Korea continues its development of world-class capabilities.

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Map Shows Buildings That May Not Survive Quake in Oregon’s Largest City

P

ortland, Ore., officials have released a map and database showing about 1,800 unreinforced masonry buildings that may be vulnerable to shaking during an earthquake if they are not structurally retrofitted.

These buildings were generally constructed before the 1960s using brick with little to no steel reinforcement in the walls.

The building data was collected as part of a Portland seismic retrofit project.

The project is being led by the Portland Bureau of Development Services, the Portland Bureau of Emergency

Management and the Portland Development Commission.

The groups are working with community members to reduce the risk posed by these buildings.

Since the last time Portland collected data about unreinforced masonry buildings, roughly 13 percent of those structures were fully or partially upgraded and another 8 percent were demolished.

The interactive map enables users to punch in an address, share the information on social media for via email, measure distances or get GPS coordinates.

Copyright 2016 Associated Press.

Colorado Governor Again Vetoes Bill to Ban Red-Light Traffic Cameras

F

or the second consecutive year, Colorado Gov. John Hickenlooper has vetoed a bill that would have enacted a statewide ban on redlight traffic cameras.

Hickenlooper said he agrees with lawmakers that photo enforcement tools should only be used for public safety, not W8 | INSURANCE JOURNAL | WEST JUNE 20, 2016

to generate income.

But he said a bill passed by the Legislature this year robbed municipalities of the power to decide whether to use the often-unpopular cameras.

Hickenlooper vetoed similar legislation last year.

Copyright 2016 Associated Press.

California Agent Pleads Guilty to Selling Bogus Bonds and Premium Theft

J

ohn Antonio Ruiz, 49, of Riverside, Calif., pleaded guilty earlier this month to 11 felony counts of grand theft after selling $334,972 in bogus surety bonds and stealing the client’s premium.

His theft left a major retailer exposed to loss on a construction project. Ruiz, doing business as Cornerstone Surety and Insurance Agency, reportedly sold and issued multiple performance and payment bonds to a general contractor.

The contractor unknowingly included the bonds with a winning bid for new store construction projects throughout the nation.

After the retailer attempted to satisfy liens filed by subcontractors, they discovered the surety bonds sold by Ruiz were bogus and they had no protection to satisfy the liens.

The California Department of Insurance Investigation Division launched an investigation that revealed Ruiz did not have a valid agent license, had not remitted any of the collected premiums to the insurance company, and pocketed the money for personal expenses.

“Ruiz’s theft of more than a quarter of a million in premiums left the contractor and the retail client at great financial risk,” California Insurance Commissioner Dave Jones said in a statement.

Ruiz is scheduled for sentencing on July 15 in Riverside Superior Court. The California Attorney General is prosecuting this case.

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Idea Exchange

Agricultural Use

Specialized Environmental Coverage Tools a Must for Today’s Farm Operations

By Harrison W. Scheider

R

ecent court and regulatory actions across the country with regard to environmental pollution exclusions in insurance policies have shown the need among farm owners and other agricultural risks for true environmental liability coverage tailored to their particular risks.

Insurance agents are well aware that virtually all property and liability insurance policies have some form of pollution exclusion. However, the reality that pollution exclusions are not limited to industrial operations sometimes comes as a surprise to both insurance agents and farm owners/ operators alike.

As regulatory pressure grows and the insurance industry tightens up on pollution exclusions, farm owners and other agricultural risks could be left totally uninsured if they do not use the specialized environmental insurance coverage tools now available. This is particularly true as the environmental loss exposure for farms and other agricultural risks has changed significantly in the last few years.

Several recent cases in various jurisdictions serve to highlight the environmental risk factors faced by agricultural operations.

On Dec. 30, 2014, the Wisconsin Supreme Court in Wilson Mutual v. Falk determined that bacteria contamination in drinking water wells, as a result of spreadW10 | INSURANCE JOURNAL | WEST JUNE 20, 2016

ing manure on fields, was an excluded cause of loss due to the pollution exclusion in the liability insurance policies commonly sold to farms. On the same date, the Wisconsin Supreme Court ruled in a separate pollution exclusion case, that nitrate contamination in groundwater was also an excluded pollution loss in liability insurance policies.

These ground breaking decisions at the state supreme court level set a precedent that pollution exclusions in insurance policies are, in effect, “contamination” exclusions.

In Iowa, the City of Des Moines is suing agricultural drainage districts that are owned by farmers in three counties north of the city. Des Moines is seeking to recover the costs of a new water treatment facility to remove nitrates from the water in the two rivers the city depends on for its drinking water supply.

It will cost the city $100 million to build a water treatment plant to deal with the agricultural-based contamination of the water supply. If Iowa follows the Wisconsin Supreme Court in determining that the general liability insurance policies sold to farmers do not cover contamination losses due to the pollution exclusion, in the absence of insurance the new $100 million water treatment plant project will be funded under the concept of “let the polluter pay.”

The stakeholders in the water districts being sued will likely be uninsured for any part of that $100 million.

In Washington state’s Yakima Valley, environmental groups for the first time were

successful in filing lawsuits against three industrial dairy farms under the federal Resource Conservation and Recovery Act (RCRA), a federal law that governs the disposal of solid and hazardous waste, and the U.S. Clean Water Act. The suit was filed over groundwater contamination of drinking water wells, which supplied drinking water to 24,000 residents in the Yakima Valley area. This was the first time in U.S. history where RCRA was applied to farm animals, and it was another first in which a federal court ruled that improperly managed manure was a solid waste, rather than a beneficial farm product.

The farms involved in the litigation were required by settlement to fund a residential bottled water system for safe drinking water for at least two years or until nitrate contamination was deemed no longer to be of significant volume. They also were required to pay for replacement, cleanup and monitoring costs going forward.

The contamination that arose out of everyday dairy farming activities was found to be harmful to human health.

However, the farm owner’s business liability insurance policies included pollution exclusions that barred coverage for damage resulting from those substances.

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farm and agricultural operations have not always been addressed. As a result, environmental excess and surplus lines insurance markets have developed specialized farm environmental insurance products and programs to address the specific environmental loss exposures faced by farms and agricultural risks.

Environmental insurance policies are designed to fill the coverage gaps in property and liability insurance policies created by pollution exclusions. However, there are no insurance industry standards for environmental insurance policy design, or for the actual insurance coverage these insurance policies provide. Therefore, it is necessary to properly match the environmental policy to the needs of a particular insurance buyer.

For example, older environmental insurance policies and limited pollution liability endorsements once meant for manufactur-

It is not possible to avoid all environmental loss exposures associated with farming.

Unavoidable Environmental Exposures

It is not possible to avoid all environmental loss exposures associated with farming.

For example, due to historical farming operations nitrates commonly are found in drinking water wells located in farming communities. At low levels, nitrate contaminants in groundwater thought are not to cause harm. However, a spike in the level of nitrates can cause bodily injury, especially to infants, and as one of the Wisconsin Supreme Court cases illustrated, a spike could be fatal to a neighbor’s cows.

Specially modified environmental impairment liability insurance policies for farms are needed to address the fact that nitrate contamination of groundwater is a known preexisting pollution condition in most agricultural settings.

Below are some common and unaddressed environmental loss exposures of concern for farming and agricultural risks.

Common Uninsured Environmental Loss Exposures in Farming

Groundwater contamination Surface water contamination Crop overspray Odors Reduction of neighboring property values Public nuisance Operating or participating in manure digesters Damage to natural resources Bodily injury from exposure to bacteria Groundwater remediations Fuel storage tanks Fertilizer spills or releases Custom farming operations Transportation risks Storage of pesticides and herbicides

-Andrew Carnagie

Get to know us at mjhallandcompany.com M.J. Hall & Company, Inc. States Covered: AK, AZ, CA, NV, & HI

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Scheider is assistant vice president at American Risk Management Resources Network LLC.

“There is little success where there is little laughter.�

Environmental Insurance Coverage

While environmental insurance for industry has been available since the late 1980s, environmental risks particular to

ers or construction firms covered sudden and accidental contamination events. Such coverage is worthless for farming risks, because actions like spreading manure and increasing nitrate and phosphorous levels for better crop yields are not sudden or accidental, but intentional operations of the farmer.

These factors, combined with changes in the liability insurance coverage currently sold to farmers, all work together to create a demand for the purchase of specially modified environmental insurance for the family farm and other agriculture risks.

Insurance agents and brokers are encouraged to seek out expertise when procuring specialized environmental insurance placements, as coverages and how they can be impacted by the multitude of federal and state environmental protection laws can get tricky.

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JUNE 20, 2016 INSURANCE JOURNAL | WEST | W11

WEST | News & Markets

Insurance Startup in California Eyeing Gig Economy Opens $2M Seed Round

B

unker Project Inc., a San Francisco, Calif.-based insurance technology startup, announced a $2 million seed funding round.

The round was co-led by Comcast Ventures and Route 66 Ventures. Insurance carriers Hiscox and American Family Ventures also participated in the round.

Bunker plans to launch its

first product this summer. The founding team includes Chad Nitschke, Dan Feidt and Steve Giddens.

An area of initial focus will be the 1099, or the gig economy. As more businesses leverage contingent staffing models, the need to manage the associated risk is growing, according to a release announcing the seed funding round.

Bunker has a second office in Madison, Wis. The release states the firm was founded in 2015 “to redefine the insurance value chain” through the creation of a contract-related insurance marketplace.

“Bunker has redesigned the insurance experience for independent contractors and small

businesses,” Callum King, principal at Comcast Ventures, said in a statement.

lot of form factors. It doesn’t need anybody to drive it, it’s understood that it can handle the environment in any condition for the use that it’s been deemed. So that’s all exciting, we’ll be somewhere on the spectrum farther than we are

dictive analytics and some aspects of artificial intelligence, but machine learning is really interesting where you can describe a new routine to a machine, and then in terms of the inputs that it needs to learn, you can teach it by telling it which inputs are what you mean, and which are not, and then work the routine until it’s doing exactly what you thought, and then it doesn’t need you anymore. You just taught the machine, you didn’t have to code it, you used the code that was already there.

You string those together into forms of artificial intelligence, and then there’s a whole bunch of jobs we think that don’t have to happen.

In five years it will be just brushing the surface for certain applications, but we’ll certainly be getting closer. Ten years? You’ll start to see level

4 all over the place — cars, autonomous. You’ll start to see drones doing a lot of work that people used to do, and then artificial intelligence will be embedded in a lot of different things, such that you won’t always need to deal with folks for routine interactions with companies and services.

Now 20 years? That might be a fool’s game to try to get into that one too deeply. I liked your scenario pretty well. I’ll throw one out there that’s kind of fun to think about. If we have autonomous cars already starting, and drones are coming, we like to think about autonomous drone travel for humans. That’s something that we could think about. Why not take it to the next dimension, and get us out there?

There’s some various experiments already on the horizon, so the degree to which that could be commercial or even personal in 20 years is quite potentially likely.

continued from page W2 is going to be “Yes.” Actually, yeah, it just depends on if iPad’s still just not integrated into their headwear now.

Just to get to your question, I think for five years it won’t be ridiculously different, but there will be some changes that probably came sooner than we think.

So how many levels for cars are allowed on the road, or are they confined to certain areas?

Just to clarify for folks, level 1 is some level of autonomy, level 2 is two systems at once, so it can steer, and brake, and accelerate for you.

Level 3 is you could go for a long period of time, pretty much put in an address and the car will take you there, but you still, the car has to be able to give us back control.

We expect that will happen in places where weather becomes inclement, or the conditions aren’t what the maps said it was, etc., so the driver really needs to be there, so the car would still look a lot like what it does today.

Level 4, it may not look like a car, it could take on a

‘Level 4, it may not look like a car, it could take on a lot of form factors. It doesn’t need anybody to drive it, it’s understood that it can handle the environment in any condition for the use that it’s been deemed.’ right now. By the way, 0 is just the human driving, no real automation at all, and that’s a lot of what most people have is some version of 0 or 1. So we’re already at 0, 1 and 2.

Within five years we’ll have some versions of 3, absolutely.

It’s just will 4 be allowed, and if so, how much and where?

Then also use of drones will become much more commonplace. Machine learning, and artificial intelligence will be (where) most of the top carriers will have worked out some application.

We’re already doing pre-

W12 | INSURANCE JOURNAL | WEST JUNE 20, 2016

Web Resource See a video and hear podcast from this interview with Brockman on www.insurancejournal.tv.

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Figures

Declarations

7

Abandoned Properties

“We are taking action to crack down on these neighborhood blights.”

— New York Gov. Andrew Cuomo said on June 7 in announcing more than $100 million in funding to help new homeowners and renovate so-called “zombie properties” — abandoned properties not yet foreclosed upon by banks. The program will target several areas of the state, including the Hudson Valley and Rochester region.

The number of years in prison to which Southwest Missouri insurance producer, Brandon Gene Francisco, has been sentenced for insurance fraud. Francisco pleaded guilty to taking a client’s money but not securing insurance. He has been ordered to pay $16,960 in restitution.

The state insurance department fined Francisco in 2012 for similar violations.

46

Deductible Idea

“The deductible is the best idea.

The state disaster programs that we already operate are more than likely programs that can apply to reducing that deductible.”

— Arkansas Department of Emergency Management Director David Maxwell, who favors a FEMA proposal that gives states disaster “deductibles” as incentives for states to better prepare for natural disasters. Maxwell said states could “buy down” the deductible by repairing levees, building public safe shelters and creating disaster awareness programs.

$67,000

Burning Citations

“What do you do if you get one?

Throw it in the trash. Personally, I prefer to burn mine.”

The number of Texas

— Tennessee State Rep. Andy Holt, to his Facebook followers who receive a traffic camera citation. The lawmaker is a longtime critic of traffic camera tickets and has previously called for banning them.

counties so far that

A Costly Crime

have been declared

“Workers’ compensation fraud is a costly crime that we all pay for.”

disaster areas by

— California Insurance Commissioner Dave Jones, comments on the arrest of a Baldwin Park Unified School District employee on workers’ compensation fraud charges. Juanita Denise Schmittle allegedly racked up $33,000 in treatments and disability payments by misrepresenting injuries and mental health conditions suffered while working as an instructional aide for the district. She was charged with two counts of workers’ comp fraud.

Gov. Greg Abbott following the severe

$8.7 MILLION

The amount an Oregon jury awarded to a 65-year-old man who has incurable cancer as a result of asbestos exposure in the 1970s. David Hoff’s attorneys say the former construction worker’s mesothelioma was caused by a wallboard product that became airborne when it was sanded down.

The amount a Georgia family seeks to recover from a kennel that gave their dog the wrong medicine, leading to its death. The Georgia Supreme Court ruled the family is entitled to reimbursement for the amount spent trying to save the dog, and may try to recoup “more than its fair market value” for the pet.

$123,431

The amount of settlement that Sterling Seating Inc., a furniture manufacturer in North Arlington, N.J., has agreed to pay to the Occupational Safety and Health Administration after the firm was issued more than 40 citations for workplace hazards.

INSURANCEJOURNAL.COM

InsuranceJournal.com

Poll

Which coverage do you find most important and necessary for your “emerging affluent” (e.g. Coverage A $800,000 - $2 million) personal lines customers?

Insuring high-end cars for an agreed value

16.12%

Water backup protection, up to the value of their coverage A

28.14%

Offering a cash settlement option for a total loss home

23.38% Covering the cost of original equipment manufacturer (OEM) car parts

8.32% Increased blanket jewelry limits up to $100,000, with no per item limit

24.04% Total Votes: 757

JUNE 20, 2016 INSURANCE JOURNAL | NATIONAL | 15

NATIONAL | Spotlight | Directors & Officers

How to Avoid D&O Policy Pitfalls – and Declined Claims: Marsh Report

By L.S. Howard

W

hen a directors and officers (D&O) claim is declined, it can be catastrophic for an insured, forcing the company to deal with “the financial costs of a claim or loss entirely on its own,” according to a report published by Marsh.

As a result, insureds must be careful not to do anything that “could undermine the protection that the policy is intended,” said the report titled “Professional and Management Liability Insurance Claims: Common Pitfalls for Unwary Policyholders.”

Such “unwary policyholders” can find themselves in difficulties if they fail “to take certain steps prescribed by the policy, either at all, or in a manner compliant with the policy wording.”

While the report focuses

on UK issues, Marsh said the problem of declined claims has “global relevance,” as does the obligation to cooperate with insurers, which is likely to apply equally to other types of insurance.

Fortunately, the report said, less than 1 percent of financial lines claims made by Marsh UK clients were declined by insurers between 2011 and 2015, which shows that such declinatures are very rare.

The report highlighted the key themes that recur in most declined claims.

“The largest proportion of declined claims results from a failure to notify in accordance with policy requirements or time-frames, or at all,” said the report, noting that this accounts for 39 percent of declinatures among Marsh’s UK clients. “This is a very important consideration for insurers and an obligation that they take

16 | INSURANCE JOURNAL | NATIONAL JUNE 20, 2016

very seriously.”

In addition, almost one-third of declined claims relate to the triggering of cover and obtaining insurers’ consent to settlements and non-disclosures, while policy exclusions account for 31 percent of claim declinations.

“Insureds should engage their insurers early on in the event of a claim, as they can provide valuable assistance in minimizing the financial loss, as well as the reputational damage, that liability claims can bring,” Marsh emphasized.

Avoiding Policy Pitfalls

“Organizations should review the terms and conditions of their policy wordings as soon they are received, not simply when a claim is first made, or worse, once it has developed or settled,” said Robert Lewis, claims leader, UK Risk Management Practice, Marsh.

The Marsh report provided pointers to help insured avoid policy pitfalls including the following: • Examine the policy wording to identify the policy trigger.

• Notify your insurers of any claim or circumstance within the correct time period and in the correct manner.

• Seek insurers’ consent before instructing counsel, incurring defense or mitiga- tion costs, admitting liabil- ity, or settling any third-party claims.

• Cooperate with reasonable requests from insurers for

information regarding the claim.

• Pay particular attending to “conditions precedent” in a notification provision.

Upward Trend in Notifications

Marsh said that D&O claim notifications from its UK clients have risen steadily over the past decade and remain four times higher than pre-financial crisis levels.

Between 2005 and 2007, Marsh recorded an average of 200-300 D&O liability insurance claim notifications. With the onset of the financial crisis, claim notifications rose by 75 percent to nearly 500 in 2008, before peaking at 1,685 claim notifications in 2012.

‘Organizations should review the terms and conditions of their policy wordings as soon they are received, not simply when a claim is first made, or worse, once it has developed or settled.’

Since 2013, Marsh has received an average of approximately 1,300 D&O claim notifications annually in the UK. “The increasing volume and complexity of regulatory activity in the UK and the European Union is a major driver of this upward claims notification trend,” explained Lewis.

“There is also an increasing level of cross border co-operation among regulators and a shift towards class or collective actions.”

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NATIONAL | News & Markets

Opioid Prescriptions in Workers’ Compensation Cases Decline: WCRI Study

A

new study by the Workers Compensation Research Institute (WCRI) found “noticeable decreases” in the amount of opioids prescribed per workers’ compensation claims in a majority of 25 states studied.

The WCRI study, Interstate Variations in Use of Opioids, 3rd Edition, examines interstate variations and trends in the use of opioids and prescribing patterns of pain medications across 25 states. The study compares the amount of opioids prescribed per claim over two roughly 24-month periods of time ending March 2012 and March 2014.

According to the study, the amount of opioids received by injured workers decreased over the two time periods in the majority of the study states.

Statistically significant reductions in the range of 20 to 31 percent were seen in six states:

Maryland, Massachusetts, Michigan, Oklahoma, North Carolina and Texas.

The 25 states in the study are Arkansas, California, Connecticut, Florida, Georgia, Illinois, Indiana, Iowa, Kansas, Louisiana, Maryland, Massachusetts, Michigan, Minnesota, Missouri, New Jersey, New York, North Carolina, Oklahoma, Pennsylvania, South Carolina, Tennessee, Texas, Virginia, and Wisconsin.

The authors say the decrease coincides with various state reforms directed at curbing opioid abuse including strengthening of prescription drug monitoring programs and adoption of treatment guidelines and drug formularies.

According to WCRI, an independent research organization based in Cambridge, Mass., some of its study’s other findings include:

18 | INSURANCE JOURNAL | NATIONAL JUNE 20, 2016

• Opioid use was prevalent among nonsurgical claims with more than seven days of lost time.

Roughly percent of these injured workers with pain medications received opioids in most states.

• Among claims with opioids, the average amounts of opioids received by injured workers in Louisiana, New York, and Pennsylvania were the highest among the 25 study states.

Although Wisconsin, Iowa, and Missouri had an increase in the average amount of opioids per claim over the study period, they had a lower amount of opioids per claim than the median state at the end of the study period.

• Among claims with opioids, simultaneous use of opioids and benzodiazepines was seen in 1–9 percent of injured workers across the 25 states. Use of both opioids and muscle relaxants at the same time was seen in 30–45 percent of claims.

Dr. Vennela Thumula, an author of the WCRI study and a policy analyst at WCRI, said the information should be useful for state officials setting public policy, payors and managed care companies with opioid management programs, injured workers and worker advocates looking to understand opioid use in their state, and providers wondering what the prescribing norms in their state may be and if the state norms are unusual.

This study uses data comprising over 337,000 nonsur-

gical workers’ compensation claims and nearly 1.9 million prescriptions associated with those claims from 25 states.

The claims represent injuries arising from Oct. 1, 2009, to Sept. 30, 2012, with prescriptions filled through March 31, 2014. The underlying data reflect an average 24 months of experience for each claim.

The data included in this study represent 40–75 percent of workers’ compensation claims in each state.

WCRI’s findings appear to track with a report by pharmacy benefits manager Express Scripts indicating that the cost of opioids in workers’ compensation claims may be slowing.

At $450.90 per-user-per-year, opioids continue to be the costliest class of medications for occupational injuries, Express Scripts found, but overall spending for opioids decreased nearly 5 percent as utilization decreased by almost 11 percent.

On average, injured workers received 2.91 opioid prescriptions per year – down from 3.33 prescriptions in 2014.

Express Scripts said workers’ compensation payers continue to be focused on opioid and compound drug management even as they grow increasingly worried about and the rising cost of specialty medications.

In March, the Centers for Disease Control and Prevention (CDC) issued new recommendations for prescribing opioid medications for chronic pain. The “CDC Guideline for Prescribing Opioids for Chronic Pain, United States, 2016” was developed in response to an epidemic of prescription opioid overdose, which CDC says has been fueled by a quadrupling of sales of opioids since 1999.

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Funny how the most successful people in the industry tend to share the same initials.

Bethany E. Williams, CPCU

The Chartered Property Casualty Underwriter (CPCU®) designation is more than fancy letters that dress up your business card. It’s the premier designation in the risk management and property casualty world. The industry standard for knowledge, ethics, and experience.

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NATIONAL | Closer Look | Medical Liability

Brokers Dealing with Soft Market, ‘Market Fatigue’ in Medical Professional Liability senior vice president of Field Operations and Business Development for Ironshore. re insurance brokers experiencing Even though pricing in the market is “market fatigue” in the medical soft, there currently is an excessive numprofessional liability line of insurber of insurance carriers in the space. ance right now?

“There is so much capacity, it is affecting Could be, according to Daniel Nash, the market. That’s what keeping the prices, to me, artificially depressed,” Nash said. With the high numbers of carriers in To watch a video interview with Dan Nash, SVP of Field this space, and more Operations & Business Development for IronHealth, a coming in everyday, division of Ironshore Holdings Inc., from the recent PLUS Nash surmised that Medical Professional Liability Symposium in Chicago visit: it’s very likely brokers http://www.insurancejournal.tv/videos/13667. could be experiencing what he termed as “market fatigue.”

“Competition is always good, always good for customers to keep the prices as low as possible, but at some point some of these companies, and I won’t name any of those specific companies, but their combined ratios are

By Stephanie K. Jones

A

Web Resource

20 | INSURANCE JOURNAL | NATIONAL JUNE 20, 2016

in excess of 100 percent,” Nash said in an interview with Insurance Journal. “You can’t make money over a 100 percent unless the investment returns are there and they’re not there today.”

It’s challenging to find the right pricing for the right risk, Nash said. “You have to be more thoughtful about your business, what you’re going to do. You want to be thoughtful about getting more business, but you also have a profitability concern you have to maintain and also you want to be there to pay the clients.”

Brokers need to be thoughtful too, he said. There are so many markets to choose from and the customer typically doesn’t have the skill set to determine which of the 60-plus markets they should consider.

“The broker has to be more thoughtful about which markets they bring to bear for that customer — do they like that particular risk, are they going to pay claims? What’s their financial strength for that company, and what has their history been in that particular space?” he said.

In figuring out which markets to bring forward to their clients, brokers also need to keep in mind what kind of relationship the customer wants. “Some customers are partnership customers; they want to work with one or two carriers. … Other customers are price shoppers and will be out in the market every year,” Nash said.

Not only do brokers need to be able to INSURANCEJOURNAL.COM

assess the markets and the appropriateness for a given customer, but they also need to be able to understand the client’s exposures and clearly articulate that risk to the underwriters — what the customer is and what they like.

“The broker has to know their customer, explain what the real exposure is so we can understand and give them the best terms and conditions available, so everyone is happy at the end of the day,” Nash said.

A Soft, Profitable Market

The medical professional liability (MPL) line of insurance is a soft, but profitable market, and has been so for years. So does that make the soft market in MPL the “new normal?”

That was the question raised during a panel discussion on market conditions at the PLUS Medical Professional Liability Symposium in Chicago in April.

The loss ratio in the medical professional liability line hasn’t been above 100 for a number of years, according to Paul McKeon, chief underwriting officer and executive vice president, Transatlantic Holdings.

There’s been “unbelievable profitability for this line of business,” said McKeon, the panel’s moderator. And the picture is “still rosy,” he added.

While the market is expected to continue in a profitable vein for a number of reasons, it’s not without its challenges, according to A.M. Best. In a special report released in early May, the ratings agency confirmed that the line was profitable in 2015 but reported the industry’s net income fell by 36.6 last year, to around $1.1 billion.

However, despite that deterioration medical professional liability is expected to continue to be profitable with strong capitalization at least in the midterm, A.M. Best said in its report, “Strong But Declining Profitability in 2015 for Medical Professional Liability Sector.”

The report noted some of the pressures on the market: changes in healthcare delivery; tort reform; new medicines and surgical procedures; solo practicing physicians moving to group or hospital employment; INSURANCEJOURNAL.COM

cyber security; an influx of insureds into the healthcare system; strong competitive market pressure and low interest rates.

There’s been ‘unbelievable profitability for this line of business.’

Still, it is a time of stable pricing and profitability, according to Mathew Carletti, managing director at the investment bank, JMP Securities LLP. A participant in the PLUS Medical PL panel discussion, Carletti acknowledged that “a lot of people define [a soft market] as rates are going down. In that case, it may be a soft market.” But he added that solid underwriting, better data and better systems have helped create “a normal where profitability cycles are less severe.”

As to whether it’s a soft market and, if so, is it the new normal, “you’ve got to ask

the question — what does the soft market mean?” said Kevin Gabhart, senior managing director at Beecher Carlson, another panel participant. “From a brokerage perspective, it’s an overabundance of capacity and competitive rates, sometimes lower than what the actuary is recommending to our clients. …. We’re in an environment right now where we’re seeing that.”

His clients, from the small physician groups to large healthcare systems, say “they can buy in the commercial marketplace cheaper than self-insuring,” he said.

However, Ironshore’s Nash, who also participated in the panel, said there may be changes coming in the next few years.

In addition to the evolving landscape of healthcare delivery, the line may also see pressures resulting from the presidential election and possible regulatory changes.

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JUNE 20, 2016 INSURANCE JOURNAL | NATIONAL | 21

NATIONAL | Closer Look | Medical Liability

Insurer’s Hospital Claims Study Corroborates High Death Risk from Medical Errors

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eath claims are the most common hospital liability claims, according to an insurance company study released after researchers at Johns Hopkins University School of Medicine reported that medical errors are the third leading cause of deaths in the United States.

The CNA Hospital Professional Liability Claim Report 2015: Stepping Up to Quality Healthcare and Patient Safety identifies patient death as the most common injury in closed claims over a 10-year period, January, 2005 through December, 2014.

According to the Johns Hopkins researchers, medical errors in the U.S. account for more than 250,000 deaths per year, which makes them the third leading cause of death in the country, after cancer and respiratory disease.

The Johns Hopkins researchers said that most medical errors are due to poorly coordinated care, fragmented insurance networks, the absence or underuse of safety nets and other protocols, in addition to unwarranted variation in physician practice patterns that lack accountability.

The report by the Chicag0-based commercial insurer CNA found that death is the most common claim from medical errors in hospitals, comprising 34.3 percent of the closed claims.

While the average hospital injury claim paid is $251,000, the average total paid in a hospital death claim is $321,000, which ranks second in total average claim payment. Claims for neurological or brain injuries average higher, at $551,000, and account for about 11 percent of all injuries.

Overall improper care is the allegation most frequently related to patient death, followed by allegations related to diagnosis or medication error.

CNA found that death is the most frequent injury outcome for: • Emergency department-related claims (47.7 percent of 107 closed claims); • Medication error-related claims (48.1

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percent of 52 closed claims) • Medicine patient and ambulatory care-related claims (50.7 percent of 138 closed claims) • Pressure ulcers-related claims (41.9 percent of 31 closed claims) According to the CNA researchers, patient hand-offs in an emergency department represent a significant vulnerability in the hospital setting. Healthcare professionals inadvertently fail to convey critical patient information to one another.

“Communication among healthcare providers is critical in any situation, but particularly in an emergency department,” said Joyce Benton, assistant vice president, Risk Control, CNA. “Research has shown that ineffective or inadequate communication is a major factor in medical errors and near-misses, especially during hand-offs and other transitions in care.”

The Hospital Professional Liability Claim Report recommendations related to improving communication include: • Train staff to use structured formats for exchanging information.

• Encourage use of the chain of command, and prohibit any retaliation on the part of colleagues or supervisors.

• Develop an effective procedure to manage diagnostic test results.

The Johns Hopkins team says that how the U.S. collects national health statistics fails to allow for classifying medical errors separately on death certificates. The researchers are advocating for updated criteria for classifying deaths.

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Umbrella | SPOTLIGHT

Things to Know About Umbrella Coverage

1 2

There is no “standard” umbrella. — Christopher J. Boggs, vice president of education, Insurance Journal Academy of Insurance Agents should visit the topic of excess casualty coverage with every new client and for every renewal; liability exposure multiplies along with increases in sales, payroll or additional operations. The coverage is not designed to be a luxury but to protect the client’s assets in this litigious society. — David A. Eudy, underwriting manager, Excess Casualty Center of Excellence, Burns & Wilcox

3

Umbrella/excess carriers may be unwilling to provide coverage over another insurance carrier’s employers’ liability coverage (Part II of the workers’ comp policy). — Christopher J. Boggs, vice president of education, Insurance Journal Academy of Insurance INSURANCEJOURNAL.COM

4

Some umbrella/excess carriers won’t provide coverage over an insurance carrier rated less than “A-” by A.M. Best. Some won’t provide coverage over policies rated by other rating organizations such as Demotech.

— Christopher J. Boggs, vice president of education, Insurance Journal Academy of Insurance

5

Many so-called umbrella policies today are not true umbrellas that provide broader coverage in addition to higher limits.

Many, if not most, are simply excess limits forms that cover the same (sometimes less) exposures as underlying the policies. They often incorporate underlying exclusions by reference and may add their own exclusions or restrictions (e.g., for fire damage legal liability or UM claims). —Ed Scheinuk, senior vice president, BancorpSouth

or extend coverage only to majority owned affiliates. — Jim Mahurin, risk management consultant

6

Many contracts, particularly in the construction industry, call for “following form” umbrella or excess coverage. It is increasingly the rare excess policy that covers everything covered by the underlying policies…many of them introduce exclusions or limitations not in the underlying forms. — Bill Wilson, associate vice president, Education & Research, IIABA

9

Failure to report underlying claims to the umbrella/excess carrier can result in a lack of coverage if a settlement or judgment exceeds the underlying policy limits. — Jim Mahurin, risk management consultant, and Bill Wilson, associate vice president, Education & Research, IIABA

7

The umbrella/excess “horizontal vs. vertical exhaustion” issue is becoming increasingly problematic. Some insurers use an umbrella/excess endorsement that changes horizontal to vertical integration for additional insureds. — Chuck Schramm, David Sanborn, and Bill Wilson, associate vice president, Education & Research, IIABA

8

Identifying who is an insured under an umbrella/excess policy can be difficult and dangerous.

Some forms may limit coverage solely to named entities

10

One of the biggest E&O threats to agents when they write excess or umbrellas for both personal and commercial customers is failing to tell the insureds that neither their umbrella nor excess will go over UM or UIM. The perception that the umbrella/excess policies provide excess limits is wrong with very rare exceptions.

— Laurie Infantino, president, Insurance Community Center

JUNE 20, 2016 INSURANCE JOURNAL | NATIONAL | 23

NATIONAL | Business Moves Amos A. Phelps & Son, J.H. Slattery

CMS, Diversified Professional Risk Managers

CMS LLC, an insurance wholesaler based in Melville, N.Y., has acquired Diversified Professional Risk Managers in Rockville Centre, N.Y. Terms of the transaction were not disclosed.

Established in 2013, Diversified Professional Risk Managers is a wholesaler and risk management firm.

Diversified Professional Risk Managers’ current Rockville Centre office will close.

The firm’s five staff members will join CMS and relocate to CMS’s Melville office as part of the transaction.

Founded in 1996, CMS is a full service insurance wholesaler providing property/ casualty products in 37 states. CMS has additional offices in New York City and Weston, Fla. CMS said that with this acquisition, it is diversifying its product lines to include management and professional liability.

CMS is also creating a new division, called CMS Management Solutions, that will focus on brokerage, consulting and risk management services for commercial, financial and health care industries.

Diversified Professional Risk Managers

Principal Keith Basile will become managing director at CMS and lead the new division.

Church Mutual, SBIC, SCS

Church Mutual Insurance Co., a Merrill, Wis.-based insurer of religious organizations, has completed its acquisition of School Boards Insurance Co. of Pennsylvania Inc. (SBIC) and School Claims Services (SCS).

SBIC and SCS were previously owned by the Pennsylvania School Boards Association (PSBA).

Church Mutual had announced in October 2015 its intent to acquire SBIC and SCS, both based in Mechanicsburg, Penn., to expand its reach in the public schools market.

SBIC writes specifically tailored types of coverage — including property, general liability, boiler and machinery, commercial auto, errors and omissions (school leaders legal liability), excess liability and workers’ compensation.

SCS provides third-party claims administration and risk management services, as well as employee benefits programs and marketing.

24 | INSURANCE JOURNAL | NATIONAL JUNE 20, 2016

Two multi-generational independent agencies in Boston suburbs — Amos A. Phelps & Son Insurance in Rockland, Mass., and J.H. Slattery Insurance Agency in Abington, Mass. — have announced their merger.

Amos A. Phelps & Son is acquiring J.H. Slattery’s stock for the transaction. Amos A. Phelps & Son’s President Kimberly Phelps Nelson and Vice President Jeffrey J. Phelps — a sister-and-brother team and current owners of Amos A. Phelps & Son — will become owners of both agencies following the transaction.

Amos A. Phelps & Son is a 4th generation, family-owned agency that has been serving Rockland and the South Shore area since 1896. The agency and its six staff members provide comprehensive insurance products for auto, home, life, business, and other specialty markets, including flood and bonds.

J.H. Slattery is a 3rd generation, family-owned agency founded in 1931. The agency and its five staff members provide a wide range of personal and business insurance services.

Amos A. Phelps & Son said both agencies will continue to operate from their current offices in Rockland and Abington and retain their agency names.

John Yurconic, Hazleton Insurance

John Yurconic Agency, an independent agency based in Allentown, Penn., has acquired Hazleton Insurance Center in Hazleton, Penn. Terms of the transaction were not disclosed.

Founded in 1969, John Yurconic Agency offers a wide range of insurance products and has approximately 64 staff members in 11 offices in the greater Lehigh Valley region.

Hazleton Insurance Center was formed in 1971 with the merger of two local agencies, M.J. Laputka & Sons and Benjamin & Markman.

Both John Yurconic Agency and Hazleton Insurance Center are independent agency partners of Keystone Insurers Group, an agency network based in Northumberland, Penn.

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Hazleton Insurance Center and its four staff members will continue to serve clients from their Hazleton location as a new John Yurconic Agency branch office.

Digital Benefit Advisors, Corporate Health Systems

Digital Benefit Advisors a national employee benefits firm, has acquired Corporate Health Systems of Eden Prairie, Minn., expanding its footprint in the Minneapolis/St. Paul area.

Corporate Health Systems’ executives, Mick Hawton and Al Hofstede, along with their 42-member benefits consulting and third-party benefits administration team, will join DBA. Corporate Health Systems was established in 1987 as a benefits consulting firm.

program of the Western Carwash Association. The program offers comprehensive coverage for property/casualty and workers’ compensation insurance.

The program is led by Sam Furno, a former carwash operator and industry specialist. Furno, along with the pro-

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Risk Strategies, Atlass Insurance

Risk Strategies Co., a privately held, national insurance brokerage and risk management firm, has acquired Florida-based Atlass Insurance Group.

Founded in 1981, Atlass Insurance is an insurance brokerage and risk management firm focused on owners and operators of boats, yachts, and commercial vessels worldwide. The acquisition of Atlass, headquartered in Fort Lauderdale with a second location in Cocoa, marks the first entry into Florida for Risk Strategies Co. Atlass also has a location in Newport, R.I. Following the acquisition, Atlass and its team will continue to operate from its established offices in Florida and Rhode Island while collaborating with the growing Risk Strategies Private Client practice group across the country.

Risk Strategies serves commercial companies, non-profits, public entities and individuals, and has access to all major insurance markets. The company has offices in more than 25 locations.

gram’s management team and staff, will join Alliant and continue to service clients from the Sacramento offices.

Newport Beach-based Alliant is provides property/casualty, workers’ compensation, employee benefits, surety, and financial products and services.

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Alliant, Western Carwash

Alliant Insurance Services Inc. has acquired the Western Carwash Insurance Program in California.

Terms of the deal were not disclosed.

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JUNE 20, 2016 INSURANCE JOURNAL | NATIONAL | 25

NATIONAL | Special Report | Construction

By Andrea Wells

A

mid ups and downs, the construction market has seen steady growth over the past four years, and now construction insurance specialists believe the market is set to finally start to heat up.

The intense competition has carriers maintaining a market favorable to buyers, especially those with good safety records.

For 2015 as a whole, total

construction starts climbed 8 percent to $645.5 billion.

This continued the pattern of moderate expansion for total construction starts established over the previous three years — 2012, up 12 percent; 2013, up 11 percent; and 2014, up 9 percent, according to Dodge Data & Analytics.

While growth is good overall, it’s not without some ups-anddowns. Construction starts were up 1 percent in January,

26 | INSURANCE JOURNAL | NATIONAL JUNE 20, 2016

then climbed 10 percent in February. They fell back down to 1 percent in March, before shooting up again by 8 percent in April.

The roller coaster ride has kept construction insurance specialists in every region of the country busy.

“We really haven’t seen much of a retraction in any segment, except a little slowdown on building in Texas because of oil and energy slowdown,” said

John Campbell, USI’s construction practice managing partner and president of the wrap-up practice. “From a standpoint of overall construction, we are still seeing a lot growth across the board.”

Matt Chase, executive vice president and practice leader for Pasadena, Calif.-based Bolton & Co., said that his independent agency’s construction clients are doing well.

The overwhelming majority of INSURANCEJOURNAL.COM

Bolton’s $40 million construction book has increased business this year while only a few have not grown. Renovation work, or commercial tenant improvement and betterment (TIB) work, are driving much of the growth, he said.

USI’s Campbell said that from a national perspective, he sees the busiest sectors are office space renovation and retail construction, especially in downtown urban areas.

Apartment building also continues to see major growth in certain areas of the country, Campbell added, and the forsale residential building market, or condos, has been ticking up as well. “Most of the growth in the last year-and-a-half has been apartment driven but now condos are up,” he said.

As for other sectors where construction activity is up, Campbell cites infrastructure and public works projects, housing for college campuses and healthcare/long term care facilities.

James Knoop, senior vice president and unit manager for Lockton’s Irvine, Calif., construction risk practice, said the uptick in residential construction in the West can be traced to both younger and older residential buyers moving to urban areas. But he worries that the activity could slow due to high costs.

Knoop said there’s been a shift from suburban to urban migration in cities with the millennial population to accommodate their lifestyles. “That’s why we are seeing such an increase in conINSURANCEJOURNAL.COM

dos and mixed use projects,” he said. “But we are also seeing a little slow down with residential homebuilders due to low inventory and affordability.”

Knoop said that affordability is an issue due to an increase in building costs.

Seasonal Risks

Summer is always busy for construction business in northern areas of the country.

Street and road projects in the Chicago area are particularly busy this season, said Mary Anne Budworth, construction practice leader for HUB International’s Chicago office.

“Everybody is out repairing roads, a construction segment that tends to be more seasonally driven.”

Budworth has also seen a surge of activity in water and sewer projects in recent months.

“There’s a lot of construction in replacing sewer lines right now and that’s work often driven by flood plain changes and media/news coverage related to water purity,” she said.

As in other regions of the country, the commercial segment in the Midwest and Chicago area has been steadily growing, Budworth added, while housing has not been as impressive in her region.

“There are more (housing) projects but it’s just not growing by

leaps and bounds; just slightly growing,” Budworth said.

Overall, in Budworth’s view the construction market has certainly improved.

“Revenues are up, payrolls are increasing and while it’s not improving by leaps and bounds, it’s much better than 2010 when companies where just holding their own,” she said. “Now we are seeing growth. Are we seeing double digit growth? No, but we are seeing steady growth.”

Road construction is enjoying a good season in the Northeast also, according to Peter Jacavone, assistant sales manager, vice president and construction practice director at Starkweather & Shepley Insurance Brokerage Inc., based in East Providence, R.I. Much of that growth and need has to do with the area’s old age, he said.

“To say our roads all need improvement is probably an understatement,” Jacavone said. “Some of the streets and roads haven’t been fixed in decades so there is definitely a need, but until now the funding hasn’t been there.”

Jacavone describes the construction sector as still in “recovery mode” but sees it gearing up for even better times ahead. “Today, you see more bidding and companies evolving and getting back to that prior 2008 level.”

Starkweather & Shepley is growing its business. The firm has its eye on another hot region — Florida, where the independent agency opened a branch office in Fort Meyers in February.

Jacavone

said the Florida market is a great fit for his construction practice.

“It’s a growing market and there’s a lot of building going on right now in Florida,” he said.

“We write everything from the landscaper to steel erectors for 100-story buildings,” he added.

Buyer’s Market

In a growing industry like construction, carriers are competing for the most profitable accounts. But even the less profitable accounts are getting a good deal in today’s market, according to USI’s Campbell.

“We are seeing carriers on renewals that are giving flat to 10 percent depending on the risk, and carriers on new business (accounts) giving (up to) 30 percent rate reduction off of expiring, on poor risks,” Campbell said. “It’s been pretty aggressive.”

Campbell said that carriers have had good underwriting experience in recent years and with very little investment income coming in, the only way for them to grow is to get new business. The fight for that new business means that some contractors switching carriers might see significant reductions.

“That 30 percent (rate reduction) number is not an unusual number,” he said. “We’ve seen that 30 percent reduction even on risks that might not warrant it from a strict underwriting perspective,” he said, although 20 percent reductions are probably “a good rule of thumb” on new business.

Campbell cautions contractors willing to move for the

continued on Page 28

JUNE 20, 2016 INSURANCE JOURNAL | NATIONAL | 27

NATIONAL | Special Report | Construction continued from page 27 price. “You don’t want to make a shortterm decision for long-term stability,” Campbell said. “But the reality is we still need to go to the marketplace and fully vet all the carriers. … Carriers are getting really aggressive to gain market share or just to have some sort of growth.”

According to Campbell, that environment is a challenge for the mainstays in construction.

“The Travelers, Zurichs and Libertys are under a lot of pressure from some of the newer players; these regional carriers like the Cincinnatis, Amerisures and Westfields, are putting a lot of pressure on them because they are looking for growth,” he said.

‘Auto is the only line that is seeing rate increases because of the escalation in distracted driving.’

Hub’s Budworth agrees it’s a buyer’s market right now.

“Carriers are definitely being aggressive to keep and win their business. Pricing is soft in most of the country and capacity is high so rates have softened,” she said.

Budworth doesn’t see the soft market as dramatic as Campbell, however. “Most are holding flat, but more than anything claims history is what we are seeing impacting rates right now,” she said. “From a construction company standpoint, how you control your costs is very important.

Understand what is creating your losses so you can control that overall cost.”

She agrees there are few increases in the rates unless those rates are being driven by loss history. And “that’s the controllable piece that the client has over their total cost of risk.”

According to Bolton’s Chase, some new carriers are entering the construction sector.

But “what we are

really seeing is capacity,” he said. “I haven’t seen general liability this soft in quite some time. Workers’ comp remains soft but I think it’s fair.”

Lockton’s Knoop believes that while capacity and price are talked about a lot, it’s the construction industry’s focus on safety that is making the real difference.

“We can talk about how competitive and soft the market is but at a baseline the underwriters are responding more aggressively to good loss experience,” he said.

“When there are authentic safety controls in place, they (rate reductions) are measurable.”

Knoop said workers’ compensation carriers are seeing good experience and medical costs are down, except for prescription drugs where costs are increasing.

Knoop cautions that down the road it’s going to level off as demographics and newer risks emerge.

“The aging work force is a concern and, interestingly, as more states legalize marijuana that’s going to be more of an issue, not only for workers’ compensation but it’s also an issue for automobile lines,” he said.

That is one class of business where rates are up for construction firms.

“Auto is the only line that is seeing rate increases because of the escalation in distracted driving,” Knoop said. “We just had a client of ours with a driver who had an accident and they were texting.”

Chase agrees that auto is where the market is having a tough time.

“Increases in auto are not necessarily indicative of whether or not an account has claims,” he said. “We are seeing consistent increases in that marketspace even for those that don’t have a lot of claims.”

“The market in general is softening but it all depends on claims,” said Jacavone of Starkweather & Shepley.

“If you are a highend, small claims type of organization you will probably get very good pricing this year,” he said.

While underwriters

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now are more incentivized to write new business, he said contractors that do not keep a close eye on safety will still have few options when going to the insurance market.

Carriers are just more proactive now when it comes to evaluating the safety practices of a construction organization, he said.

“It has a lot to do with how they want to underwrite and I think that’s a good thing,” he addded.

New Construction Certification Aims to Specialize the Specialist

T

he construction risk is one of the toughest categories of businesses to insure. Insurance professionals are vulnerable from the first point of sale, according to Laurie Infantino, president of the Insurance Community University and Insight Insurance Consulting.

“The dynamics of the construction risk sale are overwhelming starting with the basics of really understanding the risk exposures; being made aware of the contractual risk assumptions and transfers that insureds are constantly signing off on and then designing appropriate coverage and limits for their insurance,” Infantino said.

Insurance professionals offering or specializing in the construction industry have to be experts and must stay current on changes in the industry affecting their construction clients.

If agents are going to specialize then they must have specialized training.

That is why, in 2016, The Insurance Community/University launched the Certified Construction Insurance Program (CCIP). The program is spearheaded by the co-designers of the CISC designation: Marjorie Segale and Bob Marshburn. The CCIP offers construction education consisting of a series of 11 live, interactive webinars conducted

continued on Page 37

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Construction | Special Report | NATIONAL

Contractor’s Professional Mitigation of Damages Coverage

By David Krug

A

s contractors’ professional liability insurance products continue to develop and evolve in the marketplace, many contractors aren’t aware of a new “first-party” coverage that has become available to them from a growing number of insurers as an optional professional liability policy coverage part.

This new coverage, called “mitigation” or “rectification,” is typically written with a sub-limit and underwritten/ priced independent of the basic third party contractor’s professional coverage.

Because of the self-insured retentions and coinsurance requirements this coverage may currently only make sense for large contractors. But, as time goes on, these requirements will most likely be reduced, making the coverage INSURANCEJOURNAL.COM

practical for a wide array of contractors.

Mitigation coverage provides for first-party damages the insured incurs for remediation costs resulting from defective design, which are discovered during the course of construction, and, if not corrected, would result in a traditional third party professional liability claim from the owner or a higher-tier contractor.

The contractor can make claim directly under its professional liability policy for the costs it incurs for correcting the defects, which can result in more efficiency and lower costs while preserving a good working relationship with the owner. In theory, the contractor’s insurer then would subrogate against the design professional if the contract between the design professional and contractor allows for it.

In the first-party sense,

mitigation coverage is similar to a contractor’s protective indemnity coverage. They each allow the contractor to make claim under its policy for recovering costs for correcting design defects that would otherwise be uninsured or require a formal third party claim by the owner or a higher tier contracting entity. However, this is where the similarity between the two ends.

Contractors protective indemnity applies as excess over the design professional’s own policy limits and, if it is broader in scope, provides an element of difference in conditions coverage. Mitigation coverage steps in as primary coverage with respect to the contractor’s costs associated with correcting or rectifying the defective design which is discovered during the course of construction. It allows for the construction to continue with funds from the contractor’s insurer, not the contractor.

It should be noted that mitigation coverage does include a substantial self-insured retention (SIR). Many insurers will accept a minimum SIR of $250,000 and they can go up from there. Some carriers also require some level of coinsurance and exclude internal costs and profits so the contractor and insurance company are both focused on recovering as much as possible from the negligent design professional.

An example of a mitigation claim might be the discovery, during the course of construction, that the concrete mix which was specified by an engineering firm for the foundation of a new building is inadequate to properly support the structure and needs to be rectified.

Or, that the windows specified by an architect for a high rise hotel aren’t able to withstand high winds and prevent water intrusion.

Mitigation coverage can be purchased as part of a professional liability practice program or it can be project specific. However, in order to get project-specific coverage, most carriers will require that the contractor also purchase an annual practice program before they will offer project specific coverage.

‘The potential upside of mitigation/rectification coverage is self-evident.’

The potential upside of mitigation/rectification coverage is self-evident, but there is also a downside. This coverage can expose the contractor’s professional coverage to a greater potential for loss, which could impact future insurability, rate or terms — even if the insurer has successfully subrogated against a negligent design professional.

If mitigation coverage is attached to a combined contractors professional/pollution policy, the mitigation can apply to the pollution coverage as well. A good example of this would be the discovery of mold or fungus growing during the course of construction of a habitational development.

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Krug is senior vice president of risk management at Bangor, Maine-based Cross Insurance.

JUNE 20, 2016 INSURANCE JOURNAL | NATIONAL | 29

Idea Exchange

Surety

What Agents Should Know About the Surety Bond Market

By Eric Halsey

A

s a property/casualty insurance agent, you’re used to focusing on providing your clients with top-quality service and serving as a great resource for all insurance questions they might have. Then suddenly your client throws you a curveball when what they need is not insurance, but a surety bond.

Through your insurance training, you may have a fundamental understanding of surety bonds, but they can still be confusing. Even walking your clients through the bonding process can be complex.

Surety bonds are very different than what you’re used to, but with a quick overview of the basics, you’ll be on your way to learning what a surety bond is and being able to provide solid advice to your clients.

This article will help you get started writing surety bonds direct. You’ll learn the basics of bonds and what you need to obtain an approval. If you are unfamiliar with bond markets, it’s wise to begin by working with a surety bond broker until you know the markets well enough.

Understanding surety bonding starts with knowing exactly how bonds are different from P/C Insurance.

P/C Insurance vs. Surety Bonds: Understanding the Differences

The largest difference between P/C insurance and surety bonds lies in what

entity ultimately has to pay claims. While initially, insurance carriers for both P/C insurance and surety bonds will pay a claim, with a surety bond the insured is ultimately responsible for paying any valid claims which arise, plus legal costs. In a sense, a surety bond is a line of credit to ensure a valid claim will be paid promptly. What it doesn’t alter is the insured’s responsibility for those claims.

Further, while P/C insurance is designed to protect the insured, a surety bond is designed to protect the insured’s customers. That’s why a surety bond is often required for professional licenses. Always start with a firm understanding of these differences. Once everything makes sense, you’ll need to determine how many bonding requests you’re likely to be handling.

and get instant online approval which can be big timesavers. Finally, size is important, because size relates directly to cost.

Larger agencies can shop for best rates and savings are then passed on to your clients.

Once you’ve obtained a bond approval for your client, an online platform will allow you to simply print the bond and send it to them. It’s even possible to install a platform right on your own website, allowing your clients to apply, pay and print bonds there.

Your Customer Needs a Bond: Where Should You Start?

Before you worry too much about how many bonds you’ll be handling, it’s essential to have a firm grasp of the types you’ll likely deal with. Here are the categories of bonds you’ll need to be familiar with:

The first question you’ll need to ask yourself is whether you’re going to handle a low or high volume of bonding requests.

This will determine the best option for you going forward.

For Medium to High-Volume Bonding: If you’re seeing increased numbers of bonding requests, it may make sense to begin writing bonds directly. We’ll cover how you can do this in the next sections.

Understanding Bond Types

For Low-Volume Bonding: If you handle a small number of bonding requests, your best option is to work with a bonding specialist. These bond agencies can offer low rates through access to many bond markets. With direct underwriting, you’re missing out on potential savings for your clients, as well as the advantage of working with an experienced agent who understands the intricacies of bonding.

The question then becomes, “Which company should I trust?” The three main factors you’ll want to look for are reputation, convenience, and size. Reputation is straightforward – you want to work with an agency with enough industry knowledge to advise you throughout the bonding process, as well as handling any claims.

You can’t downplay convenience, though: features like an online system that allows you to easily manage your bonds

30 | INSURANCE JOURNAL | NATIONAL JUNE 20, 2016

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Providing quality

Environmental Insurance Contractor Bonds: Construction contractors are required to obtain what can be a dizzying array of bonds for different types of jobs, as well as for varying stages of a single job.

tect the public in the event that the bond holder violates the law in some way while performing work under a license or permit.

These can be required for anything from a car dealership to a travel agency.

• Bid Bonds guarantee that the bid is accurate, and if the bid on a job is accepted that the contractor will obtain a performance bond if required.

• Performance Bonds guarantee that the contractor will carry out work on the project following the rules and guide lines established in the contract.

• Payment Bonds guarantee that the contractor will pay all suppliers, laborers, and subcontractors.

• Supply Bonds ensure that suppliers deliver the materials they promise in their contracts.

• Maintenance Bonds provide a sort of warranty on the work done for a set period of time after the work has been completed.

The largest difference between property/casualty insurance and surety bonds lies in what entity ultimately has to pay claims.

License and Permit Bonds: As mentioned, surety bonds are often required to obtain licenses or permits. These are usually fairly straightforward bonds, designed to pro-

from trusted carriers for over 25 years

Court Bonds: Court bonds are not bail bonds. Court bonds are required by a court or a specific law and cover other types of responsibilities to a court. Examples include: •

•

•

Appeal Bonds are often required for appealing a court’s decision.

Guardian Bonds allow a person to act as a legal guardian for a minor.

Probate Bonds allow a person to act as a fiduciary or executor of an estate of a deceased person.

Fidelity Bonds: Fidelity bonds work a bit differently than surety bonds in that they are usually not required by the government. While they often protect your clients from your actions, they can also be used by a P/C agency owner to protect against the actions of your own employees. Here’s a breakdown of the most common types: •

•

•

•

•

Business Services Bonds protect your customers from the actions of your employees, for example, theft.

Janitorial and Cleaning Bonds are specifically designed to protect the clients of janitorial or cleaning services.

Employee Dishonesty Bonds protect you against actions by your own employees including embezzlement, forgery and theft.

Financial Institution Bonds are a type of employee dishonesty bond designed specifically for financial institutions.

ERISA Bonds protect members of employee benefit plans from fraud.

♦ GL & Pollution Liability ♦ Professional Liability ♦ Premises Pollution Liability ♦ Auto & Pollution Liability ♦ And much more

www.b-h-a.com

continued on Page 32 INSURANCEJOURNAL.COM

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Idea Exchange

Surety

continued from page 31 What Do You Need to Collect?

Because different types of bonds are required by different entities for different purposes, the process is unique for each type. Here’s an overview of what your client will need to provide: Contract Bonds: A contractor must receive a bond line approval from the surety prior to being bonded for a specific job.

Contracting companies that have been in business for less than one year have an automatic bond limit of $100,000. You can find more information on bond limits here.

As you’ll see below, the contract bond application process is different for small and large contracts.

For small contract bonds: (Jobs below $350,000) • Application form • Credit release form • Personal financial statement for each owner of the business (only required for bond lines of $700,000 or more).

• •

Large contract bond application Copies of the company’s financial statements from the last three years, ideally CPA prepared.

For bid bonds for both small and large contracts: • A copy of the invitation to bid, the bid specifications, the bid form, and any special bond forms may be required.

• If the bond is needed for a newly contracted project, the award letter and the contract or purchase order will need to be included.

License and Permit Bonds: • License or permit bond application form • Personal financial statement Court Bonds • Court bond application form • Personal financial statement • Credit release form • Blank copy of the bond • Copy of the court order

Choosing the Right Bond Market

For large contract bonds, you will need the When considering what type of bonds USA12043.qxd 1/4/08 and 2:26above) PM Page 1 you’d like to handle, you’ll need to carefulabove plus: (Jobs $350,000

ly consider each bond market. What factors should you consider? Here’s a brief overview of the major elements of choosing a bond market:

1. What is the nature of the risk the bond addresses? For this consideration, you’ll

want to think about the likely outcomes and the probability of any claims against the bond. For example, a claim against a large and well-established construction contractor is probably less likely to occur than one against a smaller and less established firm.

2. What are the bond amounts? The larger the amount, the more the client will pay to acquire the bond.

3. How risky is the individual client? This is why a variety of personal and business financial statements are required for most bonds. The better the credit of the individual or business involved, the lower the risk.

4. What does the market look like as a whole? This means whether the bond market is more favorable to buyers or sellers at this particular moment, as well as where it seems likely to go in the future. The surety bond industry is currently soft, but that looks likely to change soon.

Conclusion

Once again, if you are unsure which market to send your bond to, you should consider working with a surety bond broker to start.

This will help you get a better understanding of the bond markets without making your clients’ needs go unsatisfied.

Once you know the markets well enough, you can write direct on your own.

Share this article with a colleague.

IJMAG.COM/62EX Halsey is a historian by training and has been interested in U.S. small businesses since working at the House Committee on Small Business in 2006. Coming from a family with a history of working on industry policy, he has a particular interest in surety bonding and insurance; he loves sharing his knowledge of the industry for JW Surety Bonds. Email: eric@ hop-online.com or info@jwsuretybonds.com. Phone: 888-592-6631.

32 | INSURANCE JOURNAL | NATIONAL JUNE 20, 2016

INSURANCEJOURNAL.COM

MyNewMarkets | NATIONAL

Non Standard Home Owners Market Detail: Commercial

Insurance Group LLC (www. cig-llc.biz) offers HO3, HO5, HO8, DP1-3 coverage. Program features an online rater with indication screen and pre-approval to bind. No credit scoring. Dog bites, multiple claims, etc., all accepted.

Available limits: Maximum $1 million Carrier: Various, non-admitted States: All states Contact: Customer service at 855-900-2960

Personal Auto

Market Detail: ICW Group’s

Explorer Insurance (www.icwgroup.com) works exclusively through independent agencies to offer auto insurance products and services to individuals and families. Explorer Personal Auto Insurance is only available in California.

Available limits: As needed Carrier: Explorer Insurance States: Calif only.

Contact: Taunya Moen at 800877-1111 or e-mail: enterprisemarketingteam@icwgroup.com

Tow Truck Industry

Market Detail: KBK Insurance INSURANCEJOURNAL.COM

Group Inc., (www.kbkinsgroup.com) has focused on the towing industry since the mid-1980s. Coverage includes: commercial auto liability; auto physical damage; general liability; general liability; garagekeepers liability; on-hook cargo; hired car/non-ownership; dealer plates; property; and excess liability.

Available limits: As needed Carrier: Unable to disclose, admitted and non-admitted available States: All states except at Maine, N.H., and N.Y. Contact: Customer service at 800-229-5927

Cranes

Market Detail: Ascinsure

Specialty Risk’s (www.ascinsure.com) all-lines crane program is able to serve crane rental companies nationwide, with or without operators. The program is designed specifically for the crane industry and its complex coverage needs.

Exclusively packaged program provided through ProSight Specialty Insurance. Coverage includes: general liability; workers’ comp; riggers coverage; auto; inland marine; property; excess; and crime.

Available limits: As needed Carrier: ProSight Specialty

Insurance States: All states except Hawaii Contact: Ken Helmick at 877372-0517 or e-mail: ken@ascinsure.com

Technology E&O

Market Detail: Tennant Risk

Services (www.tennant.com) offers professional liability to technology organizations and those offering technology professional services, including: software designer/developer; website development; network/system administration; software as a service/web services; helpdesk/call centers; computer security; systems/IT consultants; process control & robotics.

Available limits: As needed Carrier: Various States: All states Contact: Bob Sargent at 860519-1301 or e-mail: rsargent@ tennant.com

Personal Training

Market Detail: Sports & Fitness Insurance Corp. (SFIC) (www. sportsfitness.com/ij) offers general liability insurance including professional liability, property insurance, umbrellas,

workers’ compensation and surety bonds for large and small fitness centers, as well as, dance, yoga, Pilates and martial arts studios and personal trainers. The underlying general liability policies provide limits from $1 million occurrence with a $2 million aggregate to $2 million occurrence with $4 million aggregate. Both cyber liability and employment related practices liability limits are available on general liability.

Available limits: As needed Carrier: Liberty Mutual States: All states Contact: Kate Martello at 601898-8464 or e-mail: kmartello@sportsfitness.com

Aerial Equipment Market Detail: Hays

Companies’ (www.hayscompanies.com) program is for aerial equipment rental yards (rental/sales/service) without operator. They can have handle other kinds of equipment such as forklifts, generators, compressors etc - but majority of revenue needs to be generated from aerials/scissor lifts.

Available limits: As needed Carrier: Unable to disclose, non-admitted States: All states except Alaska, Hawaii, and N.Y. Contact: Debbie Szyszka, e-mail: dszyszka@hayscompanies.com

This section brought to you by Insurance Journal’s sister website: www.mynewmarkets.com

Need a Market?

Find it.

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JUNE 20, 2016 INSURANCE JOURNAL | NATIONAL | 33

Idea Exchange

Marketing

Tinker Your Way to Success

By John Graham

I

t took a long time but it had to happen.

And it did. Finally, there are schools, summer camps and weekend experiences where kids learn how to tinker.

This is far from what some call “futzing around” and others label wasting time. It’s serious business.

Tinkering was once a valued profession.

Adept at analyzing and solving problems,

tinkerers tackled anything that needed fixing. They were skilled problem solvers who figured out what was wrong with equipment and machinery and fixed them, as well as found ways to improve their performance.

Tinkering is anything but a lost art.

Spotting and dissecting problems and coming up with workable solutions is an enormously valuable business skill — one that requires a lot of tinkering.

At its core, tinkering is getting things right before we make needless costly, and perhaps disastrous mistakes. It’s all about insight and creativity. And here’s what it takes:

1. Nothing is ever good enough. Tinkering is the attitude good enough doesn’t cut it.

Whatever it is, it can be better, whether it’s writing a letter, email message, report, memo, proposal, or presentation, dealing with a problem, responding to inquiries, answering customer concerns, creating a sales plan, or understanding prospects.

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There are no exceptions. Good ideas fail because they’re rushed and not thought though. Proposals are rejected because they are superficial. New initiatives are quickly abandoned because they’re full of holes. All are victims of the pervasive “getit-done and out the door” mindset.

2. Take on challenges. The one opportuni-

ty that overshadows everything else in any job is routinely ignored or passed up. And that’s taking on challenges, which is a code word in business for solving problems.

If you ask most people to spell challenge, they’ll say, “T-R-O-U-B-L-E.” They run the other way from challenges, avoiding them at all cost. As they see it, challenges conger up images of long hours, too much work, getting blamed, and failing. Just say the word and they run and hide behind claims of being too busy or having to walk the dog after work.

That’s all good news because it opens up enormous opportunities for those who dare to raise their hands and say, “I’ll work on that.”

3. Get to the bottom of things.

Understanding how things fit together, making connections, and uncovering what’s missing goes beyond superficial and incomplete answers. Since many of us think that may be a good idea, but it takes too much time, so why bother. And that’s why “Googling” is the accepted standard for research. How many of us are interested in knowing

whether something is fact or opinion? How many know the difference or even care?

The New York Times Magazine described how Kent Clizbe, a former C.I.A. officer and intelligence contractor, went about the arduous exposé of a daring media con man as “an unrelenting compulsion to get to the bottom of things….

He has a perpetual need to turn everything inside out….”

Tinkering gets us to the bottom of things, and that’s what it takes to innovate, break down barriers, and make a difference on or off the job.

4. Stop making mistakes. Is that

too much to ask? Of course there are “circumstances beyond our control,” but most often, mistakes result from moving too quickly.

Steve Jobs tapped Ron Johnson, to develop the now wildly successful Apple retail stores. Then, based on this success, he was picked to work his magic on saving the legendary J.C. Penney stores. Instead, he unleashed tornado-like disruption and was quickly blown away.

Now, Johnson is launching a new venture and told USA Today, “The mistake I made was trying to change things too C fast. I’m going back to what I learned at Apple, which is that M Y there’s no such thing as an overnight success.”

CM

No one wants to make MY mistakes, yet they still happen.

New executives arrive, for exam- CY ple, with a “Here’s what we’re goingCMY to do to make us successful” message.K This is always a mistake, because this is the time for tinkering, for learning how the place operates, spotting problems, and coming up with plans for improvement that brings everyone on board.

“The mistake I made was trying to change things too fast” is good advice.

learned how to take control of their lives.

They don’t cower, complain, or quit in the face of the endless obstacles they face every day. They’re always looking for ways to make something better.

Here’s a few examples:

What does it take to make good things like this happen? Just a little tinkering and asking one question: “What if we…?”

Every company needs tinkerers — the more the merrier. They get a kick out of making the place better.

To encourage tinkering, it might be a good idea to give a “Tinkerer of the Month Award” and share tinkering success stories. At a time when so many workers feel undervalued, we should let them tinker and see what happens. It just could be the way to turn a lot of minds into suggestion boxes bursting with new ideas.

• Amazon makes customers happy with earlier than expected deliveries.

• Honda Civic created excitement with a complimentary pair of quality, limited edition driving shoes with each new Civic.

• A Sunoco service station makes follow up phone calls to customer after working on their car.

Share this article with a colleague.

• A medical office amazes patients with its IJMAG.COM/62UI “no waiting” policy.

• A company CEO knows the cleaning Graham of GrahamComm is a marketing and sales person’s name and always says hello. strategist-consultant and business writer. He publish• Granite Telecommunications’ annual es a free monthly eBulletin, “No Nonsense Marketing “buzz cut” fund drive for cancer raised & Sales Ideas.” Email: jgraham@grahamcomm.com.

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5. Take control. Those who practice the art of tinkering know its secret. They’ve

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JUNE 20, 2016 INSURANCE JOURNAL | NATIONAL | 35

Idea Exchange

Minding Your Business

Using Agency Employees to Improve Leadership

By Catherine Oak and

the future vision of the company. Doing so raises the business’ standards to a new level.

A business that grows long term is one that is innovative. When Oak & Associates is asked to assist agency owners with management and growth, we first talk to the owner of the agency, and then go to the employees and ask them what they would change if they were CEO. Their insight and ideas are usually much different and often more simple to implement, from the insight of the agency’s leadership. An Employee Survey is completed by each employee anonymously before going to the firm, so the consultant and owner knows what the employees believe are the problems.

For example, if the agency owner is looking to improve process and profit one must look no further than to those who are in the trenches daily, on the phones and faceto-face with the company’s clients, day in

and day out. They have a great sense of knowing what needs to be done.

An owner who isn’t looking to improve those two key aspects is not a leader and instead one just keeping the status quo.

The process that a leader puts into place is as important as the growth or goal itself.

The biggest mistake that agency owners make is that they forget about how important their employees are in accomplishing future growth. Including employees when making decisions gives the leader insight as to whether or not the goals set by the leader are possible.

Employees need to be asked and not made afraid to discuss changes needed to improve the operation.

One of the most dangerous things for CEOs is if they surround themselves with employees that have nothing to say or choose not to say anything. When that happens, the owner is at fault because they never encouraged or asked their employees

William Schoeffler Jr.

I

n today’s business climate innovations in technology and systems have upended communication, payroll and record keeping. Even with these drastic changes one aspect of a business has yet to change, the CEO. Every company big and small has a CEO and their decision-making ability is key to successful growth. A truly great leader should have strong values and a rock solid mission statement, which all employees understand and look to for leadership.

These values, mission statement and written goals rarely change as a company grows.

Leaders must continually question their decisions. Not in a way of self-doubt, but questioning to ensure they are in line with 36 | INSURANCE JOURNAL | NATIONAL JUNE 20, 2016

INSURANCEJOURNAL.COM

to contribute. The good employees end up leaving. Most of the time this isn’t because the employees are unaware of any answers or ideas. Instead it is because they feel that their opinions are not valued. Also, when new employees from other agencies join, they should be encouraged to tell management what things were done differently and better in the agency they came from so they can be implemented to improve the operation. Often this input is discouraged or put down as “that’s not the way we do it here.”

To be a great leader of any organization, including insurance agencies, the leader needs to surround themselves with employees who ask great questions and continually challenge him or her as to how things are done. Those employees can brainstorm their ideas with each other and deliver their thoughts to management to improve the organization. The manager of that department or agency owner can be

continued from page 28 the first Thursday of each month. Each session lasts two hours and is followed by a short multiple choice test sent digitally to the participants immediately following the class.

Infantino said they targeted the construction industry risk and insurance for its certification program for several reasons.

For one, insurance coverage forms and issues change daily for construction risks as new case law becomes effective in states, she said. “Insurance companies move in and out of the field and new markets emerge all in an effort to limit exposure; adequately charge for exposure and to remain profitable in writing general liability for the construction risk.”

Changing building laws and codes are also a constant concern.

Economic conditions also affect the market. “The construction industry has always been a target for the hard market and tied in closely to economic cycles,” Infantino said.

Exposures and construction contracts

INSURANCEJOURNAL.COM

The biggest mistake that agency owners make is that they forget about how important their employees are in accomplishing future growth.

will be the content of another article in the future, as well as how to create leaders in the organization.

present at this meeting, but only if they get out of the way and listen and encourage, not intimidate or put down those new thoughts and ideas.

Leaders must realize that creating an environment where employees feel encouraged to give feedback on programs, processes and how to improve profit is crucial to sustaining and creating more long term growth.

Leaders/owners need to make everyone in the organization feel a part of the agency’s success and reward those efforts that do contribute. How to reward those efforts

for contractors are in constant flux as well. “Whether it’s new jobs or different types of jobs, signing different construction contracts that contain new requirements, or the constant insurance concern relating to all the construction relationships such as subs, the sub-subs, the subsub-subs, developer, suppliers. The list goes on,” Infantino said.

“That is why there are so many certificates of insurance that have to be issued for construction clients,” Infantino added.

“The number of parties involved in a construction risk makes understanding the relationship critical and the acceptance/ transfer of risk between those parties all direct how the coverage is to be issued.”

Specialized insurance education is essential and the wave of the future, Infantino said. “The construction certification is seen as validation of the insurance professional’s commitment to their customers and the insurance industry.”

To learn more about the certification, visit the website at www.insurancecommunityuniversity.com and click on the “learn more about CCIP” link.

Oak is the founder of the consulting firm, Oak & Associates, based in Northern California. Schoeffler Jr. is a financial analyst for the firm. Oak & Associates specializes in financial and management consulting for independent insurance agencies, including valuations, mergers acquisitions, sales and marketing planning as well as perpetuation planning. Phone: 707-935-6565. Email: catoak@gmail.com.

Advertisers Index

Readers, browse, contact, or do product searches on any of our full page advertisers at: www.insurancejournal.com/adshowcase/

Accident Fund www.accidentfund.com SE5 Amerisafe www.amerisafe.com SC8: SE2 Anderson & Murison www.andersonmurison.com 35 Applied Underwriters www.auw.com 2, 3, 40 Beacon Hill Associates www.b-h-a.com 31 Boston Insurance Brokerage www.bostonbrokerage.com 34 Burnett & Company www.bcoinc.com SC6 Burns & Wilcox Ltd. www.burnsandwilcox.com 9 California Earthquake Authority mvp.earthquakeauthority.com W3 Crawford Contractor Connection www.contractorconnection.com 13 First American Specialty Insurance Company www.firstam.com W7 Golden Bear Insurance Company www.goldenbear.com W5 IICF www.iicf.org 39 InsurBanc www.insurbanc.com 25 JM Wilson www.jmwilson.com SE3; M3 Lawyer Guard www.lawyerguard.om 21 Louisiana Commerce & Trade Assoc. www.lctacomp.com SC9 M.J. Hall & Company www.mjhallandcompany.com W11 Midlands Management Corporation www.midlandsmgmt.com SC5 Monarch E&S Insurance Services www.monarchexcess.com W9 MUSIC www.music-ins.com 17 PartnerOne www.p1enviro.com 22 PersonalUmbrella.Com www.personalumbrella.com 4, 5 Siracusa Staffing & Leasing www.ssandlnow.com SE4 SIS Wholesale www.sisinsure.com 10, 11 Texas Mutual www.texasmutual.com SC3 The Hartford Insurance Group www.thehartford.com 7 The Institutes www.theinstitutes.org 19 United Fire Group www.ufgsolutions.com E5 Universal Service Agency, Inc. www.universalbonds.com 32

JUNE 20, 2016 INSURANCE JOURNAL | NATIONAL | 37

Closing Quote Risks Ahead: Food Recalls and Nanotechnology

By Kevin McPoyle

Q

uick Quiz: What do baby spinach, raw cashew pieces, barbecue sauce, fish batter mix, marzipan, ice cream, packaged salads, dried kiwi and gourmet bread pudding all have in common?

These products, and more importantly the businesses which manufacture and distribute them, have all experienced market recalls since January 1. By mid-March there had already been 60 recalls.

While not every recall has caused bodily injury on the purchasing public, the impact of the recall is felt throughout the organization and food industry. Without proper risk analysis and transference the fiscal impact could be extreme.

Since 2011 the Food and Drug Administration has used the Food Safety and Modernization Act (FSMA) as the guiding document in managing the U.S. food industry. This document has revolutionized safety and compliance requirements.

With a focus on compliance and documentation FSMA has developed into an effective but burdensome tool for the food industry.

With litigation and recalls now commonplace, it is critical for food insureds to think through and plan for the “when” as opposed to the “if” of a product recall.

Nanotechnology is another growing risk for food companies. Nanotechnology is the study and application of material between 1 and 100 nanometers, with a nanometer measuring one billionth of a meter. To appreciate how small a nanometer is, consider that a dollar bill is 100,000 nanometers thick. While the unit of measurement applied to nanotechnology may be small, interest in it has been oversized. Since 2001 over 22 billion of these dollar bills have been invested in nanotechnology.

Although not enough is known about how incorporating products with nanotech-

38 | INSURANCE JOURNAL | NATIONAL JUNE 20, 2016

nology may impact peoples’ health, the FDA has recently begun to take a rules-related stance on its use in products produced for human consumption and application.

Nanotechnology is another growing risk for food companies Nanotechnology is increasingly used in food packaging applications, such as gas barriers and antimicrobial surfaces. Manufacturers already use titanium dioxide (TiO2) on a nanoscale for a range of consumer products, often to achieve a certain color or consistency. Think coffee creamer, mints, pudding and chewing gum. Don’t think Dunkin’ Donuts, because the chain removed TiO2 from all icing sugar used to make its donuts, following two years of petitioning by the advocacy group As You Sow. For any company in the food

industry, nanotechnology is uncharted territory for both the company and the FDA. What happens if someone gets sick from products incorporating nanotechnology? What about the growing population allergic to TiO2?

A company can manage its risk profile by knowing how its marketing team is selling or suggesting labels for the company’s products. The company must also understand how to execute a product recall, determine how the company’s insurance carrier will respond and learn if there is a limitation to the use of nanotechnology on its recall policy before a product recall has occurred.

Of course, insurance professionals can help food companies assess, mitigate and transfer these growing risks.

McPoyle is president and co-founder of KMRD Partners Inc., a risk management consulting firm and P/C insurance broker located in Warrington, Limerick, and West Chester, Penn.

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