Mass. weighs health insurance minimum payments

Massachusetts officials are grappling to come up with how much lower-income residents should have to pay for insurance under the state's landmark health care reform law that requires citizens to procure coverage.

Health care advocates said anyone living at or slightly above the annual federal poverty level -- earning about $9,800 a year, or about $816 a month, for a single adult -- should be exempt from monthly health care premiums. But the Romney administration says that adults should pay at least $20 or $25 a month for health insurance.

Many people in that income group have cell phones and cable television and should be able to contribute more for their health care, maintains Romney budget chief Thomas Trimarco. "Those two items are probably $100 a month. I bet 90 percent of this group has both those, what I consider discretionary items," Trimarco told The Associated Press. "And that comes ahead of your health care? No. It's not a right message."

However, John McDonough, executive director of Health Care for All, said most people living at or near the poverty level have no disposable income. "They don't have cell phones and they are living under crushing debt," he said. "They are overestimating what a family can afford."

The state is supposed to start offering new subsidized health care plans to the poorest residents in October.

John McDonough, executive director of Health Care for All, speaks at a public hearing on health care minimums in Boston. (AP Photo/Celina Fang)

N.J. nonprofits' shield ruling

A New Jersey law protecting nonprofit organizations from negligence lawsuits does not apply to all sex abuse cases, the state Supreme Court ruled.

The ruling allowed John W. Hardwicke Jr. to continue his lawsuit against the American Boychoir School in Princeton in which he alleges that he was repeatedly molested by the school's music director and three other employees from 1969-1971.

In its 5-1 ruling, the court reasoned that the state's Charitable Immunity Act protects charities from negligence claims only, not from claims that are based on "willful, wanton or grossly negligent conduct." The Supreme Court decision allows the case to go to trial.

In January, then-Gov. Richard J. Codey signed into law a bill making New Jersey the 48th state to allow victims of childhood sex abuse to sue churches, schools and other nonprofits for the actions of their staff.

R.I. requires E&O

Effective Jan. 1, 2007, all Rhode Island resident insurance producers are required to carry errors and omissions insurance coverage as a condition of obtaining and retaining their insurance producer license.

Individual resident insurance producers may satisfy this requirement with a policy in the name of the licensed firm insuring each licensee employed by the firm. Licensees are required to maintain copies of all E&O policies and shall make the information available to the public and the Rhode Island Insurance Division upon request.

The failure to maintain E&O insurance may result in the suspension or revocation of the resident insurance producer license.

The statute does not prescribe any minimum limits so producers should use their best judgment in the purchase of the policy, according to the Department of Business Regulation.

It Figures

-16%
The percentage that Beacon Mutual Insurance Co., Rhode Island's dominant workers' compensation insurer, plans to reduce rates on average. The company, which has roughly 14,500 policyholders, says it expects the rate reduction to save Rhode Island employers about $9 million in coverage costs over 12 months. The reduction, Beacon's first since 1998, will be effective as of Oct. 1.

172
The number of Pennsylvania drivers' licenses that were accidentally cancelled due to a bureaucratic error, according to the state Department of Transportation. The licenses have been restored, but residents who received notices that their licenses were canceled need to get new ones.

2.4%
The average statewide homeowners insurance rate increase approved in Massachusetts for the state's residual market insurer, the FAIR Plan. The approval includes an average 5.7 percent increase for dwellings. The new rates will hit coastal property owners hardest, as much as 25 percent in Barnstable, Dukes and Nantucket counties (Cape Cod) where the FAIR Plan writes about 30 percent of the market. Most urban areas will see either no increase or modest hikes up to about 5.9 percent. The effective date for the new rates is Oct. 1. Commercial fire and allied lines rates will not change.

-3.7%
The recommended rate cut for private passenger auto insurance in Massachusetts made by the industry's Auto Insurers Bureau for 2007. If approved, it would mean about $150 million in premium savings for drivers next year. Hearings into 2007 rates have begun. Insurance Commissioner Julianne Bowler approved an average 8.7 percent cut for 2006.

$11.2 million
The total jury award that an Atlantic Highlands, N.J., man received for injuries suffered when a cargo container fell off a truck and onto the driver's side of his car. The state Superior Court jury awarded him $8 million for pain and suffering, $150,000 for hospital expenses and $1.1 million for lost wages. Dolan's wife also received another $2 million for lost services.

$20,000
The amount emergency officials in Salem, N.H., are considering billing a driver's insurance company for a car crash that caused a propane leak and shut down part of Route 28 for over a day. Officials estimated that the town spent that much in overtime to contain the leak. Town officials said claims typically are filed with a driver's insurance company when a car hits a fire hydrant or telephone pole.

Court: Pennsylvania agents have no duty to inspect flood risks

Insurance agents and insurers in Pennsylvania were breathing a sigh of relief following a court ruling that says agents do not have a duty to inspect all properties before binding or renewing flood insurance coverage.

Had the recent Superior Court of Pennsylvania decision in the case of Wisniski v. Brown & Brown Insurance Co. gone the other way and found agents had such a legal duty to inspect all risks, industry players say it would have been so burdensome it could have "crippled not only the insurance business but all the industries that depend on insurance."

"If insurance agents had not prevailed in the case, insurance could not have been issued without an agent looking at the property, a situation that would have caused a bottleneck for consumers trying to buy real estate," added the Insurance Agents & Brokers of Pennsylvania, which filed a friend-of-the-court brief in the case with the help of Utica Mutual Insurance and Property Casualty Insurers Association of America.

The agents' group said the court's reasoning in the case "establishes a very favorable precedent" for Pennsylvania agents.

Insurers agreed. "We agree with the decision of the Superior of Court of Pennsylvania in that imposing such a duty on insurance brokers would be onerous" said Robert J. Hurns, counsel for the Property Casualty Insurers Association of America, which also filed an amicus brief in the case.

On Sept. 7, 1999, plaintiff Saturn Surplus's business was flooded. Saturn's complaint alleged that in 1994 it purchased a commercial policy from the Brown Agency, which was placed with EMC Insurance Companies. When Saturn employees informed the Brown Agency of the loss, they were informed there was no coverage for flood damage. Saturn filed suit, alleging the defendants breached their duty by failing to investigate their coverage needs, inspect the property, inform them that flood insurance was not included in the policy and recommend they purchase flood insurance. On April 18, 2003, the trial court granted the Brown Agency's motion for summary judgment.

On appeal, the appellate court quashed EMC's appeal and heard Saturn's appeal on the merits. On March 2, 2005, the Pennsylvania Supreme Court vacated the appellate court's decision and remanded the matter to the appellate court "for reconsideration of whether a duty exists." On Aug. 15, 2006, the appellate court, after examining precedent set by Althaus v. Cohen, determined that no such duty existed.

In the court opinion, Judge Maureen Lally-Green wrote that while it "very well may be a wise and sound business practice for a broker to inspect premises and recommend insurance based on that inspection," making such an inspection mandatory would have "onerous" consequences. Lally-Green explained the court's reasoning:

"First, the time and expense of inspecting every property may very well outweigh the relative value of an inspection, particularly for low-value properties.

"Second, a knowledgeable insured may be able to provide all the information necessary for adequate coverage in an interview, without the need for a personal inspection.

"Third, we stress that we are concerned with extending this duty to brokers, not insurance companies or agents. While brokers may provide a variety of services, they are primarily in the business of acting as an intermediary between insurance companies and clients. Some brokers may not have the expertise to conduct a thorough inspection, and instead may rely on loss control experts at the insurance companies themselves to assess risks.

"Fourth, it is far from clear where the duty to inspect would end. If this court recognized a duty of brokers to inspect business properties, it is difficult to see a principled basis for failing to extend that duty to homes, land, cars, boats, and other insurable items.

"Fifth, imposing a duty to inspect would unreasonably diminish the insured's own responsibility to ascertain and ask for appropriate coverage.

"Finally, we are persuaded by the position set forth by the Missouri Court of Appeals: [B]y creating such a duty insureds would have the opportunity to seek coverage for a loss after it occurred merely by asserting that they would have bought additional coverage if it had been offered. This turns the entire theory of insurance on its ear as individuals, in theory, take an 'intellectual gamble' when purchasing insurance as they weigh the expense of insurance versus the amount of coverage that they purchase. Allowing insureds to seek coverage, post-occurrence, allows them to completely circumvent this risk."

While absolving the agent from an inspection duty, this particular decision left open questions about the insurer's responsibility in this case. Saturn Surplus's action against EMC will presumably continue in the trial court after this appeal involving the Brown Agency is complete.

Mass. agents cautious on assigned risk plan

Massachusetts Insurance Commissioner Julianne Bowler has been given the green light by the state's high court to proceed with installing an auto insurance assigned risk plan and she appears intent on doing so.

On Aug. 23, the Massachusetts Supreme Judicial Court unanimously ruled that she has the authority to create an assigned risk plan to replace the existing reinsurance plan, known as Commonwealth Auto Reinsurers, for insuring high-risk drivers.

Insurance agents, who had some qualms about the plan Bowler unveiled in December 2004, hope she will invite public input to flesh out the details before going forward.

"When it was announced, we had some issues with it. But the courts stepped in," noted Frank Mancini, president and chief executive officer for the Massachusetts Association of Insurance Agents.

One of the issues agents and others raised was the language banning the ARP from accepting risks with clean driving records for the past three years. Proponents of this rule were concerned that these risks would end up in the residual market rather than with an insurer of their choice. The court also said this was a problem.

"I would think the thing to do would be to hold a proceeding on the 'clean-in-three' and also hold a public hearing on the entire ARP," said Mancini.

Mancini's group would also like to see Bowler address the issue of access by agents to the residual market. "We still don't have equality between voluntary and involuntary agents," Mancini notes, citing the fact that while exclusive representative producers (ERPs) who write only with the residual market have unlimited access, voluntary agents' face limits on their use of the residual market.

Several domestic auto insurers, including Commerce Insurance and Arbella Mutual Insurance Company, along with the Center for Insurance Research, had fought the ARP. Now that they have lost in court, some of these critics are questioning the necessity of an ARP.

"Although the court concluded that the commissioner has the authority to implement an assigned risk plan, the decision by no means requires her to do so," said James A. Ermilio, executive vice president for Commerce Insurance. In a prepared statement, Ermilio argued that the reassignments of CAR business that took place earlier this year plus the fraud fighting activities that have contributed to a lowering of rates make the ARP unnecessary.

But Bowler backs the ARP system in part because it resembles the residual market systems in 42 other states. "We're one step closer to operating like a normal market," she told Insurance Journal. Bowler was referring to the fact that 46 states utilize ARPs.

While there are issues that need to be addressed, overall she feels the ARP that goes into effect will look much like the plan as she approved it in 2004.

While she sees the ARP as a "huge first step" toward attracting new insurers, Bowler warns that the ARP alone will not dramatically alter the marketplace.

For agents, Mancini thinks the ARP could swing both ways. "For some agents it's a concern; for others it may be an opportunity," he said. If it functions well, it could mean more of the state's 600 ERPs could get voluntary contracts, he added.

Bowler believes additional reform is needed. In her view, the Legislature should permit separate pricing for a "dirty" rate for risks in the ARP. "I can't set a different rate for the ARP; that would require statutory change," she noted.

Mancini agrees that statutory change would be needed to accomplish a "dirty" rate. His group has a position on this, one that might conflict with insurers' wishes. "A dirty rate is okay as long as it is based on objective criteria," Mancini offered.

Bowler's ultimate goal is a system with prices set not by the state but by insurers themselves. She thinks the time is right to make the switch. During her four years on the job, she has all but eliminated the built-in rate subsidies for bad drivers and young drivers that have been cited by insurers as obstacles to competition. Also, insurers are making money, as evidenced by the industry's own recommendation that rates be cut for 2007. These conditions bode well for a smooth transition in which steep price swings might be avoided, she argues. "Competitive pricing is the next step," she said.

Legislation to phase-in competitive rating over a five-year period utilizing "flex band" rating has been languishing on Beacon Hill, in part due to opposition by agents.

N.Y. speeds up benefits to 9/11 rescue workers

New York State has adopted a trio of laws designed to speed workers' compensation benefits for workers and their families with claims related to 9/11 rescue efforts.

The first new law enables many workers who became ill after the expiration of the statutory two-year workers' compensation filing deadline to resubmit their claims.

The second new law permits application for accidental death benefits to families of police officers, firefighters, and other uniformed personnel who participated in the rescue and clean-up at the World Trade Center site.

The third new law eliminates the statute of limitations to allow rescue and recovery workers who retired from public service to later have their retirement status reclassified as accidental disability if illnesses related to their work on the rescue and clean-up service on 9/11 later surface.

The state has also adopted a plan to improve rescue workers' access to the workers' compensation system. The plan creates more flexibility in health care while claims are being litigated, ensures more timely access to medical procedures that require pre-approval, and calls upon insurers to provide benefits to claimants before cases have been fully resolved.

"New York will never forget the heroes of September 11th, the men and women who tirelessly worked at the site of the world's most horrific terror attacks, to help save lives, recover the remains of loved ones and begin the rebuilding process in Lower Manhattan," Gov. George Pataki said. He said workers should not be denied benefits because of a statutory time limit they had no hope of meeting.

To date, the Workers' Compensation Board has indexed 10,779 claims related to the World Trade Center attacks. Of those claims, 94 percent are classified as fully resolved.

Northeast leads in businesses buying property terrorism coverage

Nearly six in 10 large and mid-sized U.S. businesses obtained insurance to cover property terrorism risks during 2005, a dramatic increase from the 2003 average of 27 percent and up from 50 percent in 2004.

A report from insurance firm Marsh Inc. found the purchase of property terrorism insurance in 2005 varied considerably, depending on a company's location, total insured values and industry sector.

Take-up rates -- the percentage of companies buying the coverage -- varied considerably by region: about 67 percent of firms in the U.S. Northeast and 58 percent of Midwest firms purchased property terrorism insurance in 2005, compared with 53 percent in the West, and 50 percent in the South. Take-up rates increased most dramatically in the West -- to 53 percent from 34 percent in 2004 -- and in the Northeast, where the take-up rates rose to 67 percent in 2005 from 53 percent a year earlier.

Meanwhile, the cost of property terrorism insurance in 2005 was 25 percent lower than in 2004.

The report is based on data compiled from 1,623 businesses and government entities that purchased or renewed property insurance policies in 2005.

"There's an increasing awareness of terrorism among businesses across the country," said Robert Blumber, a managing director in Marsh's North America Property Practice.

Within industry sectors, financial institutions, real-estate firms, and health care facilities had the highest take-up rates, each exceeding 75 percent. In addition, media companies, those in hospitality, transportation, food and beverage, technology and telecommunications, and educational institutions all had rates above 60 percent.

Take-up rates also varied dramatically by businesses based on their insured property values. Firms with total insured values of $500 million to $1 billion had the highest take-up rate, 67 percent, up from 57 percent in 2004. Next were firms with total insured values of $1 billion or more (63 percent), followed by those with $100 million to $500 million (63 percent, up from 50 percent the prior year).

About 47 percent of the firms with total insured values under $100 million purchased property terrorism insurance in 2005, up from 35 percent in 2004.

Alternatives to TRIA
The Terrorism Insurance Act requires insurers to offer coverage for certain acts of terrorism in the U.S. that are "certified" by the government. The amounts, terms and conditions must match their other policies. As a complement to certified TRIA coverage, insurers are continuing to offer "non-certified" coverage.

As a third alternative, businesses can purchase "stand-alone" terrorism policies that do not require government certification.

"A growing number of businesses are choosing to cover at least part of their terrorism exposure in the stand-alone marketplace, particularly those with coastal windstorm or earthquake risks that face a difficult property insurance renewal," Blumber noted. "However, if TRIA is not renewed beyond 2007 or if there is no permanent solution in place by then, the stand-alone insurance market is unlikely to have sufficient capacity to meet demand."

According to Marsh, capacity in the stand-alone terrorism insurance market is relatively stable, though limited. The amount available for a specific risk can vary significantly, depending on the risk's location, an insurer's accumulated exposure, and the concentration of exposures in a given area.

Marsh to accept contingent pay as MGA

In a departure from their $850 million agreement prohibiting all contingent payments, New York officials have agreed to let Marsh & McLennan Cos. Inc. (MMC) accept contingent commissions from an insurer for which Marsh is operating as a managing general agent or underwriting manager.

The changes were included in an agreement signed Aug. 17 by New York Attorney General Eliot Spitzer, Insurance Superintendent Howard Mills and executives from MMC and Marsh Inc. and filed with the Securities and Exchange Commission.

The new pact modifies the January 2005 agreement that banned all contingent commissions or profit sharing deals involving payments based on the volume of business which Marsh placed with various insurers.

Aon Corp., Willis and Arthur J. Gallagher & Co. all signed similar agreements to forfeit contingent commissions.

The amendment defines the situations where Marsh may accept contingencies where it has been appointed a managing general agent or an underwriting manager to be the insurer's representative in connection with the management of the insurer's book of business in a specific product or product line; and in such capacity Marsh communicates with prospective insureds only through professional insurance brokers and places all such business for such product or product line only with and for such insurer.

It clarifies MGA compensation as the compensation received from the appointing insurer as consideration for the MGA services.

Michigan shows judicial restraint with asbestos decision

Courts and legislatures around the country are taking a serious look at the problems created by the consolidation of mass tort cases, like the asbestos and silica litigation. The Michigan Supreme Court provided the latest move toward restoring balance with asbestos litigation in Administrative Order No. 2006-06.

Those of us fighting for civil justice reform often criticize activist judiciaries for creating new law rather than interpreting existing law. We say that creating law is the right and responsibility of legislatures, not courts. However, in this case Michigan's Supreme Court came up with a unique approach to controlling caseloads and prioritizing sick people over those with no symptoms, while consciously leaving creation of new law to the Michigan Legislature. The Michigan decision is a refreshing reminder that many courts, including those that have implemented inactive dockets, do resist the temptation to create new law from the bench.

The Court ordered that each case should be decided on its own merits, and not in conjunction with other cases. As a result, asbestos-related cases can not be joined with any other cases for settlement. This will help to end the abusive practice of bundling cases, where the claims of a large number of unimpaired individuals are addressed in conjunction with a few truly sick asbestos claimants.

Legislatively, reform advocates such as PCI have supported proposals that require an asbestos plaintiff to submit medical evidence showing actual physical impairment from asbestos in order to bring a lawsuit. While this order does not specifically address a number of the requirements included in medical criteria bills, it will likely lead to fewer cases because so many plaintiffs have never been sick as a result of asbestos. Without actual injury, these cases will be much harder to pursue.

Justice Markman wrote for the majority: "This administrative order will, in my judgment, help to restore traditional principles of due process in asbestos cases by ensuring that they are resolved on the basis of their individual merit, and that they do not serve merely as 'leverage' for the resolution of other cases." This approach will also move sick claimants to the head of the list where they belong.

The Court's order shows that the justices clearly thought about the separation of powers implications of their decision. In the majority opinion, Justice Markman stated, "I believe that this 'antibundling' administrative order indisputably falls within the scope of our judicial powers." He went on to say that "this administrative order will better enable the Legislature, which is considering asbestos litigation, to undertake an assessment of the true costs of asbestos litigation. At present, these costs have been camouflaged by the "bundling" process, at the expense of fundamental due process rights."

The Michigan Supreme Court joins a growing list of courts around the country that have taken steps to control the rampant litigation already clogging them by creating inactive asbestos dockets. These include New York City and Syracuse, N. Y.; Cleveland, Ohio; Minn., (coordinated litigation); Madison/St. Clair counties in Illinois; Portsmouth, Va.; Seattle, Wash.; Massachusetts (coordinated litigation); Chicago, Ill.; and Baltimore, Md. Cases on the federal multi-district litigation docket have been subject to dismissal if the plaintiff cannot provide evidence of impairment caused by asbestos since 1992.

If the Michigan Legislature enacts a medical criteria bill, it will join a growing number of legislatures that have taken steps to restore balance in asbestos and silica litigation. These states recognized that when the number of exposed people and the death rate from asbestos and silica are declining, something is wrong if the number of lawsuits explodes. Since 2004, Ohio, Georgia, Florida, Texas, Kansas and South Carolina have enacted asbestos/silica medical criteria bills. Tennessee enacted a silica medical criteria bill. Mississippi enacted general tort reform in 2003.

Preliminary results have been dramatic. NERA Economic Consulting found that new case filings for 18 publicly-traded asbestos defendants were declining. Plaintiff attorneys are openly talking about significant reductions in their asbestos case counts. Partner Perry Weitz, of Weitz & Luxenberg in New York, was quoted in the July 2006 edition of American Lawyer: "I wish I still had 50,000 cases. But now this is a case-specific litigation."

While these results are im-pressive, they are not conclusive. More states need to enact medical criteria bills to make it difficult for plaintiff at-torneys to funnel cases for many states into friendly jurisdictions. Legislators are becoming more receptive to the simple logic of the argument: the claimant has to be truly in-jured and the case must have a meaningful connection to the court where the lawsuit is filed. Hopefully, they will take action quickly.

David Golden is director of commercial lines for the Property Casualty Insurers Association of America. At PCI, he is responsible for general liability and commercial automobile issues countrywide, including asbestos.

N.Y. comp bill vetoed

New York Gov. George Pataki has vetoed a bill (A.8713-B) that insurers say would have increased costs in the state's workers' compensation system.

According to Gary Henning, American Insurance Association assistant vice president, insurers opposed the bill because "it would have increased costs while providing no reform."

The measure would have increased the pre-authorization threshold from $500 to $1,200 for special workers' compensation medical services, such as MRIs and other high tech treatments. It also would have decreased the reserve requirements for self-insured trusts.

Study hits states without helmet laws

According to a study by Jeffrey Coben, M.D., a researcher at West Virginia University, states that do not require motorcycle riders and passengers to wear helmets may be contributing to the unnecessary deaths, hospitalizations, and long-term disabilities.

Traffic deaths last year reached the highest level since 1990, due to an increase in motorcycle and pedestrian fatalities. Motorcycle deaths rose for an eight straight year.

"Almost 9 percent of all U.S. traffic deaths are attributed to motorcycle riding," said Dr. Coben, director of the Center for Rural Emergency Medicine at West Virginia University. "In 2004 more than 4,000 people were killed in motorcycle accidents -- an 89 percent increase since 1997 -- and more than 76,000 were injured."

Coben is lead author of a new research study that compares motorcycle injuries in states with helmet laws with those in states with little or no helmet regulation.

The researchers found that states without universal helmet laws reported a higher number of motorcycle crash victims hospitalized with a primary diagnosis of brain injuries -- 16.5 percent versus 11.5 percent in states with mandatory use laws. The in-hospital death rate among states without mandatory helmet laws was also higher -- 11.3 percent versus 8.8 percent.

"Helmets are estimated to be 37 percent effective in preventing fatal injuries," Coben said. "Analyzing injuries by state, we found that patients from states that do not have universal helmet laws had a 41 percent increase in risk of a Type 1 traumatic brain injury."

Type 1 brain injuries include head injures likely to result in permanent disability, including paralysis, persistent vegetative state, and severe cognitive deficits.

Coben, a practicing emergency physician at WVU and researcher at the WVU Injury Control Research Center, added, "Our research shows that a large proportion of patients with severe brain injuries will require long-term care. Hospitalized patients in states without universal helmet laws are also more likely to lack private health insurance, which leaves the public to bear the brunt of the resulting financial burden associated with choosing to not wear a helmet."

Universal helmet laws require all motorcyclists to wear helmets while riding. States with partial laws require that only some motorcyclists, such as those under age 18 or age 21, wear a helmet while riding. The study is based on data from 33 states, and of those states 17 had universal helmet laws at the time of the study, 13 had partial use laws, and three had no helmet laws at all.

The study findings also suggest that partial use laws may be ineffective because researchers found little difference in the age distribution of hospitalized cases when comparing states that require those under a certain age to wear helmets to states with no laws.

U.S. traffic deaths on the rise

Traffic deaths in the United States reached their highest levels since 1990, the government reported. The spike in fatalities was attributed to an increase in motorcycle and pedestrian fatalities.

The National Highway Traffic Safety Administration said 43,443 people were killed on the highways last year, up 1.4 percent from 42,836 in 2004. It was the highest number of fatalities in a single year since 1990, when 44,599 people were killed.

The fatality rate also grew slightly to 1.47 deaths per 100 million miles traveled, an increase from 1.45 in 2004. It was the first increase in the fatality rate since 1986.

"We have no tolerance for any numbers higher than zero," said Acting Transportation Secretary Maria Cino.

The annual report found that motorcycle fatalities rose for the eighth straight year, growing 13 percent since 2004. The government said 4,553 motorcyclists died in 2005, compared with 4,028 in 2004. Nearly half of the people who died were not wearing helmets.

Pedestrian deaths increased from 4,675 in 2004 to 4,881 in 2005. NHTSA said it was investigating the increase to try to learn what led to the growth.

Copyright 2006 Associated Press. All rights reserved. This material may not be published, broadcast, rewritten or redistributed.

Guy Carpenter report examines impact and risks of nanotechnology

Guy Carpenter & Company, the risk and reinsurance specialist of Marsh & McLennan Companies, released a new study that provides an overview of the emerging science of nanotechnology, its potential benefits for the global economy, associated risks and implications for the insurance industry.

"Nanotechnology refers to the manipulation of molecules and atoms on a small scale to produce products that exhibit new and/or different properties," according to the report. Many in the scientific community see nanotechnology as the most significant scientific breakthrough of the 21st century.

The report also addresses nanotechnology's potential long term benefits to the global economy; health, safety and environmental risks associated with nanotechnology; and the regulatory environment and the likely evolution of nanotechnology insurance coverage.

The National Science Foundation forecasts that $1 trillion in nanotechnology-enabled products will be on the market by 2015.

"As with practically all scientific breakthroughs, nanotechnology carries both risks and potential rewards," observed Andrew Marcell, managing director and global head of Guy Carpenter's Casualty Specialty Practice. "With nanotechnology risks currently spread over a wide variety of coverages -- and the regulatory environment still in its infancy -- there is now a great opportunity for insurers to work with governments to shape a regulatory framework that will foster nanotechnology's positive use while sensibly addressing its risks."

A copy of the full report is available for download at:

www.guycarp.com.

Premiums remain flat in second quarter except in hurricane-exposed regions, risk managers report

According to the Risk and Insurance Management Society Inc.'s Benchmark Survey, commercial insurance premiums were flat to slightly lower in the second quarter of this year compared to the prior year. The RIMS Benchmark Survey is a survey of current policy renewal prices as reported by corporate risk managers.

In the second quarter, directors and officers premiums dropped 3.5 percent, the largest decrease of any line of business tracked by the survey. This reduction was due largely to rate cuts for small- to medium-sized businesses, according to RIMS.

Average property insurance premiums were largely unchanged, although the average masks significant discrepancies between policies in hurricane-exposed regions and policies in other parts of the country. Insureds in Florida and the Gulf Coast states are experiencing massive increases in the aftermath of the 2005 hurricane season. Those in the mid-Atlantic states are also encountering higher premiums, while insureds in the Western and, Midwestern states are enjoying substantial savings.

"Aside from the increase in property insurance premiums in catastrophe-exposed regions, insurance premiums continue to trend downward," said David Bradford, editor-in-chief at Advisen. "We expect to see this trend continue for the remainder of 2006. The industry had a good first quarter which will further fuel competition."

As predicted by Advisen analysts in the first quarter, general liability, which experienced a slight uptick in average pricing in the first quarter, resumed its downward slide in the second quarter, falling 1.2 percent. Advisen analysts claimed the increase in general liability premiums were a temporary response to a spike in property premium levels. Workers' compensation was essentially unchanged.

The RIMS Benchmark Survey is produced by Advisen Ltd., which collects and analyzes the data. Risk management professionals can contribute by e-mailing current and prior year schedules to Benchmark@RIMS.org or by faxing to 212-655-7453.

"Risk managers are generally benefiting from softer rates but companies in natural catastrophe-exposed regions aren't likely to see property insurance pricing conditions improve anytime soon," said Joseph Restoule, member, RIMS Board of Directors.

First post-Katrina court decision a victory for insurers

On Aug. 15, 2006, a decision was handed down in the first post-Katrina insurance lawsuit to go to trial. Because there are thousands of lawsuits raising the same claims with millions, if not billions, of dollars at stake, this lawsuit has been closely watched by the insurance industry and lawyers across the country. Overall, the ruling in Leonard v. Nationwide broke no new legal ground, which is the reason it largely represents a victory for the insurance company. However, the ruling should not be interpreted to mean that insurance companies do not continue to have significant exposure in pending lawsuits, many of which raise legal issues not addressed in the Leonard case and also present different factual circumstance.

No flood coverage
Prior to Hurricane Katrina, Paul and Julie Leonard owned a home on the Mississippi Gulf Coast in Pascagoula, Miss. Their home was covered by a homeowner's insurance policy issued by Nationwide Mutual Insurance Company, but it was not covered by flood insurance.

When Hurricane Katrina made landfall on Aug. 29, 2005, the Leonards' home was severely damaged by both wind and water from the hurricane's storm surge. The Nationwide policy excluded damage caused by water or water-borne material "even if other perils contributed, directly or indirectly to cause the loss." Water and water-borne material were defined to mean "flood, surface water, waves, tidal waves, overflow of a body of water, spray from these, whether or not driven by wind."

The policy also excluded damage caused, directly or indirectly, by any weather conditions which contributed to the damage in any way with an excluded peril.

The Leonards suffered more than $130,000 in damages to their home. Based primarily on the flood exclusion, Nationwide denied coverage for almost all of the damage and tendered a check for $1,667 after taking into account the $500 deductible.

The Leonards sued Nationwide, arguing that its homeowners policy was ambiguous and should be construed as providing coverage for all damage incurred during a hurricane, even that caused by water driven by the force of the hurricane winds. In addition, the Leonards alleged that Nationwide's local insurance agent had advised them that they did not need a separate policy of flood insurance, leading them to believe that the homeowner's policy would cover all damage resulting from a hurricane and they argued that Nationwide was liable for its agent's negligent misrepresentations.

Misrepresentation by the agent
The Court first addressed the claim of misrepresentation by Nationwide's local insurance agent. Paul Leonard testified that he discussed whether he should purchase flood insurance with Nationwide's local agent in 1999 following Hurricane Georges, which struck the Gulf Coast area in 1998. The Court found that following Hurricane Georges, there were public discussions about the fact that standard homeowner's insurance policies did not cover flood damage and that separate flood policies were necessary to protect against flood losses associated with hurricanes.

When Paul Leonard asked Nationwide's agent if he should purchase flood insurance, the agent told him that it was not necessary. The Court noted that while there was no discussion of the reason for this advice, Leonard inferred that the reason was that the homeowner's policy would cover any water damage that might occur during a hurricane. However, the Court found that the Nationwide billing statements sent when the Leonards' policies were renewed notified the Leonards that the homeowner's policy did not cover flood loss and that flood insurance was available through the National Flood Insurance Program.

Based on these facts, the Court concluded that Nationwide's agent did not materially misrepresent the terms of the Nationwide homeowner's policy and did not make any statements to the Leonards which could be reasonably understood to alter the terms of the Nationwide policy with respect to coverage of flooding during a hurricane.

Citing Paul Leonard's testimony that he read his homeowner's policy, the Court concluded that the exclusion for water damage should have put him on notice that further inquiry was necessary concerning his understanding that the policy would cover damage from flooding during a hurricane.

The Court also held that there was no evidence in the record to establish the standard of care applicable to an insurance agent asked about the advisability of purchasing flood insurance or applicable to the training of agents authorized to sell and interpret flood policies. Absent such proof, the Court concluded that there was insufficient evidence to support a finding that the agent's advice not to purchase flood insurance breached the agent's standard of care.

Coverage under homeowner's policy
Turning to the terms of the homeowner's policy, the Court began by declaring that the policy's exclusions for damage caused by water were "valid and enforceable terms of the insurance contract" and cited numerous Mississippi cases in support. With this single statement, the Court rejected, without discussion, any argument that "storm surge" was not covered by the flood exclusion and that a flood exclusion covering storm surge was misleading, ambiguous and against public policy. (1.)

However, the Court did find that the specific provisions which purported to exclude coverage in its entirety whenever damage was caused by the combination of a non-covered peril, such as water, and a covered peril, such as wind, was ambiguous. Interestingly, the Court noted that Nationwide appeared to agree with this interpretation because it did not seek to deny coverage based on the provisions excluding coverage for damage caused by a combination of a covered and non-covered peril. As a result, the Court held that, consistent with Mississippi law, where the insured property sustained damage from both wind, as a covered loss, and water, as an excluded loss, the insured could recover that portion of the loss which he proved was caused by the wind.

Based on the foregoing, the Court held that the Leonards had the burden of proving that their property was damaged by a peril covered by the Nationwide policy. Nationwide, on the other hand, had the burden of proving what portion of the total loss was excluded, in this case, by the water damage exclusion. Applying these burdens to the evidence presented by the parties, the Court found that the Leonards had proved that only $1,228.16 out of their total alleged damages of $130,253.49 was covered by the Nationwide homeowner's policy.

No surprise legal rulings
As noted, the Court did not make any surprising legal rulings with respect to the flood exclusion in the homeowner's policy, but followed fairly long standing caselaw in Mississippi. However, this fact by itself represented a victory for Nationwide, and the insurance industry, given the attempts and pressure to find a rationale to negate the flood exclusion, which would impose additional millions of dollars of damages on homeowner insurers.

Nonetheless, the ruling does not let the insurers off scot-free. Rather, it makes it clear that homeowner insurance policies must still pay for wind related damage. Indeed, it remains to be seen how insurers will fair in those situations where the home was totally destroyed or washed away and it is much more difficult to factually determine the amount of damage caused by wind versus water.

(1.) In response to contentions by the Leonards that the policy was ambiguous, Nationwide argued that its policy terms should be conclusively deemed to be clear and unambiguous since they were approved by the Mississippi Department of Insurance. The Court rejected this argument, noting that the approval of insurance policies constituted a human endeavor, which is subject to error. Further, the Court pointed out that under Mississippi law, interpretation of an insurance policy is subject to judicial review, notwithstanding the fact that its terms may have been approved by the Mississippi Department of Insurance.

Robert Redfearn Jr. (Redfearnjr@spsr-law.com) is a partner in Simon, Peragine, Smith & Redfearn, a regional law firm with offices in New Orleans, La., and Mississippi.

Cultivating a management mentality

A common misconception among agency owners who began their careers in sales is the belief that agency management and sales management are the same. The art and science of agency management require a unique set of managerial skills that are much broader in nature than those used to manage a sales force. In fact, many of the skills that are desirable attributes in a salesperson -- such as an entrepreneurial mentality -- can actually be drawbacks in managing a business. This article examines some considerations that need to stay top-of-mind, even when sales are pouring in. While a sales mentality is key to growing a business, a management mentality is what keeps the business on track and profitable.

Outsourcing key expertise
Agency owners who came up through the sales ranks may find themselves becoming entrepreneurial to a fault. Successful sales people are self-starters and problem solvers, who take pride in settling customers' questions and concerns. Generally, a salesperson will have a "back-office" team supporting him with questions related to daily administrative and operational issues. It's important for owners to also have a "team of consultants" for matters that arise regarding the development and operation of the business.

Two key professional resources every agency needs to have at the outset are a trusted CPA and attorney. This is particularly true in today's Sarbanes-Oxley environment where compliance issues are increasingly moving out of public-sector companies and infiltrating even small businesses. Generally, it is easier and more cost-effective to outsource this function than to retain the service in-house. An attorney can help an agency determine the best business structure, review key documents and resolve disputes.

With both CPAs and attorneys, do some homework when determining whom to use. Be sure to ask what kind of experience the firm has in the insurance agency arena.

Another function that is commonly outsourced is marketing for tasks such as graphic design, advertising placements and public relations. Hiring an external firm to perform these functions frees up staff to function on what they do best, servicing accounts.

Capital considerations
Once the resources are in place and the agency is running smoothly, growth becomes a natural consideration. Shoring up working capital is often the first priority. By definition, working capital consists of current assets minus current liabilities. The term is an assessment of how much liquidity a firm has available to build its business and can be positive or negative depending upon how much debt the firm is carrying. Companies with more working capital will be more successful since they can improve their operations and seize opportunities to further develop their business.

Too many times, entrepreneurs avoid seeking capital and instead invest personal funds in their business through use of personal savings or personal revolving debt, such as a credit cards and home equity credit lines. Intermingling personal and business finances can be a recipe for disaster, particularly at tax time. By separating personal and business debt, agency owners can avoid many headaches in the event of an audit. Identifying and claiming deductions at tax time is also much simpler when business and personal financial records are separate. A CPA and attorney should also counsel agents to keep personal and business debt separate.

Traditional sources of capital include commercial banks and venture capital firms. In recent years, boutique lenders that specialize in the insurance industry have introduced commission-based lending. Retail and business banks will expect to see a business plan, so have one ready. Be prepared to articulate how the funds will be used. Will they go to hire additional staff, invest in technology or purchase another practice?

Venture capitalists are firms that provide the start-up funds for new and novel ideas. Typically, venture capitalists are looking for an idea that is outside of the mainstream. A pitch to a venture capitalist will take advantage of a salesperson's ability to sell a vision and incite the enthusiasm of the lender. Commission-based lending allows agencies to tap into the equity of their primary asset -- the book of business. Unlike selling a book of business, commission based lending temporarily redirects commissions on renewals to the lending institution. When the loan is re-paid, the commissions revert back to the agency.

Managing capacity
Access to working capital isn't enough. A growing business must have the capacity to sustain growth. The industry is ripe with agencies that purchased a large book of business only to find that the servicing issues resulted in customer run-off. Additional business will add to an agency's revenue stream, but it also will require additional staff, technology and related resources to service the increased volume.

Reputation is critical in an industry where multiple agencies have access to the same products and carriers. Having ready access to capital is important when managing capacity. An agency should be sure that it is financially positioned to support an increase in servicing volume. Ensuring adequate capacity in terms of staff, operations and technology will also ensure that the agency continues to deliver the same level of attention to long-time customers. Study after study concludes that it is much less expensive to retain a customer than to acquire a new one, so don't let rapid growth cause the agency to cannibalize loyal, long term clients.

Staying alert to red flags
During periods of rapid growth, it can be easy to get caught up in the momentum and overlook red flags that foreshadow a problem. It's important to maintain the disciple of regularly reviewing the book of business. Routine reviews can alert the owner to a book that is too weighted in one particular area or concentrated too heavily with one carrier.

Maintaining a diverse book of business makes it easier to avoid seasonal or economic fluctuations that can impact performance and profitability. For example, a book of business too heavily weighted in agriculture may make the agency susceptible to seasonal cash flow variations. Likewise, too much concentration with one carrier can create a liquidity crunch if the carrier changes the compensation structure.

Reconcile accounts received from carriers against commission statements. Although this seems like a natural function, it's surprising how many agency owners don't perform this task. Compare the two and account for any adjustments that may have been made, such as changes to policies or lapses in coverage.

Investigate any significant change in commission checks. Don't accept it as a fluke if a large check arrives one month followed by a much smaller one. Contact the carrier with questions. Was a change made to policy premiums that may have impacted renewals? Did an accounting error occur? It's easier to solve problems sooner rather than later.

Outsourcing specific functions, planning for capital growth, ensuring capacity and continually staying vigilant to potential problems are not fun or glamorous functions of running an agency. However, these long-term strategies are what differentiate the 20 percent of top performers from the rest of the players and truly define a "management mentality."

Rick Dennen is president of Oak Street Funding, a commercial finance company that provides capital to insurance agents, agencies and carriers in order to expand their business and increase sales. www.oakstreetfunding.com.

Study urges better efforts to prevent teen worker injuries

A new survey of 6,810 teens showed that more than half of them work, and 514 of them had been injured on the job.

"The findings from this study clearly indicate that work-related injuries among youth are a significant health problem," report Kristina M. Zierold, Ph.D., assistant professor of family and community medicine at Wake Forest University School of Medicine, and Henry A. Anderson, M.D., chief medical officer of the Wisconsin Division of Public Health.

Writing in the American Journal of Health Behavior, the authors report that 150 of the teens were injured severely enough that activities at home, work, or school were affected for more than three days, and 97 filed for workers' compensation.

The study, funded by the National Institute for Occupational Safety and Health, was conducted in Wisconsin while Zierold was an epidemic intelligence service officer with the Centers for Disease Control and Prevention.

"Developing programs and strategies to reduce injury must be made a priority," Zierold said.

But training on the job -- where safety could be stressed -- often is given by another employee.

Zierold said there were no standards governing the safety training.

The researchers note that nationally each year, "approximately 70 children die from injuries inflicted at work; hundreds are hospitalized and tens of thousands require treatment in hospital emergency rooms. The National Pediatric Trauma Registry and the National Center for Health Statistics report that occupational injuries are the fourth-leading cause of death among youth ages 10-19."

The new survey showed that the jobs most likely to lead to injury were in lumber mills (51 percent were injured on the job), lumber yards (40 percent), manufacturing (37 percent), gas stations (36 percent), someone else's farm (36 percent), and construction (30 percent). Some of the jobs and the required tasks that teens do in these jobs are illegal, Zierold said.

The survey found that the 10 most common jobs for teens were in restaurants and fast food (1,135 of the 6,810), babysitting and lawn care (957), the family business or family farm (644), grocery stores (316), department stores (261), construction, (152), newspapers (135), hospitals, clinics and nursing homes (124), other farms (109), and gift or hobby shops (107). Another 274 said they were self-employed.

The survey found that the number of hours worked each week varied from just five hours to more than 40 hours a week (about 3 percent of the sample). The survey showed that 159 teens -- about 4 percent -- reported working after 11 p.m. on school nights. And 579 teens in the sample -- 16 percent -- reported working more than 23 hours a week, the equivalent of an adult half-time job.

Deal makers and deal breakers

What is it that makes some deals fly and others fail? Every deal needs to be judged on its own facts. However, there is often a pattern that develops during the M&A process.

Five deal breakers

1. Lack of good compatibility between the parties; due diligence was not done properly. For example, merging a sales and service organization might sound good initially, but in the end can lead to disaster. Buyers and seller need to understand each other's background and business philosophy as well, before closing a deal.

How to avoid: Bring in a third party to properly assess each firm. An unbiased opinion will prevent issues overlooked by rose colored glasses. The key is for the seller to factor in how the buyer will run the business. The buyer also needs to understand and appreciate how the business was run to date and take proper steps for a smooth transition.

2. Owners are not ready to sell. They may think they are but actually when it comes right down to it, they can't pull the trigger and won't until they feel "ready." Some sellers are afraid to go home to do the "honey do" list. They have no real hobbies and look at selling/retiring as dying.

How to avoid: The seller needs to sit down and review everything: selling the business, life after the sale, financial equity, etc. Again, outside experts can assist with this process. Unfortunately, some sellers will get cold feet no matter what, so the buyer needs to exercise patience. Selling a firm can be similar to facing death for some people. After all, the business has been the largest part of the typical seller's life. The key to this deal breaker is what boils down to career counseling and patience for the process to unfold.

3. Owners have an over-inflated opinion of the price of their firm. They have "heard" that firms today are going for two to three times commissions but their profit margin is only in the 15 percent to 30 percent range. The rumors are usually a case of terms that require a good deal of growth in revenues and profit in the future in order to get the top dollar or multiple.

How to avoid: Buyers needs to know what a fair price is for an agency and stick to it. Every once in a while a buyer will pay an over-inflated price for an agency. Buyers should understand what price makes financial sense for them. Sellers need to educate themselves on agency value and the full impact of terms on the deal.

4. Many owners/sellers like sales and often become tired of management of the agency. Despite that, they are usually afraid to give up control of the firm. They aren't sure what life will be like when they aren't calling the shots. Most sellers have been running their own business for many years and might lack the skills or temperament to work with a partner or especially for another owner.

How to avoid: Sellers need to evaluate what it is they are really getting into and face what it would be like to work for someone else. Buyers need to provide a way to make the transition seamless, such as providing the seller with as much authority as possible.

5. A lack of a transition plan will make a closed deal go sour. A buyer might tell the seller that nothing will change and the seller looks forward to that promise. In those cases, both the buyer and seller might not have understood each other and they are kidding themselves.


How to avoid: The seller needs to understand that things will change and the buyer needs to realistically state that fact. In the courting process buyer and seller must consider how the integration will take place and try to preserve the best aspects of each firm.

Five deal makers

1. An automatic real connection and rapport develops between buyer and seller. These are the special deals when the potential seems boundless. The key is to make sure that the connection is real and not two sales people trying to wow each other.
2. Ideal post transaction roles. This is when the seller and buyer will be able to do what they like to do best. The role might be the ability to write accounts they could not land before, due to additional markets, other services provided clients, etc. Or, perhaps just service key accounts and not worry about management.
3. Agency weaknesses that the seller or buyer cannot solve themselves are resolved with the transaction. The ideal transaction includes complementary strengths and weaknesses.


4. Effective business succession. The deal provides the much needed perpetuation plan for the owners that they were unable to do with their own key people and/or family members.
5. Smooth transition. When both parties are straightforward about the future integration of the firms, change will be acceptable and not too drastic. The seller might secure from the buyer an "office" to go to, where they can stay as long at they want. The ideal scenario is when the transition is planned and the buyer and seller remain flexible.

Summary
The difference between a successful transaction and one that falls apart is a clear understanding of the relevant facts. The use of outside experts will remove the biases and personal feelings that often cloud judgment. The making of a good deal for all parties takes time, patience and experience. Obtaining assistance with this difficult process can help insure that it is done right the first time.

Bill Schoeffler and Catherine Oak are partners at Oak & Associates. The firm specializes in financial and management consulting for independent insurance agents and brokers. They can be reached at 707-935-6565, by e-mail at: bill@oakandassociates.com, or visit www.oakandassociates.com.

New study finds coastal population drain following hurricanes

A study conducted by the Earth Policy Institute concludes that a number of people who evacuated their homes in the wake of Hurricanes Katrina, Rita and Wilma may have left permanently.

The EPI report, authored by the organization's President Lester R. Brown, notes that Katrina "forced a million people from New Orleans and the small towns on the Mississippi and Louisiana coasts to move inland either within state or to neighboring states, such as Texas and Arkansas. Although nearly all planned to return, many have not."

The study indicates that a major factor in their decision appears to be the significantly higher costs of insuring coastal property.

"Unlike in previous cases, when residents typically left areas threatened by hurricanes and returned when authorities declared it was safe to do so, many of these evacuees are finding new homes," said the report. "In this respect, the U.S. hurricane season of 2005 was different. Record-high temperatures in the Gulf of Mexico surface waters helped make Hurricane Katrina the most financially destructive hurricane ever to make landfall anywhere."

Brown expressed some surprise at these findings, as he and others "who track the effects of global warming" had been assuming that the "first large flow of climate refugees would likely be in the South Pacific with the abandonment of Tuvalu or other low-lying islands." However, as Brown wrote, "we were wrong. The first massive movement of climate refugees has been that of people away from the Gulf Coast of the United States."

The report discusses the huge losses and massive destruction caused by Katrina, and then indicates that "as of July 2006, New Orleans, the three parishes, and the three counties in Mississippi had lost a total of 375,000 residents because of destruction from Katrina. Some evacuees are still returning, but the flow has slowed to a near trickle. We estimate that at least 250,000 of them have established homes elsewhere and will not return." Brown classes them as "climate refugees."

Effect on insurance market
The study also takes into account the effect the 2004-05 hurricanes have had on property insurance rates. The difficulty of obtaining adequate, if any, insurance cover is "hanging over the future of the hurricane-prone coastal regions of the U.S." It confirms, as most of the industry knows, that "insurance costs are climbing, and private insurance companies are withdrawing from high-risk coastal areas."

The report notes that the trend goes back to Hurricane Andrew, which hit Florida in 1992, "destroying 60,000 homes and bankrupting some 11 local insurance companies." To meet the shortfall, the report states: "Governments in hurricane-prone states, including Florida, Mississippi, and Louisiana, each created a state-supported insurance company for homeowners unable to get private insurance. Florida's state insurer, Citizens Property Insurance Corporation, ran a deficit of $516 million in 2004. An analysis of risks and costs in late 2005 showed that premiums charged to property owners must be raised 80 percent to ensure Citizens' future viability.

"These deficits were repeated in Louisiana and at the national level with the National Flood Insurance Program, which ran a $23 billion deficit in 2005. The bottom line is that rates must rise as the risk rises. This applies not only to property insurance, but also for firms seeking to insure against business interruption losses."

According to the EPI there are "35 million people living along the hurricane-prone coast that stretches from North Carolina to Texas. Half of these live in Florida, 10 million on the Atlantic coast and seven million on the Gulf coast. As rising seas and more powerful hurricanes translate into higher insurance costs in these coastal communities, people are retreating inland. Just as companies migrate to regions with lower wages, they also migrate to regions with lower insurance costs."

The report concludes that the "more destructive storms in recent years are only the beginning. Since 1970, the Earth's average temperature has risen by one degree Fahrenheit, but by 2100 it could rise by up to 10 degrees Fahrenheit (6 degrees Celsius). More destructive storms are an early manifestation of global warming. The longer-term risk is that rising temperatures will melt glaciers and polar ice caps, raising sea level and displacing coastal residents worldwide. The flow of climate refugees to date numbers in the thousands, but if we do not quickly reduce CO2 emissions, it could one day number in the millions."

The full text of the report and additional information can be obtained on the EPI's Web site at: www.earth-policy.org.