Business cheers as S.C. orders objective workers' comp standards

South Carolina Gov. Mark Sanford was joined by business groups from across his state when he signed an executive order last month ordering that the Workers' Compensation Commission apply objective standards when making workers' compensation awards.

The South Carolina Supreme Court has held that the workers' compensation awards should be made in accordance with objective standards, such as those issued by the American Medical Association, and that their use is mandated by the "due process" clause of the state constitution.

However, according to Sanford, workers' compensation rulings in the state have varied wildly, averaging 81 percent higher than awards made in other states that follow similar guidelines. He said this has led in part to recent spiraling increases in workers compensation insurance, which he termed "an indirect tax on every South Carolina consumer."

The new order -- Executive Order 2007-16 -- comes after state lawmakers passed other workers compensation reforms earlier this year that failed to mandate objective standards.

The executive order does not have the force of law but it is intended to encourage the commission to use objective standards in its decisions and, as a result, help reduce the cost of doing business in the state.

"Even though the bill passed earlier this year represented a big step forward, it fell short on the idea of making clear that workers' compensation awards should be based upon objective standards, something we're addressing today with this order," Sanford said. "We believe this Executive Order will have a material impact in improving our workers' compensation system, a system that had unfortunately become too subjective, was hurting our small businesses' ability to compete, and was driving up costs for the average South Carolinian."

The changes in this year's reform bill, S.332, were aimed at injecting some "much-needed predictability, consistency, and rationality into the workers' compensation system in South Carolina," Sanford said in a statement.

Ranked 49th
In 2000, South Carolina ranked 49th in the nation in workers' compensation premium rates and moved up to 42nd in 2002 and moved three more spots in 2004 to 39th. Currently, South Carolina has the 25th highest premium in the nation, having jumping 24 spots in just six years.

Last year, South Carolina's workers' compensation premiums grew more than 18 percent and the state ranks second in the nation since 2000 in terms of how quickly rates have increased.

Meanwhile, reform in other states has produced irate reductions for their businesses - California has seen a cumulative rate reduction of 55 percent since July 2003 while Florida's workers' compensation filings - which impact the cost of premiums - have seen a 13 percent decrease this year alone, according to the Sanford administration.

The executive order is a victory for the workers and the business community, according to the Property Casualty Insurers Association of America, which maintains that manipulation of the system stifled the business environment by hurting wages and suppressing job growth and economic development.

Economic issue
"PCI commends Gov. Sanford for continuing to take action to curb runaway awards in workers compensation cases which will ultimately benefit not only the business community, but all South Carolina consumers," said Robert Herlong, vice president and regional manager for PCI.

The National Council on Compensation Insurance, which files rates on behalf of insurance carriers, estimates that consumers could see a "significant cost savings when the required use of AMA guidelines is implemented," according to PCI.

PCI said NCCI found that the AMA guidelines, which are currently used in 29 states. would provide more cost savings than any other proposal.

"Using these objective guidelines in order to address excessive and unpredictable awards will help to bring justice and reasonableness back to the workers compensation system," said Herlong.

Ky. Gov. Fletcher willing to compromise on medical tort reform

In a blunt assessment, Kentucky Gov. Ernie Fletcher told fellow doctors recently that chances of limiting pain-and-suffering damages in medical malpractice cases are bleak because of resistance from some state lawmakers. The governor expressed a willingness to compromise if he wins another term.

Speaking at a Kentucky Medical Association meeting, Fletcher said doctors should settle for another version featuring a pretrial dispute resolution process aimed at reducing "frivolous" malpractice suits.

Specifically, he said independent boards -- possibly consisting of doctors and patient advocates -- would review malpractice filings, with their findings admissible in court. The review would not preclude a right to jury trial.

"I'm willing to compromise," Fletcher said after his speech.

The Republican governor said he shared the KMA's disappointment that proposed constitutional amendments on medical malpractice have died in recent legislative sessions.

Had past proposals reached the ballot and won voter approval, lawmakers could have then limited pain-and-suffering and punitive awards to no lower than $250,000 each. There would have been no limit on economic damages for lost wages and medical costs.

"I hate to say this, until we change the makeup of the House, we're not going to be able to get the $250,000 limit on non-economic damages," Fletcher told doctors. "We've tried and tried and tried. But I think it's time that we move forward and get everything else we can."

Governors have no veto power over proposed constitutional amendments, but can exert their influence with state lawmakers in trying to get measures on the ballot, or to block such proposals.

Republican state Rep. Bob DeWeese of Louisville, a retired surgeon attending the KMA meeting, said it was the first time he heard Fletcher indicate a willingness to drop proposed caps on non-economic damages.

DeWeese said he thought doctors would accept the compromise. "They realize that half a loaf is better than nothing," he said.

DeWeese, however, wasn't optimistic that Fletcher's suggestion would jump-start the issue. DeWeese said he offered a similar compromise two years ago that failed to salvage a proposed constitutional amendment.

Fletcher, who is being challenged by Democrat Steve Beshear in the Nov. 6 election, also spoke about requiring insurance companies to justify their medical malpractice premiums - something Beshear also supports.

Beshear said that putting caps on non-economic damages "is not a realistic solution. I do understand the tremendous strain rising malpractice insurance places on doctors and the communities they serve."

Beshear said he wants to bring all sides of the malpractice issue together for discussions, adding that he's "committed to finding solutions to address this issue."

Supporters of limiting non-economic damages say it's needed to halt rising malpractice insurance rates forcing some doctors to quit doing high-risk procedures or leave for states where insurance rates are lower.

Critics say the limits would not guarantee that insurance rates drop or stabilize.

Sen. Charlie Borders, R-Grayson, said he still wants to see limits on non-economic awards in malpractice cases, which he says could lower malpractice premiums. But he said the governor's willingness to compromise "may indeed be the best thing we can do with the current situation being what it is."

"If that's all you can get at this point in time, maybe that's what you've got to take," he said.

Miss. candidates spar over public service records

The two men running for Mississippi insurance commissioner say encouraging competition is the key to reducing consumer' costs as the state continues its recovery from Hurricane Katrina.

But that's about where the candidates' similarities end.

During a recent luncheon in Jackson, Democrat Gary Anderson of Jackson and Republican Mike Chaney of Vicksburg criticized each other's records of service in government.

The winner of the Nov. 6 general election will succeed George Dale as Mississippi's top insurance regulator. Dale is the longest-serving insurance commissioner in the nation, but Anderson defeated him in the Aug. 7 Democratic primary.

Anderson said Chaney, a state senator, has flip-flopped on issues such as taxes.

Chaney told a retirees' group at the Capitol on March 8 that he would vote for a bill to reduce the 7 percent grocery tax and increase the tax on cigarettes. On March 20, when the bill was dead, Chaney voted against a resolution that would've revived the legislation.

Anderson said: "This whole race will boil down to who can you really trust in this office of insurance (commissioner). My opponent has been prone to saying one thing but doing something else. And I think that's so -- that's a character flaw that he has."

Chaney responded that he does what he believes to be best for citizens. "Only crazy folks would carve something in stone and not change their mind if the facts change," Chaney said.

Chaney also said Anderson was part of an administration that left Mississippi in a financial mess but he later acknowledged he had voted for most of the bills that led to the budget shortfall.

Fla. high court affirms insurers need pay for covered perils only

Florida's valued policy law means property insurance companies are only responsible for actual damages caused by perils that are specifically cited in the policy, the Florida Supreme Court has affirmed in a key decision.

Plaintiffs in the case, who had coverage for damage caused by wind but not for flood, had argued that they were entitled to full value even though the majority of the damage to their home was caused by flood.

The ruling, which insurers hailed, only applies retrospectively but could still affect hundreds of lawsuits dating back to 2004 when Hurricane Ivan struck.

The ruling in Florida Farm Bureau Casualty v. Cox by the state Supreme Court upset two lower court opinions. It overturned a First District Court of Appeal decision that had said that the valued policy law mandated an insurer pay the value of the property described in a policy even if an uncovered peril caused the total loss. It also disapproved a 2004 decision in another case, Mierzwa v. Florida Windstorm Underwriting Association, which required an insurer to pay a policy's full limits if any portion of a total loss was caused by a covered peril. The appeals court in Cox had relied upon the Mierzwa decision.

The question before the court was whether Florida's valued policy law (VPL) requires an insurance carrier to pay the face amount of the policy to an owner of a building deemed a total loss when the building is damaged in part by a covered peril -- in this case, wind -- but is significantly damaged by an excluded peril, flood.

The 2004 version of the VPL, which was at issue in this case, says that "[i]n the event of the total loss of any building-- located in this state and insured by any insurer as to a covered peril, in the absence of any change increasing the risk without the insurer's consent and in the absence of fraudulent or criminal fault on the part of the insured or one acting in her or his behalf, the insurer's liability, if any, under the policy for such total loss shall be in the amount of money for which such property was so insured as specified in the policy and for which a premium has been charged and paid."

On Sept. 16, 2004, Hurricane Ivan struck the Florida Panhandle. The Coxes' home suffered both wind and flood damage and was assessed as a total loss. The Coxes had a homeowners' policy valued at $65,000 with Florida Farm Bureau Casualty Insurance Co., which covered wind damage but did not cover losses based on flood damage. The Coxes did not carry flood insurance on the property.

The Coxes made a policy limits demand of $65,000, plus additional coverage for personal property and other additional provisions for a total of $117,000.

Florida Farm Bureau claimed that the wind caused $11,583.93 of the damage to the home, the storm caused an additional $3,227.14 in damage to other structures, and the Coxes were entitled to $2000 for living expenses.

After tendering all amounts it claimed that it owed to the Coxes, Florida Farm Bureau sought declaratory relief, asserting that the loss was caused primarily by flooding. The Coxes counterclaimed for breach of contract and a violation of the VPL.

The trial court granted the Coxes' motion, finding that the holding in Mierzwa was controlling and the VPL does not require that a covered peril be the peril causing the entire loss.

Florida Farm Bureau appealed to the First District Court of Appeal, which upheld the trial court. Farm Bureau then appealed to the state Supreme Court, which has now ruled that the lower courts misconstrued the plain language and missed certain elements of the VPL.

"Contrary to the conclusion of the district court, we do not find that the plain language of the statute intends that if a covered peril causes part of a total loss, that the insurer is mandated to pay for the total loss," Justice Charles T. Wells wrote for the high court.

Instead, Wells wrote, "the statute intends that an insurer is liable for a loss by a peril covered under the policy for which a premium has been paid."

The high court, noting that the lower courts relied upon the Mierzwa decision, also overturned that 2004 ruling, claiming it misapplied the VPL and ignored some provisions.

The decision only applies retrospectively because the VPL has been changed since 2004. In 2005, after Mierzwa was released, the Legislature amended the VPL, expressly providing that an insurer's liability is limited to the amount of the loss caused by the covered peril.

Even retrospectively, however, the ruling will have an impact. The state-backed Citizens Property Insurance said it has approximately 200 lawsuits affected by the ruling.

Citizens' General Counsel Perry Cone said the decision should end most litigation stemming from storm surge damage that occurred in 2004. He said Citizens believes it has paid all wind damages involved in the litigation. Plaintiffs had sought to require Citizens to pay for flood damages. Citizens argued state law did not require such payments.

The American Insurance Association, which had joined other industry trade groups in submitting an amicus brief to the Supreme Court urging it to rule as it did, praised the unanimous decision. "This decision confirms that the valued policy law is a liquidated damages statute, and not a statute that grants coverage where none exists under the insurance contract," said Eric Goldberg, AIA associate general counsel.

Fla. agents advise consumers of coverage gaps, likelihood of assessments with Citizens

Florida's insurance agents are advising consumers seeking coverage from Citizens Property Insurance Corp. to proceed cautiously, especially for those making comparisons with the private market.

Coverage in the state insurer of last resort may not always be the wisest choice for every homeowner, according to the Florida Association of Insurance Agents (FAIA).

"It's certainly an alternative, sometimes the only alternative," said Jeff Grady president and CEO of the FAIA. "But there are considerations regarding policyholder assessments and coverage."

Grady warns that not only might the gaps in coverage be significant for some families, policyholder assessments for deficits are both more likely and higher than with standard carriers.

One potential coverage gap: under a Citizens policy, personal property coverage for all personal belongings, which includes all furniture, electronics, clothing, and household goods, is limited to 50 percent of the home's value. That may be enough, according to Grady, but most standard market companies allow the limit to be increased; Citizens does not.

Additional living expense
Another example is additional living expense coverage, which pays if a policyholder can't live in a home after it is damaged. Citizens' maximum is half that of many private carriers. It reimburses only up to 10 percent of the home's value while many, but not all, private companies provide 20 percent. For example, if the structure is covered for $150,000 and is declared a total loss, Citizens will pay only $15,000 if a policyholder has to live elsewhere while a home is rebuilt. Many private companies would have paid $30,000, according to Grady.

Other potential coverage gaps under Citizens: Liability coverage is limited to $300,000 no matter how much it costs the policyholder in court or how much the final judgment is.

Medical payments are limited to $2,000, which means policyholders must pay out of pocket if a guest is injured in their home and medical costs exceed the coverage limit.

Home businesses
For home-based businesses, no coverage is available for outside business pursuits. Animal liability also isn't available. So, if a family pet bites or injures someone and the family is sued, policyholders must pay all defense costs and any judgment. Lawsuit coverage for libel or slander also is not covered, Grady added.

FAIA pointed out that less coverage is only one reason for consumers to move slowly with the state-run insurer. In the event that storms drain Citizens' reserves as they did in 2004 and 2005, Citizens' policyholders could be surprised.

That's because lawmakers changed the approach for funding deficits in any one or all of Citizens' three accounts. Citizens' policyholders will now pay before private market policyholders, beginning in 2008. They also are divided into two categories: homestead and non-homestead, with non-homestead Citizens' policyholders paying each time there is a deficit for any or all three of the Citizens' accounts.

"Our agents are working hard to inform customers about the potential increased risks with Citizens," said Grady. "When you have government proclaiming that Citizens is the answer, it can sometimes be difficult to get that message across."

Responding to FAIA's consumer advisory, Citizens maintained that its basic coverages match what most private insurers sell. It acknowledged, however, that it does not offer some of the optional endorsements or coverages available from private insurers that that go beyond the basic coverages.

ISO form
According to Paul Palumbo, senior vice president of underwriting, Citizens provides industry standard coverages based upon forms published by the Insurance Services Office (ISO) that are also used by private insurers.

All of Citizen's multi-peril homeowner policies are written on the "special form" which provides the most comprehensive coverage, according to Palumbo.

Given that Citizens uses ISO forms, Palumbo maintained that most of the limitations cited by the FAIA are standard throughout the industry.

Citizens further noted that it provides theft coverage but only if the theft occurs on the residence premise and it does not provide animal liability, which some private carriers do.

FAIA President Jeff Grady said Citizens' growth equates to the downfall of the private sector. Fewer choices in the private market is a direct result of Citizens' growth, he noted.

Kentucky earns highway safety award

Kentucky Gov. Ernie Fletcher has won a national award for historic highway safety measures that have resulted in a decrease in traffic fatalities in Kentucky.

Fletcher received the 2007 Peter K. O'Rourke Special Achievement Award, the highest award of the Governors Highway Safety Association, at the recent GHSA annual meeting in Portland, Ore. The award recognized outstanding highway safety accomplishments in 2006.

During that period, Fletcher, working with the Kentucky Legislature, won passage of three important highway safety measures: the primary seat belt law, graduated driver's license legislation, and "quick clearance" law, which permits drivers involved in minor, no-injury fender benders to move their vehicles to the side of the interstate or parkway. Highway fatalities dropped to a five-year low in 2006.

Kentucky recorded 913 highway fatalities in 2006, down from 985 the year before and the lowest total since 2001, when 843 people died on Kentucky roads. Fatalities to date in 2007 number about 25 fewer than at the same point in 2006, though figures may fluctuate daily. The primary seat belt law is expected to save more than 60 lives in Kentucky over the course of a year.

Scruggs wants contempt charge dismissed

Mississippi trial lawyer Richard Scruggs has asked a federal judge to throw out a charge accusing him of criminal contempt in a dispute related to insurance claims after Hurricane Katrina.

In court papers, attorneys for Scruggs and his law firm contend he was within the law when he gave Mississippi's attorney general copies of sensitive papers related to storm claims that two whistleblowing sister had taken.

Special prosecutors accused Scruggs of contempt in August, saying he violated a court order by U.S. District Judge William Acker to give the documents to a claims adjusting firm that had filed a lawsuit and was seeking the records.

Scruggs' attorneys claim he was allowed to release the records to the Mississippi attorney general under Acker's order, so the charge should be dismissed.

Acker previously rejected a similar argument, but U.S. District Judge Scott Coogler is presiding over the contempt case.

The dispute comes in a lawsuit filed by E.A. Renfroe and Co. Inc., an adjusting firm that handled State Farm claims and fired the two whistleblowers -- Cori and Kerri Rigsby, sisters from Ocean Springs, Miss. -- after learning they had taken internal documents about post-Katrina claims.

Copyright 2007 Associated Press. All rights reserved. This material may not be published, broadcast, rewritten or redistributed

W. Va. registrations jump during tax amnesty

West Virginia registration of out-of-state vehicles jumped 10 percent during a recent tax amnesty period, but officials don't know for certain whether the increase was spurred by the opportunity to avoid paying a privilege tax.

The state Division of Motor Vehicles says 3,622 more out-of-state vehicles were registered during the amnesty period, which ran from June 7 to Sept. 7, than the same three-month period last year.

"We would attribute the increase in registrations to that amnesty period but we have no way to define out of that 3,600 who took advantage of the period," said Glenn Pauley, director of vehicle services.

The amnesty period was part of a law passed this year that will replace the privilege tax with a 5 percent sales tax in July 2008.

"That amnesty period was the best thing that ever happened because it (privilege tax) was penalizing everybody," said Putnam County Assessor D.W. "Peachie" Arthur. Putnam saw the biggest increase in out-of-state-vehicle registrations with 523.

Arthur said people have moved into the county from out of state and "a lot of them did not change their license tag over until the amnesty period."

New residents are supposed to register their vehicles with the state within 30 days of arriving. But many kept their out-of-state tags to avoid paying the privilege tax, which is equal to 5 percent of a vehicle's value. Across the border in Ohio, there is no tax on automobiles.

Copyright 2007 Associated Press. All rights reserved. This material may not be published, broadcast, rewritten or redistributed.

Major Internet disruption would cost $250 billion in economic damages

New report urges CEOs to take action now to ensure continuity of their businesses should a meltdown occur

A major disruption to the Internet would not only be detrimental to businesses, public institutions and citizens, but also would cost the global economy an estimated $250 billion, according to a report released by the Business Roundtable, an association of U.S. chief executives.

"America's CEOs have diligently prepared to address and respond to physical attacks that threaten the safety of our employees, economy and quality of life," said Ed Rust, CEO of State Farm and co-chairman of Business Roundtable. "Our report suggests that, similar to physical threats, the risks of attack through the Internet intended on impacting our businesses, economy and national security present new challenges and must be addressed."

The report, "Growing Business Dependence on the Internet: New Risks Require CEO Action," cites the potential and widespread effects a cyber disruption could have on society and urges CEOs to take necessary action to ensure continuity of their businesses.

Among the report's key findings is that an Internet disruption would affect nearly every U.S. business, directly or indirectly, and the efforts to respond will create stress points that will hinder recovery.

In addition to the extensive effects, the report suggests a lack of awareness from business leaders on their reliance on the Internet, thus increasing vulnerability in the case of an interruption, malfunction or disruption. The World Economic Forum estimates a 10 percent to 20 percent probability that a breakdown of the critical information infrastructure (CII) will occur within the next 10 years -- thus requiring immediate attention from business leaders.

The report recommends the nation's business leaders should begin:

• Assessing companies' Internet dependencies, based on their business operations;


• Proactively addressing Internet dependence and interdependence risks in corporate continuity and recovery plans;


• Engaging with industry partners, government and other CEOs to ensure alerts as well as response and recovery plans are in order;


• Sharing information on Internet disruptions with existing industry-operated information sharing and analysis centers (ISACs); and


• Ensuring executive level engagement with government to set and communicate expectations about early warning and threat notifications.

"By addressing the challenges we have identified in this report, the nation's business leaders can ensure their employees and customers are protected and safe, and that the economy still thrives," added Rust.

The full report can be found at: www.businessroundtable.org/
pdf/Security/
BR_Internet_Business_Dependence_Report_09252007.pdf

Supreme Court to hear case pitting federal v. state product liability laws

The Supreme Court said late last month that it will decide a case that centers on whether federal regulation of pharmaceuticals preempts state law.

The case involves a product liability lawsuit against Pfizer's Warner-Lambert unit.

A group of Michigan plaintiffs led by Kimberly Kent in April 2000 sued Warner-Lambert Co. over alleged injuries caused by its Rezulin diabetes drug. Rezulin was ordered off the market in March 2000 by the Food and Drug Administration after it was linked to nearly 400 deaths and hundreds of cases of liver failure.

A federal district court dismissed the suit in 2005, citing a Michigan law that shields FDA-approved pharmaceuticals from liability lawsuits. The case was brought under Michigan law but was moved to federal court because other states were also involved.

An exception in Michigan's law that allowed the suits to proceed if a pharmaceutical company misrepresents information presented to the FDA was pre-empted by federal laws governing the regulation of pharmaceuticals, the district court said.

The 2nd U.S. Circuit Court of Appeals, based in New York, reinstated the suit. The appeals court disagreed that the exception in Michigan's law for cases involving fraud against the FDA was pre-empted by federal law.

That decision conflicted with other appeals court rulings in previous cases. Such conflicts in the federal apepals courts are one criteria the justices consider when deciding to take a case.

The case is Warner-Lambert v. Kent, 06-1498. Oral arguments haven't yet been scheduled. The case will likely be decided before the court's term ends in June.

Copyright 2007 Associated Press. All rights reserved. This material may not be published, broadcast, rewritten or redistributed.

House-passed flood insurance bill provides optional windstorm coverage

The U.S. House of Representatives has passed a measure updating the nation's flood insurance program that will give homeowners the option of purchasing windstorm coverage as part of their flood policy.

The legislation also reauthorizes the National Flood Insurance Program for five years through 2013, improves flood mapping, eliminates some rate subsidies, and adds business interruption coverage as an option.

H.R. 3121, the Flood Insurance Reform and Modernization Act of 2007, sponsored by Rep. Maxine Waters, D-Calif., passed by a vote of 263 to 146.

In an effort to make the NFIP more actuarially sound, the bill phases out subsidized rates on commercial properties, vacation homes, and second homes built before 1974. Multifamily rental properties are excluded from the phase-out of the subsidy.

Additional optional policy coverage is added, allowing business owners to purchase business interruption coverage at actuarial rates. Additionally, optional coverage at actuarial rates for basement improvements and replacement cost of contents is added. For the first time since 1994, the bill updates maximum insurance coverage limits for residential and nonresidential properties.

The bill requires the Federal Emergency Management Agency to review the nation's flood maps and makes the updating of maps an ongoing process.

Provisions protecting policyholders include clarification of disclosures about flood insurance availability and plain language information on flood insurance policies. Landlords must notify tenants of contents coverage availability. Further, the bill makes flood insurance effective immediately upon purchase of a home.

To encourage participation in the NFIP, the bill provides for a new community outreach program, and provides for a study of how to increase participation by low-income families. In order to help ensure that those homeowners who should have flood insurance do have flood insurance, the bill increases the fines on lenders who do not enforce the mandatory flood insurance policy purchase requirement for those who live in a floodplain and hold a federally-backed mortgage.

H.R. 1852 also requires FEMA to report to Congress annually on the financial status of the NFIP, increases the amount FEMA can raise policy rates in any given year from 10 percent to 15 percent, and authorizes funding for additional staff at FEMA to carry out the requirements of this bill.

The House measure includes a provision authored by Rep. Gene Taylor of Mississippi to provide for an optional multiple peril policy -- to allow property owners to purchase wind and flood coverage in a single policy. The industry has opposed this expansion of coverage.

Industry says no to windstorm
Insurance agents welcomed news of the House approval.

The Independent Insurance Agents and Brokers of America said it is especially pleased with the provisions that increase maximum coverage limits and include optional business interruption coverage and additional living expenses.

"An increase in the maximum coverage limits will better allow both individuals and commercial businesses to insure against the damages that massive flooding can cause, and we're grateful that this increase was included," said John Prible, Big "I" assistant vice president for federal government affairs. "We are also grateful that the House included the optional additional living expenses and business interruption. The security and stability that these optional purchases would provide to consumers is crucial to individuals and to small business people across America."

Agents and insurers were less enthusiastic about Taylor's windstorm provision, however.

The Big "I" said only that it has "some concerns with the inclusion of such coverage in the NFIP." The group said it would work to "ensure that windstorm coverage is affordable and available to Big "I" consumers without unduly displacing the private marketplace."

The National Association of Professional Insurance Agents said the windstorm coverage should be eliminated from the legislation when the Senate considers it.

"Adding wind coverage to the National Flood Insurance Program (NFIP) is a bad idea that we oppose," said PIA Senior Vice President Patricia A. Borowski. "It would result in uncertainty as to whether losses caused by wind should be covered by a policyholder's property policy, a state's wind pool, or the NFIP. The muddle created by this provision will increase disputes about coverage and prompt more lawsuits. It would hurt, not help homeowners."

That reasoning echoed what some insurers have said.

The Property Casualty Insurers Association of America opposes the windstorm option, arguing that while it is "well-intentioned, it may produce unintended negative consequences" for consumers.

"Adding wind coverage will create artificial subsidies, which essentially means rate hikes for consumers in non-coastal parts of the country who do not face the same wind-damage risks as coastal policyholders," said Ben McKay, PCI's senior vice president, federal government affairs. "It is unnecessary for Congress to expand the flood program, considering that wind coverage is already available either through the private sector or state wind insurance programs."

McKay said that residual state-based mechanisms provide coverage for wind damage where no market exists, and private insurers provide wind coverage where there is a market. "Adding wind coverage to the NFIP simply creates a federal government fund that will compete with existing state funds and potentially with the private market," he added.

PCI urged the Senate to pass flood legislation that does not include the wind provision.

The offshore reinsurance tax debate resurfaces in Congress again

An industry executive, representing a coalition of 14 large U.S.-based insurance groups, told the U.S. Senate Finance Committee late last month that a major tax advantage for certain foreign insurance groups could threaten the future of the domestic insurance industry.

The tax advantage allows foreign insurance groups based in places such as Bermuda or the Cayman Islands to legally avoid paying billions of dollars in taxes on much of their U.S. underwriting and investment income, said William R. Berkley, chairman and CEO of W. R. Berkley Corporation and spokesman for the Coalition for a Domestic Insurance Industry.

Berkley and the Coalition say the tax advantage, which originated in practice around 20 years ago, has already caused significant migration of insurance capital abroad. Berkley said the tax advantage permits foreign-based insurers with U.S. affiliates to move much of their taxable underwriting and investment income from their U.S.-based businesses out of the country merely by reinsuring the business with a foreign affiliate in a low-tax or no-tax jurisdiction. This type of reinsurance transaction generally requires a mere bookkeeping entry to shift revenue from one pocket to another and out of the reach of U.S. taxing authorities, Berkley noted.

"By contrast, U.S.-based insurers must pay current U.S. tax on all of their income from these policies," he told the committee. "Thus, even though the U.S. income-generating activities are the same, these foreign-domiciled insurers can avoid U.S. tax on much if not all of their underwriting and investment income."

A report for the hearings, prepared by the Senate Staff -- "Present Law and Analysis Relating to Selected International Tax Issues" -- describes the opposing points of view. "Insurance company reinsurance transactions with offshore reinsurers, particularly affiliated reinsurers, have been characterized as creating the potential for tax avoidance and as causing a competitive disadvantage for U.S. insurance businesses. At the same time, reinsurance is a fundamental component of global risk management techniques."

Recurring concern
The last time Bermuda-based insurers were called into question in Congress was in 2000, when supporters of HR 4192, or the Johnson/Neal bill, proposed legislation aimed at ending "favorable tax treatment" for foreign based insurers, principally those located in Bermuda. The main backers then were Chubb and The Hartford, which are also members of the current coalition. The bill was reintroduced in 2001, but failed to get approval.

While Bermuda-based insurance companies are considered foreign-owned, many such as ACE Limited and XL have strong ties to and a large presence in the U.S. market, and insist they are not trying to avoid taxation.

Bradley Kading, president and executive director of the Association of Bermuda Insurers and Reinsurers, summarized the points his organization focuses on. "1) Bermuda's substantial economic contribution to the United States; 2) Bermuda's insurers' role in filling U.S. insurance market needs; 3) Explaining that U.S. insurers do substantial affiliated reinsurance transactions for the same business reasons (risk transfer, avoiding trapped capital, diversification) that Bermuda reinsurers do them; 4) Bermuda insurers are primarily in Bermuda for ease of entry into insurance markets and that Bermuda regulation affords insurers an opportunity to quickly form an insurer and start writing business in time to take advantage of new market opportunities."

In a written statement presented to the Senate Finance Committee, Donald Kramer, chairman and CEO of Bermuda-based Ariel Reinsurance Co., pointed out that "a substantial percentage of U.S. insurance companies cede more that half of the gross premiums they write to reinsurers. Affiliate reinsurance is used routinely with the U.S.-based insurance company groups, for valid non-tax reasons." The practice enables related groups of companies to "pool risks and mange them more efficiently."

He joined company past and present Bermuda leaders -- notably Brian Duperreault, former CEO and chairman of ACE Limited, and Brian O'Hara, who founded and still leads XL -- in observing: "First and foremost we are in Bermuda because we can quickly deploy our capital, form a company, get licensed and write insurance."

Kramer said it is "simply incorrect" that Bermuda companies are located on the island "to avoid U.S. taxation." He pointed out that a reinsurance transaction, even among affiliates, "involves the true transfer of risk." In addition "regulation requires the price in a reinsurance transaction to be an arm's length price," he continued.

Kramer isn't alone, nor is he supported solely by ABIR members. Attached to his statement were letters from Risk and Insurance Management Society President Michael Liebowitz and Bill Newton, executive director of the Florida Consumer Action Network.

"RIMS has a history of opposing any legislation that encumbers free market movement and the transfer of risk that is vital to a sound global insurance and reinsurance community," wrote Liebowitz. "We strongly urge you to oppose any legislation that would result in negative implications for the global reinsurance marketplace and more importantly, those U.S. businesses who rely on this market to manage their risk exposure."

Nelson was even more specific. "We urge you [the Senate Finance Committee] to be on the lookout for amendments proposed this summer and fall that offer hundreds of millions in additional revenue that in the end will be paid for by Florida consumers!" Nelson wrote. "It's not a good deal and these amendments should be exposed as protectionist measures by U.S. insurers seeking to grab more business for themselves by increasing the taxes on their non-U.S. competitors."