Currents

Navigating Washington's business and occupation tax tangle

Washington State's current business and occupation (B&O) tax laws operate under a unique structure that can confuse even the most astute insurance agent or company. Harbored within this structure is the question of tax responsibility -- who reports and who pays? Because B&O taxing laws differentiate based on employee status, getting acquainted with two important tests will help clarify the distinctions between company employees and independent contractors.

Unlike many states, Washington does not have a corporate or personal income tax. Instead, it imposes the B&O tax, calculated on the gross income from business activities. With respect to the insurance industry, every person engaging in business in Washington as an insurance agent, broker or solicitor is subject to B&O tax under the "insurance agent" B&O tax classification. In other words, the agent is treated as an independent contractor.

Receipts taxed under the "insurance agent" B&O tax classification include all gross income received as a result of the insurance agent's licensed activities as an insurance agent. Other income may be subject to a different B&O tax classification and tax rate, depending on the nature of the activity. No deductions are allowed for commissions, fees, or salaries paid to other agents, brokers or solicitors, or any other cost of doing business.

Clearly, independent contractors can have a fairly heavy B&O tax obligation. On the other hand, if an agent is a company employee, he or she does not report B&O taxes on salary. The company, as the employer, must generally issue the employee a Form W-2 and file a Form W-4 on behalf of the employee. Because the responsibilities are different for the agent and company, it is important for both parties to understand whether the agent is an employee or an independent contractor.

Washington Administrative Code 458-20-164 (Rule 164) sets forth two tests for determining whether an agent is a company employee or an independent agent. One test applies to all insurance agents. The second test only applies to agents who sell life insurance or annuity contracts on a full-time basis.

All insurance agents
Section 3 of Rule 164 provides that insurance agents, brokers and solicitors are presumed to be in business for themselves and must report under the "insurance agent" B&O tax classification. Whether an agent is able to overcome that presumption and demonstrate that he or she is a company employee has been the subject of several Washington cases. Those cases have generally revolved around two criteria that must be met for the agent to qualify as an employee.

First, the insurance agent can have no direct interest in the profits or losses of the insurance business, including liability for maintaining a place of business and overhead.

Second, the insurance agent's performance and details of work are managed by the insurance company, or the insurance agent is treated as an employee for federal income tax purposes as substantiated by Form W-4.

Meaningful factors in determining whether the above criteria are met include whether the agents rented their own office space, paid overhead costs, hired their own employees, or assumed personal liability for expenses and losses incurred in the operation of the office. Other factors include what restrictions the insurance company imposed on the activities and authority of the agents, and if the contract between the insurance company and the agent permitted the insurance company to restrict the agent's activities.

For example, the company might impose restrictions such as production quotas, office location, meeting attendance, completion of company sales and industry-related courses, dealing only with a company-selected broker, detailed record keeping, dress codes, territorial restrictions, limitations on the types of policies offered to prospective clients, or restrictions on the types of clients solicited.

Life insurance agents
Section 4 of Rule 164 outlines the test for full-time life insurance agents. If the agent in question is a full-time life insurance salesperson, the person is considered an employee and not required to pay B&O tax on the money earned as such. However, to be an employee, certain criteria must be met. The agent must prove to be an employee for federal income tax purposes, usually by the receipt of Form W-2 indicating that the agent is a statutory employee of the company. Or, the person must meet all of the following four requirements that demonstrate that he or she is a full-time life insurance salesperson.

First, the agent's principal business activity must be devoted to the solicitation of life insurance and/or annuity contracts, primarily for one insurance company. The agent's principal business activity is the activity from which the agent generally receives the most income. All business activities are considered in determining the agent's principal business activity.

Second, the contract between the agent and the primary life insurance company must provide that substantially all of the solicitation services are to be performed personally by the agent.

Third, the agent must not have a substantial investment in the facilities used in connection with the sale of life insurance or annuity contracts. Facilities include items such as office space, office equipment and secretarial services but do not include items typically furnished by employees, such as clothing or transportation.

Finally, the sale of life insurance by the agent must occur in the course of a continuing relationship with the primary life insurance company.

If the agent meets all of the above, he or she will likely be treated as a company employee and thus not be required to report B&O tax on the income received from the primary life insurance company. However, if the agents sell contracts on behalf of other companies, they may still be obligated to report B&O tax on that income.

Independent insurance agents and larger companies both benefit from understanding each other's tax responsibilities. With Rule 164 in mind, both insurance agents in the state of Washington and insurance companies with agents operating in Washington should be better equipped to determine whether the agents are independent contractors or company employees for purposes of reporting B&O tax.

Navigating the labyrinth of Washington's B&O tax rules is challenging, and specific concerns should be addressed by legal counsel. At a minimum, proactively clarifying the issues will reduce the risk of finding yourself unprepared for an audit.

Stephanie Anderson is an associate in the tax, trusts and estates practice at law firm Preston Gates & Ellis LLP. Phone: 206-370-6615. E-mail: stephaniea@prestongates. com.

Establishing ethics for insurance professionals

The American Institute for Chartered Property and Casualty Underwriters (AICPCU), the American College and the Society of Financial Service Professionals founded Ethics Awareness Month in 1990. While it is impossible for all insurance professionals to reach consensus on every aspect of their ethical ideology, those professional organizations have recognized the merit in providing a platform for continued ethics awareness and discussion.

When discussing professional ethics, it is necessary to examine the core beliefs and underlying precepts that comprise our particular value system. What forms the basis for your values -- is it religion, philosophy, family, tradition, society, mentor, etc?

For the good of the society, don't unquestioningly embrace just any value system. Yet consider the three universal precepts that exist in nearly every civilized society and in most religions: honesty, respect for other persons and respect for others' property. Those ought to be the qualifying parameters for any belief system chosen by an insurance professional.

Core beliefs
The first tenet of the triad is honesty. Without honesty, there is no chance of a successful business relationship. While dishonesty is destructive in one's personal life, it usually is fatal in business. People are inclined to be more forgiving in personal relationships than they are in business. One dishonest act can tarnish an entire career. Would you buy anything from someone you knew to be dishonest?

The second tenet of the triad is respect for other persons, meaning respect for a person's physical and emotional well-being. Disrespect could manifest itself by such actions as rudeness, harassment, slander, discrimination, abuse, assault and murder. Some transgressions of this tenet, as well as the other two, are so nefarious that there are laws against such behavior. While there may be no law against rudeness, would you continue to do business with someone who was rude to you?

The third tenet of the triad is respect for a person's property. Disrespect could manifest itself by such actions as neglect, carelessness, vandalism, theft and destruction. Property and casualty insurance producers are in the express business of preserving the assets of clients. Disrespect for a person's property is the antithesis of the noble mission of an insurance professional. Would you knowingly conduct business with people who cheat their customers out of money or property?

Accountability
Once you have identified the basis for your values, ask what authority that basis holds over your life. How can someone be moral or ethical without accountability? I could never trust a person who does only what is right in his own eyes. Of course, everyone is ultimately accountable to our justice system, but that is negative accountability, occurring after the deeds have been done. To whom you have voluntarily made yourself accountable? That is the real question.

Find your own accountability upon which to build your ethics. Do you live to make your family proud by following their example? Are your core values derived from your religious faith? Have you embraced the code of ethics offered by professional organizations, such as, the Professional Insurance Agents or the Chartered Property and Casualty Underwriters? The important thing is that you know where your ethical foundation lies and to whom you have made yourself accountable.

Integrity
People do not always behave in a way that is consistent with their moral code. In other words, people do not act according to their beliefs at all times. We all are hypocrites, to some degree. There is something about our nature that gets in the way of moral perfection.

Overcoming the tendency to deviate from our moral code requires discipline of will. Unfortunately, discipline is unpleasant, and people are naturally averse to it. That is where accountability is of great assistance.

For example, accountability benefits the maturing of children. Initially, a child fears his parent's punishment, so submits to the will of the parent. Soon, a child learns that acceptable behavior has its rewards and behaves appropriately to receive the prize. Later, the child finds pleasure in meeting the parents' expectations and behaves in way that will accomplish that goal. Then, when a child goes to school and experiences the relational friction with peers, he or she discovers the merit of conforming to societal norms. A child matures as he or she realizes the benefit of behaving in certain ways. Those values are internalized and, hopefully, become who the person is.

When you act consistently with your beliefs, no matter what the circumstances, then you have integrity. Someone with integrity is the same whether they are in the light of public exposure or in the darkness of solitude.

Leadership
We cannot speak of accountability at work without considering the moral compass communicated by managers of the company. Business ethics are imparted by both official policy and practical example, but they are, undoubtedly, more "caught" than taught.

In your insurance agency, you could read the moral direction by the way management treats such matters as the proper licensing of employees, fair treatment of competitors, full disclosure to insurers and faithful control over other people's money. The two areas where producers are most vulnerable are in their stewardship of money and handling of information.

Using a scale of one to 10, where one means "anything goes" and 10 means "above reproach," where does your agency fall?

Think about the impact a manager has on subordinates. If the manager has moral clarity and a disciplined will, the worker will be governed by the manager's integrity. If the manager has moral clarity but an undisciplined will, the worker will be governed by the manager's hypocrisy. If the manager has moral confusion but has a disciplined will, the worker will be governed by the manager's tyranny. If the manager has moral confusion and has an undisciplined will, the worker will be governed by the manager's anarchy.

Professional
On one end of the spectrum are people who work solely for monetary gain (called mercenaries) and on the other end are people who work to pursue a vocation (called professionals). Henry David Thoreau proposed this aspiration: "Aim above morality. Be not simply good; be good for something." That simple statement goes a long way toward defining a professional.

An insurance professional has a passion for coming alongside people to help when they are experiencing some of the worst moments of their lives. As we all have recently seen in the Gulf States, this industry has heroes who go far beyond their job expectations and give selflessly to those in distress. Closer to home, I am privileged to observe more than 100 volunteers serving their Glenmont Professional Insurance Agent associations as officers, directors and committee members. Some of them toil numerous hours each week to help the industry achieve its full potential.

A mercenary who sells insurance is going to consider the buyer a customer; someone who purchases a product or services. A professional, on the other hand, views the buyer as a client.

"Client" is derived from a Latin word meaning "lean," which portrays someone leaning upon another for support. A client, then, is someone under the care and protection of a professional. You can choose to be a mercenary or a professional. You don't need higher education or a promotion to make that choice.

Without a doubt, if you assure your client that you will protect them against all or specified risks of loss, you have expanded the ordinary legal duty of a producer and made yourself vulnerable to lawsuits. Unless you intend to incur greater liability in exchange for competitive differentiation, you should maintain a working ethic to treat all policyholders as clients, without actually communicating such promise to the client.

Remember, becoming the person you want to be is a process that takes time and discipline. Sometimes, we need a nudge in the right direction, but the key to growth is accountability.

Dan Corbin is the director of research for the Professional Insurance Agents of New York State, New Jersey, Connecticut and New Hampshire (www.piaonline.org). Corbin can be reached at 800-424-4244.

Size up subsidence and earth movement exclusions

More than a decade ago, law firms specializing in construct defect litigation sprang up in California and the West. Construction defect cases in the building industry became all too common, and construction insurance claims and premiums skyrocketed. Most of the traditional carriers abandoned the market. The construction defect fiasco in California also led to the creation, by the specialty insurers, of the subsidence exclusion for attachment by endorsement to the commercial general liability policies of homebuilders.

Expansive soil conditions are typical in California. Many houses are built on hills or other areas where it is difficult to create a stable foundation, which may result in cracked foundations or floor slabs and other damage to the building. If subsurface conditions are not properly compacted and prepared for adequate drainage, it is likely the property will experience problems such as subsidence, structure moves or shifts, flooding and, in many cases, more severe problems such as landslides.

Originally, the subsidence exclusion applied only to completed operations property damage and was limited to subsidence generally caused by foundation failures. However, it has potentially evolved into one of the contractor's worst nightmare.

Many construction carriers have extended the subsidence exclusion into an "absolute earth movement exclusion" including earthquake. Most no longer limit the exclusion to either property damage or completed operations. One admitted regional insurer puts the exclusion on every policy it issues. Because the exclusionary language is generally so broad, it could be strictly interpreted against the finding of coverage. There is a big problem if there is damage arising from an earthquake caused by defective construction. The courts in California have been of no help in mitigating the negative effects. (See Blackhawk Corp. v. Gotham Ins. Co., 54 Cal App 4th 1090.)

Contractor concerns
Why is there a big concern for most contractors?

Any earthquake-induced bodily injury or property damage is excluded. If structural failure occurs arising out of construction defects, there is no coverage.

There is no coverage for bodily injury arising out of a trench collapse on an ongoing job.

There could be possible coverage problems arising out of equipment upset.

Subcontractors may have this exclusion on their policies.

Knowing that information, the following are a few suggestions that can help eliminate or mitigate the problem.

Use a different insurer. Several A-rated insurers cover subsidence.

Request the exclusion be deleted -- especially for premiums higher than $50,000. This is frequently not difficult to accomplish.

Require subcontractors to disclose all exclusionary endorsements.

Obtain a side letter from the insurer limiting the areas where the exclusion applies.

Large general contractors and public entities, such as Caltrans, are becoming more sensitive to the use of exclusionary endorsements on policies issued to their contractors where they are named as additional insureds. There is a requirement in both the Caltrans insurance specifications and the Associated General Contractors of California standard form subcontract that exclusionary endorsements must be set forth in the insurance certificates.

Robert G. Mahan is managing member of Mahan Insurance LLC, with offices in Irvine Calif. E-mail: bob@mahaninsurance.com.

Taking aim at your target market

Do you know how to reach your target market? You might say by advertising, e-mail broadcasting or calling someone on the telephone. That, however, is not marketing.

Many people associate marketing with such tactics because they are fun. Advertising is fun, promotions are fun and sending out e-mail campaigns is fun, too. Yet those tactics actually fall at the end of the marketing cycle. Although they are an important part of marketing, those efforts are useless if you lack the knowledge of who you are and who your target market is. In fact, marketing is analysis, and a sound marketing strategy is based on that analysis.

The beginning point of effective marketing is to know who your target market is. That does not mean if you sell homeowners' insurance, anyone who owns a home falls in your target audience. You must be more specific in identifying who you are selling to so that your marketing is more effective.

Marketing is the analysis of potential customers, competitors and your agency, combined with an analysis of what segments exist that your business can most meet the needs of. The marketing analysis also includes determining the most profitable segments to target your efforts toward, positioning your products and then doing what's necessary to deliver on that positioning.

That may sound like a lot of work, but the truth is with a little research, you can easily find the answer to those questions and focus only on your target market. That way, you avoid blanketing an entire market universe hoping for something to work.

Before starting with marketing tactics -- ads, direct mailers, flyers, etc. -- clarify a crucial notion regarding your individual strategy. The marketing strategy helps you to achieve your goals, and it should include two mandatory elements:

Which target consumers have a viable potential of buying whatever you intend to sell?

What offer you will be presenting to those consumers that appeals to them so that they realize the said potential, given their alternatives?

Looking at the first element, target consumers are consumers that make up a sizeable enough group with buying power and a desire to buy what you are offering.

Why would they want what you are selling?

You should identify the answer to that question.

There may be several reasons. For example, the target consumers may not be consumers of your kind of product yet, but they might be consumers if something happens or if they are exposed to a certain message. It could be that they have special needs or preferences, which up until now, were not taken care of by your competitors. Remember that needs can be psychological, social and aesthetic, as well as physical.

The next part of target marketing is making those target consumers an offer that they cannot refuse. That is key to your strategy. Offer something to those consumers that might improve their situation, solve a problem, give them more than what they already get for the same price or opens new opportunities. Essentially, you should be motivating your potential customer to buy from you -- not from your competition.

Here are four easy steps to develop your target market:

Identify the people you believe have potential to buy what you intend to sell.

Determine precisely what they should be doing (that they are not doing already and will probably not do if you do not tell them what to do) that would direct them to choose your agency over the competition.

Identify the real reasons that should motivate them to change their behavior.

Clarify the exact benefits they can expect when they buy from you.

If you follow those four steps, you will be well on your way to developing a well-defined target audience. And that means you will stop spending marketing dollars on a market that has no interest in what you have to sell.

Marilyn Chelini and Birgit Ricket are co-founders of Insurance Results Marketing Group, which provides marketing solutions for the insurance industry. For more information on the company's IMAP automated sales development tool, visit www.imap1.com. Or, call 866-778-1389 for more information.

California senator introduces permanent disability

California Senate President Pro Tem Don Perata has introduced Senate Bill 815, which, if it passes, will increase permanent partial disability benefits for workers' compensation claimants. The bill would double the weeks of permanent disability awarded to injured workers by phasing in increases in the number of weeks awarded to each level of disability. Currently, disabilities rated at 10 percent would get three weeks of disability payments for each 1 percent of disability rating. The Perata bill would increase the awards to four weeks for injuries after Jan. 1, 2007, five weeks for injuries after Jan. 1, 2008, and six weeks for injuries after Jan. 1, 2009.

Perata hopes to make good on a promise made more than a year ago in which he said he would revamp rules that determine permanent disability benefits.

The bill has an uncertain future, however. The governor's office has said Schwarzenegger will not sign any legislation that rolls back reforms that have improved the business climate.

The Association of California Insurance companies opposes the bill.

Chubb, State Farm reducing auto rates in California

State Farm Insurance, California's largest auto insurer, has applied for an 8 percent average reduction for its policyholders while simultaneously implementing new auto rate regulations, according to the Department of Insurance. Similarly, the Chubb Group of Insurance Companies will be lowering its automobile insurance rates in California by an average of 34 percent. Chubb also said it is rolling out new coverage options including high limits of liability protection in a state where the number of uninsured and underinsured motorists is among the highest in the nation.

State Farm's action means that about 2.8 million policyholders will see an annual reduction in premium rates totaling $204 million, according to the company. That amount, combined with earlier auto rate reductions by the Auto Club of Southern California and USAA Insurance, brings the dollar savings for consumers to nearly $370 million since auto rate reforms were introduced last year, Commissioner John Garamendi said in a statement.

Policyholders who have maintained their policies with State Farm for an extended period of time and those who also have property insurance with the company -- home and condo owners or renters insurance -- will receive enhanced benefits under the new rates. A driver with three years continuous coverage will see his or her loyalty discount increase from 8 percent to 10 percent. A policyholder with at least six years of continuous coverage will see his or her discount go from 16 percent today to 20 percent under the revised plan, the company said.

The discounts for insuring homes and autos with State Farm will increase from 10 percent to 12 percent for renters; 12 percent to 14 percent for condo owners and 15 percent to 17 percent for home owners. Homeowners who also have a personal liability umbrella policy with State Farm will received a 20 percent discount, up from the current 18 percent.

Chubb said its rate reductions will vary based on factors such as driving record and driver characteristics, with some drivers enjoying a reduction of nearly 50 percent. Chubb also has doubled to 10 percent its good-driver credit. It has introduced a companion credit ranging from 10 percent to 20 percent off the auto insurance premium for customers who also have a Chubb homeowners policy.

"These new liability coverage options are especially important for affluent drivers in a state where a recent study by the Insurance Research Council found that 25 percent of the drivers are uninsured," said Kurt Morgan, California manager for Chubb Personal Insurance. "What's even scarier is that uninsured motorists are far more likely to be involved in accidents involving injury." Mississippi is the only state with a higher number of uninsured motorists (26 percent), according to the study.

"Uninsured motorist coverage is one of the least understood features in an auto insurance policy. It helps protect you and your family against the other guy, who either doesn't have insurance or not enough of it," Morgan added.

Like other insurers -- Auto Club of Southern California and USAA Insurance -- Chubb and State Farm submitted class plan filings with the California Division of Insurance to comply with newly imposed auto rate regulations.

Work on reforming California's auto rate regulations began last year, with the Commissioner fighting to require insurers to give more importance to how safely someone drives than where the person lives when pricing auto insurance. Specifically, the regulations issued by the Department and upheld by a Sacramento Superior Court ruling last month, requires insurers have to give more weight to three factors --driver's safety record, number of years driven and annual miles driven -- than any other auto rating factors. Insurers are required to comply with at least 15 percent of the regulations now, with the rest of the adjustments factored in over the next two years.

It Figures

18.4%
Percentage of unexplained drowning deaths among Asian children ages 17 and younger between 1999 and 2001 in Washington State, according to Children's Hospital research. Asian children that age account for 6.9 percent of the state's population.

80 micrograms
Toxin measurement at which Washington officials close shellfish-growing areas because organisms called Alexandrium can cause paralytic shellfish poisoning in humans. Many areas are showing levels of 1,000 micrograms or more, with mussels at Port Ludlow in Jefferson County containing nearly 10,000 micrograms, according to state officials.

12
Number of $1000 college scholarships Unigard Insurance awarded to students to ease the burden of paying for college tuition. Experts at the College Board predict the cost of attending private and public colleges will increase about 5 percent each year. According to that estimate, in 10 years, tuition for one year would cost $49,204 at private schools and $18,489 at public colleges.

78.9%
The amount Blue Cross of California, the state's largest for-profit health insurer, spent of its premium dollars on patient care in fiscal year 2004-2005. Twenty-one percent went to profits and administration, according to a report by the California Medical Association examining annual health plan expenditures.

86,000
Number of acres that burned in the Sawtooth Complex and the Millard Complex fires that spread through San Bernardino County, Calif., in July, according to Risk Management Solutions.

Worst red tide in years hits Puget Sound

The worst red tide in years has shut down shellfish beds in much of Puget Sound and prompted serious public health worries, state officials said.

Expanded beach closures have not reached the heart of Washington's large farmed shellfish industry, and the state said commercial shellfish on the market have been tested and should be safe to eat.

But industry officials worry that more bad news could further damage businesses already reeling from a separate bacterial outbreak.

The state Health Department said the newest round of beach closures means virtually the entire shoreline from Everett south to just north of Olympia is off-limits for shellfish harvesting.

The eastern Kitsap Peninsula also has been affected, along with areas near Port Gamble, Port Ludlow and along the Strait of Juan de Fuca, said Frank Cox, a Health Department marine biotoxin coordinator.

"I don't think we've ever had anything quite to this scale," Cox said.

Scientists say toxic organisms called Alexandrium, which produce powerful neurotoxins that cause paralytic shellfish poisoning in humans, are present in very high levels. The organisms are present in blooms of algae that thrive in warm, calm summer weather.

The state closes shellfish-growing areas when measurements of the toxins reach 80 micrograms. But many areas are showing levels of 1,000 micrograms or more, with mussels at Port Ludlow in Jefferson County containing nearly 10,000 micrograms.

"I'm concerned if people ignore these warnings, we could wind up with people with illness, if not worse," Cox said.

Paralytic shellfish poisoning can be fatal, but the last deaths in Washington state were in 1942. The latest serious illnesses were in 2000, when several people were sickened -- some even paralyzed -- after eating contaminated shellfish near Gig Harbor, Cox said.

Cooking does not eliminate the toxins, and people should be extremely careful when harvesting shellfish on public or private tidelands, officials said.

Bill introduced to allow DOI to oversee California State Fund

California Gov. Arnold Schwarzenegger and Insurance Commissioner John Garamendi have jointly submitted legislation, inserted into Assembly Bill 2125, to establish oversight responsibility and regulatory authority for the State Compensation Insurance Fund. According to the commissioner's office, the agreement should resolve a long legal dispute between the Department of Insurance and State Fund over the commissioner's authority.

In 2003, the workers' compensation carrier filed a lawsuit against DOI to prevent it from conserving SCIF under risk-based capital statutes. In 2004, a judge ruled that SCIF is subject to risk-based capital regulations, but SCIF vowed to appeal.

The new proposal, submitted by Garamendi and Schwarzenegger on Aug. 15, would make SCIF subject to the same regulatory authority as other domestic insurers writing workers' compensation insurance. Language was inserted into AB 2125 giving the commissioner limited authority to regulate SCIF. The amendments reaffirm SCIF's status in the insurance code, as well as reaffirms the commissioner's duties and obligations concerning oversight of SCIF as a workers' compensation insurer. The amendments also recognize that SCIF is a public enterprise fund and has a unique governance structure established in statute.

Additionally, the amendments would require the commissioner to report to the governor and legislature when SCIF's financial condition reaches certain thresholds. However, the language does not allow the commissioner to place State Fund in conservation, liquidate the carrier or remove its authority to transact insurance. That way, the commissioner could take action when SCIF's risk-based capital is insufficient while keeping the state's leaders apprised of such action, Schwarzenegger and Garamendi said in a statement.

"In a situation where the commissioner would normally order a liquidation, the proposal would instead require the commissioner to recommend a course of action to the governor and legislature to remedy the condition," they said.

The initial proposal suggested increasing SCIF's investment flexibility, returns and cash flow, by allowing SCIF to make investments similar to private insurance carriers. Theoretically, that would have allowed SCIF to profit from its cash holdings.

Some in the industry questioned whether that provision, which would have allowed SCIF to buy stock in its competitors, would have allowed State Fund to unfairly profit from its tax-free status. However, the provision that would have expanded the type of investments the State Fund could invest in was removed from the bill, according to Normal D. Williams, assistant deputy commissioner at the California DOI.

After its submission, AB 2125, with the amendments, passed the Senate banking, Finance and Insurance Committee with a vote of 8-1. At press time, the bill was on the Senate Floor.

The legislation assures appropriate regulation of State Fund as an insurance carrier while preserving the authority of the Governor and State Fund's Board of Directors over its assets and operations as well as preserving the oversight responsibility of the legislature, Williams told Insurance Journal. Furthermore, "SCIF has agreed that when the legislation passes, it will drop its long-standing lawsuit," he said.

State Fund Acting President, Jim Tudor released a statement saying, "State Fund supports the legislation submitted today by Governor Schwarzenegger and Insurance Commissioner Garamendi and welcomes the resolution of the critical issues between State Fund and the Department of Insurance. State Fund would like to thank the Governor and the Insurance Commissioner for their leadership in drafting this legislation." Tudor was unavailable for further comment by press time.

Established by the California Legislature in 1914, San Francisco-based SCIF is a self-supporting, nonprofit public enterprise that provides a permanent market for workers' compensation insurance coverage at cost to California employers. Web site: www.scif. com.

To view the letter and amendments submitted by Schwarzenegger and Garamendi, visit http: //gov.ca.gov/index.php/pressrelease/ 3547/

Associations oppose eliminating contingent commissions

The attorneys general of New York, Connecticut and Illinois are continuing their fight against anti-competitive practices in the insurance industry. In doing so, they have been finding fault with contingent commissions paid to insurance brokers and independent agents.

Agent and broker associations are urging companies to fight those allegations on the grounds that contingent commission payments are lawful, competitively driven and do not negatively affect the consumer. The associations criticize regulators seeking to eliminate the practice.

"[Agents' and brokers'] voices need to be heard," said Michael D'Arelli, vice president of legislative and regulatory affairs for the Western Insurance Agents Association in Sacramento. "They need to communicate to carriers that it's not OK to enter into these settlement agreements [with insurance commissioners] and agree to work across the U.S. to abolish contingent compensation."

"Contingent compensation is not the problem," D'Arelli emphasized. "The problem is bid rigging and anti-competitive behavior. Contingent compensation is a very lawful practice -- it is not illegal -- and it is part of the free market system. ... We would like carriers to be mindful of how important contingent compensation is to the people writing their business."

"There is no need to regulate commissions or compensation," added Robert Hogeboom of Barger & Wolen LLP, counsel to the Alliance of Insurance Agents and Brokers, La Verne, Calif. "The consumer's primary interest is the price for the insurance and other industries involved with the sale of commodity products do not disclose compensation paid to sales representatives."

St. Paul Travelers recently reached a $77 million settlement with the Attorneys General, following similar settlements by AIG, Zurich and ACE. Under the terms of the agreement, St. Paul agreed to discontinue paying agent and broker contingent commissions on excess casualty coverage and any line of business if 65 percent of the U.S. market pays no commissions or signs an agreement not to do so. The company also agreed to support legislation and regulations to abolish contingent compensation for insurance products or lines, and support laws and rules requiring greater compensation disclosure.

Boston-based Liberty Mutual Insurance Group, on the other hand, decided instead to fight -- not settle -- the allegations. The company insisted charges of improper commissions and bid-rigging are untrue and overblown, and noted its willingness to go to court to defend its practices rather than settle.

"We have tried to reach a resolution and can only describe their settlement demands as excessive and unreasonable -- both in terms of magnitude and in their demands that we change legitimate business practices in states outside their legal jurisdictions," Liberty Mutual said in a statement.

Clark Payan, CEO of the Insurance Brokers and Agents of the West, said he sent a letter to Liberty Mutual commending its decision not to settle. "We continue to feel that contingent compensation is a legitimate business practice. It is not illegal or unethical, and it is a valid compensation tool that does not compromise the interest of clients. In that regard, we commend Liberty Mutual's decision to defend agency incentive compensation," he said.

"The competitive nature of the insurance marketplace is what motivates and drives placement of insurance," Payan explained. "To be competitive, you've got to place the business outside of what might be a compensation element."

Alliance President Gary Jensen said, "Public officials are attempting to end the legally permissible payment of contingent commissions through enforcement actions and lawsuits other than through legislative action." He noted the settlements directly affect the compensation of agents and brokers who do business with those large insurers. "In effect, the settlements provide incentives for companies to agree to support legislation to abolish contingent commissions along with greater disclosure of compensation, because they are at a competitive disadvantage as a result of this settlement," Jensen said.

"This is really a form of extortion," D'Arelli said. "Regulators are looking to the only avenue they have to make policy now. They are doing it through these settlement agreements because they've been beaten like a slow mule in the legislative and regulatory processes across the country."

In California, the Department of Insurance (CDI) is pushing a new cause of action for steering business to an insurer based on compensation paid to producers as a violation of Section 332 of the California Insurance Code.

According to Hogeboom, "Section 332 deals with disclosure of facts material to the contract concealment of specific contract terms of a policy. It is a stretch to make a steering claim under this statute. There is no statutory or regulatory authority for direct disclosure of compensation in California."

In 2004 and 2005, producer and insurer trade associations contested the California Commissioner's proposed agent-broker fiduciary regulations. The regulations would have required producers to disclose income received in handling a transaction for a client. It also would have made the failure to inform a client about the best available insurer and steering a client away from that insurer an unfair act or practice in violation of Section 790 of the Code.

The CDI held a hearing on the proposed regulations in January 2005 that was heavily criticized by the associations on the premise that producers owe a high standard of fiduciary duties to consumers in insurance transactions. Ultimately, the Commissioner withdrew the regulations on the notion that the industry would self-police.

The associations said that because CDI lacks the authority to impose additional duties on agents, broker and insurers, it is extracting concessions by insurers on contingent commissions that directly affect compensation paid to agents and brokers.

Jensen said, "Insurers need to hold the line and not cave on these types of settlements, which only induce state Departments of Insurance and Attorneys General to bring more actions."

"This all stems from Spitzer's initial investigation of several brokers and companies. There was no question some people were doing things they shouldn't have. ... But methods to deal with that already exist. To throw in contingent commissions and some other things is not the issue," Payan said. "Incentive compensation is something that has been a legitimate practice and still is a legitimate practice. Anybody can abuse any kind of practice but that does not make it bad."

Child safety seat bill passes legislature

The California legislature has approved a bill that would require children to ride in child safety seats until they are eight years old or 4 feet, 9 inches tall. Currently, children ages 6 and younger weighing less than 60 pounds are required to ride in safety, or booster, seats.

Under Assembly Bill 2108, children younger than 8 can ride in the front seat under conditions such as all the back seats are being used for other children younger than age 8. Infants up to one year old or 20 pounds must be placed in a rear-facing car seat. Car rental companies also would be required to provide booster seats if the bill is signed.

Supporters of the bill say booster seats raise a child up so that the seat belt properly goes across the shoulder and hips, instead of around the neck and stomach. The National Highway Traffic Safety Administration said children ages four to eight who use booster seats are 59 percent less likely to be injured in a car crash than children wearing only a seat belt.

At press time, the bill was before the governor awaiting his signature or veto.

Pharmacy issues critical in controlling workers' comp costs

Both labor and employers agree that workers' compensation reforms generally have improved California's business climate. However, some controversial issues still remain that likely will be addressed in 2007, according to William Zachry, vice president of corporate workers' compensation for Safeway and chair of California's Workers' Compensation Fraud Assessment Commission.

Zachry, who was the keynote speaker at the Golden Gate Chapter of the Risk and Insurance Management Society Inc.'s recent meeting in San Francisco, said one of the problems he expects to be addressed in the near future is pharmacy costs.

"Medicine has changed and pharmacy has changed for our generation," Zachry said. "It used to be that pharmacy was used for pain." Now, people take medications regularly, such as to control cholesterol or other conditions. "Did your parents take any regular medication?" he asked. "The next generation is going to take a pill for genetic and reconstructive reasons. So what happens in pharmacies is very crucial."

However, Zachry said pharmacy costs currently are being abused in California's workers' compensation system. While workers' compensation costs overall have decreased, "pharmacy costs in California haven't dropped because of repackaging abuse," he said of drugs sold directly through physicians. "Repackaging costs more than all the fraud in California -- it's all of your dollars -- but you don't see it," he said. The profits are being shared by repackagers and doctors who distribute the drugs, he told the room full of risk managers.

Currently, most medical provider network contracts do not address not allowing doctors to dispense drugs. As a result, doctors on the front lines who haven't had increases in rates in two years and are not properly paid are making up the money through profits on drugs sold directly to patients, Zachry said. Pharmacy costs used to be 14 percent of medical costs. He predicted now pharmacy costs represent 23 to 24 percent of medical costs.

Zachry said he expects new regulations to control costs on drugs dispensed through doctors "will be coming down the pike."

Another problem that needs to be corrected in California's workers' compensation system deals with permanent disability, Zachry noted. Doctors are not documenting permanent disability properly, he said. "People don't know how to write PD. Reports literally say 'no PD' under the guidelines but that the employee can't return to work. That makes it a bit awkward." he commented.

Consequently, Zachry said he expects legislators to address this issue and try to improve PD education in the coming year. He noted legislators would be unlikely to bring up controversial workers' compensation issues during 2006, an election year.

In the meantime, the commission is conducting a survey to help determine whether there are over- or under-payments in California's workers' compensation system, Zachry said.

Washington appoints assistant attorney general

Washington's Department of Labor and Industries (L&I) said that the State Attorney General's Office has assigned a full-time assistant attorney general, Susan R. DanPullo, to assist the agency in combating workers' compensation fraud. The newly assigned attorney will develop fraud cases for criminal prosecution.

"We work closely with county prosecutors and appreciate their strong support. However, they can be overloaded," said Carl Hammersburg, manager of L&I's Fraud Prevention and Compliance Program. "Having this new attorney gives us the ability to support local prosecutors or act as co-counsel, or -- when they already have their hands full -- to prosecute the cases ourselves."

Hammersburg said the addition of a new, full-time attorney gives L&I another tool for cracking down on fraud and financial abuse by workers, providers and employers.

DanPullo has been with the Attorney General's Office since 2003, with previous experience in private practice and more than six years in the Thurston County Prosecuting Attorney's Office.

Anyone who suspects fraud may call L&I's fraud hotline at 1-888-811-5974 or go to www.Fraud.LNI.wa.gov.

Allstate drops Alaska earthquake coverage

Nearly 7,000 Alaskans will lose their earthquake insurance as their policies come up for renewal.

Allstate Insurance Co. is cutting its optional earthquake coverage nationwide, and will drop this plan as policies come up for renewal, said Caitlin Gorand, spokeswoman for Allstate's Northwest region.

"It's part of a larger catastrophic management strategy," Gorand said. "The insurance industry is in the business of managing risk. We're trying to manage our exposure to mega-catastrophes."

Alaska customers have been receiving notices since mid-June, Gorand said. The company stopped writing earthquake policies in March.

In 2005 in Alaska, Allstate had 76,000 auto policyholders and 45,000 customers carrying policies on their property -- 6,800 of them carried optional earthquake coverage, Gorand said.

Allstate is working to provide its customers with an alternate carrier that is affiliated with the company, she said.

In Alaska, earthquake and volcanic activity are nearly everyday occurrences, but the state doesn't require earthquake insurance. The state has had three of the world's top 10 earthquakes. The 1964 Good Friday quake in Prince William Sound, was the largest ever recorded in North America.

Allstate and State Farm Fire and Casualty Co. together hold 64 percent of the homeowners insurance policies in the state, according to the Alaska Division of Insurance. The two hold 59 percent of the earthquake policies.

Some 54 companies offered earthquake insurance in 2004, the latest statistics available, taking in premiums totaling $12.3 million and paying out $36,000 in damage related to earthquakes, according to the DOI.

Two division spokespersons said they were unaware of any other insurance companies dropping earthquake coverage.

"It was not an easy decision to make," Gorand said. "It's something difficult for our customers, but we think it's a responsible decision for us in the long run."

Businesses file first in series of lawsuits against competitors

Frustrated businesses took their fight against illegal immigration to court in August, filing the first in a series of lawsuits accusing competitors of hiring illegal workers to achieve an unfair advantage.

Anti-illegal immigration groups said the lawsuits were an attempt to enforce immigration law by creating a deterrent against hiring illegal employees.

"We see the legal profession bringing to this issue the kind of effect it's had on consumer product safety," said Mike Hethmon of the Immigration Reform Law Institute, a Washington, D.C.-based group backing the California cases.

In the complaint, a temporary employment agency that supplies farm workers sued a grower and a two competing companies.

Similar cases claiming violations of federal anti-racketeering laws have yielded mixed results. The California lawsuits are believed to be the first based on a state's unfair-competition laws, legal experts said.

Santa Monica-based Global Horizons claimed in the lawsuit that Munger Brothers, a grower, hired illegal immigrant workers from Ayala Agricultural Services and J&A Contractors. The defendants are based in California's farm-rich Central Valley.

The suit alleges that Munger Brothers had a contract with Global Horizons to provide more than 600 blueberry pickers this spring, but nixed the agreement so it could hire illegal immigrants.

"Competitors hiring illegal immigrants is hurting our business badly," Global Horizons President Mordechai Orian said. "It's to the point that doing business legally isn't worth it."

Ayala Agricultural Services Manager Javier Rodriguez said the company doesn't hire undocumented immigrants.

"If somebody doesn't have a green card or work documents, we don't hire them," he said.

With an estimated 11 million illegal immigrants in the United States, undocumented workers are a large part of the work force.

But immigration law enforcement at work sites is limited. In fiscal year 1999, authorities arrested 2,849 people at work sites compared with 1,145 arrests last year, according to the federal Immigration and Customs Enforcement agency.

To prove competitors hire illegal immigrants, businesses could use public records involving prior violations, testimony from former employees who worked alongside illegal immigrants, and recovered W-2 tax forms that show people working under fake names and Social Security numbers, said David Klehm, the lead lawyer for cases in Southern California.

Companies planning to file lawsuits include farms and factories that depend heavily on immigrant labor, Klehm said. Legal experts said the cases could be difficult to win. Under state statutes, plaintiffs must prove a competitor directly harmed their business.

"Unless you've got smoking gun evidence, it's hard to tie economic loss of one business to another's practices," said Niels Frenzen, a University of Southern California law professor. He believes it is the first time the unfair-competition law has been used to target illegal immigration.

The Global Horizons lawsuit came after a settlement was reached in a Washington class action suit involving employees of Zirkle Fruit Co. who sued their employer for driving down wages by hiring undocumented workers.

Based on federal anti-racketeering laws, the case was settled for $1.3 million after the Appeals Court overturned a lower court decision to dismiss it.

Howard Foster, the lead plaintiffs' lawyer in the Washington case, said he expects more such suits as business owners learn their competitors hired illegal immigrants.

"So many people talk openly about using false documents to assemble an illegal workforce," Foster said. "And when you have IDs with upside down numbers and backward pictures, you know they are fake."

Insurance costs stop volunteer doctors in Idaho

A retired medical doctor in Coeur D'Alene, Idaho, who wants to donate his time to the Dirne Health Care Center in northern Idaho says he is unable to do so because medical malpractice insurance would cost him at least $10,000.

Norman Leffler, 77, said he wants to work at the center, which has a waiting list of as many as 500 patients.

"We've got enough people in this county -- besides the wealthy -- who could really use this," Leffler told the Coeur d'Alene Press. "The medical practice situation we're in today, well, the government isn't going to do anything. But we can do something locally."

The clinic changed from a free clinic to a federally funded health care center in 2003 so it could offer more services. But in making the move, the clinic lost some of the benefits of a free clinic, including immunity from malpractice lawsuits for volunteer doctors.

"It really inhibits volunteer activity," said Joel Hughes, CEO for the Dirne Clinic.

The clinic, he said, paid $7,000 for insurance to cover volunteers.

The clinic has a budget of about $2.6 million, and receives $650,000 in federal funding. It also receives money from patients with Medicaid and Medicare.

Hughes said Leffler and other doctors who want to donate their time and expertise could contact him to see if it might be possible to have them covered by the Dirne insurance plan.

The National Association of Community Health Centers, Hughes said, is trying to have the federal law changed so that volunteers would be covered.

Luke Malek is a former spokesman for the Dirne Clinic, now working for Gov. Jim Risch as a liaison in Coeur d'Alene.

"Once you're a patient of Dirne, you're a patient for life," he said. "In the long run, this helps control health costs.

"Dirne wanted to do it because they're now able to exponentially serve more people."

Washington governor declares wildfire emergency

Washington Gov. Chris Gregoire declared a wildfire emergency as several large fires burned in the state and forecasters predicted more thunderstorms and high winds.

"Numerous wildfires across Washington pose a serious threat to homes, infrastructure, businesses and natural resources ... and our firefighting resources have begun to grow scarce," Gregoire said, following a helicopter tour of the state's largest fire, the Tripod complex in north-central Washington.

The proclamation frees state agencies to spend money and resources to help local jurisdictions fight wildfires.

"Those are the sorts of things that help us in terms of making it easier to get resources," said Ray Steiger, information officer at the Columbia County fire in Washington.

Lightning-caused fires in Columbia County cover 34,000 acres and have destroyed two homes and 10 outbuildings, said Lisa Caldwell, an emergency management official.

An unknown number of residents along a roughly five-mile stretch of the Tucannon River were told to evacuate in late August.

The governor flew over the 200-square-mile Tripod complex in a helicopter as flames leaped 100 feet into the air. Nearly 3,000 firefighters are assigned to those fires, which were burning between Winthrop and Conconully and were 40 percent contained.

"It's very rugged terrain," Gregoire said. "The firefighters go in and put up a line, and ... are doing a great job of thus far being able to protect the community. ... We're just hoping now the weather cooperates."

However, the forecast called for more thunderstorms, high winds and low humidity after lightning started several new fires in tinder-dry, bug-killed timber in the Okanogan and Wenatchee national forests.

In Oregon, wildfires were burning on more than 100,000 acres of high desert in sparsely populated Harney County.

Lightning provided the spark, dried-out rangeland the fuel of grass, sagebrush and juniper, and high winds the driving force.

"We are getting tired, and our crews are getting tired. ... We've just had too much of the high winds, and the fires are pretty erratic in their behavior. It's going to be a long fight," said Tara Wilson, spokeswoman for firefighting agencies south of Burns.

In Montana, Gov. Brian Schweitzer took a first-hand look at the Emerald Hills wildfire east of Billings that has burned about 6,000 acres, intermittently closing Interstate 90 and destroying two homes. An evacuation order was issued for another 25 to 30 homes along U.S. 87, in an area southwest of the fire.

Nearly 7.2 million acres, or more than 11,000 square miles, have burned across the United States this year, much of it in grass and brush fires that have swept Western rangeland since March. Wildfires last year had burned about 6.8 million acres to this date, according to the National Interagency Fire Center.

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.

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

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.

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.

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.

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.

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

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.

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.

Agency weaknesses that the seller or buyer cannot solve themselves are resolved with the transaction. The ideal transaction includes complementary strengths and weaknesses.

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.

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.