California clarifies surplus lines rules for retail agents

California retail agent-brokers not transacting insurance on behalf of surplus line broker organizations are not required to follow a new law affecting surplus lines brokers, the California Department of Insurance confirmed. CDI clarified the requirements after numerous questions arose from licensees, it said.

In its follow-up bulletin, CDI noted that Assembly Bill 1639 applies to fire and casualty broker-agents who transact on behalf of a surplus line broker organization but are not themselves licensed as a surplus line broker; individuals licensed as a surplus line broker but who are not also licensed as a fire and casualty broker-agent; and new applicants for a surplus line broker license who are not currently licensed by the CDI in any capacity. The law does not apply to fire and casualty broker-agents who do not transact on behalf of a surplus line broker organization.

If a fire and casualty broker-agent is currently not transacting surplus lines business today, he/she will not need to obtain a surplus lines broker license after Jan. 1 because the fire and casualty broker-agent is going through a licensed surplus lines broker to place the insurance with a nonadmitted insurer, CDI said.

The legislation was passed to help "streamline the licensing process, and to become more uniform and reciprocal with other states in regard to nonresident licensing of surplus line brokers," CDI said. The law also reduces the application and renewal fees for the surplus line broker license from $1,200 to $700 per two-year license term, and reduces the fee for licensed surplus line broker organizations to endorse a licensed individual surplus line broker on their license from $336 per license term to a one-time $24 fee.

According to a statement by the Insurance Brokers and Agents of the West, prior to the law, California allowed surplus lines transactions without requiring a surplus line brokers license, as long as the person had a broker-agent license and was listed as a transactor under an organization's surplus lines license.

The new law takes effect on Jan. 1, 2008. For more information, visit

www.insurance.ca.gov/ 0200-industry/0050-renew-license/0200-requirements/
upload/Revised%20Notice%20-%20Surplus%20Lines%20License.pdf.

Court says database alone not sufficient in determining reimbursement costs

The Colorado Court of Appeals has ruled against State Farm Mutual Automobile Insurance Co., noting that the insurer's exclusive use of a computer database to determine reimbursements of medical costs was unreasonable. The decision opens the door for a class-action lawsuit to move forward that would represent patients who had payments from State Farm unilaterally reduced after the company processed the charges through Sloans Lake Auto Injury Management, a medical database that compares physician charges against "same or like services" in a geographic region.

In Pauline Reyher and Dr. Wallace Brucker v. State Farm Mutual Automobile Insurance Co., Reyher was injured in an auto accident and was treated by physician Wallace Brucker, the Junta, Colo., area's only orthopedic surgeon. Under Reyher's no-fault insurance policy, State Farm was obligated to pay "all reasonable and necessary expenses for medical" care. Brucker treated Reyher and submitted the charges to State Farm. The insurer processed the bills and reduced the payments, claiming that its database showed other physicians in the area charged less for similar services.

Reyher and Brucker filed suit against State Farm and Sloans Lake, and their complaint included allegations on behalf of a class of persons similarly situated. The court decided that the computer database used to determine "reasonable" reimbursement of medical costs was flawed and could not accurately assess the reasonableness of Brucker's charges.

According to the court, "a claimant's application and a provider's itemized billing statement are usually sufficient to establish 'reasonable proof of the fact and amount of the expenses.'" The court said it was "not persuaded by State Farm's argument that Dr. Brucker's bills were unreasonable as a matter of law because the database said they exceeded 90 percent of charges for similar procedures in the same geographic area. A question of fact exists as to whether the database accurately assessed the reasonableness of the bills."

Attorney Rob Carey of Hagens Berman Sobol Shapiro also noted that there was a problem with State Farm's conclusion because Brucker is the only doctor in his area who performs the type of medical services that Reyher required. Indeed, "reasonable jurors could infer ... that State Farms' repricing decision was invalid because there are no similar practitioners in Dr. Brucker's geographic area," the court said.

In a 3-0 decision, Judge Hawthorne remanded the case to the trial court that originally dismissed Reyher and Brucker's case, and granted summary judgment to State Farm.

For more information, visit http://www.courts.state.co.us/coa/opinion/2007/2007q3/06CA0239.pdf

Idaho reduces workers' comp rates an average of 3.7%

Idaho Department of Insurance Director Bill Deal announced that the state's workers' compensation premium rates will be reduced by an average of 3.7 percent for 2008.

"This decrease points out the stability of workers' compensation coverage in Idaho," Deal said. "It also shows that Idaho employers are doing an excellent job of providing safe workplaces for their employees."

The new rates were recommended by the National Council on Compensation Insurance, a rating and advisory organization that collects annual data on worker's compensation claims for the insurance industry. According to the NCCI, the workers' compensation system in Idaho is in strong shape and well-administered, the DOI said. The new rates will become effective Jan. 1, 2008.

Oregon to decrease workers' comp rates 2.3%

Oregon's Department of Consumer and Business Services has announced it is decreasing the workers' compensation pure premium rate in 2008 by 2.3 percent. Meanwhile, the workers' comp premium assessment, which pays for the administration of workers' comp and workplace safety programs, is proposed to remain unchanged at 4.6 percent in 2008. The Workers' Benefit Fund assessment, which pays for special benefits for injured workers and their employers also will remain the same at 2.8 cents per hour worked in 2008.

Employers and workers each pay half of the Workers' Benefit Fund assessment.

The pure premium reduction is the second year in a row that rates have decreased, and the 18th year with no rate increase, DCBS said.

DCBS credits improved workplace safety as one of the major reasons rates have gone down. It said workplace injury and illness rates in the state have declined 50 percent since 1988. At the same time, benefits for permanent partial disability have increased, as have benefits for time loss.

"Collaboration between labor and management has been key to the successful turnaround of Oregon's workers' compensation system, which began in 1990," said Cory Steisinger, director of DCBS, which administers the workers' comp system. "Employees and employers have worked together to make their workplaces safer, and they have been deeply involved with us in other improvements to make the system more efficient."

On average, employers can expect a 2.3 percent decrease in the pure premium, although specific cost changes will vary by business, claims experience and other workforce factors, DCBS said. The pure premium rate is the base rate employers pay their insurance company for workers' comp coverage.

The pure premium rate reduction and Workers' Benefit Fund assessment take effect Jan. 1, 2008. For more information, visit www.oregon.gov/DCBS/.

State Fund severs ties with group administrator; issues update on audit

California's State Compensa-tion Insurance Fund has terminated its relationship with Western Insurance Administrators and resumed its relationship with Shasta Builders' Exchange.

"I can confirm we don't have a business relationship with Western Insurance Administrators any longer," State Fund Spokeswoman Jennifer Vargen told Insurance Journal. Vargen declined to discuss the reasons for the action. She did confirm that SCIF "renewed its contract with the Golden State Builders Exchange, an association made up of individual builders, of which Shasta is a part."

Based in Long Beach, Calif., WIA used to serve as administrator for eight SCIF safety groups and was State Fund's largest program manager with more than 25,000 participating employers. On its Web site, WIA touted its "ongoing 50-plus [year] relationship with the State Fund." WIA did not respond to a request for comment.

State Fund's termination of WIA comes six months after State Fund's board of directors terminated its president, James Tudor, and another senior manager over what it termed as their "unacceptable" operation of the insurer's administrative fee program that compensates organizations like WIA to place State Fund policies at discounted group rates.

The ousting of Tudor and Renee Koren, the latter who was responsible for overseeing State Fund's group programs, came after Gov. Arnold Schwarzenegger's administration confronted WIA President Frank DelRe over a potential conflict of interest concerning administrative fees paid to WIA while DelRe served as a State Fund director.

DelRe and Kent Dagg, CEO of the Redding, Calif.-based Shasta, resigned last fall after administration officials discussed the potential conflicts with the two directors.

Following the resignations of DelRe and Dagg, SCIF began an internal investigation that led to the firings of Tudor and Koren.

In March, Nanci Clarence of the San Francisco law firm of Clarence & Dyer LLP, which is overseeing the internal review, told an oversight hearing of the Senate Banking, Finance and Insurance Committee that the inquiry is focused on the administrative fee program.

The program began in 1993 to provide group members discounts to reflect lower risk due to workplace safety programs run by the groups, Clarence told the committee.

In an update on the internal review issued August 23 by State Fund, the insurer stated the team conducting the review "determined they had taken the matter has far as they could and that it should be referred to the California Highway Patrol."

As a result of the referral of the internal probe to the CHP, the California Department of Insurance and the San Francisco District Attorney's Office formed a task force to investigate "allegations of potential misconduct" by Tudor and Koren, according to the report.

The report added that due to the task force's criminal probe, State Fund is unable to provide information on what the internal review revealed that led to the CHP referral and the formation of the task force.

"State Fund has been cooperating actively with the task force assembled to investigate whether any criminal conduct has taken place at State Fund or in connection with its operations," the report stated.

In March, California Insurance Commissioner Steve Poizner ordered an audit of SCIF. "This audit will be an independent, thorough, top-to-bottom examination of State Fund to include a review of matter relating to the recent dismissals [of Tudor and Koren], as well as all aspects of the organization and its governance," Poizner said.

Jennifer Kerns, a spokeswoman for Poizner, said the audit will be completed later in October.

In the August 23 report, SCIF reported it has made "fundamental" reforms of the administrative fee program "following a rigorous review of both operational and legal issues, as well as a complete analysis of the business case for the program."

As what it called a "first step," SCIF ceased all disbursements of administrative fees as well as payments to several unspecified vendors.

A review of the business merits of the administrative fee program by outside consultants concluded the program and the use of group administrators should be retained, the report disclosed.

"These programs help balance State Fund's business portfolio and improve safety," the report stated. "When properly administered and refocused on safety services, administrative fees are a worthwhile investment for State Fund."

New contracts with group administrators are being drafted containing "carefully defined expectations, performance metrics, mandatory audits and financial incentives for safety program participation." Groups that fail to meet the revised contractual obligations will not be permitted to participate in the insurer's group program unless they demonstrate their willingness to conform their operations to the new standards, the report stated.

According to the report, State Fund has also instituted more stringent controls on expenditures and strengthened corporate governance to keep abreast of industry best practices.

The insurer also is developing a code of ethics and guidelines on financial conflicts of interest for board members, officers and employees, and has established a whistleblower hotline operated by an outside company.

In addition, SCIF's board will be recommending the number of directors be increased, according to the report. The insurer wants to add six positions to its top management ranks.

Janet Frank, executive vice president of North American Field Operations for CNA Financial, has been hired as Tudor's replacement. Frank, who could not be reached for comment, will take over in early October according to Vargen.

Major Internet disruption would cost $250 billion in economic damages

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

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

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

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

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

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

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

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


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


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


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


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

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

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

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

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

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

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

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

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

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

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

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

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

House-passed flood insurance bill provides optional windstorm coverage

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

That reasoning echoed what some insurers have said.

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

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

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

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

The offshore reinsurance tax debate resurfaces in Congress again

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

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

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

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

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

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

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

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

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

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

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

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

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

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