Welcome to the 3rd Annual “Top Ten Stories of the Year”

By | December 24, 2001

In what became one of the most significant, traumatic and challenging years in U.S. history, the insurance industry, along with the rest of the nation, has had to come to terms with the terrorist attacks perpetrated against our country on Sept. 11, 2001.

Certainly, the topics chosen for this year’s top stories list reflects the effects those events have had on our industry. Of course, the most overwhelming aspect of Sept. 11 will always be the tremendous loss of life that occurred that day—a loss that also deeply impacted the insurance industry, which lost many within its own ranks. Then, of course, there are the issues of insured losses—who exactly is going to pay for all this—an aspect that plays a role in all of the remaining top five stories.

But despite the dominance of Sept. 11, other news stories made their mark this past year: mold litigation was on the rise; struggles over states’ privacy compliance and within the California’s workers’ comp market continued; controversy swirled around insurers’ use of credit scoring; and, on the West Coast, a northwest temblor, while, fortunately, not as deadly or destructive as the 1994 Northridge quake, brought the issue of earthquake coverage again to the fore.

The past year was most definitely a historical watershed, and it is hoped that you will appreciate this reflection on the year 2001 put together by our editorial staff. Happy New Year!

Catherine Tapia
—Senior Managing Editor

WTC Loss of Life Impacts Insurers

By Dave Thomas

In a moment’s notice, the insurance industry was hit with not only major financial losses, but more importantly, a staggering loss of life as terrorists slammed two commercial aircraft into the World Trade Center early on the morning of Sept. 11.

More than a dozen insurers had a presence in the Twin Towers, and two companies, Aon and Marsh & McLennan Companies (MMC), were especially hard hit by the attacks and subsequent collapse of the two buildings.

Stephen Ban, a spokesman for Aon, pointed out that the human loss of some 200 co-workers is something the company will deal with for years to come. “It was a time of a great deal of chaos immediately after,” Ban said. “It was critical for us to find out who was okay and be able to reach out to those people who were related to those who weren’t. Shortly after, we established crisis support centers all around the New York metropolitan area—places where people could go and talk to a counselor or congregate with other employees. Importantly, we had experts on hand who could answer very specific questions on insurance and benefits.”

Even in the midst of the tragedy, Ban said goodness emerged. “In the face of such evil, you can see so much good come out of people who are really trying to help their fellow human beings. It has been amazing. The outreach we’ve had from partners, carriers, clients and competitors has been overwhelming, literally from all over the world.”

Although declining an interview with Insurance Journal, J. W. Greenberg, chairman of MMC, remarked on the company’s status on its website following the tragic events: “This is a terrible time for all of us. Our hearts, thoughts and prayers are with all of those who are lost or are suffering from last week’s horrifying attacks. We are thankful to many of you in New York and around the world for your extraordinary efforts and outpouring of caring and concern.”

There were approximately 1,900 people from MMC’s businesses working in or visiting the WTC towers on Sept. 11. Of that number, nearly 300 were registered as missing, and two others were confirmed dead, including one that was aboard a hijacked aircraft. Those listed as missing were all in One World Trade Center—Marsh and Guy Carpenter occupied floors 93 through 100—the first building to be hit.

To the best of its knowledge, all of MMC’s colleagues from Two World Trade Center—located on floors 48 through 54—were safely evacuated. In this building were Guy Carpenter’s headquarters and smaller groups from Mercer, Seabury & Smith and MMC Enterprise Risk.

While Aon and MMC suffered the greatest human losses, a number of other insurers had a presence in the two buildings, occupying anywhere from one to several floors. Among those tenants were:

North Tower—Kemper Insurance Companies (Floors 35-36); Hal Roth Agency Inc. (77); Daynard & Van Thunen Co. (79); RLI Insurance Company (80); Metropolitan Life Insurance Company (89); and Marsh USA Inc. (93-100).

South Tower—SCOR U.S. Corp. (23-24); Allstate Insurance Co. (24); Hartford Steam Boiler (30); Frenkel & Company Inc. (35, 36); Guy Carpenter (47-54); Fireman’s Fund Insurance Co. (47-48); Seabury & Smith (49); AON Corporation (92, 99, 100); and Continental Insurance Co.

Fireman’s Fund public relations director John Kozero told Insurance Journal that all 190 employees of the company who worked in the South Tower made it out safely. “When the North Tower was hit, [the employees] began evacuating out of the South Tower,” Kozero said. “They made it safely to the 30th floor when the second plane hit their building. We’ve spoken with everyone, and they all made it out safely.”

According to Laura Margolis, spokeswoman for Allstate, the company had two offices in the South Tower. “Two of our employees made it out safely while the other two had not yet reported for work,” Margolis said.

As of late afternoon on Sept. 11, Linda Kingman, spokeswoman for Kemper Insurance Companies, reported, “The information we have at this time is that our employees were safely evacuated. We are in the process of trying to establish contact with each of our New York City-based employees.”

MetLife had a sales office on the 89th floor of North Tower out of which 35 employees worked. A day after the attack, two employees had been unaccounted for while the other 33 were reported safe.

For those that did survive, counseling was one of the first priorities. “We set up counseling not only for those employees there, but also for our employees in Jersey City and those in Johnstown [Penn.], near where the United plane crashed,” said John Calagna, MetLife spokesman. The United flight from Newark to San Francisco—the last of four planes to crash that Tuesday morning—went down about 80 miles from Pittsburgh.

Sadly, reports from some companies were not as happy as from those whose employees were able to escape to safety. The general consensus, however, was that it could have been much worse.

The good side of an entire industry came out in the moment of need; and while individual companies will continue to compete for business, the insurance industry was one on Sept. 11 and in the days following.

Financial Impact of Sept. 11 Still Being Felt

By Dave Thomas

While the human loss of life from Sept. 11 was overwhelming, problems for numerous insurers are compounded by the fact that bills resulting from the events of that day continue to grow.

According to the Disaster Insurance Information Office, 12,460 commercial disaster claims and 8,003 personal claims with a total value of $12.2 billion had been filed as of Dec. 11.

The insurance Information Institute (I.I.I.) estimated the attacks as causing total insured losses of about $40 billion, topping the $15.5 billion attributed to Hurricane Andrew. The I.I.I. reported that of that sector most impacted was business interruption, with $10.0 billion in estimated losses, followed by life at $6 billion. Losses for aviation liability and hull were $5 billion and $500,000, respectively, and losses for other liability were estimated at $5 billion. The property loss estimate for the World Trade Center’s twin towers was estimated at $3.5 billion while other property losses reached $5 billion. Also taken into account were losses for workers’ compensation, $4 billion, and event cancellation, $1 billion.

The greatest impact to date has been felt by Lloyd’s, with Berkshire, Munich Re, Swiss Re, Allianz, Zurich, St. Paul, AIG, XL Capital and Citigroup rounding out the Top 10. The terrorist attacks now have the distinction of being the top insurance catastrophe of all time, a unique position for a man-made event.

Insurance companies, both big and small, took a major financial hit from the attacks, as evidenced by their third-quarter reports.

The companies which suffered the most in terms of human losses, Marsh & McLennan and Aon Corp., were also hit hard financially during the third quarter. Marsh & McLennan’s profits dropped 40 percent from the same period in 2000 while Aon’s net income fell 48 percent.

St. Paul saw a more than $500 million operating loss for the third quarter, Chubb witnessed a $239 million net loss, and CNA Financial Corp. suffered a $155 million net loss. As a result of its losses in the last few months, CNA Financial Corp. announced earlier this month that it is restructuring, due in large part to the onslaught of insurance claims related to the WTC attacks. The move, which will eliminate 1,850 jobs, or about 10 percent of its workforce, will include restructuring property-casualty and life insurance operations, discontinuing variable life and annuity business, consolidating real estate locations and making related job cuts across the country.

CNA attributed much of its $155 million third-quarter loss to a $304 million loss for reinsurance and related premiums in connection with the events of Sept. 11.

A major player in the world market, Lloyd’s of London was also impacted greatly. Last month, Lloyd’s raised its estimate of net losses from the WTC attacks by 47 percent to $2.8 billion. On Sept. 26, Lloyd’s had estimated WTC losses at $1.9 billion

With claims coming in on a daily basis, just who is left to pay the bills?

According to the I.I.I., primary insurers will pay around 36 percent of Sept. 11 losses on a net basis, with most of the remainder being paid by reinsurers. Reinsurers, meanwhile, have been seeking to add terrorism exclusions to be in place for most of the 70 percent of treaties renewing Jan. 1, 2002.

Munich Re, the world’s largest reinsurance company, reported in November that it lost more than $1 billion in the third quarter because of claims from the Sept. 11 terror attacks. The company, however, expects to be profitable for the year despite the claims, which are the largest it has received in well over a century in business.

The $1.06 billion loss in the third quarter, which ended Sept. 30, was about what analysts expected. Analysts were watching to see whether Munich Re would raise the damage figure from the Sept. 11 attacks as late claims came in. But the company held steady with its prior figure of $1.84 billion for its share of the damage claims. The company, which holds its reserves in the form of stocks and bonds, was also hit by drops in financial markets as a result of the attacks and the sluggish world economy.

While the claims are sorted out, some are alleging that insurers are raising prices unfairly as a result of Sept. 11—that insurers have been doubling rates or raising them even more on some commercial, industrial and airline policies. Consumer advocates also claim the increases have come in coverage areas other than terrorism.

The Consumer Federation of America has urged state insurance regulators to strengthen oversight of rates and coverage. The consumer group recommended that state commissioners “immediately set up a rate and policy system that will prevent price gouging and keep terrorism coverage fully available.”

However, companies that write policies protecting property were hit hard by the assaults of Sept. 11, and insurers insist that certain rate hikes are necessary to ensure sufficient capacity to cover potential future event.

However, despite the rush of claims and falling third-quarter numbers, many observers remain confident that the industry as a whole remains healthy.

New Companies Formed to Meet Expected Demand Surge

By Charles E. Boyle

As the insurance industry recovers from the Sept. 11 attacks, companies are seeking to position themselves to meet an expected surge in demand and profit from soaring premiums. New capital is required—some replaces a portion of the losses, but even more has gone into the formation of new companies, principally in Bermuda. A review of the new initiatives announced since September includes the following:

RenaissanceRe Holdings Ltd. increased the capital and surplus of Glencoe Insurance Ltd., its primary commercial property insurance unit, by $100 million.

MMC Capital, Marsh & McLennan’s private equity subsidiary, established a new specialty insurance and reinsurance company in Bermuda, AXIS Specialty Ltd. MMC’s Trident II L.P. fund joined investors JP Morgan Partners, Thomas H. Lee Partners, The Blackstone Group and Credit Suisse First Boston to put up an initial capitalization of $1.6 billion.

American International Group’s new syndicate at Lloyd’s, N° 1414, managed by Ascot Underwriting, began operations on Nov. 1 with $144 million in capacity.

RenaissanceRe established a joint venture with State Farm Mutual to form Bermuda-based Da Vinci Reinsurance Ltd., with an initial capitalization of $500 million.

ACE Limited is raising around $1 billion in additional capital by selling 28.6 million shares at $35 per share, plus 4.29 million shares to cover over-allotments.

State Farm agreed to open an additional credit facility of about $144 million for Lloyd’s insurer Amlin Plc.

Arch Capital Group Ltd. established Arch Reinsurance, backed by $1 billion in capital, $250 million from Arch and the rest from private equity firms.

PartnerRe, issued $200 million worth of trust preferred shares and $175 million worth of mandatory convertible preferred shares, which are expected to be converted to common shares by December 2004.

XL Capital Ltd. offered up to 7 million ordinary shares, plus additional shares, to cover underwriters’ over-allotment, in a move to strengthen its capital base. The company reported an $840 million net third-quarter loss. XL’s shares have been trading in the $85-$90 range, making the offering worth over $600 million before expenses and commissions. XL also confirmed plans to increase its ownership in Le Mans Re.

Everest Re Group Ltd. filed a shelf registration statement with the SEC to offer newly issued common shares to the public up to an aggregate of $575 million.

White Mountains Insurance Group is raising $1 billion to fund a new Bermuda-based insurer. It will invest $200 million in the venture and expects to raise the remaining capital from investors.

Aon Corp. and Zurich Financial Services are forming Bermuda-based Endurance Specialty Insurance Ltd., with an initial capitalization of $1.2 billion. Aon also filed a shelf registration statement in early December to enable it to increase capitalization of its underwriting units by $750 million.

Kohlberg, Kravis, Roberts & Co. committed an additional $100 million in capital to the Alea Group [formerly Rhine Re].

AIG and Chubb Corp. teamed up with GS Capital Partners L.P., an investment fund managed by Goldman Sachs & Co., to establish Allied World Assurance Holdings Ltd. with initial equity capital of $1.5 billion. The Bermuda-based operating company, AWAC, got under way in November, when it agreed to an exclusive agency agreement with IPCRe to begin writing property catastrophe treaty reinsurance.

Lloyd’s Goshawk Insurance plans to raise an additional $145 million through a new share offering. However, ironically, it won’t bolster its Lloyd’s capital—the funds will be used to establish a new reinsurance company in Bermuda.

These capital initiatives added up to almost $10 billion as of the beginning of December. But the window of opportunity is closing, if companies want to be in operation in time for the January renewals.

The rush to enter a market which may end up paying out as much as $50 billion as a result of the attacks of Sept. 11 repeats on a larger scale the formation of new companies that followed Hurricane Andrew in 1992.

While their increased capital participation is a sign of confidence in the future, it also validates the observation of long-time industry consultant Paul Walther, head of Reinsurance Directions, that the larger companies stand to gain an even greater share of the market.

“There is probably an element of capital replacement in the new money being generated, but I see most of it as opportunistic capital, as was the case when the Bermuda market boomed after Andrew,” Walther said. He doesn’t think that the influx of new capital will eventually create a problem of excess capacity, as he expects a lot of other players will leave the market.

However, in Insurance Observer, David Schiff warned that when too much capital flows into the industry seeking high returns, it paradoxically lowers returns because too many companies compete for business. And over capacity was a major problem that depressed premiums and caused underwriting losses from 1994 through late last year.

After House Passes Terrorism Risk Protection Act, Attention Turns to Senate

By Catherine Tapia

Following the U.S. House of Representatives passage of its Terrorism Risk Protection Act (HR 3210) by a vote of 227-193 on Nov. 29—a move viewed by many in the insurance industry as, at least, a significant step in the right direction—all focus zeroed in on the U.S. Senate in anticipation of that legislative body reaching a compromise and producing its own bill.

According to the Independent Insurance Agents of America (IIAA), HB 3210 provides that in the event a future terrorist attack causes an insurance company to incur a loss equal to 10 percent of its capital surplus or a loss exceeding $100 million, the federal government would provide the company with a loan. Such loans, which would be repaid by insurers, would be equal to 90 percent of total exposure.

However at press time, no one seemed to know when, in what form or even if the Senate would come up with a bill of its own before session’s end. The Senate was expected to hear compromise terrorism legislation as a substitute for language contained in HR 3210 on Dec. 18.

A point of particular concern has been the 70 percent of reinsurance contracts that will come due Jan. 1, 2001. If the Senate were unable to come up with a bill of its own by session’s end, industry analysts predicted an economic crisis could ensue, with terrorism coverage becoming largely unavailable. But most of those same analysts remained optimistic that the Senate would come up with its own bill, albeit one that would have significant differences in comparison with HB 3210.

“[Senate Majority Leader] Daschle has taken more of a leadership role,” said According to Julie Rochman, senior vice president of public affairs for the American Insurance Association (AIA), adding that Daschle had been bringing his staff together with key Democratic members to come up with a common proposal.

During the weeks of late November and early December, there had been as many as four or five various proposals floating around the Senate. Senators Dodd and Gramm, had been working on the issue for some time, and other Senators like Hollings and McCain had also gotten energized in the process. Different committees battled over which would have the bill first, but as a result, none had dropped the tort reform provisions found in HB 3210, which, Rochman noted, “are much more controversial on the Senate side…Daschle has said he will not bring a bill to the floor that has those kinds of tort reform provisions in it.”

“We supported passage of [HB 3210] in the committee and the House,” said IIAA CEO Robert A. Rusbuldt. “However, there is no doubt that this very different from a traditional reinsurance mechanism… Insurance companies have not traditionally priced their products based on potential loans they may have to repay…We’re not sure what kind of impact [HB 3210] is going to have on rates, but there is no doubt it will clearly help make terrorism insurance more available.”

Rusbuldt emphasized the political importance for the Senate to produce a bill. He also added, “In the Senate, the bottom line really is over the liability issue…Everybody would like to have tort reform, but we don’t want the bill to fall apart over that issue. So the President clearly is going to have to weigh in on this…[And] any one Senator can filibuster…you need 60 votes to break that, not just a simple majority of 51…Somehow Daschle has to navigate all of the twists and turns because it’s so important to the economy.”

According to Carl Parks, senior vice president of government relations for the National Association of Independent Insurers (NAII), everyone from the President to the Republican and Democratic leadership in the House and Senate had all indicated that this is “must do” legislation. He also made note of the challenge faced by Daschle to get a bill out of the Senate and ready to go to the President in the couple of weeks that remained during December in which to do so.

The NAII issued a letter to all members on the Hill supporting passage of HR 3210. “We were very pleased that Oxley and the leadership responded to our concerns,” Parks said. Among the most important of those concerns were that the NAII “rather than being based on the model that came out of the administration…the methodology that [the House used] could have produced a pretty radical cross subsidization. Also, Parks noted “where there’s an industry-wide aggregate retention, we wanted to make sure that…the individual companies would have their own retention level inside of the overall industry aggregate to make certain that an individual company, a smaller company, didn’t go insolvent before the overall industry aggregate was reached.”

Rochman affirmed that the AIA still had several remaining issues with regard to HB 3210, but had always supported the process of moving forward with something, figuring that the flaws in any legislation could be fixed along the way. She added that, as there is no federal regulator for insurance, the process provided a tremendous opportunity for insurers to educate people about such things as how commercial insurance and workers’ comp work, and what business interruption coverage and reinsurance are all about.

“The interesting question is what the final bill that is sent to the President will look like,” Rusbuldt said. “The Senate has been talking about a very different, more traditional reinsurance mechanism, where the House is more of a loan program. We’re going to have to marry those two proposals together.”

Larry Silverstein Squares Off Against Swiss Re in Epic Battle

By Charles E. Boyle

Claims adjusters and policyholders may wrangle over the amount of compensation due following an automobile accident, or a fire, and eventually reach a compromise. But when you’re arguing over a difference of three and a half billion dollars, neither party is inclined to give up.

That’s the current situation between Larry Silverstein, head of Silverstein Properties, the company which acquired the master lease on the World Trade Center last July, and Swiss Re, the insurer which heads a group of 22 companies that signed binding commitments to insure it. While the “binders” are enforceable insurance contracts under New York law, the absence of a formalized policy has led, perhaps inevitably, to disputes over terms—particularly with regard as to what constitutes an “occurrence.”

Swiss Re opened the battle on Oct. 22, when it filed a lawsuit in the U.S. Federal District Court for The Southern District of New York in Manhattan seeking a declaratory judgment “that the September 11 collapse of the World Trade Center is one insured loss.” Although it framed the request as necessary in order to determine to whom insurance payments should be made, the company’s intent was clear: one occurrence means one loss— and, therefore, liability to pay for only one building, as there was no coverage against a simultaneous loss, a possibility which had been deemed unthinkable.

The binder placed a maximum limit on liability of $3.56 billion. Swiss Re avows that this is the most the insurers will be required to pay. Its own portion of the loss is 22 percent, around $780 million.

Silverstein responded by reaffirming his position that two loss events occurred and accused Swiss Re of trying to avoid its obligations, which brought a swift denial. He filed a formal response to the legal action two weeks later, asserting that since two airplanes smashed into two buildings, at two different times, two losses had occurred. Therefore, his company, its associate Westfield America, and the WTC’s owners, the Port Authority of New York and New Jersey, had the right to make two claims and be paid for two loss events. He also filed for an injunction to prevent ACE and XL from opening an arbitration proceeding in London to determine the extent of their WTC-related losses.

Whatever the court decides, the loser will probably appeal, and it could be a long time before the issue is settled. Other questions that get raised are when the $3.5 billion owed should be paid, and who earns the interest on that money.

Swiss Re has maintained almost from the day of the disaster that it is fully committed to paying its share of the claims. Jacques Dubois, president and CEO of Swiss America Holding and a member of the parent company’s executive Board, said special resources had been committed “to help clients manage these unprecedented claims,” and initial payments had begun to be distributed.

To pay interest on some $760 million General Motors Acceptance Corp. had loaned Silverstein to purchase the lease, $14.3 million was paid into an account set up by GMAC. Insurers have also begun paying the lost rental on the property, some $25 million a month. Over the five years it is estimated it will take to rebuild the WTC, that amount will come to around $1.5 billion.

Intimating that Swiss Re’s attitude was all show and no go, Silverstein opened another front in the confrontation, filing a “Preliminary proof of losses” with the company and demanding payment of the” actual cash value” of the complex.

Dubois led Swiss Re’s counterattack. In a written statement, he asserted, “By electing to recover an ‘actual cash value’ payment, Mr. Silverstein has apparently abandoned his plan to rebuild the World Trade Center.” Dubois added that if such were the case, the Port Authority would receive $1.5 billion, Silverstein and Westfield around $1.3 billion, and various lenders, principally GMAC and UBS Warburg, about $700 million.

Barry Ostrager, a lawyer for Swiss Re, told Reuters News Agency that the situation was “just like with your car.” If the company pays cash value for it, it doesn’t have to then pay to replace it. However, this analogy seems a little thin, as there are very few $3.5 billion cars.

Silverstein shot back that Swiss Re’s claim was “total and complete fiction” and emphatically denied he wasn’t going to rebuild. He maintained that how the claims are settled is separate from the issue of whether he and the Port Authority intend to rebuild the complex.

Some commentators indicated that Silverstein’s demand for the cash value was a move to obtain immediate funds, which might be worth more at present, than a series of payments spaced out during the years it would take to rebuild the WTC. He’s probably also aware that office space in downtown Manhattan is not exactly in demand since Sept. 11. One recent report found 13.2 million square feet of vacant office space in the area, a 49 percent increase in vacancies since the time prior to the attacks.

That’s where things stood at the end of November, but either side could open a third or even a fourth front before the battle is over. And even Solomon might have a hard time trying to settle their differences.

Calif. Mold Cases Closely Watched in Wake of Large Plaintiff Awards

By Catherine Tapia

For a time this year, numerous news headlines attested to a level of attention veering towards hysteria on the subject of mold in buildings. The most gripping headline appeared on June 4, 2001, when Melinda Ballard and her family were awarded a $32.1 million by a Texas jury in a mold-related lawsuit against Farmers Insurance Group.

Then on Nov. 8, in the largest personal injury verdict in a toxic mold-related lawsuit in the U.S., a Sacramento, Calif., jury awarded Darren and Marcie Mazza and their eight-year-old son, Bryce, $2.7 million. In December 2000, the Mazzas filed a lawsuit against the owners and managers of the apartment complex where the family rented a unit from August 1997 until June 2000. Representing the Mazzas, John C. Miller, an attorney from the firm of Charter Miller Davis LLP in Sacramento, said his clients began to suffer from a number of health problems about six months after moving into the apartment, which Miller said had levels of the molds stachybotrys, aspergillus and penicillium on surfaces, in air and in a carpet test sample.

The insurer involved, though not named as a defendant, is the California Insurance Group. The affected insurance companies are reported to have filed a declaratory relief action challenging coverage, scheduled for trial in January.

The major difference between this case and the Ballard case is in the Texas case, no evidence of bodily injury came before a trier of fact. In Ballard, the defense made a motion to exclude all evidence the plaintiffs wanted to put on to show how they had been injured physically by mold. Texas follows a different standard for admissibility of evidence, at least on the state level, than California, and the Ballard judge excluded all such testimony. Of the money the Ballards received, $12 million, the largest single component of the $32 million verdict, was purely punitive or exemplary damages levied against their insurer. On the other hand, the Mazza case was about personal injury; the owners and mangers of the property were charged with causing the plaintiffs to suffer bodily injury.

While the defense in the Mazza case challenged the plaintiffs’ medical evidence in a separate hearing outside the presence of the jury, the judge allowed that testimony to be included.

Miller confirmed that the plaintiffs underwent separate types of blood tests, which, simply put, measure different antibodies the human body produces in response to various antigens. Although the plaintiffs were found to be not allergic to mold, according to some of these tests, Miller said, “My clients had positive IgG antibodies to the molds found in the apartment.”

A recent California Department of Health Services (DHS) fact sheet, “Misinterpretation of Stachybotrys Serology,” summarized that [“Stachybotrys chartarum] serology tests have no clinical application at this time.” The fact sheet also stated, “The United States Food and Drug Administration has not evaluated or approved these testing methods.”

Not surprisingly, carriers are increasingly taking such steps as retaining legal consultants which specialize in mold cases as well as evaluating possible changes to policy language and adding mold exclusions.

Other mold-related cases ongoing in California are being closely watched, including several which originated last year, when a Superior Court Judge filed a lawsuit against the County of Tulare.

Michael Woods, an attorney from McCormick, Barstow, Sheppard, Wayte & Carruth LLP in Fresno, representing Tulare County, explained several lawsuits involving claims alleging personal injury arising from exposure to toxic molds in three different Tulare County courthouses are still pending. Virtually all of the 115 plaintiffs involved are represented by Alexander Robertson IV, of the Woodland Hills law firm Robertson, Vick & Capella, whose more than 1,000 clients in mold cases throughout California include Erin Brockovich. He was also one of the attorneys that worked on the Ballard case.

According to Woods, “There are lots of insurance companies involved [in the Tulare case] because of… ‘the construction defendants.’ It’s becoming a construction defect litigation, combining construction and mold.”

Robertson also recently filed 68 suits on behalf of sheriff deputies, alleging personal injuries resulting from exposure to toxic mold and lead dust in a Monterey County courthouse.

According to Eric Goldberg, assistant general counsel for the American Insurance Association, just because there are no standards on mold or mold remediation doesn’t mean that a carrier is going to sit on its hands in responding to claims. “However, there is a concern among carriers that because of the lack of standards, it is harder to determine whether the carrier acted in good faith,” he said.

California Governor Gray Davis recently signed two pieces of legislation designed to promote the study of the effects of mold. SB 732 requires a DHS task force to determine whether it is appropriate to set exposure levels and standards for the remediation of toxic mold. If it is determined inadequate scientific evidence to support regulations exist, guidelines and recommendations for appropriate levels of mold in residential and commercial properties will be developed. Under AB 284, the California Research Bureau is required to conduct a study on mold in indoor environments, the findings of which will be reported to the DHS and the legislature by Jan. 1, 2003.

State Privacy Regulations Produce Consistency—But Some Surprises

By Joseph Mangan

When Congress passed the Gramm-Leach-Bliley Financial Services Modernization Act (GLB) in November 1999, many observers expected a wave of mergers and consolidations among financial services institutions.

However, there was very little activity along those lines in 2001. The spotlight focused instead on statutes and regulations intended to implement GLB’s privacy protection provisions. State legislatures and insurance departments were slow to act. When the July 1 deadline for implementing privacy protections passed, several states still had taken no action. As the year drew to a close, privacy regulations were still pending in three states.

Fierce debate also swirled around privacy regulations that the states and the U.S. Department of Health and Human Services (HHS) adopted. Insurers complained that the model privacy regulation adopted by the National Association of Insurance Commissioners (NAIC) put them at a competitive disadvantage relative to other financial institutions. The model regulation, they asserted, went beyond GLB by including third party claimants and workers compensation policyholders in the definition of “customer.”

Insurance trade associations tried to paint these provisions as excessive, citing language in both GLB and the NAIC model, which state explicitly that privacy protection extends only to non-public personal financial information provided for personal or household purposes.

History provides a partial explanation for the slow response by the states to the privacy provisions of GLB. Insurance regulators and state legislators look on Congress as the new kid on the block when it comes to protecting consumer privacy, and they point to the 1982 NAIC Model Privacy Act to buttress their position.

By November, the NAIC reported 47 states and the District of Columbia had privacy laws or regulations in place. That tally included 13 states that have the 1982 NAIC Privacy Model Act on their books, plus 34 others and the District of Columbia that have adopted privacy regulations based on the 2000 NAIC Privacy Model Regulation.

Trade groups representing insurers, agents and brokers generally favored the regulated NAIC regulation to the extent that it implemented the privacy provisions of GLB. They took exception, however, to provisions that brought third party liability claimants and workers’ comp within the scope of privacy protection, and launched a campaign to remove those provisions—an effort that produced mixed results. Fifteen states adopted regulations or statutes removing the health information provisions in whole or in part.

“We’re happy to see that every state did something to advise their insurers how to comply with GLB,” commented Kathleen Jensen, insurance services counsel for the National Association of Independent Insurers (NAII). She did express disappointment, however, that three states, Alaska, California and Maryland, have adopted enabling legislation but have not yet promulgated the regulations necessary to comply with GLB.

Another problem insurers face is the prospect of state laws and regulations that impose an affirmative consent (opt-in) standard for sharing non-public personal financial information, instead of the opt-out standard set by GLB. In November, the Vermont insurance department adopted a regulation establishing an opt-in standard, and similar proposals remain on the table in Alaska and California.

“The Vermont legislature did not pass enabling legislation, yet the Department of Insurance went ahead and promulgated a regulation regarding privacy that actually is not consistent with GLB in that it provides for an opt-in for non-public personal financial information as opposed to an opt-out that is consistent with GLB,” Jensen explained. “That places insurance companies at a competitive disadvantage with other financial institutions in Vermont.”

When a new administration took office in January, insurers sought to reopen debate on the regulations HHS adopted in the closing days of the Clinton Administration to implement privacy provisions of the Health Insurance Portability and Accountability Act (HIPAA). The industry expressed concern that the minimum necessary rule and the provision for an agreement not to disclose would encourage fraud in third party liability, personal injury protection and workers’ comp claims by allowing claimants to conceal prior injuries. In April, President Bush dashed their hopes by instructing Secretary of Housing and Human Services Tommy Thompson to allow the regulation to take effect without modification.

The burden of the HIPAA regulations on the industry eased when HHS issued guidelines. These created an exception to the minimum necessary rule for property and casualty insurers when they obtain an authorization or when disclosure is required by state law—but concerns remain.

“The guidance that HHS put out in July was very welcome in terms of the minimum necessary rule in lines other than workers compensation,” said Nancy Schroeder, NAII assistant vice president, workers comp. “At this point, it’s ironic that the biggest problems with the regulation will really be for workers compensation writers because some of the issues were resolved for everybody else in the property/casualty industry. The one issue that the non-workers compensation writers still face is, of course, the agreement not to disclose. And there’s a lot of concern that might lead to fraud.”

Calif. Workers’ Comp Market—Not Nearly Out of the Water Yet

By Catherine Tapia

For the most part in 2001, California’s workers’ compensation market traveled pretty much along the same slippery slope it had the year before.

Again, there were some significant insolvencies, among them HIH, Reliance and Frontier. And though these, on individual levels, did not quite equate with the enormity of Superior National’s demise in 2000, cumulatively, they struck quite a blow. These insolvencies provided a major challenge for the California Insurance Guarantee Fund (CIGA), an important safety net for policyholders in the event a carrier goes insolvent.

On Sept. 12, California Governor Gray Davis signed into law AB 1183, which raised the premium surcharge to insurers from 1 percent to 2 percent in order to ensure that the CIGA remains adequately funded.

Last October, Lawrence Mulryan, executive director of the CIGA, told Insurance Journal that despite the passage of AB 1183, CIGA was in need of additional help and was working with the California Department of Insurance to receive a much more prompt distribution of assets from estates.

“We continue to see losses develop very adversely,” said David M. Bellusci, chief actuary for the Workers’ Compensation Insurance Rating Bureau (WCIRB). “Our estimates are the industry is still significantly under-reserved in 2001, as it was in 2000…The main story of the loss side is frequency has been continuing to decline—that’s been a positive. [But] what’s happening is the average cost of claims has been going up dramatically and more than offsetting that.”

Bellusci noted that in 2001, there was even a very similar legislative process to one last year (and the year before) where a bill (in this case SB 71), calling for very significant benefit increases, was passed by the state legislature but in the end, vetoed by the governor. “I think [Davis] was concerned about the magnitude of the costs and imposing those kinds of costs on a business community that was clearly reeling from other issues,” he said. “The bill was vehemently opposed by most of the business community.

“[The 2001] package we estimate would have cost $3.4 billion by the time in was fully implemented in 2006,” Bellusci continued.

Going into 2002, there will be a new dynamic in that on Dec. 3, two ballot initiatives were filed with the aim of significantly increasing benefits. Labor has been pushing for such proposals, which would not go through the legislative process, but rather to the voters in November.”

On Dec. 3, the Workers’ Compensation Action Network issued a release regarding the proposed ballot measures. It stated in part that the initiatives would be “costly” and “destructive” to California’s economy. According to the statement, “They would add billions to the cost of keeping jobs in California and providing public services while ignoring the problems that make California’s workers’ compensation system one of the most wasteful and inefficient in the nation.”

And this past year, there was a pure premium rate increase of 10.1 percent, which went into effect on Jan. 1, 2001. Bellusci noted that these loss cost increases approved by the California Insurance Commissioner “are really only advisory…These had already been increased by 18.4 percent in 2000. And there has been an increase approved for next year of 10.2 percent, which will take effect on Jan. 1, 2002.”

Despite the number of insolvencies over the years, there are still a large number of companies, more than 100, licensed and writing at least some workers’ comp business.

“The State Fund estimates for 2001, their market share will be above 30 percent, where a couple of years ago it had been below 20,” Bellusci said. “Clearly with these with insolvencies and with other companies hurting because of the underpricing that happened a few years ago, plus the continued loss development…the State Fund’s market share has been growing.”

But despite the seemingly endless decline of the California workers’ comp system, Bellusci said that, in terms of the health of the marketplace, there are some encouraging signs—one of them clearly the upward movement of pricing in the marketplace. “The results were so horrific in 1999,” he said, adding that the true combined ratio for that year has been estimated at about 170. “So there’s some improvement from those kind of results.”

Bellusci noted that prices have gone up 50 percent over the last two years, but losses are continuing to escalate, particularly on the medical side.

“Even though the prices on current business may be moving closer to adequate, most people believe there’s a significant under-reserving,” he continued. “So the reserves the industry has to pay for old claims is probably short, and that has to work its way through.

“In my mind, the picture is probably not as bleak as it was a year or two ago,” Bellusci concluded. “But that doesn’t mean there won’t be other insolvencies or that the industry’s anywhere close to a healthy state yet.”

The Great Insurance Scoring Debate

By Sky Barnhart

The use of credit scoring in insurance has gained national attention this year as a point of contention between insurers and consumers.

An insurance score is a number, based on an objective analysis of a person’s past credit history, which predicts the amount and costs of that person’s future insurance claims. Companies generate insurance scores by entering a consumer’s financial history information—such as payment history, collections, balances, bankruptcies and inquiries—into a computer model, which then calculates a score. This score is used to aid insurers in the risk evaluation process.

The practice has been in use for some years now, but the issue was dragged into the spotlight earlier this year with the release of “Breaking the Silence,” a study by Conning & Company that looks at auto insurers’ use of credit scores. The study revealed that out of the 100 largest personal automobile insurers, 92 percent use credit information in underwriting new business.

According to Derrick Shannon, vice president personal lines product management at Ohio Casualty in Fairfield, Ohio, establishing the use of credit scoring is one of the primary initiatives for Ohio Casualty right now. “Actually, I think we’re a little late to get on board,” he said. “We’ve seen a shift in our book of business—for more and more consumers that have lower-than-average credit histories, there is a clear connection between loss ratios incurred [and credit history].”

Shannon said credit history is not a more important factor than a driving record or claims history, but “we do incorporate it as a separate rating variable, and all of those things are still rated in the traditional way.”

On Nov. 30, the American Insurance Association (AIA) publicly stated its belief that credit-based insurance scores are objective underwriting and rating tools which increase competition, and allow insurers to charge customers premiums that reflect their individual risk.

“Insurers have found this tool to be an extremely accurate predictor of future risk exposure, yet they also recognize the need to use that tool responsibly,” David F. Snyder, AIA assistant general counsel, told the Consumer Federation of America’s annual conference. The use of insurance scores, Snyder said, enables insurers to write more insurance for more individuals, which leads to more choices for consumers and in many cases, lower costs.

However, on Dec. 3, Washington State Insurance Commissioner Mike Kreidler called for bold measures to limit the use of credit scoring by the insurance industry, saying the increasingly common practice is likely hurting consumers.

Kreidler, who had input from hundreds of citizens in recent public hearings around the state, said reform was needed to decrease disparities among insurers and to demystify credit scoring for consumers. Kreidler’s office polled other states, and out of the 36 that responded, 13 said they have laws that limit the use of credit history.

Consumer backlash has been forceful. “What I’ve seen more than anything is backlash against the companies that are refusing to issue policies, declining risks and non-renewing risks based on credit history,” Shannon said. “We accept all risks regardless of credit history, though we will still check out their driving records and claims history. We actually provide credits to individuals that have better-than-average credit history. If someone comes in with relatively poor credit, they’re just not going to be eligible for the credit.”

Some consumers point to errors in credit reports that could jeopardize the availability of coverage for some drivers, but insurers say the likelihood of this occurring is small. “I have yet to see any individual credit report that has come across my desk in which there is an error that could make a substantial difference in credit history,” Shannon said.

Reducing the number of inaccuracies in credit reports will benefit both consumers and insurers, Snyder said. To achieve this end, by improving the quality of the information that goes into an insurance score, the education process will intensify in the next year. The AIA and other industry partners have announced they will launch a nationwide educational campaign.

“I think it’s unfortunate that many carriers, in their hurry to jump onto the insurance scoring bandwagon, rather than adopting a risk with better than average history, [are] just declining consumers with poor history,” Shannon said.

Legislation may be the ticket to regulate the credit scoring practice—both to decide what is acceptable use of the data and to mandate disclosure.

Disclosure is a key topic in the credit scoring debate. Kevin Callahan of the Bob Callahan Agency Inc. in Albany, N.Y., said they have used insurance scoring as a tool for about five years, and from an agency standpoint, have developed a way to tell the customer about it in the “least threatening way possible.”

“Many people feel as though they have been discriminated against, and even those who benefit from it seem to resent having insurance companies accessing this type of information,” Callahan said.

But for many insurance companies, credit scoring has been and will continue to be an integral part of the underwriting process.

2001 Washington State Quake Rattles Insurers

By Dave Thomas

While the U.S. has not experienced any recent earthquakes the size and impact of the 1994 Northridge earthquake, which killed more than 70 people and did more than $13 billion in damage, 2001 did produce one quake that got the attention of both residents and insurance companies.

On Feb. 28 and 10:54 a.m., a temblor measuring 6.8 on the Richter scale hit Seattle, causing a rattle which extended beyond the Washington/Oregon state border. The event ranks as Washington’s worst catastrophe to date, incurring the state’s largest insured-property losses on record. The most recent estimates of total insured losses from the event released last November by Insurance Services Offices (ISO), was $305 million—$295 million of those claims coming from Washington and the remaining $10 million from Oregon.

It is also important to note that although experts say that the Seattle-area quake lacked the severity of the Northridge disaster because the tremors occurred well below the surface, several hundred were injured and one woman suffered a fatal heart attack in the aftermath of the quake.

It was reported that the quake cracked the dome of Olympia’s capitol building and caused major power outages in the area. A state of emergency was declared by Washington State Governor Gary Locke declared a state of emergency, who was himself left temporarily homeless by the event—the Governor’s Mansion was damaged considerably during the earthquake. Seattle, located on the Juan de Fuca fault, had not had a major earthquake since 1965.

Claims adjusters from companies such as USAA, Allstate and SAFECO were quickly sent to the scene of the disaster to assess the amount of injury and insured damage to the state’s business and residential areas. According to the Insurance Information Institute, the bulk of claims stemmed from cracked walls, foundations and contents, and damage to roofs and automobiles, mostly in the Olympia area.

According to ISO spokesman Dave Dasgupta, Washington’s was the only earthquake-related catastrophe this year in the nation. And while Dasgupta noted the Seattle quake did not have a major impact on property and casualty insurers as a whole, he also pointed out that it is especially difficult for insurers to prepare for earthquakes because of the unpredictability of those disasters.

“Part of the problem for insurers…is that earthquakes are what we call ‘low frequency, high severity events,'” Dasgupta commented. “You don’t know beforehand their likelihood and their impact. Insurers have been looking into more earthquake-resistant buildings, better construction, better building code enforcement to make sure properties can withstand events of that nature.” He added that Northridge had served as a wakeup call in terms of the need for structures which, as a result of more stringent requirements, are better able to withstand tremors of that nature.

Michael Harrold, Northwest regional manager for the National Association of Independent Insurers (NAII), whose member companies write more than 43 percent of Washington’s homeowners insurance, noted that insurers oftentimes have to point out to clients just what their policies do and do not cover.

“Many consumers are misinformed or unsure about the coverage provided by their standard homeowners policy,” said Harrold. “Typically, earthquake coverage is not provided by the policy unless specifically purchased, but only about 10 to 20 percent of property owners in Washington do purchase this coverage.”

Although earthquake coverage is available in the state, NAII statistics show that insurance premiums for “earthquake and other earth movement” coverage represent only 8 percent of total homeowners premiums in Washington.

SAFECO, which estimated $15 million in customer claims from the Seattle quake—$6 million in personal insurance, $6 million in business insurance and $3 million in commercial insurance—began to write quake insurance in Washington three years ago.

As the year progressed, Spokane, a city of 190,000 in eastern Washington, was in the throes of what experts call an “earthquake swarm.” More than 75 quakes have been recorded since May 24. Spokane, which has had no major earthquakes in its 120-year recorded history, hasn’t been deemed as being in an earthquake zone. Because of that, there were no seismographs in the city when the “swarm” started in May. Now the city has four. In the past month, hundreds of small earthquakes have also been detected near Mount St. Helens, in western Washington.

When all was said and done, the earthquake near Seattle resulted in lower insured losses than originally estimated. The factors that weighed in favor of insurers and their clients included the 33-mile depth of the quake and an upgraded building code that was instituted in 1995, allowing much of the damage to fall within deductible limits.

Still, the final financial numbers meant an early blow to a number of insurers who would later deal with the country’s greatest catastrophe ever—Sept. 11.

From This Issue

Insurance Journal West December 24, 2001
December 24, 2001
Insurance Journal West Magazine

Top 10 Stories of 2001

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