December 19, 2004

Insurance Agency as Franchise

In December 2004, a Connecticut jury awarded $2.3 million to an insurance agency terminated by Nationwide, despite a provision in the agency agreement allowing termination "without cause," according to press reports. The decision was based in part on a finding that the action was governed by the Connecticut Franchise Act ("CFA"), C.G.S. §§42-133e, et seq. Atty. Ray Garcia of Garcia & Milas, P.C. represents the plaintiff in this case and told Insurance Journal: "This jury decision is groundbreaking in that it is the first in the United States to apply Franchise rules to the Insurance business, in effect invalidating the 'without cause' provision."

According to Atty. Garcia, "The jury's decision ... opens up the possibility of future class action suits against major insurance companies from independent agents terminated in the last few years without cause, or those who were not given reasons for their termination even when accused of illegal conduct." Jury Backs $2.3 Million Award to Terminated Independent Agent; Nationwide to Challenge Verdict

In September 2003, the U.S. District Court denied summary judgment sought by Nationwide. Charts v. Nationwide, D.Conn., Civil Action No. 3:97CV1621(CFD) (1993)). Nationwide has indicated it may appeal if the court allows the jury verdict to stand, according to Insurance Journal.

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December 18, 2004

Terror Insurance Market Overview

The events of September 11, 2001 constituted the largest catastrophe in the history of insurance. Despite the shock of estimated combined claims of over $32 billion, the global insurance network held and adapted. Before that date, the market for terrorism insurance was small and specialized. After that date, the demand exploded and prices rose as many insurers excluded terrrorism coverage.

Some corporate insurance buyers found the resulting prices to be unaffordable, or were unable to purchase terrorism coverage at any price. In response, the United States Congress passed the Terrorism Risk Insurance Act of 2002 ("TRIA") which provided $100 billion in federal reinsurance, nullified terrorism exclusions, and required insurers to "make available" terrorism coverage.

TRIA expires at the end of 2005, and may or may not be extended. The continuing need for TRIA, or a measure like it, has been a topic of intense political and economic debate as corporate risk managers and insurance providers plan their 2006 insurance and reinsurance programs.

Released on December 15, 2004, a new study, "Terrorism Risk Management & Risk Transfer Market Overview" is now available (free registration required) from the global insurance brokerage firm Aon. According to its Executive Summary, the report "summarizes the salient features of the central components of today's global marketplace for terrorism insurance," and is "designed and intended to provide a current snapshot of the state of the terrorism insurance marketplace and to describe metrics, risk control, and other issues surrounding it." Ibid.

(read more)

Aon reported on its examination of data regarding 500 of its corporate accounts that renewed coverage in the previous 12-month period. The report includes detailed graphs and tables of data regarding "take up" rates and pricing for terrorism coverage broken down by variables including account size, industry segment, total insured values ("TIV") and geographical location. Aon concluded that the presence of TRIA increased availability and affordability of terrorism coverage, and that the percentage of insureds that purchase or "take up" terror coverage has increased substantially in the past year.

Aon also examined the upsides and downsides of the use of single-owner captive insurers to handle terrorism exposures. It also examines U.S. Treasury Department interpretive letters addressing concerns over potential use of captives to "game" the TRIA system, and suggests ways of styling a captive program to satisfy the concerns of Treasury.

"Fire following" an event is a hazard that must be covered under the 1943 New York Standard Fire Policy ("SFP") language required by statute in 29 jurisdictions. Fire following the terrorist attack played a key role in the destruction at the World Trade Center on September 11. Aon notes 9 states that amended their statutes to allow insurers to exclude from such SFP coverage "fire following" an otherwise uninsured terrorist event.

The study examines arguments for and against extension of TRIA beyond 2005, and bills pending that would continue its "back stop" provisions. It also offers hypotheses on what the market would look like if TRIA were not extended, and raises doubts that satisfactory alternatives can evolve before the end of 2005. It also provides a view of how TRIA coverage would "unwind" if not renewed or extended, predicting a "clear potential for significant confusion and disruption in the market as TRIA expires." Id., page 40.

Available capacity for "Stand-Alone" terror coverage is also presented in tables in the Aon study, based upon information obtained by Aon in the course of placing coverages for its customers. It also provides information about Stand-Alone coverage form language and the definition of terrorism, generally based upon the London market "T3" definition: "an act of terrorism means an act, including the use of force or violence, of any person or group(s) of persons, whether acting alone or on behalf of or in connection with any organization(s), committed for political, religious or ideological purposes including the intention to influence any government and/or to put the public in fear for such purposes."

The study report closes with an analysis of the challenge and importance of corporate management of the terrorism risk.

Appendices include summaries of recent U.S.Treasury Regulations, a listing of international terrorism risk programs and a list of some officially recognized terrorist organizations and examples of potential methods of attack.

Although Aon clearly discloses its support for the continuation of the TRIA provisions, its report provides substantial information of interest to objective students of the issue.

Other Unintended Consequences postings about TRIA resources available online:

  • TRIA : Resources online at GEIS, Treasury and BNA
  • Political Impacts on Terror Insurance

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  • December 15, 2004

    AIK Comp Paid Discounts

    AIK Comp, the troubled Kentucky workers compensation self-insurance group, was paying members advance discounts to attract business, when rates were inadequate to fund reserves, according to press reports about of the contents of a private consulting firm's audit. Insurance Journal reported that $38.6 million in discounts over a three-year period led to a $59 million shortfall at AIK Comp, forcing it to assess 3,700 member employers.

    (read more)

    According to the Kentucky Post, the Office of Workers' Claims received a report from a private consulting firm, York Consulting, on the status of AIK Comp. "Giving discounted premiums to members before loss reserves can be reasonably established appears to be a key factor in the current financial distress of the fund," said the York Consulting report, according to the Post. "The current deficiency could have been partially or completely offset had the trustees allowed for time to see losses develop over a reasonable time prior to returning any potential excess premiums to members," the York report added, according to the Post.

    A "lack of appropriate oversight" by the Kentucky Office of Workers' Claims allowed the situation to continue until a cash crisis forced the situation to the surface, according to a F.A.Q. on the website of the Office of Workers' Claims.

    Following the discovery of AIK Comp's financial status, on August 3, 2004, the Governor of Kentucky signed an order relieving OWC of authority over self-insurance funds, including AIK Comp, placing it under the supervision of the Department of Insurance. By August 5, the Department of Insurance placed AIK in rehabilitation. As explained by the DOI in its own FAQ on the action:
    "Rehabilitation is a first step to reform and revitalize an insurer. The rehabilitator assumes control, but not ownership, of assets and property owned by the insurer. Under court supervision, the rehabilitator assumes the power of the board and trustees, has the power to direct and manage, can hire and fire employees and can plan and carry out a reorganization of the company. After successful rehabilitation, the court may terminate the proceeding and return control to the insurer. Liquidation begins when rehabilitation is seen as failing or futile. The liquidator assumes title to all assets and property and asks the court to declare the entity insolvent. In a liquidation proceeding, the Court determines the rights and liabilities of the insurer, its creditors, policyholders, shareholders, members and all others interested in the estate."

    Within the month, five senior officers of AIK Comp were fired, according to a D.O.I. press release.

    According to the various news stories, FAQs and press releases, 100% collection of the assessed funds is considered doubtful. Many former members of AIK Comp have gone out of business or do not have the ability to pay their assessment. The membership in the fund has declined dramatically since it stopped discounting its premiums in advance and began charging an actuarially sound rate.

    The Kentucky Department of Labor provides material from a public hearing on AIK Comp's status, including an actuarial report of financial dealings over the period of concern.

    More information is available at AIK Comp's website.

    See also: Unintended Consequences: Member Assessment : Dangers of Under-reserved S/I Plans

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    Member Assessment : Dangers of Under-reserved S/I Plans

    Under-reserving for workers compensation claims since 1999 has caught up with a group self-insurance plan in Kentucky. Member employers (and former members) are being assessed to shore up inadequate reserves that allowed underpricing for years.

    The assessments provide a hard example of the hazards of "pay as you go" financing in insurance programs designed to cover "long tail" exposures. Such financing allows managers of such funds to charge premiums that are lower up front than that charged by competitors that do reserve adequately. As a result, such plans can take business away from more responsible providers. But some day, the bills will come due, as 4,000 employers in Kentucky are learning today. 4,000 Businesses In Group Comp Fund Owe $51 Million In Ky. Self-Insurance Claims

    (read more)

    Assuring sound reserving and financial management is one of the roles of the insurance regulatory authority. That role is sometimes opposed by those whose prime goal is offering insurance cheaper than the competition, in order to grow its market share. For a current example on a scale larger than that in Kentucky, see the ongoing struggle between California Insurance Commissioner Garamendi and the management of the State Compensation Insurance Fund (State Fund). See, e.g. "Judge's Key Ruling Favors California Department of Insurance in Trial Concerning Regulatory Authority Over State Compensation Insurance Fund," (Calif. Ins. Dept. Press Release, December 13, 2004).

    This dispute has been ongoing for over a year, and raises memories of similar controversies in states such as Texas. In 2002, the California Commission on Health and Safety and Workers’ Compensation released a comprehensive white paper "State of the Workers’ Compensation Insurance Industry in California" that is worthwhile reading on this subject. See Unintended Consequences: Drive Down Comp Costs, not Premiums, says Garamendi (September 4, 2003).

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    December 14, 2004

    Garamendi's Broker Regs Overreach Says Agents Group

    American Agents Alliance, an association of independent insurance agents in Arizona and California, opposes the "incentive commission" disclosure regulations recently proposed by California Insurance Commissioner Garamendi. The Alliance has released a position paper written by the Los Angeles law firm of Barger & Wolen, LLP, now available on the Alliance's website.

    (read more)

    In November, Robert W. Hogeboom of Barger & Wolen provided "Broker Fiduciary Regulations -- Legal Questions and Answers" and has since written and edited a "Position Paper on Broker Fiduciary Obligations" (Rev. Dec. 7, 2004).

    Atty. Hogeboom's position paper includes a summary of the factual circumstances of enforcement actions and lawsuits initiated in the fall of 2004 in California, New York and elsewhere, challenging "incentive commission" practices of certain insurance agents and brokers. He provides an analysis of the proposed regulations and criticizes them on the grounds that they mistate the current law in California regarding the duties of agent and brokers and attempt to expand it beyond the authority afforded the Commissioner. The eleven-page paper cites decisions of the California courts in support of its position.

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    December 13, 2004

    "Occurrence" under WTC v. HFIC

    Predictions of rate increases emerged from some insurance industry sectors immediately following the 12/6/04 jury verdict that certain of the World Trade Center insurers must pay two limits of insurance, a decision with an impact exceeding $1 billion. While that may be true for some, the decision of the Second Circuit in 2003 offers a clear alternative for coverage written today: define “occurrence” as did the Willis policy form known as “WilProp.” In WTC v. Hartford Fire, 345 F.3d 154 (2d Cir. 2003), the “WilProp” definition was found to be unambiguous. Applying it, the destruction of the WTC was one, not two occurrences, as a matter of law.

    Some notes on the case follow below.

    (continue reading)

    World Trade Center Properties v. Hartford Fire Ins. Co.,
    345 F.3d 154 (2d Cir. 2003)

    Holders of interests in the World Trade Center (WTC) (the "Silverstein Parties") and various insurers sought delaratory judgments whether the events of September 11, 2001 constituted one or two "occurrences" under first party insurance coverage on the WTC property. At stake was about $3.5 billion in coverage, the total of the insurer's combined "per occurrence" policy limits . If the events constituted two separate "occurrences," the Silverstein Parties could recover about $7 billion; if they constituted only one "occurrence," the total recovery would be only about $3.5 billion. Both sides sought summary judgment. The court affirmed that the defined term "occurrence" used by some of the insurers was not ambiguous and meant that the events of September 11 were one occurrence. It also affirmed that the undefined term "occurrence" used by another insurer was ambigous, so that whether there was one occurrence or two must be decided by a jury or other trier of fact.

    The factual situation was complicated by the fact that at the time of the attack on the WTC, the insurers had issued binders, but not final insurance policies. As starting points for negotiation, the binders issued by the first three of the insurers included references to the "WilProp" policy form and the binder issued by Travelers referred to Travelers' own commercial property form.

    The court of appeals recognized that insurance binders are necessarily incomplete in some respects and that New York courts have long recognized that terms must be implied in them, citing Hicks v. British Am. Assurance. Co., 56 N.E. 743, 744 (N.Y.1900). One way of implying terms is by examining the terms that are used in the usual policy issued by the company. The court also allowed reliance upon extrinsic evidence of the parties' pre-binder negotiations to determine which terms are to be implied in the binder. It disqualified as of "no import to this case" proferred evidence of post-binder negotiations over what language would be used in the final policy to be issued. It relied in part on New York law that the binder and the policy to be issued are "two separate contracts of insurance, containing two separate sets of terms," citing Springer v. Allstate Life Ins. Co., 731 N.E.2d 110 (N.Y. 2000) and Rosenblatt v. Washington County Coop. Ins. Co., 594 N.Y.S.2d 456 (App.Div. 1993)

    Regarding three of the insurers (Hartford Fire, Royal and St. Paul), the court of appeals upheld an award of summary judgment against the Silverstein Parties, based on the finding that the binders the three insurers issued before the disaster were governed by the "WilProp" policy form. Those binders referenced the WilProp form as a starting point. The court upheld the finding that the definition of "occurrence" in that form was not ambiguous and ruled that under its terms, the destruction of the WTC was one occurrence as a matter of law. This was the definition in the "WilProp" form:
    "'Occurrence' shall mean all losses or damages that are attributable directly or indirectly to one cause or to one series of similar causes. All such losses will be added together and the total amount of such losses will be treated as one occurrence irrespective of the period of time or area over which such losses occur."

    The court of appeals agreed with the district court that "no finder of fact could reasonably fail to find that the intentional crashes into the WTC of two hijacked airplanes sixteen minutes apart as a result of a single, coordinated plan of attack was, at the least, a 'series of similar causes.' Accordingly, we agree with the district court that under the WilProp definition, the events of September 11th constitute a single occurrence as a matter of law."

    Regarding the fourth insurer (Travelers), the court of appeals dealt with a binder referencing a form in which the term "occurrence" was not defined. The Silverstein Parties had argued that as a matter of New York law, the term was not ambiguous and its meaning was legally established by various precedents. Further, they had argued that the legally established definition meant that the September 11th events were only one occurrence as a matter of law. The district court had disagreed, applying a test found in Curry Road Ltd. v. K Mart Corp., 893 F.2d 509 (2d Cir. 1990). Accordingly, the district court denied summary judgment and decided that the interpretation of "occurrence" had to be determined by extrinsic evidence, to be considered by the trier of fact. See SR Int'l Bus. Ins. Co. v. World Trade Ctr. Props. LLC, 2002 WL 1163577 (S.D.N.Y. June 3, 2002)("Travelers Dec.").

    As it did for the first three insurers, the court of appeals allowed consideration of extrinsic evidence of the parties' intentions with respect to the incomplete binder terms, citing Underwood v. Greenwich Ins. Co., 55 N.E. 936 (N.Y. 1900), even though extrinsic evidence would not be allowed to contradict language that was clearly unambiguous, citing Am. Sur. Co. v. Patriotic Assurance Co., 150 N.E. 599 (N.Y. 1926).

    The Silverstein Parties argued that under New York law, "occurrence" means the direct, physical cause of a loss and not more remote causes; because the WTC destruction was the result of two impacts from two planes, there were two occurrences as matter of law. They relied on Arthur A. Johnson Corp. v. Indem. Ins. Co., 164 N.E.2d 704 (N.Y. 1959) and other cases involving third-party liability insurance.

    The court of appeals decided that the construction used in such cases is not necessarily applicable in cases involving first-party property insurance, such as that covering the Silverstein Parties. For such cases, the court of appeals found most applicable Newmont Mines Ltd. v. Hanover Ins. Co., 784 F.2d 127 (2d Cir. 1986). In Newmont Mines, the court of appeals found that "occurrence" had no special meaning in the context of property insurance, and that its meaning must be interpreted in the context of the specific policy and facts of the case.

    In reaching this conclusion, the court of appeals looked at the fundamental differences between liability policies (that protect an insured against liability for causing loss) and first-party policies (that protect an insured against loss resulting from events). The court pointed out that the Johnson line of cases follow a New York rule for determining the number of occurrences that was expressed in Stonewall Ins.v. Asbestos Claim Mgmt. Corp., 73 F.3d 1178 (2d Cir. 1995) : “[A]lthough a single ‘occurrence’ may give rise to multiple claims, courts should look to the event for which the insured is held liable, not some point further back in the causal chain.” 73 F.3d at 1213.

    Unlike in cases of third-party coverage, in which the trigger of coverage “event” is the insured’s negligence, in the case of the WTC first-party coverage the trigger of coverage is “direct physical loss or damage to Covered Property at premises … caused by or resulting from a Covered Cause of Loss. Covered Cause of Loss means risks of direct physical loss unless the loss is excluded … or limited [in other policy language].” (as quoted by the court from the Travelers policy form).

    “A jury,” said the court, “could find that the words ‘direct physical loss or damage’ does not refer to the ‘event’ that triggers coverage at all, but rather sets forth the scope of damage resulting from the ‘event’ that the insurer will pay for, namely, direct physical damage as distinct from remote or incidental damage.”

    As a result, the court of appeals affirmed the district court's ruling that the definition of "occurrence" under the Travelers policy was ambiguous, and that its interpretation would be left to the fact finder. "To be sure, a jury could find two occurrences in this case, as it did in Newmont Mines, or it could find that the terrorist attack, although manifested in two separate airplane crashes, was a single, continuous, planned event causing a continuum of damage that resulted in the total destruction of the WTC, and, thus, was a single occurrence."

    On December 6, 2004, a jury found that under versions of “occurrence" not used by the "WilProp" form, the destruction of the WTC was two separate occurrences, triggering two separate limits of insurance. Subject to the results of any appeal, the insurers affected by the verdict face obligations totaling $2.2 billion instead of $1.1 billion. See "Silverstein Wins Two-Occurrence Verdict in Second World Trade Center Trial," Insurance News Network (Dec. 7, 2004).

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    December 09, 2004

    Spitzer Probe Good+Bad for Insurers?

    Increased disclosure and transparency will result from the Spitzer investigation of the insurance industry, and that will be good for it in the long run, suggests Therese Rutkowski, Managing Editor of Insurance Networking News, in "Spitzer Probe Pushes For More Disclosure" Insurance Networking News, December 1, 2004.

    The Spitzer probe, according to Rutkowski, "is pushing the entire industry-even those who have nothing to hide-toward process and technology improvements that enable companies to track and manage compensation more effectively-as well as to disclose those processes and data to regulators when required." The availability of that information will ultimately enable insurers to provide better products at lower prices, she suggests.

    She also points to the treasure trove of indiscrete statements that Spitzer's staff seems to have found in the e-mail archives produced by subpoenaed insurers and brokers. Similar gems found in the investigation of investment bankers and the antitrust actions against Microsoft.

    The article quotes Robert H. "Skip" Myers Jr., partner in the Washington, D.C. office of law firm Morris, Manning & Martin LLP: "E-mail creates an electronic trail of information, and if you're Eliot Spitzer, once you get into the database and you've got the time to look at it, you can follow the clues and get all the information," Myers told Rutkowski. "As we've seen in any number of recent investigations, e-mail can be a terribly obvious form of information, which-for whatever reason-people don't seem to manage with the same scrutiny as they do their written communications."

    All this is enough to make a company consider updating their policy regarding management of email. See, e.g. Atty. Chip Rainey's "Trying to Exorcise the Ghosts, Nightmares and Demons Alive in your E-mail Server: The Need for A Virtual Document Retention Policy," (PDF) a presentation to a local chapter of American Corporate Counsel Association (ACCA). Mr. Rainey is a partner in Locke Liddell & Sapp LLP.

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    December 07, 2004

    Jury Finds "Two Occurrences" at WTC

    Because two jets struck the two towers at the World Trade Center, insurers must pay developer Larry A. Silverstein for two policy limits, not one, according to a jury verdict rendered December 6, 2004. The decision represents a $2.2 billion blow to the nine insurers directly affected by the jury verdict. Insurance experts predict it will have ripple effects throughout the insurance industry as others take the decision into account in pricing other commercial property exposures. "Towers' Insurers Must Pay Double" (The New York Times, December 7, 2004).

    See earlier posting of online resources regarding the case at Unintended Consequences: WTC Coverage Dispute - Phase Two

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    Pew Surveys Artists on P2P Music Sharing

    Washington Post's Cynthia Webb surveys news media comments on the "Artists, Musicians and the Internet" study results released by the Pew Internet & American Life Project. While the majority of music artists agree that unauthorized P2P file sharing should be illegal, they also agree it poses at best a minor threat to them. Webb links to articles in the New York Times, Wired and others. Musicians Sing Different Tune on File Sharing (

    Such studies are consistent with theories that the Internet is less a threat to producers of goods and services (individual artists, for example) and more of a threat to intermediaries, (the record distribution industry, for example) and their ability to control distribution, create artificial scarcities and thereby create opportunities for "rent-seeking" behavior.

    Other featured Pew reports online include:

  • "The Internet and Democratic Debate"
  • "Use of Online Rating Systems"
  • "Prescription Drugs Online"
  • "Presidential Campaign Ads Online"
  • "How Americans Use Instant Messaging"

    The Pew Internet Project (PIP) also provides a summary of "Surprising, Strange and Wonderful Data" from a presentation made in November to the 10th Anniversary of the World Wide Web Consortium.

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  • December 04, 2004

    FairTest Challenges College Board Copyright Claim

    A letter from The College Board, alleging copyright violations arising from publication of data about its test results has been challenged by The National Center for Fair and Open Testing ("FairTest").

    According to a copy FairTest published of The College Board's letter of October 27, 2004, FairTest's presentation of data from the 2004 SAT scores, broken down by gender, ethnicity and family income, violates The College Board's copyright. According to FairTest's letter of response, dated November 30, 2004, "the raw data on SAT scores, from which this chart is derived, are widely available in the public domain, having previously been published by a variety of news media outlets and research journals, they are not subject to copyright protection."

    FairTest, a long-time critic of The College Board, said they would continue publishing the data. Source: College Board Letter Press Release at

    (read more ... )

    Copyright protection of the contents of databases has been a controversial topic for some years. Those whose livelihood depends upon revenues from licensing data argue that data should be protected under current law, or that the law should be changed to provide such protection. Critics of such laws point to the impairment of scholarship and critical commentatary that could result from laws that allow punishment of those who republish known facts, as well as the philosophical problems of a concept of "ownership of facts".

    Among the online sources for further study of this topic are:

  • Feist Publications v. Rural Telephone Service Co., 499 U.S. 340 (1991), (copyright protection extends only to the original expression of factual data, not to the facts themselves)
  • WIPO Database Proposal and HR 3531 at Stanford University Library
  • Database Legal Protection at BitLaw, A Resource on Technology Law
  • Copyright Law at IP Watchdog
  • Database Protection Proposals Page at Hyperlaw

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