Winter2013

Professional Insurance Agents/Winter 2013 1

Tennessee Edition/Winter 2013

2013The year in review

110868 MagCover Dec Fix2 .indd 5 11/5/2013 3:37:30 PM

2 Professional Insurance Agents/Winter 2013

MidSouth Mutual provides a measure of workers’ compensationto the home builders industry others simply cannot match.

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•In-depth construction industry experience

•Strong insurance and risk management expertise

•Stability through the ups and downs of the market

•New name, same company, same high standards and focus on our clients (formerly known since 1995 as Home Builders Association of Tennessee Self-Insurance Trust)

• Examples of clients we serve include:

Bricklayers Painters Carpenters

Electricians Insulation Framers

Plumbers Flooring Cabinetry

Siding Installers Dry Wallers Masonry

Contact your local agent or Tom Perez at BSA 615.712.2398 or [email protected]

Proudly serving the members of the Home Builders Association of Tennessee since 1995.

Stability & Strength

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Professional Insurance Agents/Winter 2013 3Winter 2013

Dedicated to the advancement of knowledge and informed opinion for the professional enlightenment and growth of the men and women of the insurance industry.

Cover design: Roberta Lawrence

Departments

4 Update

7 In your corner

11 Tech talk

21 Your best defense

23 Tech bit

26 Readers’ service & advertising index

27 Officers and directors directory

Statements of fact and opinion in PIA magazine are the responsibility of the authors alone and do not imply an opinion on the part of the officers or the members of the Professional Insurance Agents. Participation in PIA events, activities, and/or publications is available on a nondiscriminatory basis and does not reflect PIA endorsement of the products and/or services.

President and CEO of PIA Management Services Inc. Mark LaLonde, CPIA, CIC, AAI, Communciation Director Mary E. Christiano, Senior Magazine Designer Sue Jacobsen, Member Information Manager Jaye Czupryna, Advertising Sales Executive Susan Newkirk.

Postmaster: Send address changes to: Professional Insurance Agents of Tennessee, 504 Autum Springs Court, Suite A-2, Franklin, TN 37067.

“Professional Insurance Agents” is published quarterly by PIA Management Services Inc. PIA Management Services, 25 Chamberlain St., P.O. Box 997, Glenmont, NY 12077-0997; toll-free (800) 424-4244; email [email protected].

© 2013 Professional Insurance Agents. All rights reserved. No material within this publication may be reproduced—in whole or in part—without the express written consent of the publisher.

15The year in review

A look at the factors that affect the insurance market

18‘Cadillac tax’

Robin Hood as a model for health-care reform

Feature

Cover story


Association newsJ&J named Managing General Agency of the Year PIA National has named Johnson & Johnson Inc. of South Carolina as recipient of its 2013 Managing General Agency of the Year award. Johnson & Johnson is a platinum partner of PIA of Tennessee. The award was presented Sept. 20, 2013, during a ceremony in Las Vegas, Nev., held in conjunction with fall governance meetings. The award recognizes outstanding achievement in furthering the interests of agents, a commitment to the agency system and successful efforts to create a better business environment for professional insurance agents.

“Johnson & Johnson’s ongoing commitment to helping Professional Insurance Agents better serve their clients is nothing short of outstanding,” said PIA National President-elect Richie Clements, in presenting the award. “Johnson & Johnson also has a commitment to education. They make sure that all of their employees are at the top of their game, so they can serve their clients better.” “Johnson & Johnson also provides agents with a website that allows them to quote, retrieve policies, track billing and generate finance agreements—all online. They are adding features all the time to help make an agent’s life easier,” Clements said.

PIA agents respond to the McKinsey Report

PIA members disagree vehemently with many of the conclusions and observations in a study by McKinsey & Co. on the future of independent insurance agents.

PIA agents and officials shared their views on the McKinsey report in a series of interviews for forthcoming articles in both industry and association publications. The verdict: The report is a flawed premise wrapped in a faulty analysis. It contends that the marketplace is marching away from independent agents and toward commoditization of more lines, but then notes with frustration that, “Surprisingly [this] has not yet led to a change in the local insurance agent landscape.” But then in a contradictory statement, under a headline, “The End of an Era for the Local Insurance Agent,” McKinsey asserts that “the economics of the traditional agent model are beginning to unravel.”

“The McKinsey report is just somebody’s opinion. In reality, I just don’t think it’s true,” said PIA National President John G. Lee. “There is a percentage of the market that’s going to go direct. Overall, it’s been stuck under 30 percent for many years, despite billions in advertising. I don’t see that market share increasing.”

“Far from being the ‘End of an Era,’ this is the dawning of a bright, new age for the independent insurance agent,” Lee said.

“Every decade or so, consulting firms will predict the demise of the independent agency distribution system, for their own competitive priorities,” said PIA National Senior Vice President Patricia A. Borowski, who has seen this all before. “Often this leads to massive losses by those who buy into this narrative.”

“The report by McKinsey is not a research report, as no true unbiased research seems to have been conducted for it,” said Borowski, during a break at a conference held by the Society of Insurance Research

in San Antonio, where she was representing PIA. “There are charts and graph references, but they appear to be used to support a predetermined outcome. It is nothing more than an opinion article by a couple of analysts.” She added the consensus among the panelists and a number of the conference participants on the Commercial Lines Insurance Agents Panel at the SIR conference was that the report is little more than a dressed-up op-ed article.

The McKinsey report observes that carriers are expanding investments in digital technology, but concludes that such investments will marginalize rather than help the agent. PIA agents have found that not to be the case. Cutting-edge agents are using digital technology, especially social media, to attract new clients and build ever stronger relationships with existing clients of their independent agencies.

Report: Online auto insurance shopping down

The 2013 Online Auto Insurance Shopping Report, issued by comSource Inc., found that auto insurance shopping dips below 50 percent for first time in five years.

The report found that, the percentage of consumers who shopped for insurance in the past year dipped below 50 percent, in 2013. Despite the fact that shopping for auto insurance was down slightly, the percentage of consumers who seriously considered switching their auto insurance policy remained relatively flat. In addition, respondents were increasingly more open to the idea of purchasing policies online than they were in 2011 and 2012, up 3 percent and 1 percent, respectively.

News to use


Platinum partner profileGrange Insurance 671 S. High St. Columbus, Ohio 43206 www.grangeinsurance.com

Doing business in Georgia, Illinois, Indiana, Iowa, Kentucky, Michigan, Minnesota, Ohio, Pennsylvania, South Carolina, Tennessee, Virginia and Wisconsin.

Senior executives Tom Welch, president and CEO John Ammendola, president, property and casualty insurance Elizabeth Dinnin, president, commercial lines Michelle Benz, president, Life Co. Peter McMurtrie, chief sales & marketing officer

Tennessee staff Donya Wilson, regional vice president sales Denise Flatt, regional claims manager Troy Cantrell, sales territory manager (eastern Tennessee) Katherine Ethridge, territory sales manager (middle and western Tennessee)

History Grange Insurance, with $2 billion in assets and more than $1 billion in annual revenue, is an insurance provider founded in 1935 and based in Columbus, Ohio. Through its network of independent agents, Grange offers auto, home, life and business insurance protection. The company and its affiliates serve policyholders in Georgia, Illinois, Indiana, Iowa, Kentucky, Michigan, Minnesota, Ohio, Pennsylvania, South Carolina, Tennessee, Virginia and Wisconsin. For more information, visit www.grangeinsurance.com.

Philosophy Grange Insurance philosophy is: “Grange believes in true partnership with our agents through the creation of strong, personal relationships based on collaboration, consultation and the delivery of best-in-class products and services to create a mutually beneficial business strategy.”

Appetite Grange is a full-lines carrier focusing on personal-lines, commercial-lines and life coverages marketed through our independent agents to our customers. It targets home and auto business, nonstandard auto, farm, small commercial BOP business with BusinessAssure, higher risk commercial auto business with AutoAccel, commercial package business with CPP, and a full array of life products. Whether it’s for you, your family or your business, Grange offers the right auto, home, life and business insurance solutions to help you protect what matters most.

Tom Welch, president and CEO

PIA of Tennessee and Grange Insuranceproud partners

for independent insurance agents.

“Our goal every day is to optimize and activate our understanding of what our agents need from us to be successful.” —Peter McMurtrie, chief sales & marketing officer


Johnson & Johnson Charleston, South Carolina (800) 487-7565 www.jjins.com

Doing business in Alabama, Delaware, Florida, Georgia, Maryland, Mississippi, New Jersey, North Carolina, Pennsylvania, South Carolina, Tennessee and Virginia.

Senior executives Francis Johnson, president Harry Johnson II, chief operating officer Peter M. Burrous, chief marketing officer Steven Craig, chief financial officer Frank Zanin, treasurer

History Johnson & Johnson is a full-service managing general agency that was founded in 1930. Johnson & Johnson provides insurance solutions to its valued agency partners east of the Mississippi, from the Deep South to the Northeast. J&J’s product lines include personal lines, commercial lines and premium financing. Supported by a staff of professional underwriters, each production department offers markets, which are tailored to the specific needs of the independent agent.

Philosophy Johnson & Johnson philosophy is: “Johnson & Johnson is the No. 1 choice for providing insurance solutions. Our business is built on a foundation of long-term relationships with our agents and companies. We are a technology and service driven sales organization committed to writing business with our agency partners. We are embedded in their communities with marketing representatives, regional sales vice presidents and local underwriters. This allows J&J to understand the needs of our agency partners better and allows us to help them grow their business. We are a family of highly trained insurance professionals recognized as industry leaders. Our commitment to continuing education enables our staff to service day-to-day business and to craft creative solutions for difficult accounts. Long-term relationships with our agency and company partners provide a solid foundation for our future.”

Appetite Personal lines include habitation, manufactured homes, high value homeowners, marine & recreation. Commercial lines include excess & surplus, property/casualty, standard, professional, workers’ compensation, transportation, and brokerage. Premium financing includes our full-service finance company will finance all policies, not just those written through J&J.

PIA of Tennessee and Johnson & Johnsonproud partners

for independent insurance agents

Platinum partner profile


Sullivanis senior partner of The Sullivan Law Group, LLP. He can be reached at (212) 695-0910.

In our column this month, we thought that it would be of benefit to discuss a recent holding of the Connecticut Supreme Court.1 The decision of the court involved a matter of first impression (never before addressed by a Connecticut court) and forms the basis for a broader discussion of the impact of a deductible upon potential errors-and-omissions exposure.

The case Coincidentally, the matter involved a deductible contained in an insurance agent’s E&O insurance policy. The agency’s client was a construction company that had been a longtime client. The agency placed a builder’s risk policy and an inland marine floater

for the agency’s client in connection with the construction of a housing development. A fire destroyed a building under construction on one of the development’s lots. The agency client’s claim for damages as a result of the fire was denied on the grounds that the lot where the fire occurred was not an insured location under the policies. Accordingly, the agency client made claim against the agency for its loss. The agency’s E&O insurer settled the claims for some $353,000, of which the agency contributed its $150,000 deductible and the insurer contributed the remaining $203,000, in return for an assignment of the builder’s claims against the two insurers. Armed with the assignment, the E&O insurer asserted claims against the insurers that ultimately it settled

Who eats the deductible? By Robert M. Sullivan, Esq.

In YourCorner


for $208,400, less than the amount paid to the agency’s client to settle its claims against the agency. Because the amount recovered in the settlement from the two insurers did not adequately compensate both the E&O insurer and the agency for their respective losses, a dispute arose as to who was entitled to be compensated first for their loss, the E&O insurer or the agency.

The ‘made-whole doctrine’ At issue in the dispute is the applicability of the so-called “made-whole doctrine.” Under this doctrine, absent an agreement contained in the policy of insurance itself, an insurer is not entitled to recover under the doctrine of subrogation until the insured has been made whole for any loss.2 In Tennessee, the “made-whole doctrine” applies regardless of whether the insurer is given priority of recovery in the contract of insurance.3 The Tennessee courts reason that because subrogation is an equitable remedy, fairness dictates priority of recovery for the insured regardless of the terms of the insurance contract. Under the doctrine, in the event of a dispute between an insurer and its insured, the insured has priority of rights to collect from the responsible party. In order to resolve their dispute, the E&O insurer brought suit in the Connecticut Federal District Court to determine its rights regarding the settlement proceeds and the agency essentially counterclaimed for the same relief. As there were no disputed facts and only a question of law to be determined by the court, the parties stipulated to the salient facts and asked the court to decide the question. In a decision by the District Court, the lower federal court4 held in favor of the insurer, holding that, although the made-whole doctrine applies in Connecticut, there was no authority under Connecticut holding that its made-whole doctrine applies to a contractually agreed deductible. The court agreed with the insurer that the agency had agreed under the insurance contract that before the insurer would respond to a loss, the agency would have to first be out-of-pocket for the deductible. In addition,

according to the court, the language of the policy itself provided for priority of recovery by the insurer. Under the law of Connecticut, as is the case in the other jurisdictions of our readership, the language of the policy can explicitly abrogate the made-whole doctrine and the courts will not overturn that contracted for arrangement. The agency appealed the District Court’s decision5 to the U.S. Court of Appeals for the Second Circuit, which sits in New York, but has jurisdiction over the Connecticut District Court. The Second Circuit disagreed with the District Court and held that the specific language in the policy, contrary to the holding of the District Court, did not take the case out of the made-whole doctrine. According to the court, the policy language was a boilerplate provision that did not expressly address the question of priority of recovery of funds recovered in subrogation. However, the court opined that the rationale of applying the made-whole doctrine to deductibles was counterintuitive. Under the contractual arrangement with the E&O insurer, the agency (or any insured for that matter) agreed to assume a portion of the risk by way of agreeing to a deductible. Payment of that deductible was a condition precedent to the E&O insurer paying any portion of the loss. For example, if the loss was less than the deductible, the insured would bear the entire risk of loss. However, because Connecticut law was silent on the question of whether the made-whole doctrine was applicable to deductibles, the court invoked a procedural device by which it “certified” a question of law for determination by the governing authority on questions of Connecticut law, the Connecticut Supreme Court. The referral also was made because “[i]nsurance is an important industry in Connecticut, and Connecticut’s Supreme Court is one of the leading authorities in this area.” In a decision handed down by the Connecticut Supreme Court on July 30, 2013,6 the Supreme Court unequivocally reaffirmed that the made-whole doctrine was the law in Connecticut, against the possibility that there was any doubt on that point.

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As to whether the doctrine was applicable to deductibles, the court ruled that it was not. The insurer had priority of any subrogation recovery in excess of the deductible. The court concluded:

“… that the equitable considerations supporting the made-whole doctrine are inapplicable to deductibles … If we were to decide otherwise as (agency) urges, we would effectively disturb the contractual agreement into which (agency) and (E&O insurer) entered, thereby creating a windfall for agency for a loss that it did not see fit to insurer against in the first instance when it contracted for lower premium payments in exchange for a deductible …”7

The decision was referred back to the Second Circuit and the court entered a decision in accordance with the holding of the Connecticut Supreme Court and ruled that the entire recovery was to go to the insurer.8

As acknowledged by the Connecticut Supreme Court in its decision, only a few courts in the country have addressed the question of whether the made-whole doctrine applies to deductibles and none of these courts include Tennessee. How they would rule, if faced with the question, remains to be seen because arguably the resolution of the question, in our view, depends upon the public policy views of the courts in each jurisdiction. However, given the prevailing view of the Tennessee Supreme Court discussed above, we believe that Tennessee would have decided this case in favor of the insured and would have allowed a recovery.9 Under our federal system, there could be divergent views in each jurisdiction. However, to avoid any issues insurers simply could assert provisions in their policies dictating priority of recovery, including deductibles, assuming the various state legislatures or insurance departments found then to be in accord with the public policy considerations of the state. This would eliminate any possible questions because all states permit express agreements regarding priority of subrogation.

Analysis and strategy While presenting an interesting discussion of a legal question of first

impression, the case also brings to the fore the significance of deductibles, and even retentions and even sublimits in policies and their impact upon insureds in the event of a loss. Unlike our example case, not every insured is an insurance agency and is sophisticated enough to recognize their impact. For the most part, insureds are sensitive to insurance costs in the short term and are willing to save money on premiums by assuming risk via a large deductible, retention or sublimit for other risks. While they may pay lip service to understanding the ramifications of the deductible, the music changes when a loss occurs. Given the holding of our example case, the likelihood of recovery of that loss via subrogation is less likely. What is important from an E&O loss-control standpoint is to confirm with insureds, in writing, their selection of choices which in any way limits recovery in the event of a loss. When it comes to determining who must “eat” the deductible, make sure that it isn’t your agency.

1 Fireman’s Fund Insurance Co. v. TD Banknorth Insurance Agency Inc., 2010 WL 420041(D. Conn. 2010); question certified by 644 F.3d 166 (2nd Cir., 2011), certified question answered by, 309 Conn. 449, ___ A.3d ___ (2013), answer to certified question conformed to, 2013 WL 4055221 (2013) 2 See, Winkelmann v. Excelsior Ins. Co., 85 N.Y.2d 577, 650 N.E.2d 841, 626 N.Y.S.2d 994 (1995)(New York); Culver v. Ins. Co. of N. Am., 115 N.J. 451, 559 A.2d 400 (1989)(New Jersey); Dimick v. Lewis, 127 N.H. 141, 497 A.2d 1221 (1985)(New Hampshire) 3 Abbott v. Blount County, 207 S.W.3d 732 (2006) 4 Fireman’s Fund, supra, 2010 WL 420041 5 Id., 644 F.3d 166 6 Id., 309 Conn. 449, ___ A.3d ___ 7 Id., 309 Conn. at 468-469 8Id., 2013 WL 4055221 9 See Note 3


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Corbinis PIANY, PIANJ, PIACT and PIANH’s director of research.

A few things I think about By Dan Corbin, CIC, CPCU, LUTC

One of the things I think about is my wife (and the readers say—aah). I think about her more now that she calls me at work several times a day. The strangest thing happened seven weeks ago. My wife of 27 years landed a job with a general contractor and one of her main responsibilities is to verify the insurance of subcontractors. My wife and I had never discussed insurance before she took this job. She would run the other way when I talked about insurance, complaining that it furloughed her brain cells. Suddenly, it has become the focus of our conversations. I tutored her all the way to Gloucester for our weekend getaway. Never in this life did I imagine such a scene. The process of explaining to my wife the items on a certificate of insurance, and the coverages they represent, got me thinking about some issues that

generally are misunderstood by certificate holders.

Subrogation Subrogation is the first one that comes to mind. Is checking the “waiver of subrogation” box really that crucial for compliance with the certificate holder’s insurance requirements? Is it enough to reject a subcontractor? It depends on whether the certificate holder is an additional insured. An additional insured already has subrogation waived. Under the antisubrogation rule, an insurer has no right of subrogation against its own insured for a claim that arises from the risk for which indemnification was sought under the policy. Once a general contractor has been named as an insured for claims arising out of the ongoing operations of


the subcontractor, it precludes the subcontractor’s insurer from subrogating against that general contractor. On the other hand, if that general contractor is not named as an insured, a waiver of subrogation may be in order. There are two different ways to block the insurer’s subrogation when not an insured. First option. In an effort to modify the effect of equitable subrogation, insurance policies incorporate a

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subrogation provision that, first and foremost, preserves the rights of the insurer by obligating the insured to secure those rights and do nothing to impair them. And, second, in recognition of the fact that it may not always be in the best interest of the insured to enforce subrogation rights, certain waivers are permitted. The Insurance Services Office Inc. commercial general liability policy has such a provision that requires the transfer of the insured’s rights to the insurer after the loss has been

paid. Nevertheless, it is implied that the insured may impair those rights prior to the occurrence of a loss; as the provision states: “The insured must do nothing after loss to impair them.” To that purpose, a construction contract could have a provision that the subcontractor relinquishes his or her rights against the general contractor for damages incurred by the subcontractor due to the fault of the general contractor. We call this a “hold-harmless” agreement; that is, the subcontractor holds the general contractor harmless for his or her negligence in contributing to the loss incurred by the subcontractor. Once the subcontractor gives up his or her rights, there are no rights for the insurer to assume in a subrogation action against the general contractor. Second option. An insurer could block subrogation with its own policy provisions using the Waiver Of Transfer Of Rights Of Recovery Against Others To Us (GL 24 04) endorsement. If for some reason the general contractor does not trust the enforceability of the hold-harmless agreement, or it does not exist, this endorsement could be used to avoid subrogation independently from the construction contract. The point to remember is that being an insured on the subcontractor’s policy essentially is the only assurance a general contractor needs in order to waive subrogation.

Completed operations General contractors routinely ask for completed operations coverage as an additional insured. The 11/85 edition of the ISO CG 20 10 additional insured endorsement provided coverage “with respect to liability arising out of your ‘your work’ for that insured …;” which implied that completed operations was covered. The current edition of this ISO endorsement states that coverage applies “only with respect to liability … in the performance of your ongoing operations for the additional insured …;” which precludes coverage for completed operations. In order to get completed operation coverage, the general contractor will need to be named on the optional ISO CG 20 37 Additional Insured–Owners, Lessors or Contractors–Completed


Operations endorsement. I understand why general contractors want completed operations coverage, but I wonder if they understand what triggers it. Both the “occurrence” and “claims-made” general liability policies require that the bodily injury or property damage occurs before the end of the policy period. “When” the work was performed is of no consequence to the existence of coverage. Given that New York, for an (extreme) example, has no statute of repose and the exposure to a suit for completed construction work continues indefinitely, it will be the policy in force at the time injury occurs sometime in the future that will respond to the claim. The policy in force while construction operations are taking place is the least likely policy to respond to a completed operations claim. So, the general contractor needs to ask himself: “Will my company continue to track the subcontractor’s policy after the job has been completed?” Keep in mind that in order to rely on the subcontractor’s policy for years into the future, that subcontractor must endorse on his or her policy the general contractor as additional insured for completed operations coverage each and every year. What do you suppose the odds are of that happening? The best-case scenario is likely to be coverage for an occurrence that takes place during the weeks or months after the job has been completed, but before the subcontractor’s certificate expires (which, I concede, might give some contractors reason enough to ask for completed operations coverage). Let’s suppose that a general contractor uses the same subcontractors for projects year after year. The general contractor will be expected to get a certificate for each new job, when insurance for current work also could respond to completed operations for past work. However, in order to accomplish this, the current policy must provide completed operations coverage for the additional insured general contractor without reference to a specific job or location. For example, the ISO CG 20 37 endorsement will have to show “any” under Location And Description Of Operations. If the insurer is willing to issue this endorsement to be applicable

to any location or job performed for the additional insured (big if), requiring completed operations insurance could make sense. But, for the occasional use of a subcontractor and the regular use of a subcontractor whose insurer will not cooperate, the request for completed operations is nonviable. All I’m saying is that general contractors should make educated requests for insurance and not waste resources on unnecessary or impertinent demands.

Primary and noncontributory Speaking of waste, most requests for the subcontractor to provide the general contractor with noncontributory coverage are totally unnecessary. In 1996, ISO revised the Other Insurance provision of its Commercial General Liability Coverage Form to make the policyholder’s coverage excess when that policyholder has been named as an additional insured on someone else’s policy. If the general contractor has an ISO policy (or equivalent language), then that policy will be excess in relation to the additional insured coverage provided by the subcontractor’s policy. So in order to be noncontributory, the only thing you need to know about the subcontractor’s policy is that it provides primary coverage. An educated insurance request will save everyone time and money. For those general contractors who do not have the ISO Other Insurance provision that makes the policy excess under these circumstances, ISO introduced in April of 2013 a new CG 20 01 Primary and Noncontributory–Other Insurance Condition endorsement that makes the subcontractor’s policy primary and noncontributory for the additional insured without being contingent upon policy language of the general contractor. Note that this endorsement requires that there be an underlying written contract or agreement stating that the policyholder’s coverage for the additional insured must be primary and noncontributory.

DBAs Are DBAs appropriately included in the description of named insured on the general liability policy? Only the legal

entity should be stated as the named insured. The standard general liability policy will cover the legal liability for any operations the named insured performs (not otherwise excluded). If a DBA is shown along with the legal entity, then it could imply that only operations performed under that DBA is covered. There is no reason to limit coverage in this way unless forced into it for underwriting reasons. Can a DBA be shown on the certificate of insurance? Of course it can. The certificate of insurance is not a policy contract. The general contractor is hiring a subcontractor who has been identified with a DBA and he or she would like to see that DBA shown on the certificate along with the legal entity. As long as the legal entity is the named insured on the policy, it does not matter what DBA is used by the named insured (provided it has been registered). There you have it—a few things I think about. I had better get back to thinking about my wife. She’s waiting for me to finish this article so we can talk about it over tonight’s cocktail hour.

www.mjkelly.com 800.873.8374


“Whether you choose Arlington/Roe for our breadth of knowledge, product line diversity, market access or industry know-how, you may be assured we are in business primarily to serve you. We will do our best to earn and keep your trust. You have our word on it.”

– James A. Roe, CPCU, ASLI, President

IT’S THE RIGHT THING TO DO.

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Managing General Agents andWholesale Insurance Brokers

Aviation | Bonds | Brokerage | Commercial Lines | Farm | Medical Professional | Personal Lines | Professional Liability | Transportation | Workers’ Compensation

From left to right: Andy Roe, Patrick Roe and Jim Roe


The insurance brokerage field had a pretty good year: Premiums are up, but not too much, due in part

to lower costs of natural disasters and catastrophe losses this year. Generally, the economy is improving, albeit not in all facets or locations. The merger and acquisition activity that set records in 2012 and slowed to a snail’s pace in early 2013 has picked up each quarter; all this despite Washington continuing to confound us all with its inability to get things done in a timely and orderly fashion. As we approach the end of the year and look back at the events and trends of 2013, we’ll try to assess the opportunities and challenges for 2014. Over the first two weeks of October, Washington was “shut down” as our elected officials attempted to resolve how to pay their salaries, what to do with health-care reform and whether they could borrow any more money to keep things afloat. In the end, this was worked out and seemed to be more about posturing by all parties at the stress and expense of the rest of the world, unfortunately. Furthermore, we are likely to see this repeated again in the near future. Ultimately, the hope is that Washington does what it has to do and stays out of the way of the rest of us. Health-care reform (the Patient Protection and Affordability Care Act), appears to have survived this Washington storm, but will continue to be a major challenge and opportunity for employee benefit producers and markets until the dust settles, if it ever does. Interestingly enough, as we’ll address later in this article, the acquisition appetite for

The year in reviewA look at the factors that affect the insurance market

By Dan Menzer

benefits agencies has remained relatively unchanged over the past couple years, despite all the uncertainties surrounding the implementation of the PPACA.

Insurance market behavior Looking back over the last 40 years, there have been three periods of significant premium increases, according to the Insurance Information Institute, with periods of modest growth in between, or in the case of 2007-09, total industry premiums actually declined for the first time since the Great Depression.

Earlier in the year, PIA of Connecticut, New Hampshire, New Jersey and New York State released the findings of their PIA Market Trends Survey. The result: More than 45 percent of respondents indicated a significant or extreme change in the underwriting approaches to homeowners policies—underwriting approaches that would be categorized as significant or extreme. Homeowners, commercial property and commercial liability experienced price increases, according to the survey. It indicated a 6 to 10 percent price change for these three categories for new business—homeowners (46 percent); commercial property (53 percent); and commercial liability (56 percent). By contrast, the personal auto

“Whether you choose Arlington/Roe for our breadth of knowledge, product line diversity, market access or industry know-how, you may be assured we are in business primarily to serve you. We will do our best to earn and keep your trust. You have our word on it.”

– James A. Roe, CPCU, ASLI, President

IT’S THE RIGHT THING TO DO.

800.878.9891 • ArlingtonRoe.com

Arlington/Roe. You have our word on it.

Managing General Agents andWholesale Insurance Brokers

Aviation | Bonds | Brokerage | Commercial Lines | Farm | Medical Professional | Personal Lines | Professional Liability | Transportation | Workers’ Compensation

From left to right: Andy Roe, Patrick Roe and Jim Roe


market was least affected by the changing market, the line saw an average price change of 6 to 10 percent, with an average price increase of 0 to 5 percent. Similarly, the Council of Insurance Agents and Brokers has done a quarterly survey of its members since 2000 regarding the price changes in the marketplace, illustrated in the chart below. The price increases noted in the early 2000s corresponds to the table above, but also shows pricing changes going negative from early 2004 until 2011 when they finally starting increasing, rather than decreasing at a slower pace. However, unlike some of the past “hard markets” price increases thus far generally have remained moderate rather than the rapid and dramatic spikes experienced in previous market cycles. If this trend continues, it would seem to represent a more sustainable pricing environment for the insurance companies, the brokers selling the insurance products, and the consumers and businesses having to pay for the insurance.

For the purely property/casualty agencies, Confie Seguros has been the most active acquirer this year. The acquisition of employee benefits focused agencies, as a percent of the total number of transactions, is higher in 2013 than any of the prior years, led in 2013 by Digital Insurance and Gallagher. After the artificial lift in the number of early 2013 announced transactions from the 2012 carryover, with the exception of July, not surprisingly every month has been below the 2011 and 2012 numbers. While we don’t expect the current low levels of M&A activity to continue forever, we also don’t expect it to match the level of 2012 anytime soon. Sellers need to realize and accept that taxes are going to take more of their gross purchase price than in the past, and the value of the business did not automatically increase on Jan. 1, 2013, to offset this. Buyers need to rebuild and replenish their inventory of prospective sellers, and likely stretch on the pricing in some situations to help mitigate the higher tax costs sellers are going to incur.

The baby-boomer effect Another factor that will affect M&A activity over the longer term is the continuing aging of the baby-boomer agency principals and the lack of adequate preparation for a planned internal ownership succession strategy. Ultimately, there are only two ways agency principals can extract their built-up value in the business—selling internally to their perpetuation team, or selling externally to a third-party buyer. Some agency principals have been able to accumulate enough wealth and capital without the need to sell their agency, so they either plan to gift the agency to the next generation of owners, or hold onto it and let it pass to others via their estate. Depending on the size of the agency, gifting value can be a long process, given the $14,000 annual gift limitation rules. Even if there are multiple gift recipients with the spouse of the owner participating in the gifting, and the gifted stock is valued with appropriate discounts for minority interest and lack of control (up to a point), it can still take years to fully transition the ownership of the agency. There also can be unanticipated issues

M&A in 2013 Agency merger & acquisition activity in 2012 surpassed all previous records, in particular during the fourth quarter as the impending tax changes were scheduled to take effect with regard to capital gains on Jan. 1, 2013. Due to the timing of company announcements, we believe there were a number of 2012 transactions that were not included in the final 2012 totals. These late announcements fell into the early 2013 activity, offsetting what was otherwise a slow beginning to the year. The results presented here do not include sales of life/annuity/financial product businesses, and are only U.S.-based transactions announced in the various trade publications. The decrease in deal announcements in 2013 is caused by two primary factors: 1.) The impact to sellers of the tax law changes and the need to adjust their outlook on the after-tax proceeds of a sale; and 2.) The major buyers exhausted their pipeline of acquisition candidates closing out 2012, and have therefore spent much of 2013 rebuilding their pool of acquisition targets. Privately owned agencies, which dominate the number of participants in the marketplace, lead the list, but by smaller and smaller margins. The private equity backed firms (e.g., USI, Hub, Confie Seguros) are rapidly closing the gap as additional PE funds take up the acquisition strategy. The public brokers (e.g., Gallagher, Brown & Brown, Marsh) have had a dramatic pull-back in 2013, but will very likely pick back up as they need to continue to grow and acquire to meet the expectations of their shareholders.


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with this form of ownership transition, including: uncertainties surrounding the death of the owner and potential change of heart of the spouse; sibling parity if not all the children are involved with the agency; and sibling rivalry if some are “absentee owners” and not active in the business, but participating equally in the value appreciation. An agency-succession strategy developed over years of consideration, evaluation and proper planning will address any potential sibling issues, agency leadership and management issues, pricing, value and structure of the purchase, as well as the impact of a sudden death or disability of the elder owner(s). However, this is not something assembled in a weekend planning session, and requires time to develop the right people, valuation expectations and capital base of the agency to implement successfully. Without the right planning, the only option available to the principal(s) is to sell the agency. It should be noted that a long-term plan to sell the agency also can be a viable business strategy. Often, the agencies generating the most interest and highest value from buyers are those that have built an organization best prepared for an internal perpetuation. They have quality people throughout the organization, and are ready and able to step into leadership and management positions. The agency has built up a strong capital base and runs with a strict focus on profitability and long-term operational improvements. The message to agency principals is to stop and think about your long-term plans, start to build an execution strategy, and provide you and your agency with options for your ultimate exit.

Agency performance metrics There are countless ways for agencies to measure their success, progress, productivity, profitability, etc., but in the end, it often comes down to the ultimate value of the business. Since the valuation of privately held businesses is somewhat subjective and often doesn’t reflect the true potential market value of the business, it can be

difficult to compare to publicly traded brokers. On the other hand, it’s not uncommon at all for the sale of a publicly traded firm, insurance brokerage or otherwise, to command a price well in excess of the traded share value because of the strategic value and the value associated with gaining majority (or 100 percent) control of the company. Agency principals should continue to monitor the common performance metrics, review the various industry standards as guidelines and not absolutes, and strive for improved performance over time of your own agency, since that’s all that can truly be controlled.

2013 in summary This year has been good to most insurance agencies, and hopefully the current trends will continue. If the insurance companies are able to balance profit needs, investment earnings and premium growth without having to extract the kinds of hard-market attributes

so often seen in the past, perhaps the moderate levels of rate increases can be sustained for a longer period of time. M&A activity will likely continue to expand, driven by buyers’ needs to put their PE funds and capital to work and sellers’ needs to cash in their equity if they haven’t planned properly for the perpetuation of their agencies. The good news in all of this is agency values have been increasing, the result of all of the above. Barring another long drag-out fight in Washington in early 2014 or some other external factors, we believe the recent trends should generally continue through 2014.

Menzer is a principal with OPTIS Partners LLC (www.optisins.com), a Chicago- and Minneapolis-based investment banking and consulting firm providing M&A, valuation and strategic consulting services to firms in the insurance distribution sector. He can be reached at (630) 520-0490 or [email protected].


Much has been said and written about specific aspects of health care that will change

as Obamacare is implemented fully. What has not gotten enough attention is the 40 percent tax included in the Patient Protection and Affordable Care Act on what pejoratively are called “Cadillac” health plans that provide more coverage. This tax, set to take effect in 2018, is

‘Cadillac tax’

similar to proposals advanced to place a 30 percent surcharge on Medicare Part B premiums if people purchase first-dollar Medigap policies in the private market. Both are presented as positive reforms. They are not. They are attempts to ration health care. In a recent op-ed in the Washington Post (“Godspeed to Obamacare’s Cadillac tax”), editorial writer Charles Lane did

some major cheerleading for the “Cadillac tax,” saying it is such a great idea that “liberals, conservatives and everybody in between should be able to agree on” it. He went on to assert that this tax is likely to “further Obamacare’s avowed purposes of expanding coverage while taming costs.” Really? That depends on whose coverage and whose costs are being discussed.

Robin Hood as a model for health-care reform

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A surtax on better health Let’s assume for the moment everyone agrees that one priority for health-care reform is to expand coverage, to make sure that more people can access and afford medical care. How does placing a 40 percent tax on a subset of people with employer-sponsored coverage—estimated at 16 percent of health plans initially and as high as 75 percent by 2029—expand coverage? It does not, for the people it touches. It reduces their care in order to extend a lower level of coverage to others, while also giving the federal government a big pot of new money by creating a new tax. Lane, citing a paper by a health economist with Johns Hopkins University, says that the “Cadillac tax” will not be borne entirely by the plans—“38 percent of that money comes not from the tax itself, but rather from the shift of employee compensation from health benefits to wages, which would then be subject to income and payroll taxes” as some people are forced into either Obamacare or individual plans in the private market. Whoever came up with that strategy of imposing a new tax that also shifts much of the employee compensation used to pay it from tax-exempt to taxable status probably remarked, “Hey, this is really cool.” Unfortunately, it’s too clever by half. Placing an onerous surtax on comprehensive health-care plans is bad public policy. Arguments being advanced to support it are somewhat disingenuous. What’s really going on here is that the spin being used to convince people of the benefits of the PPACA has some glaring omissions: Omission No. 1. The purpose of PPACA is not simply to expand coverage. Cost containment and the expansion of federal revenues also are priorities. These are achieved in PPACA, among other ways, through rationing, raising taxes and creating new taxes. Omission No. 2. Benefits are being added for some in part by taking benefits away from others. All of this railing about “Cadillac” plans has an undercurrent of class warfare. It’s like saying that people who have such plans don’t deserve

them and employers who sponsor them are somehow denying coverage to the uninsured. This is envy as public policy. The model for health-care reform should not be Robin Hood. Omission No. 3. Less care means worse outcomes. Selectively lowering care to some discourages overall utilization, not just unnecessary utilization. If a cancer diagnosis is missed as a result, are the people whose coverage was cut going to be told, “tough luck, you were too affluent?” This is just as bad as saying to others, “tough luck, you are uninsured.” Omission No. 4. Discouraging medical testing runs counter to the mission of improving health. Rather than throwing up roadblocks to medical testing (and the resulting treatments when tests find something wrong), we actually should encourage appropriate additional testing in order to catch problems earlier, when treatment is less costly and more effective. In his op-ed, Lane also comments on the tax exclusion for the value of

employer-sponsored health plans, saying it is “The nation’s largest tax expenditure, expected to cost $760.4 billion over the next five years according to Congress’ Joint Committee on Taxation.” This construct is disingenuous in the extreme. A tax not levied and not collected cannot be classified as an expenditure, unless one resides in a parallel universe. Such arguments add nothing constructive to the debate about health care. What is needed instead is an honest dialogue and a coming together on what we all value collectively, and how to pay for it. Regrettably, there is too much to be gained by both sides in perpetuating the current situation of take-no-prisoners political warfare—until the public finally decides it has had enough and demands real solutions.

Besesparis is senior vice president of communications of PIA National.

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Wouldn’t it be nice to have ‘mulligans’ in E&O? By Curtis M. Pearsall, CPCU, CPIA, AU, ARM, AIAF

Often in the world of golf, the subject of “mulligans” comes up before a group starts to play. A mulligan is a do-over. If a golfer hits a bad shot, he or she can call a mulligan and take the shot again. The premise is that the second shot will be better than the first, and the first shot won’t count. Wouldn’t it be nice to have mulligans in errors and omissions? After an E&O claim is made, the producer or customer service representative could get a mulligan—a do-over—to fix things, say, if there is no documentation or the documentation is not at the level it should be. If a producer misspoke as to how coverage would apply, he or she could go back, make the correction and all would be forgiven. This would result in fewer E&O claims and fewer dollars paid out on those claims made.

A claim example The following claim scenario took place a number of years ago: A bar owner did not have liability insurance, but was required by a new landlord to secure general liability coverage. The bar owner spoke with one of the bar’s patrons, who happened to be a customer service representative at a local insurance agency. The CSR indicated that the agency would provide the bar owner with a proposal. The proposal was provided and coverage was purchased. There was no documentation in the agency file/management system as to the exact nature and content of the discussion. After a big party at the bar, a patron hit a car,

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killing the driver, who was president of the senior class at the local high school. When the bar owner was served with a lawsuit, it was brought to the agency. During a discussion with the agency, the bar owner was advised that the policy did not cover liquor liability claims. The bar owner then filed suit against the agency. During the trial, the CSR admitted, “I can’t document everything. If I did, I would never get any work done.” She

testified that she personally delivered the policy when she stopped one night on her way home to have a couple of beers. She said she explained to the bar owner about the protection afforded by the general liability policy and that liquor liability claims would not be covered. The producer claimed to have explained this, too. Again, there were no notes in the system reflecting the personal delivery of the policy or the discussion

that subsequently developed. In turn, the bar owner testified that: 1.) he was not a sophisticated insurance buyer; and 2.) he definitely would have bought coverage for liquor liability had he known that the general liability policy did not provide it. His comments were something to the effect of “I have a bar, so why wouldn’t I buy coverage for liquor claims?”

It is what it is In all probability, the bar owner knew he did not have coverage for liquor claims, but with nothing documented, the legal system found the agent liable and a settlement was reached. Do you think the producer and CSR wish they had a couple of mulligans to fix some areas after the claim was made against them? Without a doubt—but that’s not the way it works. When an E&O claim is made against an agency, the file “is what it is.” While it is acceptable for an agent to organize the file, at no time should an agent add or delete anything from it. No do-overs! So, what does this essentially mean? It means that when agency staff—producers, customer service representatives, accounting folks, receptionist, etc.—performs a particular task, if that task should be documented, it gets documented. Imagine the impact on the judge and the jury when the CSR in the above claim admitted she did not document the discussion and that there were other files and discussions that weren’t documented. Clearly, the odds of an agency prevailing in an E&O matter are strengthened when documentation in the file is handled promptly, professionally and accurately. The odds also are enhanced significantly when the file reflects documentation back to the customer, memorializing the various conversations and decisions. Agencies and their staff must be extremely serious about this and make every effort to have a culture and commitment that tolerates nothing but the best. Using an audit process is a great vehicle for ensuring that agency expectations are met because, in the world of agents’ E&O, unfortunately, there are no mulligans.

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Marshallis a speaker, author and con-sultant. He can be reached by email at [email protected]. or visit www.vendor-tech.com.

Tech Bit

Using portable apps By Gregg Marshall, CPMR, CSP, CMC

I have been using portable apps to carry a complete open source alternative to Microsoft Office on a flash drive since 2009. I can carry a complete office set up that will run on any Windows computer I can find, such as a spare at a client or the hotel’s business center. I can have LibreOffice, which does a good job with Microsoft Office files, along with several development tools I use. And, even a tricked out collection of almost everything barely takes half of an 8 gigabyte flash drive. Programs and data stay on the flash drive. You plug it in, do your work, and when you are done, remove it. All trace of your visit goes with you. It has been fun watching the portable apps ecosystem grow, with more and more programs becoming available. I can even have a web server that runs on the flash drive and lets me work on a new website anywhere I might be. I also have found a new use for portable apps. I try a lot of software. Generally, the process with new software is to install it, try it out and if it doesn’t work out, uninstall it. Unfortunately, most uninstall procedures generally leave little bits and pieces of the program—both files and registry entries. They clutter up your computer and are one of the reasons why computers slow down with time. With so many applications available in portable app format, many of the programs I want to try are available for the Portable App platform. I can install them on my portable app flash drive, try them out

and if they don’t work out uninstall them from the portable app drive. Sure there are still bits and pieces left over, but I can reformat the drive and reinstall the apps I want to keep. And, my desktop and laptop aren’t collecting any extraneous files. I’ve got my portable apps installation on a Kingston DataTraveler® Ultimate 3.0. I have found the Kingston products to be reliable and this flash drive is fast. Because it is going through a USB port, it isn’t as fast as the PCI SSD drive in my desktop or laptop, but it seems as fast as any direct connect hard drive. I had tried a Super Talent USB 3 drive, but it failed. It would show up in Windows Explorer, but then all files disappeared. Unplugged and reinserted would return the files for a few minutes, then gone again. Data is far too important to trust to drives that are not dependable. So, I switched back to a brand I know and trust. If you haven’t tried Portable Apps, I’d suggest you go to www.portableapps.com and download the installer. From there you can use the platform to download and install the applications you might need when you travel. Or, you can experiment with applications before installing them permanently on your computer. Don’t forget to use a reliable flash drive.


At this time of year we take stock of all for which

we are grateful.

We thank our generous advertisers for your support over the years.


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PIATN officers and directorsDirectoryOFFICERSPresidentTina Hutsenpiller, CPIAHutsenpiller Insurance Services LLCMt. Juliet, TN(615) [email protected]

President-electJohn Keisling, CPIA, CISRKeisling Insurance Agency Inc.Byrdstown, TN(931) [email protected]

Vice PresidentJoe Kerr, CIC, CPIAKerr Insurance ServicesBrentwood, TN(615) [email protected]

SecretaryHerbert MontgomeryClay and Land Insurance Agency Inc.Memphis, TN(901) 767-3600, ext. [email protected]

TreasurerDonnie Hogan, CICFred M. Smith & Son Inc.Springfield, TN(615) [email protected]

Immediate Past PresidentSteve PeayBoyle Insurance Agency Inc.Memphis, TN(901) [email protected]

NATIONAL DIRECTORJune Taylor, CIC, CPIA, CPIW, DAEWilkinson Insurance AgencyWhite House, TN(615) [email protected]

DIRECTORSGreg AugustineThe Augustine Insurance GroupClarksville, TN(931) [email protected]

Llew BoydSouthern Insurance AssociatesChattanooga, TN(423) [email protected]

Carl Butcher, CIC, CPAC.L. Butcher Insurance AgencyKnoxville, TN(865) [email protected]

Andrea Bond Johnson, CPIAGolden Circle Insurance AgencyBrownsville, TN(731) [email protected]

Britt Linder, CICPeterson-Linder Insurance ServicesBartlett, TN(901) [email protected]

Chris Mills, CPCU, CICMills Insurance AgencyNashville, TN(615) [email protected]

Bill Richards, CPIA, LUTCFCommunity InsuranceGreeneville, TN(423) [email protected]

STAFFPam Cass, CPIAConvention, Education, Membership(615) [email protected]

Sandy Clive, CPIAE&O, Member Services(615) [email protected]

Lochiel GainesCommunications, Trade Show(615) [email protected]


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National Association of Professional Insurance Agents400 N. Washington St. • Alexandria, VA 22314-2353(703) 836-9340 (phone) • (703) 836-1279 (fax)www.PIANET.com • [email protected]

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