Okay, we've all been busy with other things over the last year but I'm surprised this one is slipping under the radar.  Last September, California Insurance Commissioner Steve Poizner  issued final pay-as-you-drive regulations, which will enable insurers to rate their policies based on actual miles driven as opposed to estimated miles driven.   Have you even heard about this?  Judging from the silence out there, not many have.

I've been watching the success of providers like Zip Car in large cities like Philadelphia and San Francisco.  Customers--mostly city dwellers with limited daily needs for cars--can join up, simply get in the car and drive where they want paying only for the use of the car.  "Pay As You Drive" does the same thing, shifting the fixed cost of insurance to a variable cost just like gas, oil and tires.

This one just might work because technology now allows mileage tracking securely enough to satisfy the crustiest underwriter.

Like all innovations, this is not for everyone:  high mileage drivers will probably want a more traditional policy.  And California is not the first to offer PAYD policies, according to the Environmental Defense Fund:

"PAYD insurance is available in some form in 34 states and in many foreign countries including Israel, the Netherlands, United Kingdom, South Africa, Canada and Japan.

"Given its many benefits, why isn’t PAYD universally available in the U.S.? One reason is that many state insurance regulations do not permit PAYD — either by outright prohibition or conflicting requirements. North Carolina, for example, requires that premium charges be stated upfront, which precludes PAYD charges since they vary according to miles driven.

California is now working on eliminating its barriers to PAYD insurance. The state's insurance commissioner Steve Poizner recently announced his intention to draft new regulations to allow usage-based insurance. 

Texas recently became the first in the nation to have a "by the mile" choice of auto insurance offered by MileMeter. Traditional insurance offers 15 percent or less mileage-based discounts that don’t typically capture the full benefit of driving fewer miles."

The California regulations also allow insurers to offer discounts to drivers who opt to purchase a mileage verification policy. Any auto insurance program, including a pay-as-you-drive program, must be approved by Commissioner Poizner before being placed on the market for consumers to purchase.

If a driver elects to purchase a pay-as-you-drive policy, the insurer would verify the driver's miles through a variety of methods, including odometer readings taken by the insurer or its agents or vendors, auto repair dealers, smog check stations, self-reporting by the policyholder or a technological device placed in the consumer's vehicle. The final regulations explicitly prohibit insurers from gathering location data from consumers for automobile rating purposes through the addition of a technological device. The regulations would not affect existing multipurpose devices such as GM's Onstar system or the use of a technological device as part of an emergency roadside assistance program.

In 2008, the Environmental Defense Fund estimated that if 30% of Californians participate in pay-as-you-drive coverage, California could avoid 55 million tons of CO2 emissions between 2009 and 2020, which is the equivalent of taking 10 million cars off the road. This would save 5.5 billion gallons of gasoline and save Californians $40 billion dollars in car-related expenses. Additionally, the California Air Resources Board has recommended the adoption of pay-as-you-drive as one of the means to meet future climate change gas reduction targets.

As near as I can tell, Progressive and GMAC are offering these products now.  Others are "studying it."

IEA is fortunate to count Allen Leno as one of its senior instructors and course authors.  Allen sheds some interesting light on the lesser-known case of the "Almarez/Ogilvie" rulings recently revised by the WCAB.  In this article, Allen points out that the key problem for claims adjusters and employers is earnings capacity after an injury.  Here is Allen's article:

In Ogilvie, the Board made few substantive changes from its prior decision. The parties must use the RAND methodology and formula which means that the formula from the original decision still applies. The problem is that the RAND researchers did not fully understand the impact of the terminology they used and the Board compounded the problem by failing to consider the impact of events following injury. The Board confirmed that the calculation should consider earnings for the three years pre and post injury. Earnings for the three year period pre-injury should be for a “similarly situated” worker meaning that we may not use actual wages but wages for the average worker in the industry in question in the worker’s geographic area. The real problem is the post-injury earnings which are often zero or are very low because the employee was TTD for a significant portion of the three year period (TD payments cannot be included in the calculation). Thus we would often have to enter $0.00 for the post-injury earnings capacity, giving the worker a 100% earnings loss. This results in a calculated DFEC modifier that can go as high as 6 compared to the 1.1 to 1.4 range in Table A from the 2005 PDRS. Thus we have modest WPIs doubling, tripling, or worse compared to the 10% to 40% increases contemplated by the Table A. The Board does leave some room for contemplation of earnings capacity rather than actual earnings for the post-injury period although when and how substitution is appropriate is vague. Taken as a whole, the Board’s decision suggests that calculating and applying the DFEC modifier is not a simple calculation that can be done by any claims administrator or attorney. The involvement of vocational experts seems a certainty for the foreseeable future.
 
The real issue in the Ogilvie formula is earnings capacity after injury. It seems pretty clear that the Legislature had earnings capacity in mind and the RAND research discusses earnings capacity. Unfortunately, the RAND researchers apparently did not understand that an injured worker is usually not going to be in a position to earn wages until s/he is P&S/MMI. Thus the three year post-injury period should not begin until the employee is P&S – at the very least. We cannot count TTD as earnings and the worker cannot earn wages and received TTD. Beyond that simple fact is terminology itself. We use a DFEC value from Table A or calculate a DFEC value for the modifier. It is a Diminished Future Earnings Capacity modifier NOT a Diminished Future Earnings modifier. A simple example might best serve to clarify the Board’s perceptual error:
 

John Doe was earning $20/hour as a warehouseman when he injured his back. He had a lumbar laminectomy and was TD for 2 years following injury. At P&S, he was able to secure a position in inventory control earning $15/hour.

 
What is John Doe’s post-injury earnings capacity? If we use the Ogilvie Court’s logic, his earnings capacity would be $31,200 for the three year period following injury. Will he stop earning $15/hour at the end of the third year? Of course not – he will continue to make $15/hour and perhaps more. His post-injury earnings capacity for a three year period should be $93,600. If we assume John Doe has a 10% WPI, the DFEC modifier using just one year of earnings ($31200) is 2.36 (well outside the Table A value) and the PD adjusts to 24%. If we use three years of earnings capacity ($93600), the DFEC modifier is 1.45 and the PD adjusts to 15%. A significant difference.
 
Both the Ogilvie formula and Table A have significant problems. The formula frequently produces values outside the values in Table A even when you use earnings capacity. In our example above, we have a relatively modest wage loss but still calculate a value that falls outside the highest value in the table. This happens with alarming frequency and suggests to me that the formula MUST use a three year value for earnings capacity, not actual earnings, and that Table A needs revision because the modifier values are too low to reflect real world situations. It would appear that we need both the Courts and the DWC or Legislature to act quickly and logically to prevent large numbers of DFEC cases from inundating the WCAB. With these options, we should be prepared for a lot of work.

  TO OUR READERS: Perhaps in response to the burst of publicity this rule inspired, the FTC announced on October 30 that the compliance date has been moved back to June 1, 2010. 

*******************
The Federal Trade Commission’s “Red Flags” Rule is designed to protect personally identifiable information from data thieves.  Insurance brokerage firms and other service providers that receive payment after their services have been delivered are required to comply.  The compliance deadline is November 1, 2009 (now June 1, 2010!)—data breaches on or after that day may be subject to penalties of up to $3,500 per violation, and could also result in prosecution for violation of state consumer protection or deceptive trade practices laws.  Such laws may permit private individuals to sue and recover treble damages, attorney’s fees and/or litigation costs.

 Red flags are signs of danger to brokerage firms and agencies, and also to their business customers.  By learning about the new FTC Rule, agents and brokers can help business policyholders ensure that their risk management and insurance plans include protection against identity theft and similar losses caused by security breaches.

 Data security is more than a legal concern; it’s also an important customer satisfaction and public relations issue.  Imagine having to sign letters to valued customers, telling them that their funds and privacy are at risk because of a missing flash drive.  Some firms proactively work with potentially impacted customers after a data loss and contact credit bureaus to help protect against damage caused by identity theft.

 Data breaches routinely result in lawsuits, and compliance with the Red Flags Rule is the first step in proving that a business was not negligent.  Failure to comply, on the other hand, may be used as evidence that the business failed to meet established federal regulations for safekeeping personally identifiable data.  Litigation outcomes may be strongly impacted by whether a business is, or is not, in compliance with the Red Flags Rule.

(This article originally appeared on the American Agent & Broker website.  The authors are Louie Castoria and Lori Nugent, both attorneys at the law firm of Wilson Elser Moskowitz Edelman & Dicker LLP.)

Williams v. HRH, Cal. Court of Appeal, September 9, 2009

 

This recent California case affirmed a $5.8 million judgment against a broker, but the real lesson of the case is buried deep in its text, and is, simply, “If it’s not in writing, it doesn’t exist.”

 

In general, a broker is only required to use reasonable care in obtaining the insurance that the client requests, but a broker who holds herself out as “having expertise in a given field of insurance,” will assume additional duties.  No surprise there.

 

In 1999, the commercial customers started a dealership for a Rhino spray-on lining for pickup trucks.  Rhino referred them to its “go-to” insurance broker, who had designed a special coverage package.  The coverage was renewed in 2000, and again in 2001 with a different carrier.

 

In July, 2001, a fire broke out at the customers’ Santa Fe Springs operation, severely burning an employee.  The customers then discovered they had no workers compensation coverage.  The injured employee sued and obtained a verdict of $11.3 million.  Although their liability insurer provided a defense and paid its policy limits, the customers were left with an uncovered loss of $5.8 million, and sued the broker.

 

The broker admitted that she was aware that workers compensation insurance is mandated in California.  There was no dispute that she selected the coverages requested in the application form, which she submitted to the carriers.  From her point of view there was no mistake.  She testified that she had priced the workers compensation coverage and spoken with the customers, who thought the price was too expensive, and would look elsewhere to buy comp coverage.  The broker processed the remaining coverages, the premiums were paid, and she forwarded them the policies.

 

Unfortunately, the story does not end here.  The customers’ recollection was, well, different.  They testified that they never rejected the workers compensation coverage, and never said they would obtain it from another broker.  It was up to the judge to decide who was telling the truth.  The judge looked for corroborating written evidence, but there was none on either side.

 

The broker could produce no confirming letter, no email or database entry, not even handwritten notes of a telephone conversation corroborating the customers’ instructions to place all the coverages except the workers comp.  Finding that the onus should fall on the professional to confirm her instructions, the judge found in the customer's favor, and was upheld on appeal.  The moral of the story: document your file. 

(This article, which offers a lesson to all who practice in the property casualty industry, was penned by Ed Garson.  Mr. Garson is a Partner at Wilson Elser, a San Francisco law firm.  Ed specializes in complex litigation involving professional liability.)

Introduction:

 

Insurance regulation is once again on the radar screen of the White House and U.S. Congress.

 

On June 17, President Obama introduced the administration’s proposal for Financial Regulatory Reform: A New Foundation (“White Paper”) that provides a framework to reform the regulation of the U.S. financial system.

 

On May 21, Congressman Paul Kanjorski, D-Pa, reintroduced the Insurance Information Act of 2009 (“IIA”).

 

Both proposals establish an insurance division within the Department of the Treasury to enable the monitoring of the insurance industry by the executive branch.

 

The Department of the Treasury’s White Paper:

 

The Treasury’s proposal may ultimately change the nature of insurance regulation.  The

White Paper calls for the creation of the Office of National Insurance (“ONI”) within the

Treasury Department. The White Paper proposes that the ONI monitor all aspects of the insurance industry to: (i) identify the emergence of problems or gaps in regulation to avoid a future insurance related crisis; (ii) manage the government’s responsibilities under the Terrorism Risk Insurance Act; (iii) function as the federal insurance regulatory authority on international insurance matters with the authorization to enter into international agreements; and (iv) increase international cooperation on global insurance regulation. Treasury has further recommended that ONI identify insurers “whose failure could pose a threat to financial stability” for referral to the Federal Reserve for supervision.

 

Treasury has listed six principles to modernize and improve insurance regulation:

 

1. Effective systemic risk regulation with respect to insurance.

2. Strong capital standards and an appropriate match between capital allocation and liabilities for all insurance companies.

3. Meaningful and consistent consumer protection for insurance products and practices.

4. Increased national uniformity through either a federal charter or effective action by the states.

5. Improve and broaden the regulation of insurance companies and affiliates on a consolidated basis, including those affiliates outside traditional insurance businesses.

6. International coordination of insurance regulation.

 

The Insurance Information Act:

 

Establishes the Office of Insurance Information (“OII”) within the Department of the Treasury, and authorizes OII to:

1.      Receive, collect, analyze, and disseminate, data and information, and issue reports regarding all lines of insurance, except health insurance.

2.      Coordinate federal efforts and establish federal policy on international insurance matters.

3.      Determine whether state insurance measures are inconsistent with federal policy.

4.      Serve as a liaison between the federal government and individual or several states regarding insurance matters of national and international importance.

5.      Serve as a primary advisor on the export promotion of United States’ insurance products and services for the Treasury’s representative to the Trade Promotion Coordinating Committee.

 

The IIA does not grant the Treasury “general supervisory or regulatory authority” for insurance in the United States. If passed by Congress, IIA would additionally create an advisory group of regulators and consumer groups to inform the OII, which would be required to report to the U.S. Congress every two years.

 

The Beginning of the End or the End of the Beginning?:

 

Does IIA mark the beginning of the end of state regulation of insurance? Will a Treasury pronouncement that a state’s regulations are inconsistent with federal policy fast track the federal charter of insurers? Will the Treasury’s desire to improve and broaden the regulation of insurance companies and affiliates on a consolidated basis preempt state supervision? As conventional wisdom puts it: “Once the camel’s nose is in the tent, the rest is sure to follow.”

 

Alternatively, does the limited scope of IIA signal the end of the beginning of federal regulation of insurance? Advocates of IIA contend: “the bill has clearly defined and limited preemptive powers applicable only if state laws conflict with United States international trade agreements.” Does the absence of insurance supervision and regulatory authority for the Treasury in IIA reveal a political retreat from an optional federal charter? Or is battle for the regulation of insurance merely postponed for another day?

 

Washington D.C. insiders note that Congress will be consumed with the regulatory overhaul of the U.S. financial system, an exhaustive and complex endeavor. As reasoned by Charles Symington of the IIABA: “There’s only so much oxygen. When they’re trying to stabilize the financial markets, it does leave less time than people would like.”

 

 (This blog is excerpted from a longer essay published in ReSource ReSearch, a journal published by ReSource Intermediaries, a reinsurance brokerage based in San Francisco.  ReSource Intermediaries is a member company of the Insurance Educational Association and its CEO, Bob Kennedy, is a former Chairman of IEA.)

 

One of the most controversial topics of the President’s proposals for health care reform is “the public option.”  While this blog is not a forum for personal or institutional opinion for or against the reform proposals, I do want to point out that, in the insurance industry, there are abundant examples of public options that work well.  While my experience is in the property-casualty side of the world, I can’t see why these examples would not extend to health insurance.

 

Consider personal automobile insurance.  Auto insurance is viewed by many as being a social right.  Every state where I’ve done business has a state-sponsored “assigned risk pool” that provides insurance for all but the most dangerous drivers—usually those whose licenses have been revoked.  Premiums are high and based on driving records, but the depth of availability proves that it is “affordable.”  Private insurers peacefully co-exist with these pools, and often issue and service the policies on behalf of the governmental department that runs the program.  So, administratively, it works.

 

Consider homeowner’s insurance in coastal states.  Protection from hurricanes is viewed as a social right by these states’ citizens and legislators.  Some insurance companies provide “wind coverage,” while most rely on state-run FAIR plans or state-sponsored insurance companies to serve folks who own homes or condos in the wind zones.  In some cases, insurance companies issue and service policies on behalf of the plans; in other cases, the state-run insurers do the job.  In a few cases, the private companies actually compete with the state-run companies.  Once again, a “public option” system works.

 

And in my home state of California, we have perhaps the best example of a working “public option.”  Workers’ comp is not only a social right; it is legally required for employers. California’s State Compensation Insurance Fund has operated for decades as a backstop insurer of workers’ compensation.   Over time, the State Fund has expanded to be a very large enterprise and often competes with insurance companies in a state whose work comp market is larger than the next five states and the federal work comp program combined.  Here, corporate insurers coexist with the State Fund in good years and lean; and employers stay or switch insurers based on a variety of factors including service, convenience, financial solidity and price.  As employers and agents and brokers participate in the WC market in California and discuss provider options, State Fund is mentioned as often and as unremarkably as Travelers, Zenith, Liberty Mutual, and all the other insurance companies who voluntarily compete in the marketplace.  In this example, the “public option” works very well.  (Dean Calbreath, a staff writer for the San Diego Union Tribune, has a great article on this subject in that newspaper’s August 16 edition.)

 

So the health care debate rages on, and who knows where it will all come out.  But care should be taken about dismissing the “public option”—in many cases public options serve a great and useful purpose to free enterprise and society.

            Mediation is all the rage in settling claims and lawsuits. What did we do before there were mediators?

There was a time, back when dinosaurs ruled the Earth, when insurance claims adjusters and their appointed counsel actually negotiated settlements with claimants and their counsel. It was far from a perfect system, but it worked most of the time because the best plaintiffs’ lawyers knew that, on average, they’d do better by settling most cases, and that they couldn’t take every case, or even a large percentage of cases, to trial. It was a more congenial time, when opposing advocates would battle fiercely, but professionally, in court, then head out afterwards and try to settle the case over a couple of drinks.

The old system can still work, but today it’s considered “safer” to discuss settlement in the context of a formal mediation. State and federal rules encourage mediation and generally cloak the process in an unbreakable “cone of silence” privilege to allow the parties and the mediator to communicate candidly, without fear of what they say being later used in evidence.

As mediation has become overutilized, myths have grown up around mediating, the foremost of which is that it’s the mediator’s job to evaluate the case for the parties. If that were true, why would claimants and insurers even bother to hire adjusters and counsel? The fact is that it is the claims professional’s job to evaluate the case, aided by the legal advice and courtroom experience of outside counsel. (Ironically, is also the plaintiff’s attorney’s job to evaluate cases.) The mediator may have many years’ experience on the bench or in practice, and any mediator worth hiring is worth listening to, but that doesn’t turn mediation into an evaluative process. The evaluation precedes the mediation.

Evaluating a case requires the use of a highly specialized tool, a telephone. Oh, it will likely involve other tools, such as independent medical examinations, depositions, and some jury verdict research, but all that paper is meaningless unless the claims professional and his/her colleagues, including outside counsel, honestly discuss the case. The dialog cannot be outcome-driven; no participant should try to sugar-coat a bad fact or play “spin doctor.” There needs to be a healthy skepticism in the dialectic—nobody should accept any important fact as a given. Long before the mediation begins, the arguments and evidence should be tested by fire.

And then it is time to mediate, or if you want to be brave, to negotiate.

There are two overused processes at many mediations: opening presentations and “mediator’s proposals.” An opening joint session can be useful to set the tone and lay out the ground rules, but lengthy, grandiloquent dissertations tend to produce more heat than light. PowerPoint slide shows are death to discussion, and chew up hours of valuable time that should be spent bargaining, rather than grandstanding for the clients and driving the parties further apart. Neither side does better by “surprising” the other. That’s why mediation briefs, including crucial exhibits and consultants’ reports, should be (gasp!) exchanged in advance of mediations. Both sides need to be ready to compromise, which requires knowing their downsides, not just their mantras.

Then there is the ultimate mediation cop out, the “mediator’s proposal.” These were once face-saving devices, in which each side would confidentially disclose its acceptable range to the mediator, who would then pronounce, with Delphic acuity, a proposed number that just happened to fit within the narrow overlap of the two ranges. Miraculous!

Maybe it’s that sense of infallibility that has given rise to the modern myth of mediator as judge, jury, and executioner, in other words, both sides moving in baby steps until 5:45 PM, then letting the mediator pick a number in last few minutes. Is that mediating or passing the buck—maybe hundreds of thousands of bucks?

A skilled mediator can aid the parties, especially those unaccustomed to litigation, by helping them see past their emotional ties to their positions, and see their case as it is, warts and all. The mediator should be more than a telegraph, simply sending messages back and forth, but less than an oracle. If the parties have impartially evaluated their positions, and each other’s, they won’t need an oracle.      

(The author of this article is Louie Castoria.  He is an attorney with Wilson Elser and a Director of the Insurance Educational Association.  Louie publishes often in trade journals and shares his sense of humor on a weekly basis in his home town newspaper.)         

 

A long time ago, when I was learning the finance trade at Cigna, the insurance folks there started talking about “24-hour coverage.”  That seemed a natural for this brand-new company which was trying very hard to mesh the life insurance culture of Connecticut General with the property/casualty culture of the Insurance Company of North America in Philadelphia. 

 

24-hour coverage made a lot of sense to me then.  Why couldn’t you line up your workers’ comp policies and your group health policies and simply tell your employees “you’re covered!”  And to this untutored observer, it looked like a great business opportunity for large providers like Cigna, who were able to bring both sides to the customer.  One very large state—California—welcomed the idea and offered to be an incubator.

 

As we all know, 24-hour coverage is still a work in progress.  (That’s usually code for “we missed the deadline,” or “we’ll keep studying it until the funding runs out.”)   There are systemic hurdles including regulation, systems integration and—yes—culture.

 

But the concept still makes a ton of sense, and there is one group of active and rapidly growing advocates who have developed a workable concept which makes integrated delivery of occupational and non-occupational health and productivity services a reality.

 

That group is the Disability Management Employer Coalition (DMEC).  Supported by a large number of major employers and providers, DMEC and its members work tirelessly to overcome hurdles and make integrated delivery of employee health and productivity programs work. 

 

I just attended DMEC’s national conference in Portland, and 500 participants filled three and half days with workshops, presentations and case studies—all targeting integrated disability and absence management.  These folks work hard and share what they know…in a year when most conferences are at 50% of average attendance, this conference nearly matched 2008’s record turnout.

 

Employers and providers who need to know more about integrated disability management, and the hard financial benefits this concept can bring to the bottom line, should go to DMEC’s website, www.dmec.org.

Welcome to the Insurance Educational Association blog: "IdEAs."  IEA is always involved in two worlds--insurance and training.  IEA wants this blog to be a community forum for issues, ideas and inspiration about both these worlds.  Our staff, Directors and instructors will be publishing small, but relevant observations about insurance and professional training.  We love comments!  And if we spot a great article, video or website you ought to know about, we'll pass them along.  If you know about something we should know, please pass it along to us!