Monthly Archives: December 2012

Producer Contract Fundamentals


One of the amazing things that occurs in some agencies, even successful ones, is that often the producers have not signed contracts.

There are three main reasons for the lack of contracts.

The most common is that the agency owner and the producer has a verbal agreement. Usually the owner is reluctant to put the agreement in writing for fear that the producer will not sign one any way and might leave if forced to sign.

The second reason is that the owner just did not take the time to draft an agreement or did not know were to start. The third most common reason is that the owner feels contracts are a waste of time and money. They believe that if a producer wants to leave and violate the contract they will.

The last reason does have a bit of truth to it. However, if a producer does violate a contract, at least the owner does have a means of recourse. This is especially true if the agreement is fair.

Those who feel a verbal agreement will suffice or fail to take the time to write an agreement are playing with fire, and will get burnt. Without a contract, any dispute must rely on verbal agreements, implied agreements and common practices. The results of such disputes are up in the air. At least with a contract both sides have a common starting point in which to resolve their disagreements.

One of the biggest reasons to have a contract with a producer is to clearly state who owns the business. Producers often feel that since they generated the business they own it. Whereas many owners feel that since they own the agency, they also own all of the business. The conflict arises when these two opposites do business together.

The time and money it takes to put a contract together seems trivial when a producer with a $250,000 commission book of business walks away. Sometimes the ownership issues pop up only when the agency owner is retiring, only to find out their agency is worth a lot less because they do not own the producer’s book of business.

The Starting Point
There are many boilerplate or do it yourself contracts out there. Some of these are quite well written. They can be used as the starting point for negotiations between the parties. Or, you may choose to start with a plain language Letter of Intent that outlines all the terms agreed to by all parties.

The next step is important. HAVE A COMPETANT LEGAL ADVISOR REVIEW AND APPROVE ALL YOUR CONTRACTS. Boilerplates are fine to an extent, but laws change and vary from state to state, so never do all the contract work without an attorney who has experience with producer contracts. If you start with a Letter of Intent, the attorney can use it as the raw material for a contract.

So what are the key elements that make up a good contract? The first thing to consider is that each agency and producer is unique and that a contract can and should vary based on the circumstances. There are, however, some basic components that each contract should contain. The most common elements are:

Parties to the Agreement and Recital – State the name of all parties (individuals and entities) that are entering into the agreement. The recital provides a brief overview of the background and why the agreement is being written.

Term of Employment or Contract – State how long this agreement will run. It can be open-ended, if so desired.

Responsibilities of the Producer – Describe the duties expected from the producer. Always add a line that duties include any reasonable task requested or assigned to him/her by the employer. This is a good “catch-all” phrase.

Obligations of the Employee – Explain what the employer will provide the producer to enable them to perform their work.

Compensation and Benefits – Outline the compensation plan and any benefits provided.

Exclusive Nature of Employment – State that the employee is to devote their full-time and efforts exclusively for the benefits of the business. This section should not be included in a contract with an independent contractor.

Termination of Agreement – Describe what the rules will be for termination of employment.

Death and Disability Issues – Many contracts omit this valuable section. Make sure it is understood how the death or disability of the producer will impact the agreement.

Non-Disclosure and Non Piracy – Clearly state the importance of non-disclosure and non-piracy of the agency materials. If included in the contract, it is most likely to hold up in court.

Ownership of Accounts, Expiration Lists and Renewals – Describe how the ownership of the accounts will be handled.

Injunctive Relief and Damages – Spell out the ramification of any violations of the agreement.

Assignment of Agreement – Allow for the assignment of the contract to a third-party, such as a buyer of the agency.

Invalidity of Specific Sections – This section allows for the rest of the agreement to remain intact, if a specific section becomes invalid for some reason.

In addition to these sections, there will be additional sections related to common legal practices in a contractual agreement, such as Applicable Law, Binding Effects, Amendments, Waivers, Arbitration and Complete Agreement.

Is it Negotiable?
Some of these sections are negotiable, such as Compensation and Obligation of the Employee. It is important, however, that the agency owner not negotiate on other sections such as Non Disclosure, Assignment of Agreement and Termination of Agreement.

The sections that tend to be the most important to the owner and the producer revolve around compensation and ownership issues. The approach towards these two issues needs to be customized based on the needs, expectations and position of the parties.

Insights on how to handle producer compensation was addressed in a prior article (VVVVV). The bottom line on compensation is that it needs to be rewarding and motivating for the producer, affordable to the owner and fair to both parties.

Ownership of Accounts
There is a wide range in how account ownership is handled, or mishandled, by many contracts today. Some agreements have the producer owning it all, some have the agency own it all and some fall in between.

The problem is that sometimes account ownership has been used as the vehicle for a vesting agreement or deferred compensation plan. It is important to keep the concept of account ownership separate from the concept of a vesting agreement or deferred compensation plan.

The ownership of the accounts, renewals and expiration lists should always remain with the agency. The contract should clearly state this fact. This will prevent any misunderstanding about who owns the accounts. The vested interest, if allowed, should be strictly a financial benefit to the producer, not an ownership interest in the accounts.

If the two parties agree to some sort of vesting or deferred compensation, that should be spelled out separately from account ownership. In a vesting agreement, the producer has a vested interest in some portion of the renewal commissions generated by the accounts, while the ownership still remains with the agency. This agreement can be part of the employment contract or it can be its own agreement.

A deferred compensation plan can be effectively the same as a vesting agreement. It is probably less confusing to use the deferred compensation terminology rather than the vesting terminology, since the latter may be confused with an ownership of the accounts.

Keep in mind that a deferred compensation plan can be unrelated to the producer’s book of business. For example, the employee may earn $10,000 in deferred compensation per year of employment.

The terms of the deferred compensation or the vesting agreement needs to be clearly stated. Why bother saying that a producer is 50% vested in their accounts without describing how the value will be determined? Failure to state how the value is determined will only cause more problems.

A “rule of thumb” multiple for value is the most common approach. The main problem with a rule of thumb, such as one times commission, is that it may not reflect the fair value of that particular book of business. It makes sense to include the option for a professional appraisal if a dispute arises.

The contract can also allow the producer to buy the accounts from the agency. This makes the agreement bilateral and may help the agreement to be construed as fair in the courts. The agency, however, should always reserve the right to sell (or not).

Good producers are hard to find. For an agency owner to spend a lot of time and money finding and developing a good producer, it only makes sense to have a clear understanding of what their agreement is. When both parties know what the terms are and agree to them in writing, it tends to keep both sides honest and more likely to follow the terms.

The legal world is not perfect and valid contracts sometimes don’t hold up for one reason or another. An agency’s clients are better off with the proper insurance then no insurance at all. In a similar fashion, an agency and producer are better off with a written contract then no contract. A well-written producer contract is a form of assurance to a good relationship between the agency and the employee.

About the Authors.

Bill Schoeffler and Catherine Oak are partners in the international consulting firm, Oak & Associates, based in Northern California. The firm specializes in financial and management consulting for national and international insurance agencies, including valuations, mergers acquisitions, clusters, sales and marketing planning as well as perpetuation planning. They can be reached at (707) 936-6565 or by e-mail at print


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Being “Nice” To Your Kids Can Get You in a Lot of Trouble

Family Portrait - Montreal 1963


The kids finally turned 18, out of the house off to school or their first real job and you have done what you have waited to do for years—re-decorate their room! But, this economy has changed that dream in a lot of different ways.  The kids are back, or if not physically moving back into “your” home they are back on the household payroll.  The good news is you talk to them more…th



e bad news is that they are calling for a transfer into their account.


I hear these stories all the time, and I, too, have become much closer to my kids! This economically driven dependence has created some very interesting insurance questions. The fact is that as the helpful parent we are creating some serious personal liability and taking insurance risk.  Here are a couple of true examples (fictitious names are used to save my friendships):


“Can you lease a car for me—I cannot qualify with my credit rating”


Sandy is a 40 year old who not a member of his mother’s household and needs to lease a new car.   He cannot qualify for the lease, so he asks his mother to lease the car in her name.


They have considered two ways to handle the insurance on the leased vehicle:


I.    Mom insures the car on her personal auto policy; give the car to him to drive; and, he will reimburse her for the payments and monthly insurance bill.  


When mom called her insurance agent, the agent told her that she could insure “Sandy’s Car” since she is the registered owner and the only person on the lease. The problem here is that it is just not right to do this. It is misrepresentation to the insurance company. While a small claim may not highlight this fraud to the company—when Sandy gets into a significant accident the truth will come out. The insurance company has the right to rescind coverage under such circumstances and their agent will face the consequences of bad advice. Even if they do get away with it, many insurance carriers have restrictive language in their policies regarding permissive use.

In particular, California law generally requires that automobile insurance policies cover permissive drivers under the owner’s liability policy [Insurance Code§11580.1(b)(4)] but the insurer can limit permissive user coverage by use of clear and conspicuous language to $15,000/$30,000/$5,000 [Vehicle Code §16056; Haynes v. Farmers Insurance Exchange (2004) 32 Cal.4th 1198, 1205 (finding that to be enforceable, a limitation of limits for permissive use must be conspicuous, plain and clear)].

However, if a motor vehicle owner gives express or implied permission to a person to use a motor vehicle, and that driver wrongfully (negligently or intentionally) causes injury or death to a person or damage to property, the vehicle owner is also vicariously liable [Vehicle Code §17150 ]. In fact, Owner liability under Vehicle Code §17150 generally has a maximum dollar limit of $15,000 per injured person but $30,000 per occurrence even if more than two people are injured, and $5,000 for property damage [Vehicle Code §17151; see also Vehicle Code§17155].

The permissive use statute does not limit the liability amount owed by the owner based on another viable legal theory (other than permissive use) such as, for examples, negligent entrustment to an “incompetent, reckless, or inexperienced driver” (Syah v. Johnson (1966) 247 Cal.App.2d 534, 538), and failure to properly maintain brakes (Fremont Compensation Ins. Co. v. Hartnett (1993) 19 Cal.App.4th 669). As such, an injured or damaged party will file suit against both the owner and driver for the permissive use statutes to apply [Vehicle Code§17152].

If we strictly interpret the PAP, we know that anyone can drive our vehicle with our permission and there is no time frame for the permissive use. The PAP does not say it MUST be garaged at the owner’s home although that was the address the insurance company used for rating purposes as well as the mom’s driving record.

So the first question to answer is if Sandy gets into an accident, will Mom’s policy provide her coverage for the occurrence?

Mom’s AAA policy (insuring agreement) provides that the insurer “will pay damages for which any person insured is legally liable because of bodily injury or property damage caused by an occurrence arising out of the ownership, maintenance or use of an automobile…”

Further, Mom’s policy includes as an insured, “any person using an insured automobile with your permission…” So far, so good. Based upon the insuring agreement alone, it appears that Mom and Sandy will be covered. However, the policy also requires Mom to notify the carrier if there is a change in driver. The policy provides:
“You agree to pay the premium…resulting from changes made during the policy period. Changes include, but are not limited to…(c) a change in drivers…”

The policy also contains a “Misrepresentation or Fraud” section, which provides:
“This entire policy shall be void from its inception if any person insured has misrepresented or omitted any fact or circumstance which was material to our issuance or renewal of this policy. Any statements in the application or in any documents provided to us by any insured in connection with the issuance of renewal of the policy shall be deemed material to the acceptance of the risk assumed by us under this policy, and this policy is issued in reliance upon the truth of such representations. If any person insured intentionally makes a false statement or conceals or misrepresents a material fact or circumstance that relates to an accident, occurrence or loss, or to our investigation thereof, we may elect not to provide coverage for that accident, occurrence or loss. We also may elect to cancel or nonrenewal the entire policy as permitted by law.”

Based upon the initial and continued misrepresentation as to “who” is driving the car, the insurer has a clear basis to void Mom’s ENTIRE policy from its inception. Thereby jeopardizing not only coverage for “Sandy’s Car”, but for any other vehicles insured on the policy in question.

Assuming the insurer does not find out about the misrepresentation or agrees not to void the policy upon making that determination, the next question becomes:

Does Mom’s policy cover Sandy, if Sandy gets into an accident?
To qualify as an insured under the policy, with respect to an insured vehicle, a relative must be a resident of the same household in which the named insured resides. So, should Sandy get into an accident, he will not qualify as an insured on Mom’s policy.
If Sandy has his own auto policy of insurance (say for a different auto) will Mom’s car be considered an “Additional Insured Automobile”? To be an additional insured automobile, Sandy cannot own the car (check) and it cannot be “available for regular use” by Sandy. Under the strict definition, Sandy’s own policy won’t cover him.

II. Sandy is going to insure the car on his personal auto policy.

This approach is even worse than the first scheme. Mom may think this gets her off the hook but she, and she alone, is the registered owner and subject to liability as the owner. Mom has no insurance on the car because she did not add it to her policy.

Further, Sandy has no insurable interest in the car; he is neither the lessee nor co-lessee. There would be no coverage under his auto policy or her policy for the leased vehicle.


Advice to Mom
1. Have your 40 year old kid move back home because he will then be a member of the household and the PAP would have a better chance of extending coverage.
2. Do not lease a car for your children in your name whether they live at home or not but especially if they are not in residence.
3. Have them get a jalopy or take the bus.

Footnote [1] “Every owner of a motor vehicle is liable and responsible for death or injury to person or property resulting from a negligent or wrongful act or omission in the operation of the motor vehicle, in the business of the owner or otherwise, by any person using or operating the same with the permission, express or implied, of the owner.” California Vehicle Code § 17150.

Next case


I am moving home (with the kids) so that I can start my own business

Your perfect home, since you kicked out your husband has been infiltrated by your son, wife and two children under the age of 8.  We have some significant issues to resolve and I am not talking about the play dough in the carpeting here, which is a given. The bigger concern is the fact that your son is going to start his own internet company.  He was the victim of layoffs in the industry and is striking out on his own.


The Homeowners is clear in its definition that an “insured” means You and residents of your household who are your relatives…  Good so far, the family is all covered on the mom’s Homeowners Liability Policy.


The business takes a while to get going and as soon as the big break is becoming a reality, the son decides to file a DBA and form an LLC.  He has to buy a substantial amount of computer equipment through his new company all of which is kept in the home or more often in the detached garage.


The insurance problems are now mounting.  We have a business operating out of the home; the business is operating in a name other than the resident relative on the policy; and a lot of expensive equipment owned by the company maintained in residence.  Hopefully you are saying to yourself NO coverage or at best very limited coverage.  Mom’s Homeowners Liability policy had problems before the son formed a company—specifically all of the business exclusions.  When he formed the company, even the limited coverage that was part of the policy was removed.  In terms of all the computer equipment, it too is not owned by the relative in residence—it is owned now by his company.  Even if you could put a claim in for loss under the Homeowners policy it would be limited for both coverage on and off the premises.  The fact that it is stored primarily in the garage brings up the very strong language that a detached garage cannot be used in whole or in part of business purposes.


Advice to Mom:


1.    While you are now the proud mother of a budding entrepreneur, have him buy a business policy to cover his liability and property.
2.    Remove the play dough with hot water and salt




Written By:
Laurie Infantino AFIS, CISC, CIC, CRIS, ACSR, CISR
President, Insurance Community Center, Insight Insurance Consulting



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Insurance Lessons Learned from Hurricane Sandy

Hurricane Sandy is said to be the most damaging hurricane recorded in U. S. history.


Hurricane Katrina in the Gulf of Mexico near i...


There appears, however, to be some dispute as to whether Hurricane Katrina holds that dubious honor.  The loss estimates and concerns are changing daily .The cost of the storm, estimated by private firms including PricewaterhouseCoopers and the PFM group,  points to the fact that Hurricane Sandy destroyed or damaged more units of housing, affected more businesses and caused more customers to lose power. Here is the breakdown provided on November 26, 2012:

                                                        Sandy in New York ALONE        Katrina & Rita in Louisiana
Housing units damaged or destroyed    305,000                                      214,700
Power Outages (peak)                         2,190,000                                   800,000
Businesses Impacted                          265,300                                      18,700

•     Number of deaths is more than 110 from Hurricane Sandy
•    The official death toll from Katrina was 1,723.
•     7.5 million power outages throughout Hurricane Sandy’s two day assault on land
•    Moody’s Analytics estimates the loss in the vicinity of the storm to be $50 billion, of which $30 billion will be directly from damage to property and the remaining $20 billion from economic activity, not all of which is going to come from an insurance policy.
•    60% of the losses in economic activity, or about $12 billion, will come from the New York City metropolitan area.
•    Because of the storm’s intensity and the breadth and scope of the damage, President Obama declared New York and New Jersey federal disaster zones without waiting for any damage estimates.
•     As of 12/3/2012, the Federal government has already issued $180 million in federal contracts related to Sandy.
•    The President has declared several areas as disaster areas, which means that federal funds will now be available to storm victims. (This is not limited to those without flood insurance.) This federal disaster assistance usually takes the form of low-interest loans to help home and business owners rebuild, which you can learn more about on the Disaster Loan page.

The statistics are staggering as are the losses (both covered and not covered) that are emerging from the storm.  We will attempt to discuss some of the unique and troublesome issues that are arising from the storm.
Article Discussion Points:
•    Definition of “Storm” and its impact on insurance
•    Flood or NOT Flood?—that is the question (or the hope)
•    Personal Auto salvage concerns
•    The Lawyers are out to get you

A storm reaches tropical storm status by reaching sustained winds of 39 MPH.  The National Hurricane Center creates annual lists of names from the database of names maintained and updated by the World Meteorological Organization.  If a storm causes significant damage and /or loss of life, the name is retired from the list permanently.  Thus, there will be no Katrina II or Sandy II.

1.    What Does The Definition Of “Storm” Have To Do With Insurance?  There May NOT Be Coverage On The DIC.

Thousands of businesses were affected by Sandy. Many times those larger clients have flood and wind coverage, but written on a large property or DIC (Difference in Conditions) policy.
In those policies there may be restrictions, sub-limits or different deductibles that apply to “Named Storms.” Those policies will define what that is, and should include flood, wind, wind gusts, storm surges, tornadoes, cyclones, hail or rain into this category once the storm has been declared by the National Weather Service to be a hurricane, typhoon, tropical cycle, tropical storm or tropical depression, thus bringing into focus the entire life cycle that a storm may go through.
We have found a number of articles written by law firms that are already taking on the issue of “named storm,” claiming that even though the NWS had named the storm, it was not at hurricane strength when it reached landfall.  A comprehensive definition of “named storms” would be helpful to clarify coverage.  The fact that the meteorologists are discussing the attributes of this storm to be more like a winter storm rather than a tropical storm may end up on the chopping block of justice in a civil court or two and test the insurance policy coverages.

2.    What Is Unique About Hurricane Sandy?

•    Sandy has defied normal storm behavior by moving east to west; it acted both like a hurricane and a cyclone simultaneously.
•     The result of this last odd wind pattern was the root cause of the flood tides and the inundation of the New York subway system.
•    The storm qualified as a hurricane at the time of landfall and its wave “destruction potential” reached a 5.8 on the National Oceanic and Atmospheric Administration’s 0 to 6 scale.

3.    One Storm or Two Storms:

Bad memories of the World Trade Center came immediately to mind when I read about this potential concern relating to Hurricane Sandy.  You might remember there was a significant concern that a second storm, following the initial impact of Sandy,  was going to hit which would have further devastated the area.
Richard Mackowsky, a member of the firm’s global insurance group, said” new damage from a second storm could result in a separate occurrence, potentially requiring a separate set of deductibles.”

“If there is damage caused by a second storm but related to the first storm, issues arise as to whether there were one or two occurrences. A second storm could impact causation as to what is really driving the loss. If the only reason the second storm caused damage was because of damage from Sandy, the question then becomes whether that is a covered cause of loss,’ Mackowsky said. ‘A second storm could trigger a separate limit of liability if it’s a big enough situation,’ he said.

But even one storm can create causation questions. Was the damage from wind or flooding? Not a simple question to answer, litigation stemming from previous storms has shown.”
Saved by the bell on this one—the second storm never hit but the insurance pundits were armed and ready.

This appears, at first glance, to be Insurance 101—most of this damage was either directly or indirectly caused by the condition of flooding.  That is sure what it looked like to me and that is NOT a very popular observation. Why?? Because most people did not have Flood Insurance and if they did, the Flood insurance policy has limited amounts of insurance and significant restrictions such as NO business income coverage.

1.    Dilemma Of The Federal Flood Insurance Program—It’s A Problem:
Even if it is covered on the Flood insurance policy there is real concern about the overall program.  According to Reuters:
“ ‘The federal government’s flood insurance program may not have access to enough funds to cover anticipated claims from Hurricane Sandy victims,’ a top official at the Federal Emergency Management Agency said on Thursday.
Edward Connor, FEMA’s deputy associate administrator for federal insurance, told an insurance advisory panel on Thursday that his agency is projecting a flurry of flood-related claims in the neighborhood of $6 billion to $12 billion.
‘That is well above FEMA’s current borrowing power,’ he said, ‘which is maxed out at $2.9 billion. To extend it would require authorization from Congress, something Connor said he expects the Homeland Security Department will request soon.’ ”

2.    Flood or NOT Flood
Whether talking about homeowner’s insurance (including renters and condominium owners) or commercial property insurance, those forms most often include an exclusion for flood.  So, here is where it gets a little tricky:
a.    Did the property owner sustain damage from storm surge,
b.    Was the loss due to  rising flood waters
c.    Was the loss due to  too much rain that entered into the building because the wind removed the roof, blew out the windows or knocked a part of the building down
“It is an ongoing saga,” says insurance lawyer Frank Darras, who has worked extensively on litigation scenarios following Katrina. “If you are a homeowner, you are going to argue that you have damage caused by wind and wind-driven rain. If you are the carrier, you are going to say the damage was caused by flood, tidal surge or a hurricane, which requires hurricane coverage.”  In a unique twist, New York has a specific website that contains a regularly updated scorecard on insurance company performance.  Here’s the link:  For example, State Farm has had 48,109 claims; 6,363 closed with payment; 5,229 closed without payment.

3.    Problems With The Flood Insurance Solution
FEMA says that less than 15% of homeowner’s nationally carry flood coverage.  Federally backed lenders have been lax in enforcing the obligation to purchase flood insurance (THAT may change due to higher penalties being imposed upon the banks as of July, 2012).
The NFIP program anticipates claims between $6 and $12 billion but has borrowing power at $2.9 billion.  Reauthorization from Congress would be required and Homeland Security is expected to request appropriation soon.  Those current and new policyholders of NFIP coverage will be getting a scheduled rate increase that predates Sandy.
Even if the person or business purchased flood coverage, there are still problems and concerns.
a.    The limits of insurance available through the National Flood Insurance Program are small.
b.     Replacement cost coverage applies only to a dwelling and not to commercial structures.
c.     There may be wind damage to the building that the flood insurer will not pay but are covered in the homeowner’s policy.
d.     The insured will get to pay two deductibles for those two separate policies.
e.     What kind of coverage is there if the first layer of property coverage is the NFIP coverage and the insured purchases excess layers of flood coverage above that policy?
i.    Will it drop down to pick up the replacement cost difference?  No.
ii.    Will it drop down to pick up business income, extra expense coverage?  It should.  Check the policy language.

4.    The Future Of Flood Insurance
The future of the entire program is bleak enough, add to that the impact of Hurricane Sandy on the future purchase of flood insurance.  Homeowners in storm damaged coastal areas who had flood insurance , and many more who did not, still now may be required to carry Flood insurance and will face premium increases for Flood from an estimated 20 to 25 percent per year beginning January.  This is due in part to legislation enacted in July to shore up the debt ridden National Flood Insurance Program and is exacerbated by Hurricane Sandy.
“ ‘Because private insurers rarely provide flood insurance, the program has been run by the federal government, which kept rates artificially low under pressure from the real estate industry and other groups. Flood insurance in higher-risk areas typically costs $1,100 to $3,000 a year, for coverage capped at $250,000; the contents of a home could be insured up to $100,000 for an additional $500 or so a year,’ said Steve Harty, president of National Flood Services, a large claims-processing company.”
Lenders, in addition, will be affected by Hurricane Sandy if they fail to enforce the requirement for their lenders to carry Flood Insurance.  They will face even higher penalties than they have in the past.

5.    Ordinance or Law
a.    Many of those properties damaged by Hurricane Sandy had been built a number of years ago. So here are the questions:
i.    Does the Homeowner’s Policy, Commercial Property Policy or DIC include contingent ordinance or law coverage, demolition coverage and increased cost of construction coverage?
ii.    What about the loss of use for the homeowner as well as the business interruption coverage?
b.    The NFIP policy is out as there is no coverage for the indirect loss.
c.    Many DIC policies do not include ordinance or law automatically and many more do not include ordinance or law – increased period of restoration to cover the additional down time due to code or law enforcement.

6.    Power Loss
Earlier we quoted the statistic of approximately 7.5 million power outages throughout Hurricane Sandy’s two day assault on land.  Many of these outages lasted days and weeks.  There are several issues relating to insurance in terms of the power outages:
d.    Requirement Of An Off Premises Endorsement:
In order for businesses to have coverage for either direct or indirect losses relating to power outage, the insurance would first  have “off premises” or “utility coverage” on the policy.  Typically, losses stemming from off premises situations are excluded on property insurance policies.
e.    Causation Of The Power Outage:
If there was coverage on the property policies for the off premise loss, the situation that occurred off premises would have to be covered.  For example, if the off premises loss were caused by a windstorm, that cause of loss is typically covered on a Commercial Property Policy or personal form.  If the loss were caused by flooding, then that cause of loss is excluded and the off premises endorsement would not apply.
f.    Off Premises Deductible:
Off premises coverage oftentimes has a “time” deductible or waiting period of 72 hours unless endorsed. This waiting period would have eliminated coverage for many of the properties that had their power back in three days or less.
g.    Direct vs. Indirect Loss:
An Off Premises Endorsement would have to cover both direct damage and indirect to pick up a loss for Business Income.
h.    Other Perils such as Equipment Breakdown  (EB):
The cause of off premises loss may be due to a power surge that results from the storming.  If the EB policy has off premises coverage and Business Income coverage then recovery can be sought under that policy.
i.    Some Off Premises Policies Have Distance Limitations:
It must be ascertained if there is any distance indication on the policy to which the off premises is being attached. For example some policies have a 500-foot distance radius which means the source of the off premises loss must be within 500 feet of the insured’s premise.
j.    Spoilage:
It may be that the loss the insured sustained while the power was out was spoilage, such as loss to refrigerated items AND the business income that stems from that loss.  This could be covered on either an Equipment Breakdown Form depending on whether there was a “breakdown” or on a Commercial Property Spoilage Form.  Some Homeowners have limited coverage built in for refrigeration loss but not for the peril of Flood.

7.    Business Income:  Now we are talking about one of the bigger claims that will result from Hurricane Sandy and much of it will NOT be covered.  Here are some of the pressure points of this coverage:
a.    Cause of Loss—back to that one. Flood is excluded on the Commercial Property form so there will be no response for Business Income.
b.    The Flood insurance policy does not cover business income.
c.    If the cause of loss is determined to be “windstorm” and the insured has Business Income insurance then the policy should respond from the causation point of view assuming they had direct damage.
d.    The insured will have to prove that their income loss is directly attributable to Hurricane Sandy.
e.    The policy has a waiting period for coverage typically 72 hours unless endorsed.
f.    The policy would have to be endorsed with Off Premise coverage for the Business Income stemming from loss of power to apply.
g.    There is NO building ordinance for the business income—it would have to be endorsed.
h.    Civil Authority:  Many of the businesses did not sustain direct damage but where closed by civil authority.
i.    There is limited coverage on the BI form
ii.    There may be distance limitations
i.    Ingress/Egress:  A bigger problem is the ingress/egress issue which basically means “because of the condition, itself, access to an area is affected or unavailable.”  For example, if a road is flooded out so that there is no access to a grocery store, the grocery store will be able to demonstrate they are losing customers.  However, if the store was not directly affected by the physical loss, there will be no trigger on their business income form.  Civil Authority did not close down the area—it was closed to natural events in this case.
Traditional Business Income Policies require that there be direct damage to the premises by a peril insured against for there to be any business income insurance response.  However, there is talk, in the aftermath of Hurricane Sandy of what is referred to as Non-Damage Business Interruption or Non Physical Business Interruption Insurance. It is referred to as NDBI.  While articles are referring to these coverages, as if they are readily available, I believe they are truly exceptional in availability and accessibility.  Sometimes these forms are part of a “supply line coverage” for very large businesses that often have an international component.  There is also the TDI or CDI coverage—Trade Disruption which could come into play; however, that coverage has a very limited market.  Bottom line, the average business that sustained damage as a result of Hurricane Sandy had neither one of these types of coverage.  Here is a link to Liberty International that apparently has a program.

8.    Automobile Losses from Hurricane Sandy
Autos are the easiest part of this equation:  whether wind, flood or a combination, all are covered under the “Other Than Collision” coverage.  The salvaging of these autos is where it gets interesting.  Canadian officials are now bewailing the fact that thousands of autos, some estimates are as high as 250,000, are likely making their way to Canada.  Those storm damaged vehicle are classified in Canada as “non-repairable” and are illegal to sell.  But, in the aftermath of Katrina, Canadian citizens were buying these vehicles in the thousands and they expect the same thing to happen again.  What I wonder is, who is selling those vehicles?  The original owner?  The salvage company the insurer uses?

Errors and Omissions Litigation
Well, as if all the foregoing isn’t depressing enough, we cannot end this article without a little nudge to the insurance agent and broker.
If you are relying upon “conversations” with your client along the lines of “Do you want flood insurance?  No.  OK, then,” you are going to be sadly mistaken that your client is not going to enjoin you in litigation over your standard of care.  Your client is going to claim an increased standard of care, yes including New York residents, and that you had a duty to advise and quote coverage for them or at the very least, tell them in writing of the limitations of coverage in the policies they purchased and that they relied upon you for your expertise.  Many agents simply renew, year after year, their direct bill homeowner’s and small business clients without ANY documentation of coverage offers.  Even those handling larger accounts somehow rely upon the client’s memory and good will not to sue you.  So, again, for the millionth time already, please, please DOCUMENT your file, in writing, to the insured, with a rejection signature every year or, for larger accounts, an authorization to bind affirmation from the insured.
As we were all glued to the TV, watching reporters being blown around reporting the devastation, my insurance brain immediately went to “flood exclusions.” I saw the wind ravaging the houses, the uprooted trees blocking the roads, but also saw the rising waters in the streets; along the shores; in the housing areas.  The question will come down to that simple reality—was the damage due to flooding or not.  The attorneys are out in force, fighting for first page on the Google search engine so you get to them first.  A quotation from the Stephenfoster law site got my attention:
“There are reports that hurricane Sandy insurance claims are not being promptly or fully paid. Hurricane Sandy has caused billions of dollars of property damage. Fighting an insurance company’s hurricane Sandy appraisal is possible and, sadly, frequently necessary. Hurricane Sandy claims are handled similarly to other storm damage claims but there are some unique differences.
One common tactic that is employed by insurance companies or their adjusters is stating that damage is “flood damage”. Flood damage is typically not covered by standard homeowner’s policies or business interruption policies. It is important that people that have suffered losses realize that just because they are told it is “flood” damage doesn’t necessarily mean that the loss is not covered.
Hurricane Sandy insurance claims are expected to be huge. Stephen Foster is handling hurricane claims against insurance companies for claim denial, claim delay, loss of use of home, property damage, roof damage, loss of use of business, water damage, water damage caused by wind and bad faith claim handling. If an insurance company does not fulfill honor their promises to pay for damage caused by Hurricane Sandy then an insured should consult with an experienced hurricane insurance claim attorney.”
I love that last paragraph.  It reminds me of an old Gun Smoke movie—ready, aim, fire.  Barrels are being loaded against the insurance companies.
There is no easy way to end this article, although I am sure all of you who reached the very end are hopeful that I will.  The storm was one of the biggest ever and the insurance story will not end soon.  There is so much more we could say but best end this with a heads up to watch and see how these claims unravel; and, for those of you who did not insure any of these damaged properties, I say a toast of champagne is in order.


Written By:
Laurie Infantino AFIS, CISC, CIC, CRIS, ACSR, CISR
President, Insurance Community Center, Insight Insurance Consulting
Director of Education, Insurance Community Center & President, Segale Consulting Services, LLC




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Italian Court Convicts 7 Scientists For Failing To Predict Earthquake

October 22, 2012 Fox News.Com


Locator map of the province of L'Aquila, in Italy.


I was shocked when I read this article while cruising all the news stories on my IPAD at 2am.  I had to re-read it first thing in the morning to make sure I had not dreamed up this crazy story.  Could this be a new trend in litigation that could happen to us here in the United States?  This was a criminal charge made against the scientists but what could stop the victims (especially here) in filing civil suits against those who did not make the right predictions.  If you think this is “crazy” read on……


L’AQUILA, Italy – Defying assertions that earthquakes cannot be predicted, an Italian court convicted seven scientists and experts of manslaughter Monday for failing to adequately warn residents before a temblor struck central Italy in 2009 and killed more than 300 people.


The court in L’Aquila Monday evening handed down six-year-prison sentences to the defendants, members of a national “Great Risks Commission.” The defendants were accused in the indictment of giving “inexact, incomplete and contradictory information” about whether small tremors felt by L’Aquila residents in the weeks and months before the April 6, 2009, quake should have constituted grounds for a quake warning. Prosecutors had sought convictions and four-year sentences during the trial. They argued in court that the L’Aquila disaster was tantamount to “monumental negligence,” and cited the devastation wrought in the southern United States in 2005 when levees failed to protect the city of New Orleans during Hurricane Katrina.


Earthquakes are, of course, nearly impossible to predict, seismologists say. In fact, according to the website for the USGS, no major quake has ever been predicted successfully.


“Neither the USGS nor Caltech nor any other scientists have ever predicted a major earthquake,” reads a statement posted on the USGS website. “They do not know how, and they do not expect to know how any time in the foreseeable future.” The verdict also calls for damage payments that could add up to hundreds of thousands of euros, Science magazine wrote.


The article specifically references “negligence” or “monumental negligence”.  It also refers to the “damage payments” that are due from the scientists.  And, the article refers to Hurricane Katrina with the levees failing—putting that loss in the same category of their earthquake.  Are they pointing a finger that we, too, should be filing criminal cases against—who…..And seeking damages from people who were negligent in warning about the potential of the levee failing?  This article has even more impact as we are living through the effects of Hurricane Sandy and the unexpected and incomprehensible damage it has caused.


Let’s hope the Italian approach to their disaster does not set any trends in our country.


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