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The demarcation between years always seems to take on a contemplative aspect. We look back to where we’ve been, and then look forward to weigh our expectations. Will the market continue to harden? Will the dot-coms take our business? Will badly damaged lines, like workers’ comp, recover in states like California? How will Gramm-Leach-Bliley change our business?

For our industry, the Year 2000 began with the event that never happened—the Y2K bug’s bite was much more vicious in our dreams than in reality.

But not everything was so gentle. In Fort Worth, the tornado that ripped through downtown left visible scars. Saul Steinberg, the czar of Reliance, had his own catastrophe, which rippled through the industry.

Two elected commissioners, Chuck Quackenbush from California and Jim Brown from Louisiana, made history—albeit the kind that isn’t good—through their actions. But the news isn’t all bad. The insurance industry made progress internationally, entering a variety of countries including China. U.S. catastrophes on the whole were non-existent. And the hard market we’ve been begging for finally showed signs of its arrival.

We hope you enjoy our snapshot of the 10 biggest insurance stories of 2000. Drop us an e-line at [email protected] if you have additions to our list. Here’s to a great 2001!

Kimberly Young, Executive Editor

We knew the Reliance debacle had really hit rock bottom when embattled former Chairman Saul Steinberg was served with a particular lawsuit. But more on that in a moment.

After two years of relentlessly embarrassing revelations, Reliance is in “active discussions with insurance regulators, bank lenders and bondholders over the terms of our restructuring,” said Joel Weiden, spokesman for Reliance Group Holdings. “At this point in time, it’s premature to say what may happen. The talks are ongoing. We’re hopeful that we will be able to reach an agreement over the terms of the restructuring with those parties.”

The ratings agencies aren’t really hopeful. A.M. Best in early December dropped Reliance Group’s rating to “D,” the lowest level before full regulatory control. The company is under watch by the Pennsylvania Department of Insurance, the lead regulator on this case, but it appears more likely that the company might face more formal supervision, said Karen Horvath, Best’s vice president of property/casualty ratings. There’s a greater likelihood of bankruptcy as well, she noted.

“Their major focus now is how to ultimately restructure and pay their claims and hopefully have something left over for shareholders. Which is questionable because they don’t have enough money left to pay their debt,” Horvath observed.

Steinberg has personally lost $1 billion as majority shareholder of the once venerable, worldwide brand name.

The story of Steinberg’s flashy lifestyle is well- chronicled. The company was leveraged for years. There were losses in construction, marine, aviation and toxic waste transportation lines. The failed Unicover workers’ comp reinsurance pool resulted in a $117-million charge.

The death knell came in June: a buyout deal with Leucadia National fell through, and A.M. Best hammered Reliance by dropping the rating to a “B++” from “A-.” For huge chunks of ratings-sensitive areas—such as government entities and banks—Reliance was out of play for brokers, even if they wanted to do business with the company. At that point, Reliance stopped writing any business.

Best’s Horvath figures the Unicover mess “was one symptom of a greater problem… [T]his company grew very rapidly in a very soft market. They really lost control of the quality of the business in the book, as well. And because they didn’t have the appropriate controls, they were underreserving for this business. Unicover was part of that. Negative publicity associated with that was a greater problem.”

At the same time, Reliance had adverse reserve developments in other lines of business, Horvath said. Debt came due and the company had been taking a lot of capital out of the insurance subsidiaries to pay debt and shareholder dividends. And a significant portion of its assets was invested in common stocks—and concentrated in a select few issues to boot.

“If you take any one of those factors by themselves they probably would have been okay. But not a confluence of all,” Horvath said.

David Schiff, editor of Schiff’s Insurance Observer, has written extensively on Reliance and the Steinbergs. Many insurance companies can fail, he offers. A hurricane can come along and wipe them out, for example. But Reliance “was a long-term disaster,” Schiff said. “They were speculating their long-term strategy, and it caught up with them.

“What they did was a little too much of everything. They grew during an unlikely time, which is easy to do in the insurance industry. You just offer more coverage at a lower price, and if you get lucky, you can write your way out of it. But they didn’t…Steinberg’s strategy was to walk on the edge. They played everything so dangerously. It was a reckless strategy.”

Some 75 percent of Reliance has been sold off, consistent with the plan to run off the company, spokesman Weiden said. The Hartford took Reliance’s D&O, E&S and inland marine lines—plus a bunch of employees. Claims processing was outsourced to Aon’s Cambridge unit. Markel purchased renewal rights to childcare, social services and healthcare books. Combined Insurance, another unit of Aon, bought the accident and health book.

Travelers bought the surety business and renewal rights to middle-market accounts. Kemper bought renewal rights to large risk casualty and construction wrap-ups. Sounds like a Moroccan bazaar.

“Obviously this is a very difficult period for long-term employees of Reliance,” Weiden added.

It got more difficult-or shall we say “ugly” -last September, when The Wall Street Journal reported that Anne Steinberg, 83, is suing her son for allegedly failing to repay a $4.7-million loan.

Sure, this is business and there are three sides to every story (Saul’s side, mom’s side and the truth), but this is nuts. Can it get any worse than your own mother suing you?

Even this jaded Jersey boy shudders at the thought.

Peter van Aartrijk Jr. owns a communications firm specializing in the independent agent distribution channel.

The nursing home market, in a state of deterioration for several years now, has become increasingly barren.

Most insurers say the legal community has found a new weak spot, targeting the area as one ripe with potential for litigation.

A lack of commercial carriers willing to write nursing home coverage currently exists in most states, though Florida, Texas and California are considered some of the most challenged states, with few admitted carriers still offering new coverage.

In states where carriers are available, they are often too overwhelmed with submissions to get quotes out in a timely fashion. In some cases, per-bed costs have escalated to more than $6,000.

“The nursing home market has tightened up considerably over the past six to nine months, mainly because of an increase in severity and frequency of losses,” said Bill Yurek of Avreco Inc. in Chicago. “The insurance companies that were writing business in the past, the standard market…their loss ratios have really skyrocketed, so they pulled out of certain tough states such as Texas, Florida and Alabama.”

The punitive nature of recent court rulings hasn’t helped the situation. For example, the nursing home liability market in Texas dwindled over the last year to just one admitted company writing new coverage in the state. Huge losses due to liability claims, questionable and otherwise, are partly to blame. The graveness of the situation may lead the Texas Legislature to address the issue in its upcoming session.

Texas Rep. Craig Eiland, D-Galveston, has said the legislature will be looking at increasing Medicaid funding and could also look at other ways to alleviate some of the problems.

In an effort to improve the coverage availability for nursing homes, the Texas Department of Insurance decided Feb. 1 to include non-profit facilities in the Texas Medical Liability Insurance Underwriting Association – commonly referred to as the joint underwriting association. It is the first time since 1982 that nursing homes have been included in the state pool.

Commissioner Jose Montemayor will likely request the legislature look at including for-profit homes in the pool as well, but many believe that move would do nothing to help the situation. Meanwhile, insurers and others are calling for tort reform, but the Texas legislature will likely shy from such a move.

Like Texas, Florida has also considered reopening the state’s Joint Underwriting Association. Many insurers, like Ray Thomas, president of Bunker Hill Insurance Agency in Houston, say allowing even non-profit facilities to purchase coverage through the joint underwriting association is a “Band-Aid solution.”

“The JUA does not change the underlying problems with nursing homes,” Thomas said, stressing that most nursing homes are providing good care, but are falling prey to a litigation-happy society. He called for tort reform that would establish reasonable caps on punitive and mental anguish damages. He also suggested privileged records should not be admitted into court. Thomas also pointed out that “the surplus lines market is working,” and to offer coverage through the JUA would undermine the free market.

Several factors are to blame for the nursing home crunch, including Medicare cuts. “Most recently, because of the balanced budget act, their Medicare reimbursement was cut dramatically,” Yurek explained. “Their income has been lowered so that maybe the quality of care has been reduced because they’re not spending the kind of money they need to keep the facility running efficiently. That’s not to say that’s happened in every nursing home, but that has happened in some nursing homes around the country.”

Another problem is a high turnover of personnel in the nursing homes, which can lead to difficulty in obtaining a highly experienced staff knowledgeable in the procedures involved in patient care.

Some of the most common claims in nursing homes have to do with wound care, particularly bedsores. Others deal with patients wandering off from the facility as a result of a disease like Alzheimer’s or a lapse in security at the facility.

Many are hopeful that a White House proposal pumping $16 million into improving nursing home oversight will make a difference. Others, such as Sen. Charles Grassley, R-Iowa, and chair of the Senate Special Committee on Aging, has said more money won’t guarantee better quality because the government does a poor job ensuring state inspectors enforce federal laws.

Most of the money proposed would go to state agencies responsible for inspecting nursing homes. The money would be specifically earmarked for training the inspectors, inspecting the nursing homes during off hours, such as evenings and weekends, and providing more inspections of the facilities with the worst compliance records.

The proposal could very likely shut down some of the worst facilities, but would also improve others, which could eventually lead to decreasing litigation and fewer bankruptcies. That would be good news for the facilities, legislators and insurers, who have watched over the last year dozens of nursing home providers file for Chapter 11 protection.

Back in 1999 it was a rogue financier, Martin Frankel, that brought up questions about a regulatory system that allows individual states to regulate insurance commerce. Frankel had duped several insurance commissioners and their departments in his international scheme. The Tennessee Commissioner, Douglas Sizemore, even resigned in Frankel’s wake.

But in 2000, two insurance commissioners were their own worst enemies: Chuck Quackenbush of California and Jim Brown of Louisiana.

March 26, 2000, was the day the news broke that California Insurance Commissioner Chuck Quackenbush allegedly abused his authority by diverting insurer settlement money for his own political benefit. Quackenbush, a Republican, was only the second elected insurance commissioner to serve in California. He first ran for office in 1994 and again in 1998.

A shocking article in the Los Angeles Times marked the beginning of the end, alleging that Quackenbush collected political contributions from insurance companies, their lawyers and employees, transferring $100,000 of this money to his wife’s campaign accounts. The money was supposedly going to repay Chris Quackenbush for personal loans she made on her unsuccessful campaign against State Senator Deborah Ortiz, D-Sacramento, in the November 1998 election.

The L.A. Times report highlighted certain contributions made by a group of insurers in the wake of the Northridge earthquake to a special fund created by the Commissioner allegedly in lieu of paying fines for unfair claims practices. According to records filed at the Secretary of State’s office, in the last six months of 1999 the Commissioner collected $245,000 in political contributions. Insurance interests gave a total of $216,000.

On March 27, lawmakers demanded that Quackenbush appear at an April 26 hearing and produce confidential reports his office prepared on the handling of Northridge quake claims by six major insurance companies.

Assembly Insurance Commission Chairman Jack Scott, D-Altadena, asked for reports on Allstate Insurance Co., Farmers Home Group, Farmers Insurance Group, Fireman’s Fund Insurance Co., State Farm Insurance Companies and 21st Century Insurance Co. Records indicated that these major insurers agreed to make donations to one or more nonprofit foundations as “settlement” of the CDI’s confidential market conduct investigations. Quackenbush established several private foundations for these contributions. A large portion of the proceedings went to the California Research and Assistance Fund which ran television public service spots starring the Commissioner. Another Quackenbush-created foundation, the California Insurance Education Foundation, also came under scrutiny. A list of foundation fund recipients was revealed to include social service groups, minority community projects and athletic programs (including Skillz Athletic Foundation which hosts a football camp attended by the Quackenbush children).

In early May, four California newspapers—The Los Angeles Times, the Sacramento Bee, the San Diego Union-Tribune and The San Jose Mercury News—called for Quackenbush’s resignation. At this point, the Commissioner was walking a tightrope and was left with two choices-quit or face impeachment proceedings in the Legislature.

On May 23, Quackenbush stormed out of a State Senate Committee hearing, refusing to testify based on the advice of his lawyer, who warned the Commissioner to avoid a “political ambush” by the Democrat-controlled Legislature. Before walking out, Quackenbush presented an e-mail exchange that took place 15 months earlier between a Senate staffer and a former Joint Legislative task force staffer. The e-mail urged the Senate staffer not to confront Quackenbush about secret settlements with insurers because “we have to set him up first…If we do not completely ambush him, he will slide out of it.”

It seems that portraying himself as the victim of a political conspiracy did more harm than good, because on June 28, doomsday arrived for Quackenbush and he resigned.

Jim Brown, the Louisiana Insurance Commissioner, had been thwarting doom since 1999. In November of that year, despite a 56-count federal indictment in September 1999, he won a run-off election against Allen Boudreaux for a third term in the commissioner’s seat.

It was alleged that Brown, along with former Louisiana Governor Edwin Edwards and a host of others, all conspired to construct a sweetheart liquidation deal for a failed insurance company.

He was convicted on seven of 13 counts of making false statements to an FBI agent. The jury acquitted Brown on the remaining six counts, along with dismissing 43 additional counts of conspiracy, mail and wire fraud, insurance fraud and witness tampering.

In a one-on-one interview after the conviction with a television reporter, Insurance Commissioner Jim Brown vowed to fight his conviction in the Cascade Insurance case. “I never dreamed, in my wildest dreams, that it was a setup,” Brown told the reporter. “Obviously the [FBI] agent knew everything he wanted to know before he walked in the door. He wasn’t looking for information.”

The final numbers have yet to be tallied, but all indications say that 2000 is shaping up to be a great year in terms of catastrophe losses. Hurricanes meandered back off to sea, earthquakes were mild and centered in obscure places like the Texas panhandle, and the drought that riddled much of the nation was assuaged by a wealth of fall rain.

Fort Worth was not so lucky. March 28, 2000 began like any other day, but ended with over 100 people injured, four killed and $520 million in insured property damage. Two separate tornadoes hit Fort Worth. One moved northward through the city causing only minor damage. The other ripped into the downtown area, shatttering thousands of windows, tossing cars and creating softball size hail. The torrential rain that followed caused even more damage.

Following the storm, all of downtown was blocked off as rescue crews cleaned up the glass and removed pieces of windows that dangled from area high rises. Temporarily resembling a war zone, the downtown district has not completely recovered.

The tornadoes, along with a few that touched down in Arlington and Grand Prairie, are shaping up to be the biggest insured catastrophe of 2000. Dave Dasgupta, an Insurance Services Office spokesperson, said that initial damage estimates in the $400 million range have been increased to $520 million.

Insurers’ catastrophe losses through the first nine months of this year totaled $3.48 billion, down from $8.06 billion in nine-months 1999, and $9.59 billion in the corresponding 1998 period.

The 35-story Bank One building, the beacon for downtown, was devastated with nearly every window blown out. While most buildings and businesses have recovered and moved on, Bank One is still grappling with its situation. Just one month ago Trammell Crow Co. backed out of its agreement to purchase the building, leaving the landmark’s destiny in limbo.

Higginbotham & Associates, one of the largest agencies in Fort Worth, escaped much of the damage that occurred just two blocks away. Only one pane of glass was broken and electricity was restored before midnight the night of the storm. Several employees, including Mary Russell, claims manager, were in the building when the tornadoes ripped through downtown Fort Worth. They stayed until midnight, actually taking claims from customers who drove by the offices.

“They knew from the [May 5] 1995 storms to get their claims in early so they could be at the top of the list,” Russell said. “It was a good storm relative to the storms in 1995. Damage is severe in areas, but relatively isolated.” The 1995 storms, with intense and widespread hail, produced over 400 claims for the agency.

Higginbotham lined up an outside glass company and three restoration companies to work exclusively for their clients. Rusty Reid, president of Higginbotham, said they decided they would cover the cost for the instant repairs if for some reason the insurance carriers balked at some of the coverage.

Reid said agency members reflected on the tornadoes during their annual Christmas party. “We all felt very fortunate that as a business we didn’t have a large amount of damage,” he said. But they were also very thankful “for the evolution of business policies.”

Business interruption coverage, available on the standard ISO BOP, was key to many of the businesses affected by the storms.

“While the volume of claims wasn’t as bad [as the May 1995 hailstorms], the severity of claims was enormous,” Reid said. “Where they had an office one day, they had an empty room the next. All of their belongings were spread out over downtown Fort Worth.”

The Brants Co., another long established Fort Worth agency, was not as lucky as Higginbotham. Located in the Cash America building at 1600 W. Seventh St., the Brants’ building was one of the hardest hit in the city. Not a window remained on the northwest side of the 8-story building and there were several harrowing accounts of a direct tornado hit from people in the building. Renovation on the building is set to begin this spring.

The insurance community, while often competitive, reached out to the Brants Co. Higginbotham & Assoc. immediately offered space, phones and room to operate, as did others, including InSpire Insurance Solutions, which had space available. The Brants Co. has settled in more permanently with InSpire, calling their building home.

Around this time last year, everybody—even those who weren’t convinced that the world would turn into a pumpkin at midnight on Jan. 1, 2000—seemed to be focused on the power that computers held over the world. But rather than an entrance into the netherworld of Y2K, the first months of the New Year brought on a different phenomenon—the “Year of the Dot-Com.”

In the early part of the year, business interests of all types, including those related to insurance, were eager to get involved. According to a study entitled “e-Insurance, The Convergence of Insurance, Technology and Capital” by Friedman Billings Ramsey & Co. Inc., with the insurance industry generating $1.8 trillion transactions annually, “it is the sheer magnitude of the industry that has inspired so many Internet companies and industry participants to begin to explore and employ the Internet.”

But as the year progressed, a decidedly more sobering reality set in. Tech stocks started to take a severe beating, and the rollercoaster ride has continued up to the present. Many initially well-financed dot-coms, failing to quickly deliver the IPOs of their backers’ dreams, began to struggle to maintain financing. Others, already having achieved an IPO, simply could not reach a level of previously anticipated profitability. By the end to 2000, staff cuts, mergers or outright shutdowns had become increasingly more frequent.

One example occurred in October, when Esurance, a direct-to-consumer online provider of personal lines insurance, cut approximately 25 percent of its staff. The company, after experiencing very rapid expansion during the first part of 2000, put a hold on plans to introduce new product lines and promptly went in search of a buyer, which came along in the form of FolksAmerica Holding Co.

A recent study conducted by Forrester predicted a “Dot-Com Shakeout” that would continue over the next several years in three waves. During the first wave in 2000-2001, dubbed “The Purge,” a huge number of dot-coms will fade away from the marketplace as their funds are depleted. During the second, or “Fortification” stage, as buyers and sellers become more exacting in their demands, there will be more merging between weaker players and a scaling back of all-inclusive ventures.

Finally, during 2002-2003, eMarketplaces will hit critical mass and enter the “Reconciliation” phase of the shakeout. The study reported that, “At that point, eMarketplace mystique will fade and rational practices will set in. With user adoption taking off, surviving eMarketplaces will have more to do and less need to fight over small bits of turf-drawing the lines of truce…”

According to a separate report released by Challenger, Gray & Christmas Inc., since December of 1999, about 31,056 jobs have been cut in the dot-com sector, with 40 percent of that total coming from service industries. Layoffs reached record levels in November 2000, when the Internet industry announced 8,789 job cuts. Of 383 companies tracked, 20 percent had gone under by year’s end. Who will make it from the purge to reconciliation?

Perhaps one of the answers to that can be found in yet another study, “Personal Property and Casualty Insurance Online Premium Volume Forecast and Analysis (2000-2004),” conducted by the International Data Corporation. Among its findings were that in 2000, the number of people who purchased online was about 0.4, and the percentage of those that initiated the transaction online but then went on to contact an agent to complete the transaction was 54.6 percent. Those who abandoned the online shopping process before purchasing totaled 45 percent. However, by 2004, those percentages are expected to be 6.3 percent, 65.8 percent and 28 percent, respectively.

What this would seem to suggest for insurance agents is that far from being distintermediated by the Internet, as was feared or even proclaimed earlier on, the new buzz is that agents may play one of the most vital roles in the successful online sale of such a complex product.

According to Ron Davidson, co-founder of the online storefront InsurePoint, the early attitude held by some participants in the commercial insurance environment that e-agencies could disintermediate agents and write coverage for the world was not a very prudent one. “Roughly 95 percent of the commercial insurance marketplace in the U.S. is written by independent agents…[who] have very good relationships with their customers on the whole,” Davidson said. “You’re not going to destroy and cannibalize those relationships by becoming an e-agency. We started InsurePoint with an agency force behind it. We think we have to empower the agency force to become Internet-enabled and to understand how you use new mediums to market and build relationships.”

However, at least in the short-term, the survivors will most certainly be the companies that are able to generate revenue quickly. Or as Max Carter, CEO of the online B2B insurance exchange iwix.net, put it: “If you don’t get any revenue, you’ll run out of money before you make it.”

In February, Texas Attorney General John Cornyn cracked down on auto insurers in the state, suing 16 companies regarding their illegal betterment practices.

The lawsuits alleged that State Farm, Allstate, Farmers, USAA, Progressive County Mutual, Farm Bureau, State and County Mutual, Travelers, Trinity, Nationwide, Old American County Mutual, Home State County Mutual, Sentry, Maryland Casualty, Consumers County Mutual, and CNA insurance companies violated Texas law by taking illegal deductions for betterment or depreciation on some of their policyholders’ repair claims.

Several cases are still pending, but many of the auto insurers have already begun making reparations for deducting portions of policyholders’ claims when replacing older parts with new ones on the grounds that it made the vehicles more valuable.

Many of the companies sued by Cornyn argued that owners of older vehicles weren’t entitled to full payment because the repairs increased the value of the vehicle when newer, better parts were used. Also, the companies said they never promised to make customer vehicles more valuable than before repairs were made. A state appeals court ruled such policies illegal in 1998.

In March, Safeco agreed to pay policyholders $132,000 plus $15,000 in attorneys’ fees. USAA, Geico, State Farm and Liberty Mutual insurance companies also agreed to give refunds to their Texas policyholders.

In June, GEICO and Liberty Mutual agreed to return nearly $600,000 deducted from Texas policyholder claims. Liberty Mutual agreed to stop the practice of deducting for betterment on its policyholders’ claims and will refund $78,000 to policyholders who had an auto repair claim from Jan. 1, 1997 to the present.

The settlement, in the form of an Assurance of Voluntary Compliance, was approved by a Travis County District Court. “Liberty Mutual is to be commended for its willingness to do what is right for its Texas policyholders,” Cornyn said at the time of the settlement.

GEICO, also agreed to pay policyholders an estimated $500,000 in reparations. The average refund amount, including interest, is estimated to be about $150. In addition to GEICO policies, the settlement covered Colonial County Mutual Insurance Company policyholders whose policies were reinsured by GEICO.

In August, USAA settled with the AG’s office, agreeing to pay an estimated $479,000 in refunds, plus interest, to over 3,800 Texas policyholders. USAA also agreed to pay $57,500 in attorneys’ fees and other expenses to the Attorney General’s office. The settlement did not require USAA to admit liability or wrongdoing of any kind.

State Farm made a similar agreement in November, returning more than $3.1 million to customers, the largest single refund made by any of the insurance companies that have settled with the Attorney General’s office. As part of the settlement, State Farm agreed that this settlement will not affect its insurance rates. The company will also pay $175,000 in attorneys’ fees and other expenses to the AG’s office.

On the flip side of betterment is diminished value. Trinity Universal Insurance Co. based in Dallas was one of dozens of insurance companies around the country slapped in 2000 with class-action suits asking for “inherent diminished value.”

The National Association of Independent Insurers in Des Plaines, Ill. has been tracking these cases for more than a year now and estimates that 39 such cases have been filed in courts all over the country, four of which were in Texas.

According to Robert Hurns, legal counsel for NAII, somewhere between 16 and 18 of these cases have been dismissed, including the case against Trinity. The Fourteenth Court of Appeals affirmed a lower court ruling in favor of Trinity Nov. 16. That’s good news for the industry, but these suits are still costing insurance companies a considerable amount of money to defend.

In the case against Trinity, an insured brought suit claiming the company was obligated to pay for the “inherent diminished value” of his vehicle. He argued that, because of the damages, his vehicle was worth less money and the insurance company should make up the difference. A Galveston court found in favor of Trinity in January 1999. In November of 2000, the Fourteenth Court affirmed that decision, saying the scope of the coverage and the insured’s limit of liability under the insurance policy were the points at issue.

The court concluded that the trial court had not erred in finding in favor of Trinity and upheld that Trinity’s liability for direct and accidental loss to Carlton’s vehicle was capped at the amount necessary to repair or replace the property “with other of like kind and quality” in accordance with the terms of the contract.

The headlines are beginning to sound much too familiar: “Leading Websites Under Attack!” “Customer Database Hacked.” “Extortionist Attacks Online Customers.”

And the losses are beginning to mount much too quickly. Cyber-attacks cost U.S. companies an average of $266 million last year—more than double the average annual losses for the previous three years, according to a study by the San Francisco-based Computer Security Institute and the San Francisco FBI Computer Intrusion Squad.

Perhaps one of the most shocking cyber-attacks occurred in October, when Microsoft’s internal networks were penetrated by malicious hackers in an act of industrial espionage, or “netspionage.” The hackers created an intelligent software agent, called a worm, to rummage independently through networks for valuable information and steal priceless digital blueprints of future products. As Microsoft struggled to assess the potential financial losses, its attackers disappeared into cyberspace.

Welcome to crime in the 21st Century—and welcome to the newest headache for insurance brokers across the planet.

It doesn’t matter who your customers are, or how big or small their businesses may be—they are targets for cyber-crime. In fact, 90 percent of the 273 survey respondents in the 2000 CSI Survey had detected cyber-attacks within the last year. And 70 percent reported serious computer security breaches, such as theft of proprietary information, financial fraud, system penetration from outsiders, denial of service attacks and sabotage of data or networks.

According to the American Society for Industrial Security, Fortune 1000 companies sustained losses of more than $45 billion from thefts of proprietary information in 1999. This type of theft has been called the greatest threat to U.S. economic competitiveness in the global marketplace.

Is one of your clients destined to be the next cyber-crime poster child? It’s not unlikely. And if they were, what are the chances their exposures would be covered by insurance? If your answer is “very unlikely,” your client is not alone. According to the May 2000 “e-Risk Survey,” conducted for Assurex by the Human Resource Institute of Eckerd College, many of the nation’s largest Fortune 500 companies are not prepared to handle e-business risks. Few employers have implemented the type of comprehensive e-risk crisis management program that can limit electronic exposures, or the kind of insurance coverage that can help reduce e-liability and financial losses.

Agents today have an obligation, as much as an opportunity, in the e-insurance marketplace. They must help educate employers, especially small business employers, regarding the potential exposures and costly e-liabilities that threaten today’s business survival.

“As a basic foundation, employers should carry business interruption insurance in case they are the victims of a denial of services attack,” said Rick Jones, president of Talon Technology International, a security company that partners with insurers to help them develop coverages for cyber-risk and cyber-loss. “In a DOS attack, losses begin the second the networked system stops working. Those losses can be massive; including lost transactions in play, lost intended transactions, and finally, loss of future transactions due to erosion of customer confidence.

“Employers who want to be in business tomorrow must take control of their e-risks today by purchasing e-insurance policies to reduce first-party losses and limit third-party claims,” Jones continued. “And brokers need to be the guiding light that brings employers into this insurance safe harbor.”

Overall, the May 2000 “E-Risk Survey” confirmed that employers are not yet taking full advantage of the protections offered by many e-insurance products. Brokers must work proactively with employers to assess their potential exposures from a network attack, then establish a comprehensive e-risk management program that combines computer network security with e-insurance policies to help reduce electronic exposures and mitigate financial losses following a network intrusion.

“By listing on a chart the potential cyber-perils the employer faces, along with their potential costs, you will be able to clearly focus the team on the very real potential losses of a cyber-attack,” said Donna F. Williams, president of Tripwire Insurance Services, which offers consulting services that combine technology solutions with risk financing strategies. “Equally important is to list on the other side of the chart the insurance policies already in place to cover key losses. Here, your team will begin to see the gaps and exposures that remain, and the potential financial losses from those exposures.”

Once you can engage senior executives by presenting e-business risk management as a business issue, not just a technology issue, you’re well on your way to both meeting the obligations and reaping the benefits of e-business insurance.

Philip Pierson is vice president-technology products for Sherwood Insurance Services and is founder and manager of Sherwood’s e-Sher Underwriting Managers. e-Sher provides insurance products and risk management services for e-business.

The Emperors of the Chou Dynasty, who began the construction of the Great Wall of China in the 4th Century, B.C., intended it to keep out the barbarian hordes that periodically invaded the Middle Kingdom. After 1,800 years, the wall extended over 1,500 miles but was never entirely successful. Walls however, have two sides, and the barrier affected the development of Chinese civilization by both physically and mentally restricting access to other cultures.

China’s real gross domestic product has grown more than 5 percent every year since 1979. It topped $1 trillion in 1999, and is on track to grow another 8 percent this year. Most of that growth has been export-driven. At the end of the third quarter, China’s exports had risen more than 32 percent for the year to $205 billion, and its overall trade surplus is expected to top $25 billion.

China has gained a place in world trade, and for the last 10 years its leaders have sought entry into the World Trade Organization. Membership would insulate China’s exports from protective trade barriers, open new markets for expansion and facilitate the importation of needed technology.

The WTO, however, is based on free trade principles, and, as a member, China will be required to open its economy to competition and to abide by WTO rules. Can its leaders force through the necessary reforms, and see them observed, given China’s bloated, inefficient, state-run economy and the corruption of many officials? The answers should begin to emerge, as it appears almost certain that China will join the WTO in 2001.

Two major barriers fell this year. The United States concluded and ratified a treaty providing for “Permanent Normal Trade Relations,” a milestone in U.S./China relations. It did more than eliminate the annual debate over China’s “most favored nation” status. The European Community then negotiated its own bilateral trade agreement with China. Both pacts provide essentially the same benefits and obligations, but the EU gained some additional concessions, notably the acceptance of agents and brokers as part of the insurance accords.

These agreements were essential before WTO membership could be approved, and most of their provisions are contingent upon China’s joining. They cover the rights of western companies to enter previously protected markets, mainly telecommunications, agriculture and financial services.

European and U.S. insurance companies enthusiastically supported the trade agreements. AIG Chief Executive Officer Maurice Greenberg said, “The best way to promote positive change in China is to trade with China.” Both PNTR and the EU deal provide for more licenses to foreign insurers, and a loosening of the stringent restrictions on where they can operate. Other than Hong Kong, foreign insurers are mostly confined to the Shanghai and Guangzhou regions. Eventually they hope to gain increased market share, and the opportunity to offer their products to 1.3 billion Chinese consumers.

So far, however, China hasn’t been exactly generous in granting new licenses. AIG and Aetna already had them; Chubb and John Hancock were accepted in April. European insurers AXA, Allianz, Royal & Sun, CGNU and Winterthur were also approved before the accords were signed. Afterwards, only Generali and ING Group have received licenses, although Gerling, Skandia and Transamerica/ Aegon have applications pending.

U.S. Commerce Secretary Norman Mineta recently complained that no U.S. insurers have so far received new permits. It appeared the Chinese were going ahead with their pledge to grant seven new licenses to the Europeans, Mineta indicated, but were holding back on their promise for an equal number to U.S. insurers. They may even be planning to cut the number to just four, he added. New York Life, Met Life, Cigna and others are still waiting.

Licenses alone won’t guarantee entry into the Chinese market. Two major obstacles exist. In the euphoria over signing the PNTR agreement, people conveniently overlooked the fact that China isn’t a country where legality and contract law are highly valued.

Greg Mastell, vice president of the Economic Strategy Institute, summed it up in his testimony before the Senate Finance Committee in March 1999. “The central problem is that China has neither a rules-based country, nor a true market economy. The former head of the Chinese people’s Congress is fond of saying ‘China is a country of strong leaders, not strong laws.’ This lack of rule of law has a direct impact on U.S. concerns ranging from human rights to trade,” he said. Trying to get Chinese bureaucrats to adopt regulations is already seen as a problem.

Also, China’s culture goes back over 2,200 years and functions in ways that are uniquely Chinese. Dr. Herbert Gooch, chairman of the political science department at California Lutheran University, summed it up this way. “While there is a tradition of family and clan (tong) pooling of venture capital, traditional capitalist insurance concepts of impersonal, much less individual sharing of risk may be hard to translate and sell well in the Chinese culture.”

On Aug. 29, a federal judge sentenced an El Paso physician to 168 months for money laundering and 60 months for mail fraud as well as $23 million in restitution to insurance carriers that incurred losses resulting from his fraudulent billing practices. It was, by far, the largest fraud conviction of the year in Texas.

The perpetrator, Dr. Arthur C. Bieganowski, was also ordered to pay $11 million to the government in criminal forfeiture proceedings. He was convicted in June after an undercover operation that began in 1995. Federal prosecutors said during the trial that Bieganowski and his associates routinely used fraudulent billing practices such as upcoding, unbundling and billing for non-existent treatments or services.

Bieganowski, his brother, attorney Victor J. Bieganowski and seven others were arrested in early August. A 23-count indictment accused the brothers of paying “ambulance chasers” to solicit clients on their behalf. The brothers would also send each other clients, particularly accident victims and people receiving workers’ compensation benefits, according to court documents.

Authorities said Dr. Bieganowski and his accountant, Richard Goldberg, another defendant, also set quotas for scheduling costly medical procedures.

The agencies targeted by the scheme included the Texas Workers’ Compensation Commission, the U.S. Department of Labor and the Army, according to the indictment.

Also named as defendants were Bieganowski employees Lucy Campos, Gustavo Diaz, Jesse Lopez, Guadalupe Rodriguez Morales and Patricia Yvonne Reyes. The ninth defendant, Maria Romero, was Dr. Bieganowski’s patient.

Three of Bieganowski’s associates received sentences, including Goldberg, who will serve 16 months for money laundering and 100 months for mail fraud; Gustavo Diaz, a physician’s assistant, who will serve a 51-month sentence; and Jesse Lopez, a physical therapist, who will serve 41 months.

Bieganowski’s sentencing marked the end of a lengthy fraud investigation, including an undercover operation, that began with the Texas Workers’ Compensation Insurance Fund in 1995. The indictments stemmed from a four-year investigation involving the FBI and several other federal state and local agencies.

“We took the case to the FBI. We got them interested in it, then we produced the evidence to get the U.S. attorney interested, and all at our cost,” said Mitchell Sherrod, senior investigator in the Fund’s organized fraud unit.

Another high profile fraud case in Texas in 2000: The Nov. 1 indictment of Houston insurance agent Tracy Akin Giron on charges that she stole about $245,000 from more than 80 senior citizens by pocketing premiums they paid her for long-term care insurance.

Giron, 33, was jailed Oct.5 after Houston police and the Harris County District Attorney’s office searched her home and office and arrested her on theft charges. Bond was set at $150,000.

Giron allegedly started the scam in May and made contacts by speaking to church and retiree groups about long-term insurance. Her alleged victims also included people who had been her customers in earlier legitimate insurance sales.

According to the indictment and case records, Giron took applications and initial premiums for long-term care insurance from her victims but pocketed the proceeds instead of forwarding them to insurance companies to buy coverage.

Colonial American Life Insurance Co. reported Giron to the Texas Department of Insurance after receiving inquiries from some of her alleged victims about their non-existent policies.

California is a lot like the Weather Channel. If you want to know what’s coming, just tune in to the biggest state in the nation. That’s why Texans should be watching construction defect litigation closely. It has severely limited the market for insurance in that area, with the potential to bankrupt those that get involved. In California, it is estimated that the state needs 250,000 new housing starts per year in order to accommodate the population. Yet, only 139,000 units were built in 2000.

The shortage of housing is due in part to gun-shy builders and developers who have seen a rising tide of construction defect litigation in the last few years. The litigation factor has, in turn, squelched the willingness of insurers to provide coverage for multi- and single-family housing starts in California and the western states.

The building boom of the 1980s brought a new supply of developers to the market, not all of whom had the necessary skills to build this kind of housing. The result: Some shoddy construction and an increase in defects.

The trouble is also that many so-called “defects” are actually cosmetic issues or maintenance problems. The lack of clarity about what is and is not a defect has been a key factor in the increase in litigation. “It’s all a result of this whole phenomenon of people coming in and literally stripping down houses to count nails to make sure they’re spaced correctly,” said Gary Hambly, president and CEO of the Home Builders Association of Northern California. “It’s amazing how issues that used to be customer service issues…now turn into litigation issues because people look to their attorneys as the first and last resort, rather than trying to work with the builder.”

As the number of law firms specializing in construction defect litigation has steadily increased over the years to almost 100 in California alone, the number of insurance carriers who will write the coverage has declined from more than 40 admitted companies in the early 1980s to only a handful today.

Part of the trouble is that each lawsuit can balloon quickly to involve many parties; typically, if a construction defect is alleged, the homeowners’ association will sue the general contractor, who may then file suit against any of the 40 or more subcontractors who worked on the project.

David Golden, director of commercial lines for the National Association of Independent Insurers pointed out that exploitation of the additional insured status is a growing trend. “We’re seeing the additional insured status exploited to where a subcontractor can end up having to pick up the liability of the general contractor for whatever is wrong, even though it may not be directly related to the work that the subcontractor was doing,” Golden said.

This is not a development that insurers were prepared for-“the premium charged for additional insureds never really contemplated taking on the responsibility of another contractor in any specific case,” Golden explained.

According to the California Research Bureau, these types of lawsuits can take from one to two years to come to trial. Most cases are settled before reaching court, with an average settlement of $1 million to $2 million.

And the litigation is no longer limited to just California condos, but is spreading to other states and other specific types of defects: soil problems in Colorado, EIFS issues in Washington, and multi-family housing defects in Nevada.

“I think it started with homeowners’ associations and condominiums, but that was six or seven years ago,” said Bill Newton, president of Lemac & Associates Inc. in Los Angeles. “It spread pretty quickly to single-family dwellings, and over the last three or four years, single-family dwellings have been as bad as condominiums.”

However, within this dire picture is one bright spot. A welcome victory for insurers, as well as builders, was recently won on the construction defect litigation battleground.

The California Supreme Court ruled on Dec. 4 that homeowners cannot sue builders for negligence unless there has actually been damage to property or bodily injury.

According to the San Diego Union-Tribune, justices decided that homeowners already have access to other remedies available through builder warranties and contracts, which can cover periods of one to 10 years.

The decision came out of two San Diego cases that centered on “allegations of negligent construction and building code violations that made the homes more vulnerable to damage from fire and earthquakes,” the Union-Tribune reported. The cases involved more than 240 homeowners living in a single-family subdivision and a condominium development in Carmel Mountain Ranch. The developer was Newport Beach-based William Lyon Co.

The ruling helps to more closely define where the liability falls and may serve to lessen the fears of both builders and insurers.


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