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Big “I” National News

In the States

Supreme Court Sides with Insurers, Against Trial Lawyers in Credit Scoring Case
Decision saves insurers from billions of dollars in potential penalties.

In any given year, only a few dozen cases ever make it to the Supreme Court’s docket, and very few of those have a significant or direct impact on the state-regulated insurance industry. On Monday, however, the Supreme Court handed the nation’s insurers an important victory in which billions of dollars and the continued viability of some leading carriers were at stake.

The new decision---handed down in the cases of Safeco v. Burr and GEICO v. Edo---addresses insurance company use of consumer credit reports and the obligations that insurers using this information have under the federal Fair Credit Reporting Act (FCRA). The FCRA requires insurers to alert consumers when they take an “adverse action” based on credit scores and information contained in credit reports. These written notices provide affected consumers with the name and contact information of the reporting agency that provided the report, a statement explaining the consumer’s right to obtain a free copy of the report and a description of how the consumer can dispute the report’s accuracy.

The FCRA was not entirely precise in specifying the instances in which adverse action notices must be provided, and some insurers believed the notices were only required when a person’s credit information had an adverse or unfavorable impact on the insurance rates or terms that would otherwise have been provided. The district court that initially heard these cases agreed with the insurers, but the U.S. Court of Appeals for the Ninth Circuit later adopted an expanded view and ruled that adverse action notices were also required whenever more favorable credit information would improve the rates or terms of a policy.

In its 2006 decision, the Ninth Circuit said an adverse action notice must be provided to a person who does not receive the insurer’s best rate because of a less-than-perfect credit history, even when the credit information or score is better than average and its consideration by the carrier results in a lower premium for the consumer. On Monday, the Supreme Court disagreed. The court found that an adverse action only occurs when a consumer pays a premium that is worse than what he/she would have paid had credit information not been considered and that notices are not required to consumers in cases where a better credit history or a superior credit score would have produced a cheaper rate.

Perhaps the most crucial elements of Monday’s decision were its findings concerning the penalties that apply to insurers who do not satisfy the FCRA’s adverse action notification requirements. The law states that insurers who negligently fail to comply are liable for any actual damages incurred by consumers, but those who willfully violate the law can be liable to each consumer for damages between $100 and $1,000 (plus punitive damages). The circuit court determined last year that GEICO and Safeco had recklessly disregarded the law and thus willfully violated the notice requirements even though the carriers claimed to have, in good faith, followed plausible legal interpretations provided by attorneys and adhered to an earlier lower court opinion.

Fortunately, the Supreme Court---as well as common sense---intervened. In addition to confirming that the industry was in fact largely conforming to the FCRA’s notice requirements, the court clarified that the penalties associated with willful violations are reserved for companies that do not have an objectively reasonable basis for their interpretation of the law. The court recognized that, given the lack of clarity in the FCRA language, the carriers’ positions were not unreasonable and did not pose the type of “unjustifiably high risk” for illegal behavior that would warrant triggering the harsher, more expansive penalty provisions.

The significance of the court’s reversal and its findings concerning liability and penalties are impossible to understate. Although the plaintiffs never alleged that they suffered any actual damages or real harm, the adoption of a contrary position by the court would have meant that GEICO, Safeco and many other insurers had committed millions of technical and inconsequential errors in recent years and faced incalculable financial penalties as a result. Instead, company officials this week find themselves relieved to have survived an extremely close call while many in the trial lawyer community lament the loss of a potentially colossal source of revenue.

For more information, log on to www.iiaba.net and click ob “legal advocacy”, then “memoranda & FAQ” and see “Fair Credit Reporting Act.”

Wes Bissett (wes.bissett@iiaba.net) is Big “I” senior vice president, government affairs and state relations.

P&C Trends

Homeowners Report Fewer Non-Renewals, Rate Increases
Trusted Choice^® survey sheds light on homeowners market.

Premium increases and non-renewals for homeowners’ insurance are low in the current homeowner’s insurance market, according to an updated independent consumer survey conducted for Trusted Choice^®.

The national survey, first conducted back in 2003, found that few homeowners, about 4% or more than 3 million households, have been cancelled or received a non-renewal notice since the last survey. However, the number is much higher in the south with 8% of homeowners reporting cancellation notices and even higher (15%) among homeowners living in Gulf Coast states. The figure does represent a slight increase in non-renewals since the 2003 study, which reported 2.5 million households had lost their coverage.

While the number of homeowners receiving non-renewal notices is low, those incurring rate increases represent a slightly larger portion of the population with 35%, or nearly 27 million homeowners, reporting higher premiums since 2003. The increases are more prevalent in the south and northeast, especially in the Gulf Coast where more than half (53%) of respondents reported increases.

For those homeowners who experienced a rate increase, the average percentage increase was a little more than 16%. Forty percent reported that the increase was less than 10%, 22% reported a 10% to 25% increase and 13% said they experienced a 25% or more increase. About 25% did not know the amount of their increase. The homeowners market does, however, appear to be leveling off. When asked what has happened to their rates in just the last year, 62% of respondents said their rates stayed the same.

Unfortunately, the survey also uncovered a rather startling statistic: only a quarter of those polled have made changes to their home (i.e. storm shutters, structural reinforcements, etc.) since 2003 to secure it in case of a natural disaster. Even in the South where hurricanes are a way of life, the numbers remain relatively low. Only 31% of respondents in southern states reported making changes and a mere 37% of Gulf Coast residents said they’ve made updates. The survey findings come on the heels of an MSNBC study conducted earlier this month that found few Gulf Coast residents are readying their homes for a storm. To read more about the MSNBC study, click here.

The Trusted Choice® survey was conducted via telephone by TRC, an independent research company in Fort Washington, Pa. Interviews were conducted during May 2007 among a nationally representative sample of 726 homeowners. The margin of error is +/- 3.7% points at the 95% confidence level. For more information about TRC visit www.trchome.com.

Michelle Payne (michelle.payne@iiaba.net) is Big “I” writer/editor.

On the Hill

GAO May Study Crop Insurance Agent Commissions
Committee chairman asks GAO to study financial arrangements between companies, agents, farmers.

House Committee on Oversight and Government Reform Chairman Henry Waxman (D-Calif.), along with Ranking Member Tom Davis (R-Va.) and Rep. Jim Cooper (D-Tenn.) sent a letter to the nonpartisan Government Accountability Office (GAO) May 31 asking the GAO to “examine the financial arrangements that may exist among the insurance companies, their affiliated sales agents and the farmers and ranchers who purchase crop insurance.” Such a study could mean increased congressional scrutiny for the Federal Crop Insurance Program (FCIP).

Specifically, the letter asks that GAO examine the financial arrangements between the companies and their sales agents, examine the financial arrangements between sales agents and farmers and ranchers, including the practices sales agents may use to compete for business, and assess agents’ costs for selling crop insurance to farmers and ranchers, taking into consideration the different types and sizes of policies.

The letter was sent as a result of a hearing in the House Oversight and Government Reform Committee examining waste, fraud and abuse in the FCIP. During that hearing, Bruce Babcock from Iowa State University stated that commissions are "the industry's No. 1 cost," and that "commissions vary dramatically depending on how attractive an agent's customers are to competing crop insurance companies."

The House Agriculture Committee will have a hearing today in response to some of the allegations made in the May 3 hearing, and the Big “I” is preparing testimony explaining that the success and viability of the FCIP depends upon the hard work of independent insurance agents, who are the sales force of the federal program.

The Big “I” is also prepared to work with the GAO in any study it conducts on commissions earned by agents in the FCIP.

Should GAO initiate an examination of agent commissions in the FCIP, as Chairman Waxman and others have requested, agents should expect significant oversight of the FCIP, and specifically of agents’ work in the sale of crop insurance policies. The Big “I” will work with the GAO on a fair and objective analysis of agent commissions, and is confident that once the GAO studies the issue they will see the extreme amount of time and labor that goes into the writing of these policies and that agent commissions are, in fact, commensurate with the work that an agent must complete.

"With the majority changing in Congress, the House Oversight and Government Reform Committee has set out an ambitious oversight agenda of federal programs, including the FCIP," says Charles Symington Jr., Big "I" senior vice president for government affairs and federal relations. "We welcome the opportunity to fully explain how agents earn commissions for the sale of crop insurance policies and the vast amount of work that goes into this particular line of business. We will be closely monitoring any new developments, such as these, that will affect independent insurance agents and brokers, and we will work hard to advance our members' agenda on all important insurance issues."

John Prible (john.prible@iiaba.net) is Big “I” assistant vice president for government affairs.

P&C Trends

Improve Your D&O IQ – Part Two
Is a package-policy approach to EPL and D&O best?

Premium Of the nearly 3,000 participants in the Towers Perrin “D&O Liability 2006 Survey of Insurance Purchasing and Claims Trends,” more than half purchased their D&O coverage from industry leaders Chubb, Ace and AIG. Perhaps most surprising is that AIG is not in first place, but it was cited as the third most accessed insurer for this line by policy count (AIG was the largest when ranked by premium volume). What is very clear about the top writers is they are larger, national insurers, as not even one regional player was reported. For a complete list of the 27 insurers cited by respondents, read the entire survey at www.towersperin.com.





Source: Towers Perrin 2006 D&O Liability Survey


Before anyone concludes that this is a biased sample of larger and publicly traded D&O purchasers and the results would not be a meaningful comparison to insureds, pause for a moment to consider that 61% of respondents had less than 100 employees. Moreover, 40% had revenues of less than $6 million and 55% of the participants were private companies and 20% were non-profits. With 2,794 of 2,875 respondents reporting at least $1 million in D&O coverage, the real question agencies should ask is whether they are taking advantage of all the D&O-related opportunities in their customer base.

In discussing D&O issues with the survey’s author, the conversation turned to the impact of employee suites on D&O. Michael Turk, senior consultant at Towers Perrin, notes that 92% of claims at non-profits are from employees. While Turk points out that figure falls to about 25% at for-profits, employee claims are an important consideration with all organizations. Turk explains that smaller organizations are more likely to purchase EPL coverage and often as an endorsement to their D&O policy. 

“It follows then, that non-profit claim drivers center around employment practices liability,” he says.

Turk urges independent agents to take care in assessing what approach is optimal for employment practices liability (EPL) coverage and he cautions that a package approach to D&O and EPL, while convenient, may not be the best approach, even for non-profits where it is so prevalent. First, when EPL coverage is not packaged with the D&O and there is an EPL claim, D&O limits are preserved for D&O claims. This can increase limits available for a D&O claim should both an EPL and a D&O claim occur. Second, the scope of EPL coverage tends to be not as broad when it is packaged with D&O. And, lastly, there can be advantages to placing a client’s EPL with an insurer that is focused on just that exposure. 

“Of course,” Turk says, “in fairness to the package approach, there are some excellent packages out there and it can be more economical to purchase a single policy instead of two separate ones.”

So, discussing the EPL exposure in the context of the broader D&O liability exposure can be a key sales opportunity. Armed with this knowledge and faced with a package approach, agents can counsel insureds or prospects to also consider a stand alone approach with separate D&O and EPLI polices. Conversely, faced with a prospect looking for less-costly alternatives to stand alone policies, with a little research, it’s possible to find ready access to these sorts of packages, particularly for medium to smaller organizations that are not publicly traded or are non-profit.

Next week’s IN&V will include a third and final installment on improving D&O IQ that takes a look at agents’ exposure for sitting on a non-profit board. Many agents, through business contacts, find themselves on a community-based board, a neighborhood or condominium association and even your local, state or national agents association. We’ll look at some exposures and one possible remedy.

Paul Buse (paul.buse@iiaba.net) is president of Big “I” Advantage^SM.

Producer Compensation Issue Update

Big “I” Denounces RIMS Stance on Incentive Compensation
Association maintains its opposition of contingent compensation agreements.

The Big “I” strongly disagrees with the recent statement by RIMS supporting the prohibition of contingent compensation arrangements for agents and brokers acting on behalf of buyers, and calling for all sources of compensation to be disclosed to clients without their request. 

The Big “I” has taken a vocal and unwavering stance against the illegal activities that set off the debate about how agents and brokers should be paid. It also has advocated consistently for insurers to be able to choose how to pay their sales forces, including through the use of the types of legal incentives used in virtually all sales environments. 

“Just like other businesses distributing products through a sales force, the insurance industry has developed effective compensation practices to reward sales excellence. Incentive compensation is one such form of compensation, and companies doing business in a competitive, free market economy should be able to continue to choose to use it or any other legal form of compensation,” says Bob Rusbuldt, Big “I” CEO.

Rusbuldt also noted that RIMS’ position that such payments represent an inherent conflict of interest is simply wrong, and that improper manipulation of certain payments by a few large brokers does not mean that all incentive compensation should be banned. “Risk managers are sophisticated people who have the option of using brokers who accept or don’t accept incentive compensation,” says Rusbuldt. “They base their insurance decisions on many factors, such as coverage, price of the policy, service of the broker, financial strength of the company and more, not on incentive compensation for the broker. Insurance companies recognize that agents and brokers must invest substantial time to identify consumers’ wants and needs; understand the complex terms of policies available; assess the products to present; offer choices about coverage, price, service and financial strength of carriers; and remain available to assist insureds with questions and policy changes, as needed. This investment by agents and brokers goes far beyond the initial sale or renewal of insurance and adds substantial value to the relationship between the carrier and insured. Maintaining and enhancing the value of that relationship is an important reason insurance companies use a variety of types of compensation, including commission and incentive compensation, to reward sales professionals.”

“The problem uncovered in the insurance industry by legal and regulatory investigations is not based on the form of compensation paid by insurers,” says Debra Perkins, Big “I” executive vice president and general counsel. “The problem is the illegal activity, such as bid-rigging and false quoting, to obtain that compensation. Barring companies from making legal payments to their sales force will not stop a handful of bad actors from engaging in illegal activity.”

“At the end of the day, the factors that motivate a consumer to purchase insurance are the policy coverage, its features and price, the service record of the carrier, financial strength of the insurer, company reputation for paying claims and the like,” Perkins says. “Consumers simply do not decide what insurance to buy based on how the sales force is compensated any more than they choose what electronic equipment to buy based on how the salesperson is paid.”

Incentive compensation works effectively because it allows companies to take productivity and profitability into account. It also rewards agents and brokers for better risk management for insureds. With thousands of property-casualty, life and health insurance companies in the United States and more than 1 million agents and brokers, as well as other distribution channels from which consumers can choose, there is enormous competition, so agents and brokers consistently must provide insureds with the level of choice, service and advocacy that the market and consumers demand in order to attract and retain business. 

“We believe that a strong and competitive insurance environment is crucial for consumers,” Rusbuldt says. “And, we also believe that competition is fostered by preserving the right of each insurance company to decide how it should compensate its sales force, including the right to offer and pay incentive compensation within the law.” 

Debra Perkins (debra.perkins@iiaba.net) is Big “I” executive vice president and general counsel.