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 Big "I" National News

P R O D U C E R   C O M P E N S A T I O N   I S S U E   U P D A T E
Questions Surround Life After Contingencies
S&P reports some brokers are prospering without contingent commissions; for others, the future is uncertain

What does life after contingencies look like for some brokers? According to its recent report, "Some Insurance Brokers Manage to Prosper Without Contingent Commissions," S&P predicts that while some brokers will rise above the recent turmoil, the outlook for the industry as a whole remains questionable.

In the fall of 2004, S&P revised the insurance brokerage industry outlook to negative, largely because of the uncertainty hanging over the industry. Among the questions: Would the more serious bid-rigging charges fall on another broker besides Marsh? How would the industry fare if it stopped collecting of contingent commissions? What would plug the revenue hole? Although the threat of legal action is by no means over, S&P believes the worst of the legal probes have ended, allowing for reflection and evaluation.

The new report outlines what S&P thinks will be the new landscape of insurance brokerages: an even more intense two-tier industry. "Aon and Willis have seemingly put the probes of their business activities behind them, gone on to reduce debt and other costs, and seem poised to prosper even without the contingent commissions that accounted for a large portion of their revenues," the report states. "Meanwhile, the smaller brokers, some of which have vigorously defended the practice of contingent commissions, will remain under a cloud until they know whether they will continue collecting these commissions or if they can successfully adjust without them."

S&P puts Marsh in a different category, noting that it was the only broker accused of bid-rigging---a charge that is significantly different and more substantial than debates over contingency commissions.

The report says that successful companies will overcome the end of contingent commission income by staking out new markets, cutting expenses, de-leveraging their balance sheets and successfully boosting other revenues. While recovery is possible, S&P has retained its negative rating because it believes not enough brokers have "developed a strong enough new business model to warrant revising the industry outlook to stable or positive."

Conversely, S&P has altered its ratings for Aon and Willis to stable from negative, noting that they have "successfully weaned themselves from the nourishment of contingent commissions while maintaining their competitive positions."

In regard to Marsh, S&P believes its fate is the most uncertain of all. "If Aon and Willis seem to be adapting to the post-Spitzer world of insurance brokerage, while USI and its smaller brethren seem uncertain in how they will deal with it, the fate of the world’s largest insurance broker, Marsh, is far harder to predict," it says. The report notes that S&P believes the stigma of bid rigging drove clients away, making repairing its damaged reputation difficult. S&P is watching to see if any more legal issues develop with Marsh and to see if it will be able to alter its image.

Overall, S&P reports the recovery of the brokerage industry will be dependent on its ability to imitate the best practices of brokers that have recovered. "They will achieve greater stability to the degree that they can ensure a future that is not heavily dependent on an income stream that is uncertain for those that have not already given it up, and could disappear altogether," says S&P analyst Robert McNatt.

Katie Butler (katie.butler@iiaba.net) is IA’s editor in chief.

P & C   T R E N D S
Pulling All-Nighters at Work Can Take a Toll
New study links long working hours to increased injury, illness.
What are the insurance ramifications?

Letting out a yawn, you throw your arms behind your head and stretch upward to loosen the kink in your back you developed after sitting in a chair for 10 straight hours, hunched over a computer. You then rub your slightly watery eyes as the numbers on the spreadsheet in front of you start to blur together. Shaking your head one last time to clear away any lingering signs of fatigue, you refocus your thoughts. Who cares that you’ve been at work for nearly 12 hours? You have a project to complete.

According to a new study in Occupational and Environmental Medicine, America’s long-working-hours culture is taking a toll on its workers. With increased working hours come increased risks of injury and illness---for all jobs, not just those typically considered hazardous.

The study, which utilizes statistics from the National Longitudinal Survey of Youth, found 5,139 work-related injuries and illnesses in the 110,236 jobs records analyzed. More than half of the injuries and illnesses occurred in those working overtime or extended hours. In fact, working longer hours makes individuals 61% more susceptible to these ailments.

"Working at least 12 hours a day was associated with a 37% increased risk of injury or illness, while working at least 60 hours a week was associated with a 23% increased risk, compared to those who worked fewer hours," the study says.

Allard Dembe, an associate professor at the University of Massachusetts Medical School and author of the study, says that 35% of respondents suffered from musculoskeletal conditions linked to long working hours. The study also says that for many U.S. workers, overtime is "compulsory."

"Long working hours, and in particular overtime, induce fatigue or stress, which may lead to injury and illness," Dembe told Bloomberg News. "There may also be the workers’ perception that overtime is something that’s more than what one should be doing, something that makes you deviate from normal hours."

Does the increased risk of injury and illness brought on by long hours impact workers’ compensation?

According to the Bureau of Labor Statistics, workplace injuries and illnesses are down. There were five per 100 full-time employees in 2003, compared to 7.1 in 1997. However, a 2005 National Council on Compensation Insurance report found that the medical care portion of lost-time claims increased by about 10.5% last year.

"It’s a statistical concept from a workers’ compensation perspective," says Robert Hartwig, senior vice president and chief economist of the Insurance Information Institute. He says that workers’ comp rates are not dependent on a larger amount of injuries, but on more injuries per premium dollar.

"It’s the rate at which injuries occur that matters, not necessarily the number of injuries," that the industry should watch, he says.

Jennifer Sikorski (jennifer.sikorski@iiaba.net) is IA’s associate editor.

L & H   T R E N D S
Help Customers Deal with Transition
Fall opens doors for p-c, l-h marketing opportunities

The end of the summer is hectic. For retail stores, it’s one of the busiest times of the year, second only to the holiday buying season. For many families, it means sending kids off to college. And for virtually all employees, it means a renewed focus on accomplishing their organization’s objectives.

Many people find themselves facing personal or professional transitions---or both. To add value to your agency-client relationships, help your customers deal with transition. While policyholders often pick up the phone to call an agency with questions, try the proactive approach of contacting them to share information.

For example, from a personal lines perspective, many parents with college-age kids have questions about their auto insurance. Should they keep their kids on the policy if the kids are not attending a local college? Or, should they sign their kids up for the college’s health insurance policy if the kids are dependents on their plan? Anticipate these insurance quandaries by posting general information addressing the topics on your agency’s Web site. If your agency does periodic mailings, add a few paragraphs to encourage customers to visit the agency’s Web site frequently for updates to relevant information.

Not all transition issues deal with personal lines coverage. As fall approaches, many small businesses are concerned about the cost of medical insurance. With the growing popularity of Health Savings Accounts (HSAs) and Consumer Driven Health Plans (CDHPs), September and October is an excellent time to meet with the agency’s commercial accounts to educate them about the nuances of these new plans before the health insurance renewal season. Come November, everyone is busy and less patient in learning new concepts.

September is also an appropriate time to review customers’ retirement plans. Has your agency systematically contacted its commercial accounts to discuss rule changes that allow employees to contribute substantially more to their retirement plans (as much as $20,000 per person in 2006)? Rather than wait until the end of the year, meet now with companies to review service issues, investment performance and plan document amendments (don’t forget the new distribution rules). This sets the table for picking up retirement plan business at year-end. Again, posting 401(k) plan information on the agency’s Web site and in newsletters is pragmatic ways to let customers know that you provide the service.

September is a season of change. Anticipate the needs of your customers and proactively helping deal with transitions to a leg up on the competition.

Dave Evans (dave.evans@iiaba.net) is a certified financial planner and IA l-h contributing editor.

O N   T H E   H I L L
Spitzer Advocates McCarran-Ferguson Repeal,
State-Based Regulation Preservation

New York Attorney General Eliot Spitzer reportedly has filed comments with the federal Antitrust Modernization Committee calling for the repeal of the McCarran-Ferguson Act and the preservation of state-based regulation.

Spitzer, who has created numerous headlines with his aggressive prosecution of large brokerage firms accused of illegal bid-rigging and steering, reportedly also called for preserving the "state-action doctrine," which allows immunity from federal antitrust statutes for state-regulated business conduct, as long as said conduct is clearly noted as state policy and supervised at the state level.

Spitzer’s testimony opines that a repeal of the McCarran-Ferguson Act, which grants the insurance industry a limited antitrust exemption pertaining to data collection and rate-and-form developments, would not harm state-based regulation. The testimony states that repeal would not affect state regulation of issues such as "insurance operations, reserves, notices to policyholders, forms of policies and other matters affecting the day to day business of insurance."

Spitzer, a Democrat, has announced his 2006 candidacy for the governorship of New York state, where Republican George Pataki has announced he will not seek a fourth term. Spitzer is considered a leading contender for the top job in the predominantly Democratic state, where Democrats hold a better than 5-to-3 registration edge over Republicans.

The Big "I" continues to strongly support state-based regulation and the State Modernization and Regulatory Transparency (SMART) Act being proposed by Chairman Michael Oxley (R-Ohio) of the House Financial Services Committee and Chairman Richard Baker (R-La.) of the House Capital Markets, Insurance and Government Related Enterprises Subcommittee.

Cliston Brown (cliston.brown@iiaba.net) is Big "I" director of public affairs/media relations. 

  V I E W :   A G E N C Y   M A N A G E M E N T
Best Practices: Develop a Vision for Change, Part III

What characteristics do all Best Practices agencies possess? In addition to a commitment to their visions for change, which help thems clearly see where they are going and allow them to proceed with success, Best Practices agencies’ practices and attitudes make them distinctive.

First and foremost, they highly value their people. These agencies know that:

· Their people control customer services and satisfaction; world-class associates provide world-class customer satisfaction.

· World-class customer satisfaction provides profitable growth.

· Higher retention.

· More referral business.

· A distinguished reputation.

· Profitable growth provides funds to support world-class associates.

· Top-dollar incentives and total compensation.

· Cost-effective training and development.

· High-efficiency automation and support systems.

How do Best Practices agencies achieve their visions as a result? They are leaders who apply each of the five best leadership practices by:

· Engaging associates in teams and empowering them to participate in planning, problem solving and decision making.

· Aligning associates’ energies and activities with objectives and goals that will achieve the agency’s vision and business objectives.

· Clarifying key expectations for business results, service and quality standards and performance and behaviors.

· Supporting associates with tools, training, open feedback and care.

· Rewarding associates with appropriate financial and non-financial recognition.

The agencies have strong visions for change that go beyond simple "motherhood and apple pie" verbiage; they are solid and unshakable commitments to the agency team. The vision provides staff members with a consistent direction so that they focus all their activities and behaviors on accomplishing the vision. This allows them to communicate the vision as subtle and positive messages to customers and prospects.

As effective leaders, Best Practice agency owners use the vision for change to integrate processes that acknowledge their essential, personal role in creating and sustaining the framework for short- and long-term growth and success.

Next week’s article will cover how effective leaders engage their associates by using a participatory leadership style and by building effective teams.

If you would like to know more about the innovative concepts that the Best Practices program can offer your agency, attend the Best Practices Management Institute on Sept. 12, 2005, during the 2005 Big "I" Convention in New York.

Madelyn Flannagan (madelyn.flannnagan@iiaba.net) is Big "I" vice president of education and research. This article is the third in a series covering Best Practices agencies’ management strategies.

L E G A L   A D V O C A C Y
State Farm Auto Repair Parts Case:
Illinois Supreme Court Reverses Award
of More than $1 Billion to Policyholders

On August 18, the Illinois Supreme Court reversed the decisions of two lower courts in a class action lawsuit with a verdict in favor of State Farm policyholders on breach of contract and consumer fraud. In Avery v. State Farm Mutual Automobile Insurance Company, the policyholders were awarded damages of $1,186,180,000 by the trial court. That award was reduced to $1,056,180,000 by the appellate court. The Illinois Supreme Court reversed the earlier decisions, concluding that the lawsuit was improperly certified as a class action and finding no class-wide breach of contract or consumer fraud.

Plaintiffs called into question State Farm’s practice of specifying the use of parts that were not "original equipment manufacturer" parts (commonly referred to as "OEM" parts) for repair estimates to policyholders’ cars when OEM parts were available. Plaintiffs claimed that this practice breached State Farm’s insurance policy because the use of non-OEM crash parts would fail to restore policyholders’ cars to their "pre-loss condition using parts of like kind and quality." Plaintiffs also contended that the use of non-OEM parts violated Illinois’ consumer fraud law which prohibits misrepresentations of the "standard, quality or grade" of goods and services provided.

Following State Farm’s appeal to the Illinois Supreme Court, the Court held that:

1. The suit did not qualify as a class action. Given that State Farm had multiple policies with different terms instead of one uniform policy, the class failed to fulfill the commonality of purpose requirement of the class action certification requirements. In its opinion, the Illinois Supreme Court quoted State Farm’s argument to the appellate court, as follows:

"Rather than trying to deal with the variations in policy language and the governing [state] laws, the trial court chose to ignore them completely. The court instructed the jury that there was only one policy form, even though there are a number of different forms. Then the court made up its own interpretation of that policy form, without citing any law to support it. Finally, in order to enforce the artificial uniformity it had created, the court barred State Farm from telling the jury about any different contract language or differing state laws governing the specification of non-OEM parts. The trial court’s decision to force this case into the mold of a class action by fabricating a single contract and a single interpretation is an error of law of constitutional dimension that requires reversal by this Court."

In addition, the Illinois Supreme Court concluded that out-of-state plaintiffs had no viable claim under the Illinois Consumer Fraud Act and Deceptive Business Practices Act, and that the lower courts erred in certifying a nationwide class that included class members whose claims were outside Illinois.

2. There was no breach of contract. The Illinois Supreme Court pointed out that some of the State Farm policies expressly permitted the use of non-OEM parts, and thus the court failed to see how such contracts could be breached by the specification of non-OEM parts. Also, the court stated that in order to establish a breach of the "pre-loss condition" promise found in many of its policies, plaintiffs would have to prove that parts specified or used by State Farm, whether OEM or non-OEM parts, failed to restore the car to its pre-loss condition, which the Court found that plaintiffs failed to do. Thus, the court held that use of non-OEM parts "would not necessarily constitute a breach of the ‘like kind and quality’ promise" if they are "sufficient to restore a vehicle to its pre-loss condition."

3. There was no sustainable claim under the Illinois Consumer Fraud and Deceptive Business Practices Act as alleged by plaintiffs. The court found that: 1.) Plaintiffs’ consumer fraud claim could not be based on the breach of a promise found in their State Farm policies because all promises that go unfulfilled do not turn breach of contract claims into fraud claims; 2.) The act of specifying non-OEM parts is not the basis for a consumer fraud action since State Farm did not claim that non-OEM parts were as good as OEM parts; 3.) State Farm’s description of a non-OEM part as a "quality replacement part" is puffing and, thus, not actionable as fraud; and 4.) State Farm’s guarantee that if the policyholder is unsatisfied with the "fit and corrosion resistance qualities" of a replacement part, it would be repaired or replaced at no cost does not improperly burden policyholders because every guarantee requires the consumer to take some action to invoke it.

It remains to be seen what the fall-out of the decision will be for carriers and policyholders. Carriers that modified their policies following the lower court decisions to expressly permit the use of non-OEM parts or to expressly require only OEM parts may consider reviewing and revising those policies. And carriers that monitored the case while it was pending also may consider possible policy language changes. It is important that agents understand the coverages offered by carriers whose policies they sell, and communicate with policyholders about the coverages.

Amy Hendricks (amy.hendricks@iiaba.net) is IIABA’s assistant general counsel.

Class Action Lawsuit FAQs Answered

A number of class action settlement advertisements and news stories made headlines in recent weeks. Confused about the definition of a class action suit? Here’s a summary from IIABA’s Office of the General Counsel about the notice requirements when class action lawsuits settle or settlements are proposed.

When a lawsuit is approved to proceed as a class action (sometimes referred to as certifying the class), Federal Rules of Civil Procedure, as well as most state court rules of procedure, require that notice to the identified class be given as soon as practicable and in the best manner possible under the circumstances. Frequently, though not always, that notice is through a personal mailing and may also be by publication, such as in a newspaper or magazine. The notice advises each member of the identified class that the court will exclude that member from possible recovery under any settlement of the lawsuit if the member "opts-out" or declines to participate in the class action according to the directions outlined in the notice. An "opt-out" form often is included with the notice. If a class member opts-out, he/she will not be bound by any settlement of the lawsuit, regardless of whether class members feel it is favorable or unfavorable. The person opting out will no longer be treated as a part of the class for that lawsuit and may sue or not sue individually as he/she sees fit.

Once the parties reach a settlement of a class action lawsuit, notice to class members who have not opted-out is mandatory in federal class action lawsuits. It may also be required in state class actions (but a review and summary of the notice requirements of the 50 states and District of Columbia is beyond the scope of this summary). The notice must fairly explain the options for class members and apprise the members of the class of how to participate in the settlement. While notice is mandatory, the form and specific content of the notice changes from case to case. In federal class actions, the named plaintiffs for the class propose the form and content of the notice to the judge, with their plans for it to be disseminated. Most often, the named plaintiffs also pay for the notice to be copied and disseminated, however the judge can delegate that responsibility to defendants. The judge must approve the notice.

Frequently, the members of a class are so numerous or so difficult to identify that personal mailing of the notice is not practical. In these circumstances, the judge usually will approve notice by publication. This type of notice typically is placed in newspapers and/or magazines where it is likely to be seen by class members. In some cases, the notice can be published by airing it on radio or television. The class members can choose to opt-out of the class, stay in the class but object to the terms of the settlement, or follow the procedures described in the notice to file a claim for compensation.

When an insurance agent or broker is a member of a class, he/she is entitled to the same notice and rights as any other class member. In other words, an agent or broker can opt-out of the class, stay in the class but object to the terms of the settlement or follow the procedures described to file a claim for compensation.

A person or entity that is not either a defendant in a class action or a member of the class does not have automatic standing to object to the form, content or method of disseminating the notice to class members. Although a court periodically may consider objections from non-parties that have had no role in the lawsuit to the settlement notice due to perceived flaws, such as content that is incomplete or misleading or publication in media not targeted at the class members, such efforts rarely are influential with judges, who have wide discretion to approve the notice, and such action often draws undesirable attention to other possible targets of the litigation.

Kathleen Graber (kathleen.graber@iiaba.net) is IIABA’s associate general counsel.