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Lessons From Katrina: Communications & Technology |  Texas State Court Orders Allstate to Cover Expenses of Rita Evacuees Who Are Texas Policyholders |  Should You Buy Katrina Catastrophe Bonds? |  Permanent Estate Tax Repeal in Doubt |  Michigan Governor Threatens Insurance Marketplace |  Top 10 Reasons to Purchase the Rental Car CDW/LDW | Big "I" National News

 V I E W :   H U R R I C A N E   U P D A T E
Lessons From Katrina:
Communications & Technology
How one agency’s experiences can help you prepare for a disaster.

I had the opportunity to visit with independent agents Angelyn and David Treutel at their temporary office this past week in Bay St. Louis, Miss. The 32-ft. storm surge that destroyed virtually all of their community took their home, office building, and all but a few of their family’s possessions. The storm surge did not take their spirit, however. If anything, their spirit has emerged even stronger as they work seven days a week filing claims, advocating for their clients’ interests and championing initiatives to rebuild their community.

Over the years, the Treutels have worked tirelessly to help other agents as active participants in ACT and the state and national associations. Now needing help, they have been overwhelmed by the incredible kindness and support that they have received from many other agents, as well as from their carriers, vendors and the Mississippi and Florida associations.

The Treutels are not unlike many other agents and brokers in the affected areas who have been dislocated but, nonetheless, are working non-stop to serve their clients’ needs and who are receiving support from the insurance community. Many lessons will come out of these collective experiences over time, particularly concerning communications and technology issues. They will be highly relevant to most independent agencies and brokers because they could come into play in a host of different disaster situations.

Communications with clients and carriers from their temporary office continue to be a significant problem for the Treutels even today, five weeks after the hurricane. They are using several cell phones employing multiple providers in an effort to make connections. Even when connections are made, they typically are lost after a few minutes. They also have not found satellite phones to be an answer in their area. Additionally, they have the same problem making and keeping connections when connecting their PCs using wireless Internet access. They have been told that it will be a considerable time before their land lines are restored by the phone company.

Given this situation, the Treutels’ access to a 24/7 remote CSR phone service has been absolutely vital to their ability to respond to clients and handle the sheer volume of increased calls. (Virtually every one of their insureds has one or more claims.) This 24/7 service has a mirror of the Treutels’ database and is therefore able to answer many of the callers’ basic questions such as their carrier and coverage limits, and can provide the carriers’ 1-800 claims numbers. The service e-mails the Treutels about the calls so they are kept in the loop and know when their follow up is required. The service also contacts the Treutels directly in the event a particular call needs to be expedited.

The flooding of both the Treutels’ office and home raise the very real question as to where agents keep their systems’ backup tapes. Fortunately, the Treutels had a tape backup and were able to rescue their hard drive with data intact. If the water had risen a little more, this would not have been the case. The agency management system vendors are doing a terrific job of helping agents get back online by transferring the data to their ASP systems, which permits the agents to access their systems from anywhere they have an Internet connection. But it is essential for the vendors to receive a good backup of the agent’s database in order to accomplish this result. Agents should think about several things:

· Does the agency regularly test its backups to make sure they are good?

· Would the use of a remote backup service be a good investment for the agency?

· Would the gravitation from an in-house agency management system to an ASP system maintained by the vendor be a good move for the agency because of the vendor’s expertise in protecting data, keeping software current and safeguarding against security risks?

It continues to be very difficult for the Treutels to access the Internet or their ASP system from their Bay St. Louis location. They have secured an apartment about two hours away in Daphne, Ala. and do their system processing during their daily commutes and while at the apartment in the evening. The Treutels have worked very hard to eliminate paper, but in this situation, they are forced to resort to a paper claims system in their temporary office.

Agents who have a second location in an area that is not likely to be affected by the same disaster have a real advantage because they can re-establish their communications and have access to their systems from the second location. They could maintain a presence in the affected community and shuttle information between the two offices. Perhaps there are opportunities for agents in disaster-prone areas without a second office to cluster their backroom operations with other agents in different areas of the state in order to backstop each other.

Another key element in the Treutels’ recovery has been the on-site assistance they receive from the Florida Association of Insurance Agents’ teams of agent volunteers. FAIA even rented an RV trailer to house these volunteers at the Treutels’ temporary office location. This is an incredible industry service, and it is only possible because FAIA took the steps in advance to put a system in place capable of delivering this type of proactive, on-site help. These on-site volunteers have been crucial for the Treutels because the agency’s eight employees have been dislocated by the hurricane as well, leaving only a couple of them able to work on a part-time basis.

To handle their clients’ needs most efficiently in this environment of limited electronic access, the Treutels and their volunteers would like their agency management system to be able to print out a single client list alphabetized by last name and containing location addresses, policies, carriers, limits and deductibles. Currently, they must refer to multiple lists in order to get all of the information they need to handle many inquiries.

Agency and carrier Web sites can play a much greater role in disaster situations than they currently do. The Treutels posted on their site how they could be reached (24/7 remote CSR service, claims procedures, etc.) and the location of their temporary office. They included the 1-800 claims numbers of their carriers and encouraged their clients to submit their claims directly to the companies. Also, as a precaution, Web sites should be housed remotely so that the disaster does not take the Web site down along with the agency.

Since many of the clients’ calls seek an update on their claims, the industry needs to do a better job getting prompt, up-to-date claims status information on the carrier Web sites as well as on the agent Web sites, along with implementing claims download capability. Where agents have access to their systems, it is also very important for them to be able to do real-time claims inquiries to the carrier through their agency management systems. The next step is for agency management system vendors and carriers to enable clients to access this claims status information directly from the agency Web site. This last step is very important for the industry to undertake because many insureds do not know the names of their insurance carriers. This is understandable when one considers that in states like Mississippi and many coastal areas, an insured typically must have three different policies and insurance providers to cover his or her property (flood, wind, and homeowners with wind excluded).

I also encourage agents to provide insureds at the start of each hurricane season (or other foreseeable disaster season)—and again when an event is imminent—with information listing their policies, carriers and coverages and advising them to keep this information with them in the event of a disaster. These letters also should encourage the client to check the agency’s Web site for contact information should a disaster strike, provide them with the agency’s emergency contact information and the 1-800 claims numbers for their carriers, and urge them to keep the agency advised of their phone numbers and locations following the disaster.

Several carriers also have been of considerable assistance to the Treutels in the aftermath of Katrina. They have provided cell phones, satellite phones and, most recently, a portable office trailer. I encourage carriers to think about maintaining an inventory of this type of emergency equipment that could move around the country to assist agencies suffering a disaster. It is also important for carriers to allow their agents to file claims however they can in these situations. In addition, carrier claims departments should reach out to their dislocated agents so that good communications are maintained between the parties.

The key lesson to take from disaster experiences is that advanced planning and making contingency arrangements really pay off. This advance work can make the difference between whether the agency survives or not. For assistance in developing your agency’s disaster plan, use ACT’s disaster planning tool, " Key Considerations in Disaster Planning & Management for Independent Agencies & Brokerage Firms."

Jeff Yates ( jeff.yates@iiaba.net) is ACT’s executive director. This article reflects the views of the author and should not be construed as an official statement by ACT.

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H U R R I C A N E   U P D A T E
Texas State Court Orders Allstate to Cover Expenses of Rita Evacuees Who Are Texas Policyholders

In another interesting turn on coverage for losses related to natural disasters, a Texas District Court has gotten into the fray.

Acting on a petition filed by the Texas attorney general and the Texas Department of Insurance, the Travis County Texas District Court issued a temporary restraining order (TRO) on Oct. 7, 2005, restraining and enjoining Allstate Insurance Company, Allstate Indemnity Company and Allstate Texas Lloyds (collectively Allstate) from "denying Texas homeowners’ claims for insurance coverage which resulted in loss of use caused by Hurricane Rita where property is, wholly or in part, untenantable, regardless of whether direct physical loss or physical damage to the residence premises occurred, which coverage falls under the Extension of Coverage provisions of the Policies." The court based its ruling on Federal Ins. Co. v. Bock, which stated that if the terms of an insurance policy are susceptible to more than one meaning, the terms will be construed strictly against the insurer.

Since TROs address urgent situations for short periods of time until a further hearing, another hearing is set for Oct. 20 to consider if a temporary injunction should be issued, which, if granted, could extend the restraining order to the time period of the litigation on this matter. It is expected that at the hearing on the temporary injunction, Allstate will oppose payment of the insurance claims because it is reported that Allstate maintains that it has never covered living expenses for its Texas policyholder evacuees unless the policyholders have proven that their homes were damaged and unlivable.

While many Texas Allstate policyholders suffered little or no damage to their homes, an estimated 91,000 people in southeast Texas were still without power as of Oct. 7 (the date of the TRO), and many were prohibited from returning home for a week or more after the hurricane.

The petition seeking the TRO was filed after the Texas Department of Insurance received 75 Rita-related complaints, most of which were against Allstate.

The Big "I" will follow this action and will provide updates as significant developments occur.

For more information, contact IIABA Assistant General Counsel Amy Hendricks at amy.hendricks@iiaba.net; 800-221-7917.

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P & C   T R E N D S
Should You Buy Katrina Catastrophe Bonds?

As a member of the public, you probably can’t buy Katrina Catastrophe Bonds. You should know of them, however, as they do exist. A bond issue looks likely to pay-off for the insurer who issued it. Cat-Bonds could finally become a financial force as our industry and government recons with how to prepare for major catastrophes without relying on tax-payer subsidizes.

No, these are not like your parents’ War Bonds. On the contrary, sophisticated capital market players like hedge funds are purchasing these bonds, issued by a few big insurers. Like typical bonds, Cat-Bonds pay interest for the use of funds but, unlike other bonds, they give the bond issuer the ability to skip repaying the principle in the event of certain catastrophes.

Because of their payback escape clause, Cat-Bonds are viewed as riskier than other similar bonds issued by the same insurer. What is interesting is why bonds with such an escape clause are attractive to some investors. First, they pay higher interest than the typical bond issued by the same insurer under typical bond covenants (about five to seven percentage points higher, according to the Wall Street Journal). Second, they tend to be a good counterbalance to other investments—they pay well when some other investments might pay less, but pay less (or not at all) when other investments are expected to do better.

Paul Buse (paul.buse@iiaba.net) is a licensed agent and president of Big "I" Advantage, IIABA’s for-profit subsidiary. 

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L & H   T R E N D S
Permanent Estate Tax Repeal in Doubt

The current debate over the estate tax is just the latest chapter in a long-running drama that spans virtually the entire history of the United States. The first federal estate tax, a stamp tax established in 1797 with a maximum rate of 2%, helped fund naval expenditures. It was repealed just five years later and remained dormant until the outbreak of the Civil War, when it was again instituted to help pay for military expenditures. The tax rate was very minor. There were periods between the Civil War and the Great Depression where the estate tax was implemented and repealed. The modern version, enacted in 1916, used a progressive tax rate with the highest rate at 25% on estates of extremely high net worth. During the Depression, the maximum rate increased to 70% and then 77% in 1945.

What can independent agents take away from this discussion? The estate tax is again front and center as debates rage about the estate tax’s 2010 sunset. The federal estate tax is scheduled to disappear completely in 2010 and reappear in 2011 with an exemption of only $1 million per person.

While a permanent repeal of the estate tax was gaining momentum, that prospect now seems unlikely given the massive federal deficits incurred by war in Iraq and Hurricane Katrina relief rebuilding. Now, it’s likely that any estate tax for 2011 and beyond will increase the federal estate tax exemption and not include a total repeal.

For business owners, this is not just an academic exercise. Should the estate tax exemption be lower than the value of their estates, particularly the value of their closely held businesses, it could require selling the businesses or debt financing to meet the estate tax liability. Agents communicate with customers who could be affected by what Congress does or doesn’t do to make sure they have adequate life insurance to fund their estate tax. And remember, agents can’t guarantee their customers that their health won’t change five years from now if they wait for the resolution of this vexing issue before purchasing life insurance.

As the adage goes, the only things that are certain are death and taxes, and the estate tax debate includes both of them. Wise agents will make sure your customers are covered.

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

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I N   T H E   S T A T E S
Michigan Governor Threatens Insurance Marketplace
Calls for onerous and oppressive "reforms" of the industry.

Last week’s edition of Insurance News and Views chronicled the significant insurance reforms enacted in New Jersey in 2003 and outlined the notable marketplace improvements that occurred there during the past two years. That article highlighted how insurers are returning to the state and how the newfound competition benefits consumers in meaningful ways. The story concluded by noting that industry observers are optimistic that the experiences of New Jersey can be replicated elsewhere by promoting industry competition, addressing the factors that drive up the cost of insurance and eliminating counterproductive government intervention. Unfortunately, policymakers in Michigan reminded us this week that there are still many state officials unwilling to embrace thoughtful insurance reforms.

During a series of press conferences held Monday, Michigan Governor Jennifer Granholm (D) announced the introduction of legislation designed to "lower the cost of insurance, strengthen protections and improve insurance accountability." However, instead of pursuing the market-oriented reforms implemented successfully by New Jersey, South Carolina and a growing list of states, Granholm’s legislative package embraces an antiquated and obsolete command-and-control philosophy.

The most notable element of the Granholm package would require insurers to cut homeowners and automobile insurance rates by 20%. It's  hard to imagine that the state would mandate that any other private sector entity cut the price of its products or services by one-fifth, but the insurance industry appears to once again be the easy target of misguided politicians. In addition to the mandatory rate rollback, the reform proposal would prohibit the use of insurance credit scoring, enable the insurance commissioner to arbitrarily disapprove an insurer’s rates in a competitive market and order a refund of premiums to consumers and establish an Office of Insurance Ratepayer Advocate. It also would allow pain-and-suffering claims in excess of economic damages that may be awarded to victims of automobile accidents.

Critics of the proposal were quick to note that the governor’s call for reform was political grandstanding. Perhaps not surprisingly, the proposal does nothing to tackle the factors that motivate underwriting decisions or the causes of increases in insurance rates. For example, the package does not address the unlimited medical benefits that are available under Michigan’s unique no-fault law, the sizable increases in both liability and personal injury claims that have occurred in recent years, or the costly effects of insurance fraud, theft and arson.

If enacted, these onerous and overreaching proposals would have serious consequences for independent insurance agents and brokers and the state’s insurance industry as a whole. As a result, the Big "I"---at both the national and state levels---opposes this ill-advised reform package. The substantive problems with such a heavy handed, government-knows-best approach are obvious to nearly every observer, but these proposals also have important political repercussions.

State regulation of insurance is already challenged by many forces within our industry and by an increasing number of frustrated policymakers on Capitol Hill, and some even argue that a federal regulatory system should be created because the states are not up to job. Critics of state regulation cite an unnecessary and unjustifiable lack of uniformity among the states and the existence of outdated and anticompetitive regulatory requirements (like those included in the Granholm proposal). With proponents of full-blown federal regulation already ramping up their efforts in Washington, enactment of Granholm’s flawed legislative package will only add fuel to the fire. These types of "reforms" bolster the argument that the state system is beyond repair and that only federal regulation can remedy it.

Despite Granholm’s unfortunate and misguided actions, the Big "I" is encouraged by the adoption of competitive market reforms at the state level and is optimistic that this trend will continue in 2006 and beyond. IIABA also believes Congress can play a limited but important role in improving state regulation and supports efforts underway in the U.S. House of Representatives to utilize targeted federal legislation to reform and modernize the state system. While full-scale federal regulation and the creation of a new and unprecedented federal insurance bureaucracy would not be in the best interests of consumers or independent insurance agents, targeted congressional action could play a vital role in securing meaningful, market-oriented reforms in all states.

Although Governor Granholm’s announcement this week was not welcomed by independent agents or the rest of the industry, the good news is that these onerous provisions have not yet been enacted. Hopefully, Michigan’s elected legislators will ensure that sanity and reason are restored.

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

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F O R M S   &   S U B S T A N C E
Top 10 Reasons to Purchase the Rental Car CDW/LDW

Although most CDW/LDW fees are considered outrageous, the insured is best advised to purchase the CDW/LDW for short-term rentals. This is not only in the best interest of the insured, but also the agent since an inadequately covered loss may result in the loss of an account or worse—an E&O claim. Here are the top 10 reasons to purchase rental car CDW/LDW:

1. Loss Valuation
The ISO Personal Auto Policy (PAP) covers the lesser of the "actual cash value" of the vehicle or the amount "necessary" to repair or replace the damaged property. The rental agreement may very well contractually obligate the insured to reimburse the lessor for the "full value" of the vehicle. Under the current PAP, the "betterment" clause may result in the insured being significantly underinsured relative to his/her obligations under the rental agreement.

2. Loss Settlement
As implied above, there may be disagreement over the value of the vehicle or the amount charged for labor and materials to repair the property—depending on the PAP edition, the appraisal clause may be invoked with its accompanying costs. More importantly, the PAP insurer has the right to "...inspect and appraise the damaged property before its repair or disposal." The rental company may choose to effect the repairs immediately, potentially resulting in a lack of PAP coverage because of failure to comply with the condition cited above.

3. Loss Payment
The rental agreement may require immediate reimbursement for damages and it is not uncommon for the lessor to charge the insured’s credit card. This can create a significant debt, exceed the card’s credit limit (perhaps shortening a vacation or business trip), result in litigation, etc.

4. Loss Damage Waivers (LDW)
The rental agreement may require reimbursement for more than collision—some include theft under certain circumstances and others may make the insured responsible for any "loss" in value beyond normal wear and tear. Obviously, the PAP must include collision coverage on at least one insured owned vehicle for coverage to transfer to the non-owned auto—if the rental agreement includes a loss (not just collision) damage waiver (LDW), the policy must also include comprehensive coverage to adequately protect the insured.

5. Indirect Losses
The insured most likely will be responsible for the lessor’s loss of rental income on the damaged unit. The PAP has, at best, daily and maximum caps for this indirect loss and, depending on the edition date, an unendorsed policy may pay only for loss of income resulting from theft.

6. Administrative Expenses
The rental contract may make the insured liable for various "administrative" or loss-related expenses such as towing (e.g., one insured was charged for a 230-mile tow), appraisal, claims adjustment, etc. The PAP normally does not cover any of these expenses.

7. Other Insurance
The PAP says it is excess over: any coverage provided by the owner of the auto (does "coverage" include self-insured funds?); any other applicable physical damage insurance; and any other source of recovery applicable to the loss—travel policies, credit card coverages, etc. The potential controversy over who pays what is obvious and can result in litigation. In addition, keep in mind that many states (e.g., Maryland, Montana, New York, Tennessee, etc.) have statutes, proprietary forms and/or case law precedents that may govern this and other rental car exposures.

8. Excluded Vehicles & Territories
The PAP normally does not provide physical damage coverage for motorcycles or other non-auto/pickup/van vehicles (e.g., motorhomes) and use of covered vehicles is limited to the U.S., its territories and possessions, Puerto Rico and Canada (the rental agreement may also exclude operation outside a specific geographical area). In addition, if the insured is renting a trailer (U-Haul, camper trailer, etc.), coverage is limited to $500. The insured usually has no choice but to rely on the CDW or LDW for coverage.

9. Excluded Uses & Drivers
The PAP may have limitations on use of vehicles that are not otherwise excluded by the rental agreement CDW or LDW. For example, the ISO form provides no physical damage coverage for the business use of non-owned pickup trucks or vans. Also, the PAP may include an exclusionary endorsement for certain individuals or may apply only to designated individuals. The CDW will probably also only apply to designated individuals, but operators for which no PAP coverage is available may be afforded protection under the rental agreement by designating them as such.

10. Additional and/or Future Costs
The PAP most certainly will include a deductible in the range of $100 to $500 or more. In addition, payment for damage to a rental car may result in a significant premium increase (if not nonrenewal) via surcharges or loss of credits.

To download a consumer version of this article that you can share with your customers, click here.

Bill Wilson (bill.wilson@iiaba.net) is Big "I" director of the Virtual University.

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