Declarations and Exclusions

The Soft Parade of Dubious Risk Management Techniques

If you were looking for a counter-example to the proposition that "Republican elected officials can be counted upon, at all times, to side with Large Corporate Interests," you need look no further than the relationship between Florida's Republican Governor Charlie Crist and the property-casualty insurance industry. 

In a nutshell, in the name of a populist "I'm protecting the little guy" strategy, Crist throughout his administration has fought even the simplest and most uncontroversial proposals that might make the Florida insurance market more rational.   Martin Grace at RiskProf has been doing an outstanding job of tracking Gov. Crist's questionable policies for several years, notably in his blog's "hurricanes" category.

Now, speaking of hurricanes . . .

It may have escaped your notice that Florida has not been an actual target of hurricanes for some several years.  It has not escaped the notice of Governor Crist.  And Governor Crist is prepared to explain how it comes to be -- apart from Sheer Dumb Luck and the innate complexities of our planet's wildly chaotic system of meteorological phenomena -- that Florida, in particular, has been spared the depredations of Nature and her extremes of low pressure recently.  

The answer, citizens, is simple: 

Governor Crist -- yea! he himself, whether personally or by proxy -- has the ear of the Almighty:

Crist told a group of real estate agents Friday that he's had prayer notes placed in the Western Wall in Jerusalem each year and no major storms have hit Florida. 

Crist noted that just before his election in 2006, Florida had been affected by a total of eight hurricanes in 2004 and 2005. 

'Do you know the last time it was we had a hurricane in Florida? It's been awhile. In 2007, I took my first trade mission. Do you know where I went?' asked Crist, a Methodist. 

He then told of going to the Western Wall and inserting a note with a prayer. He said it read, 'Dear God, please protect our Florida from storms and other difficulties. Charlie.'

The Lord, so far as has been determined, has not protected Florida from any of the other the difficulties attendant to having Charlie Crist as its Governor.  But hurricanes?  We've got that covered.

Jim Morrison and the Doors were famously skeptical of the risk management method endorsed here by the Governor of Florida, as should wise Floridians be:

You Do Know How to ERISA, Don't You?

This weblog is usually more focused on property/casualty insurance issues, but everybody knows that health insurance is where much of the political action is.

Only ten days ago, Stephen Rosenberg's Boston ERISA Law Blog looked westward to examine recent bipartisan moves in Sacramento to address health care insurance availability and affordability through "fair share" legislation. Under a "fair share" plan (to oversimplify a bit) employers are required either to provide health insurance to their workers  or else make a monetary contribution to the state's coffers.

As Stephen points out, there is One Small Problem with this approach. . . . Congress will not permit it.

When Congress passed ERISA [the Employee Retirement Income Security Act] way back in 1974, the federal government completely occupied the field of regulating employment benefits. Enacted in response to the perceived pension crisis of the early 70's, ERISA governs not just pension and retirement plans but also nearly every other sort of plan that may be characterized as an "employment benefit," including employer-provided health insurance plans. Congress was so intent on taking control of this area that state and local governments are expressly prohibited from enacting any regulation of their own concerning employee benefits. ERISA is the only game in town. The federal preemption is so broad that even state courts are barred from recognizing or enforcing common law remedies where employee benefits are concerned.  This last attribute drives the plaintiffs' bar crazy, because it precludes "bad faith" claims against HMOs and health insurers if the policy was provided through an employer.

It would be difficult to imagine a more plainly ERISA-precluded policy than a state level mandate compelling employers to provide health coverage.  Even ERISA itself does not mandate that an employer must offer any particular benefits, or any benefits at all, to employees.  ERISA simply regulates the operation of benefit plans if an employer chooses to provide them.  Congress has not mandated employer-provided health benefits (yet), but ERISA ensures that Congress is the only body that possesses that authority.

Stephen Rosenberg sums up the problem this poses for state and local governments who feel the urge to "do something" involving employers and health insurance:

California, like other state and local governments who tread this path, are likely walking right smack into the buzz saw of ERISA preemption, and much like the legislature of Maryland did in enacting its fair share act that was struck down by the courts, appear to be simply sticking their heads in the sand when it comes to this issue.

He's right, and early proof has surfaced this week.  Not ones to wait for Sacramento to move, the progressive burghers of the City of San Francisco have already enacted a local "fair share" employer mandate.  Yesterday, U.S. District Judge Jeffrey White on Wednesday ruled that the City had no power to do that.

The Sacramento Bee's Daniel Weintraub echoes Stephen in a post on his California Insider weblog [registration required], and offers suggestions as to why the merry band in Sacramento is blithely ignoring the obstacles posed by ERISA:

It shouldn't come as much of a surprise that Federal District Court Judge Jeffrey White has ruled that San Francisco's new health care benefits law violates federal law because it requires employers to spend a certain amount on health care for their workers or else pay a fee for the city.  The bigger mystery is why state officials -- especially Gov. Arnold Schwarzenegger and Assembly Speaker Fabian Nunez -- have been pursuing an almost identical strategy, knowing it would probably eventually suffer the same fate.  One answer is that they hope the Congress and the next president will repeal the law that preempts state and local programs, or at least give California permission to experiment with a federal mandate.

Not, in my view, a terribly likely outcome, no matter who is in charge of Congress and the White House at the end of next year.  There are simply too many engrained habits in D.C. to make it all that likely that Congress will relinquish control of employee benefits at this late stage.

Weintraub, in turn, links a San Francisco Chronicle report that includes its own fascinating bit of policymaker rationalization:

City lawyers, joined by a group of labor unions, argued that the city was not regulating employee benefits - which federal law forbids - but was simply making health care available to workers whose employers chose not to provide it.  They said federal law allows a local government to require employers to share in health care costs as long as companies can comply without setting up new health plans.

That sort of thinking is reminiscent of the old U.S. Supreme Court decision that reasoned that a denial of benefits for pregnancy did not discriminate between men and women, but rather between "pregnant and non-pregnant persons."  Which makes it OK, right?

Interestingly, neither of these reports mentions ERISA by name, even though it has loomed large over employee benefit issues for more than three decades.  Daniel Weintraub's post does not dig into the Court's rationale, and the Chronicle only refers vaguely to "a 1974 federal law that prohibits state and local governments from regulating employees' benefits" -- which is rather like describing the Internal Revenue Code as "a federal law that requires most adult citizens to fill out a form each year."

~~~

UPDATE [122807]:  Follow-up comments by Stephen Rosenberg on the San Francisco decision are here.  He also points to a good summary post on the Workplace Prof Blog.

When the Night Wind Howls in the Chimney Cowls

The Halloween-themed tableau infernal above, by Irfan Khan, is included in an extraordinary portfolio of photos from last week's wildfires posted by Matt Welch* on the Los Angeles Times' Opinion LA Blog.  The entire selection is worth a look, as it captures the sublime unreality of life in Southern California, where fires such as these are a possibility through much of any given year.

Often enough, surprisingly, California wildfires will scorch vast acreages without loss to life or structures.  This past week's fires were not that kind.  A Reuters report, posted today at Business Insurance, puts the current losses at 12 lives,  with 78 persons injured and the destruction of some 2,300 structures:

Roughly 14,000 insurance claims have been filed from last week's fire and wind storms in California, according to a research group for the property casualty insurance industry.

The New York-based Insurance Information Institute said insurers may have to pay up to $1.6 billion in claims for fires that ravaged the state's homes, farms, vehicles and businesses.

Every year when one or more major fires burn in and around hillside residential developments, the question arises: why encourage construction in obviously imperiled areas?  The East Coast variant -- when we aren't benefiting from a two-year string of subnormal Atlantic hurricane seasons -- is to ask why we build and rebuild beach front homes when we know they are just waiting to be swept away to sea. 

As the latest fires neared control yesterday, the LA Times' well-respected architecture critic, Christopher Hawthorne, slipped from the arts pages to Page One to opine that "Ignoring Nature, We Build Our Way Into Fire's Path" [the online version of the article receives a somewhat more tabloid-y title: "New developments mask wild land's deadly threat"].  Hawthorne typically leans Green on the subject of development, and this essay is consistent with that approach:   

Since the middle of the 20th century, this is how we have developed much of our new housing in the U.S., and particularly in Southern California: by pushing deep into canyons and deserts and onto flood plains.  We build reassuringly familiar-looking subdivisions, decorated with vaguely Spanish or Mediterranean accents, in locations that by land-use standards -- and by common-sense standards -- are truly exotic.

We build with the unstinting belief that growth is good and that progress in the form of various kinds of technology -- new building materials, military-style firefighting, a vast system of pumps and levees -- will continue to make it possible to construct new pockets of nostalgic architecture virtually anywhere. But maybe our nostalgia should extend beyond red-tile roofs to include earlier lessons about how and where it is safe to build. . . . 

One of the success stories of the last week has been Stevenson Ranch near Santa Clarita, which narrowly averted destruction in part because its houses were built with concrete roof tiles and heat-resistant windows.  But to celebrate this neighborhood as a model for escaping fire is itself a kind of escapism.  The question is never, why am I building here on this hillside that predictably catches fire every few years in the fall (and maybe now in spring or summer too)?  It is, instead, how can technology and new materials -- how can progress -- protect me from the dangers inherent in living where I have chosen to live?

Although Hawthorne is not stating them in that way, these are really no more than classic risk management questions.  We are presented with a known peril -- wildfire -- and must ask ourselves how best to address it.  One answer is to assume that the loss will occur, but to cushion the blow by purchasing insurance.  Another approach is risk prevention: utilize technology in order to limit the damage the peril will cause when it comes calling.  Hawthorne's preferred approach, plainly, would be risk avoidance: there's a serious risk over there, so let's just not go there in the first place.

The answer to the question "why are you building here" is usually a simple one, whether we build in the hills or put down floor at the shore: "I'm building here because I want to live here, because the air seems cleaner, because the view is delightful, and because I am (if I have my wits about me) prepared accept the risks and to take the actions or bear the costs necessary to build and live in this risky place." 

That answer does not address concerns for the preservation of wilderness qua wilderness -- which is undoubtedly a significant additional factor in Hawthorne's critical view of hillside development -- but it is a reasonable and prudent response from the standpoint of facing and managing risk.  If you don't ask for a subsidized or free ride -- insurance, for example, that is artificially underpriced in the name of "affordability" -- feel free to build your house on sand or in the canyons. 

Just remember, and be prepared to accept in some fashion, that the rule in southern California is well settled: "If you build it, the fires will surely come."

~~~

* UPDATE [1132 PDT]:  It seems that Matt Welch is becoming a fixture of fire-related discussions here at Decs&Excs.  In addition to his Opinion LA post linked above, I cited his 2003 Reason article on the California FAIR Plan last week here.  One more citation is essential:

On today's Los Angeles Times opinion page, in an item smolderingly yclept "Burn, burn, burn, burn, burn the rich," Matt takes note of a creative and effective response to the wildfire peril -- the AIG insurance plan, to which I alluded in this post, that provides its admittedly well-heeled insureds with benefits that include a private fire response team -- and is bemused by the howling outrage it inspires in some quarters:

You would think that the cheap availability of potent fire retardant, and the creation of supplementary firefighting capability — with costs borne entirely by the homeowners who choose to live in fire zones, instead of everyday taxpayers — would be a cause for at least mild enthusiasm.  Instead, it was greeted with howls of class warfare.

Numerous colorful examples -- and at least one suggestion that class-based arson would be a laudable social policy -- make the whole thing worth reading, if you can keep your eyes on it while shaking your head in disbelief.  Hot stuff indeed.

~~~

Post title, in the spirit of Halloween, from "The Ghosts' High-Noon" in Gilbert & Sullivan's Ruddigore.

Insurers After the Fires: Liked, But Not Well-Liked

As the fires of this past week are brought increasingly to heel, and as residents and business owners return to assess what the fire has left behind, two articles from Wednesday's Los Angeles Times provide a reminder of the ambivalence so many feel toward their insurers.  "Sure," they seem to say, "insurance companies are there then you need them -- but you've gotta watch 'em like a hawk."

In Section A, as part of the paper's comprehensive fire coverage, we find the headline "Insurers roll even before smoke clears."  The story begins well for insurers: they are on the move, allocating resources with abundance and speed to begin to get their insureds back on their feet.  State Farm and Farmers have moved "mobile claims command centers" in to the field, the better to be close and responsive.  Upper-crust insureds get upper-crust claims handling:

A third insurer, American International Group Inc., was even more proactive.  Its Private Client Group subsidiary dispatched six special trucks to spray retardant on the vegetation and wood portions of policyholders' multimillion-dollar homes threatened by fast-moving fires.

'We think it provides enhanced protection from extensive damage,' said Stan Rivera, the company's director of wildfire protection.

By article's end, however, the focus has shifted from praise of insurers' response to the grim spectre of future rate increases or policy cancellations.  Allstate comes in for particular opprobrium:

The latest fires are just the sort of catastrophe that prompted third-ranked Allstate Corp. in May to stop writing new policies for homeowners.

The insurer also is seeking a major rate increase for current policyholders, citing danger from fires.

That could spell trouble for California homeowners "if other insurance companies choose to look at it like that," warned Douglas Heller of the Foundation for Taxpayer and Consumer Rights in Santa Monica.

State Farm and Farmers said emphatically this week that they had no plans to follow Allstate's lead.

'Southern California is Farmers' home and its territory,' CEO Hopkins said. Los Angeles-based Farmers is a unit of Switzerland's Zurich Financial Services. 'I hope other carriers don't look at this as a time to try to take on horrendous rate increases or try to leave the state.'

Insurers are hastening to reassure the public that cancellation, at least, is not a probable result of a loss in these most recent fires, as Insurance Journal reports:

Insurance industry associations are hoping to quell concerns stirred up they said by the media and politicians that indicated policies would be canceled.

According to the Association of California Insurance Companies, Personal Insurance Federation of California and American Insurance Association emphasized that a law is in place to address the issues of cancellation and nonrenewal.  Besides that, there is no history of widespread non-renewals, as evidenced by data produced by the Insurance Information Network of California, the associations said. In fact, [Cal. Insurance Code §675.1] prohibits an insurer from cancel a policy because of a claim prior to reconstruction, and requires the insurer to offer to renew the policy immediately following a disaster.

Meanwhile, back in the LA Times, the front page of the Wednesday Business section featured a "Consumer Confidential" column by David Lazarus under the title, appropriate to late October, "Insurance claims could haunt houses."  The subject: those wicked insurers are actually gathering information about risk and (horrors!) using it in making underwriting decisions:

If past history is any measure, many homeowners affected by the wildfires burning throughout Southern California will find that claims they submit to insurers will result in higher rates or even dropped policies.

What they, and you, may not know is that virtually all such claims also will end up in vast, privately run databases that are routinely accessed by the insurance industry to determine what rates they'll charge -- or if they'll cover you at all.

In other words, a claim filed with one insurer can be used by another insurer to jack up premiums, even though your record with that other insurer may be spotless.

Pause to consider the topsy-turvy notion of causation underlying that last sentence.  In Lazarus' world, it seems Insurer B is expected to have selective amnesia and to overlook the risk factors surrounding a property so long as prior losses came to rest on Insurer A -- even though the likelihood of loss is exactly the same no matter which particular insurer is covering the property.  If the only change is that State Fire Casualty covered my house last week and Shifting Sands Mutual covers me today, Shifting Sands has every reason to want to know what happened on State Fire's watch.

Lazarus may not be thinking clearly, but he goes to the head of the class in comparison to Amy Bach, executive director of the "San Francisco-based advocacy group" United Policyholders:

Although the databases may help insurers make educated decisions about risks posed by potential customers, they also can be abused by insurance firms seeking any rationale for charging higher rates, Bach said.

'Why should supposedly competing companies get to access your history?' she asked. 'Insurance requires a certain amount of risk on the part of insurance companies. That's just the way it is.'

At the risk of restating the resoundingly obvious, Ms. Bach:

(1)    Any insurance company that wants to charge higher rates for their own sake will do so.  If the rate charged is calculated based on the risk actually being undertaken, then it is an "educated decision" and should be respected as such.  (And someone at the LAT needs to open up a dictionary and rediscover the distinction between a rationale and a rationalization.)

(2)     It isn't exactly fair competition among insurers if the competing companies don't have access to equally accurate information.  [Insurer: "So, has this house ever burned before?"  Applicant: "That would be telling."]

(3)   Yes, insurance "requires a certain amount of risk" -- but the insurer is certainly entitled to know what that "certain amount" is, given that the insurer is kindly (in exchange for payment of the stated premium) taking that risk off the shoulders of the policyholder. 

Fair is fair: While insurers are fully within their rights to gather as comprehensive a database of relevant information as they are able, insurance buyers are entitled to be informed that that sort of data gathering is going on.  The Lazarus column provides a valuable service to that extent, by alerting insurance consumers that they are entitled to free access to their loss history files once a year and by including links for that purpose to the two major database providers -- CLUE and A-PLUS.  The column would have provided a more valuable service, however, had it not wrapped itself in all that conspiracy-theorizing. 

As they say: "That's just the way it is."

~~~

FOR FURTHER LISTENING:  A somewhat more sophisticated discussion of these issues can be had by tuning in to the RiskProf himself, Martin Grace, earlier this week on NPR's Marketplace:

• Marketplace: Once burned, twice shy?

~~~

FOR FURTHER READING:

• At Overlawyered, Walter Olson points to burgeoning discussions of the forestry management issues raised by large Western wildfires.

• Writing on Cato-at-liberty, Randal O'Toole looks at the imbalance between pre-fire risk reduction measures and price-is-no-object suppression efforts after fires have started:

In fact, President Bush’s signing of the Healthy Forests Act in 2003 seemed to signal a huge increase in fires. In the decades prior to 2003, an average of about 4 million acres burned each year and only one year had topped 8 million. Since then, the number of acres burned has never been less than 8 million.

The real problem is too much money: Congress has given the Forest Service a virtual blank check for fire suppression.  The agency — perhaps subconsciously realizing that it needs a sustained number of homes burned each year to keep Congress’ interest in giving it money — has not adopted policies aimed at cost-effectively protecting homes.  Instead, it merely promises that it will save homes through fire suppression — a promise that it cannot keep.

An extended version of that post -- with charts and illustrations! -- is available at The Antiplanner weblog, as is a report on the apparent success of firewise "shelter in place" communities in northern San Diego County.  Unreasonable expectations were a topic alluded to in my earlier fire post.

Smokey Despair, or, "My Momma Told Me, 'You'd Better Chaparral'" [now with Updates]

In the past 48 hours, it seems that all of Southern California has begun to go up in flames.  Especially in an extra-dry year such as this one has been, this is no surprise, but it is far from a welcome development -- especially for those in or near the fire areas.  While Los Angeles County has seemingly drawn the most national attention -- the "celebrity-filled Malibu" angle probably accounts for that -- matters are as bad or much worse in San Bernardino and San Diego counties.  Today's issue of the Los Angeles Daily Journal (our local legal newspaper, unfortunately not available online to non-subscribers) reports that so many judges, lawyers and staffers in San Diego have been affected by fire that the county's entire court system was shut down yesterday.  (San Diego courts remain closed today, per the courts' website.)

• The Los Angeles Times has linked an Interactive Google Map of the fires throughout the region, with updates on size, containment (of which there is still very little) and damage.

• The NASA photo above gives an idea of the extent of fires around Los Angeles at mid-afternoon on Sunday.  At the NASA website, you can compare that photo side by side with another from three hours earlier, for an inkling of how speedily the conflagrations spread once they got started.

One of the key problems with California wild fires is the intermix of natural fuels -- uncleared brush and foliage, particularly in the chaparral-type ecosystems that dominate the region -- and man-made commercial and residential structures.  Back in May, early on in this year's fire season, Insurance Journal published a story ("High Expectations Create Hazard for Firefighters in the Wild") examining the heightened risks faced by firefighters pressured to "do whatever it takes" to save homes from the flames.  Among others, the IJ story quotes John Maclean "a federally certified firefighter and the author of several books on wildfire disasters":

Maclean said the Forest Service could scale back structural protection without too much political fallout, but that would not be easy for the California Department of Forestry and Fire Protection, which answers to the governor.

More than 6 million homes in the Golden State stand in wildfire 'red zones' and that number is expected to grow by 20 percent in the next decade.

'There is an expectation on the part of a lot of people that somebody better get in there and do or die for their house,' Maclean said. 'If you stop doing that and you stop taking reasonable risk to protect structures, you'd have a new governor in about five minutes.'

Chaparral, like many another natural phenomenon, has its own group of supporters, notably the California Chaparral Institute.  It is commonly assumed that the array of plants that make up chaparral actually thrive on fire, or require fire as part of its natural life cycle.  The Institute argues against that perception, emphasizing that while many plants are well adapted to recovery after a fire, none really require it.  Discussing "How chaparral is misunderstood," the Institute looks back at the long history of brush fire in California, and gives simple advice on managing the risk attendant on living when surrounded by a fire-prone native environment:

Large chaparral fires have occurred prior to 2003 and will continue to occur.  Southern California has one of the worst fire-prone climates on earth.  For example, an estimated total of 800,000 acres burned late September, 1889 in two different fires.  One in Orange County, the other in San Diego County (the 2003 Cedar fire [in San Diego County] burned a little over 273,000 acres).  They weren't big deals then because no one really lived in the back country.  Now, with so many homes up against the wilderness, fires can become catastrophic.

'Santa Ana. Sept. 25. - The fire which has been burning for the past two days still continues in the canyons. The burned and burning district now extends over one hundred miles from north to south, and is 10 to 18 miles in width. Over $100,000 worth of pasturage and timber has been destroyed.'

Los Angeles Times, September 27, 1889.

The best ways to prevent loss of life and property are to retrofit existing structures to make them more fire safe, plan communities so they are not built in high fire risk areas, and maintain proper vegetation management directly around structures.

Those whose homes and businesses are damaged in these fires will inevitably present claims to their insurers.  The most fire-prone brush and slope areas are predominately covered by the California FAIR Plan*, but private insurers can expect their share.  California Insurance Commissioner Steve Poizner yesterday issued a press release on responses to the fires.  While there will likely be a string of stories suggesting that insurers have dealt unfairly with fire claims, the Commissioner's release ends with this remark directed to "public adjusters," whose role is to represent insureds and to pursue claims on their behalf:

Commissioner Poizner also reminds public adjusters of a law enacted after the 2003 wildfires that prohibits them from soliciting homeowners for adjusting business for seven calendar days after the disaster.  The purpose of the law is to permit victims, such as victims of this week's fires, to have some time to comprehend their losses before contracts relating to their losses are solicited.

More fire and insurance news as the situation develops...

~~~

* Matt Welch, then with Reason magazine and now of the Los Angeles Times, took a skeptical view of the FAIR plan in 2003, noting its tendency to encourage building in dangerous areas by making available unduly affordable insurance. 

A personal anecdote: When we bought our current home in Glendale, just north of Los Angeles, 16 years ago, a brushfire came within a quarter mile or less two days after we closed escrow.  We were insured with the FAIR plan for the first ten years or so, at which point several private market insurers began writing in the neighborhood.  Were those insurers unwise?  Personally, I hope never to have cause to find out.

~~~

UPDATE [2115 PDT]: From his current perch at the LAT, Matt Welch has a few more choice insights on FAIR plans.  A small taste:

The Malibu Schadenfreude identified by Steve Lopez and others today contains a legitimate public-policy issue within its (even more legitimate?) naked class envy/hatred. Namely, that many rich folk who build mansions in canyons -- and their less-rich compadres who build McMansions in foothills -- do so with subsidized, artificially inexpensive, actuarily unsound, government-secured insurance of last resort, called the California Fair Access to Insurance Requirements, or FAIR for short (and ironic). . . .

It is peculiar that a government-based insurance mechanism originally intended to deal with the urban wreckage of the riotous -- but metaphorical -- "long hot summers" of the 1960's is now the central tentpole for property owners' responses to the literal "long hot summers" that annually turn southern California into the prime exhibit in the Tinder Box Museum.

Discuss, if you will.

~~~

FURTHER UPDATE [102607, 1047 PDT]:  The Wall Street Journal, in an article free to non-subscribers, profiles California Chaparral Institute founder Richard Halsey, who is encountered with hose at the ready as that chaparral around his own home burns vigorously:

• "Fires Turn Up Heat On a Key Advocate Of California Shrubs"

If You Wanna Make the Rules, You Have to Follow the Rules

Or, as Bob Dylan would have it: "To live outside the law you must be honest."  A case in point:

Now-departed California Insurance Commissioner John Garamendi -- from whom almost nothing has been heard since he became Lieutenant Governor in January -- had something of an obsession with the legal distinction between insurance "agents" and insurance "brokers."  To oversimplify a bit, an insurance "agent" represents and is paid (typically via commission) by an insurance company while an insurance "broker" represents and is paid (typically on a fee for services basis) by the prospective insurance buyer.  Never the twain should meet, in the view of Mr. Garamendi, and he was particularly touchy about any situation in the insurance producer might be seen as acting in both capacities, or receiving compensation as if acting in both capacities.  (For an example from 2004, see Decs&Excs' previous report on the case of Krumme v. Mercury Insurance.)

During 2005, Commissioner Garamendi's interest in agent/broker compensation issues took the form of a set of proposed regulations that would have rigorously defined the "fiduciary obligations" of producers concerning compensation and disclosure of compensation, and would have imposed draconian penalties for failure to make the mandated disclosures, whether or not the insurance customer was harmed in any way.  (More on those proposals here.)  That effort ultimately reached a state of suspension, without the adoption of any final rules and with the Department taking a "wait and see" attitude while the leading agents' and brokers' organizations worked on a self-regulatory approach.

Stymied in his efforts to impose regulation by the usual means -- involving notices, public comment, formal hearings and other such time-consuming acknowledgments of the right to Due Process of Law -- Mr. Garamendi found a method to streamline the process.  The Department was pursuing administrative action against American Reliable Insurance Company and one of its agents, Superior access Insurance Services, alleging improper compensation practices under existing law.  American Reliable entered into an agreed settlement of that proceeding.  The settlement agreement was somewhat unusual in that it included a long narration concerning issues of law and purported to identify 11 specific situations in which a producer would be deemed to be an "agent" and thereby prohibited from charging the insurance buyer a broker's fee. 

Ordinarily, that settlement would be binding only between the parties themselves -- the Department of Insurance, American Reliable and Superior Access -- but the former Commissioner perceived an opportunity to leverage a broader impact from the deal.  To that end, he unilaterally declared that the settlement was not merely a settlement -- it was to be deemed a "Precedential Decision" of the Department of Insurance.  That is, without notice or a hearing or the taking of evidence, the settlement was to become the equivalent of new regulations binding on all licensees of the Department, not merely the parties who actually agreed to it.

Agents' and brokers' representatives responded to the outgoing Commissioner's gambit this past December by filing a petition  with the state Office of Administrative Law seeking to have the precedential effect of the American Reliable settlement vacated.  The particulars of their arguments will be of interest mainly to connoisseurs of the finer points of administrative law, but the larger point was fairly straightforward: there are specific circumstances under the law in which an agency decision can be made "precedential," and a stipulated settlement is not among them.

Today, Insurance Journal reports that the insurance producers' position has been vindicated:

The California Department of Insurance (CDI) has been handed a procedural setback in its effort to crack down on agents charging broker fees.  This week, the California Office of Administrative Law (OAL) determined that former Insurance Commissioner John Garamendi acted illegally last year when he deemed a settlement with an insurer accused of allowing its agents to improperly charge broker fees to insureds a precedential decision, giving the settlement the force of law.

    * * *

IBA West [The Insurance Brokers and Agents of the West] argued that while litigated decisions by the insurance commissioner may be adopted as a precedential decision, mere settlements cannot. . . .

'He [Garamendi] was effectively holding a gun to a licensee's head behind closed doors, forcing it to agree to a lengthy 'manifesto' written by his lawyers, and then attempted to use a relatively obscure and limited provision in the Government Code to give these opinions the force of law,' said IBA West General Counsel Steve Young.

Young warned if CDI's use of the procedure was not overruled, it could be used against licensees 'on any subject in which the Department of Insurance desired to make new law — without having to persuade the Legislature and governor of the merit of its proposals, or having to comply with the minimum due process requirements of the California Administrative Procedures Act in promulgating regulations.'

The OAL agreed, citing a 1999 report by the California Law Revision Commission. 'As the Law Revision Commission comments make clear, there are two ways for agencies to make new law or policy: 1) APA rulemaking or 2) administrative adjudication which has been designed a precedential decision. The Department did not employ either method.'

New Insurance Commissioner Steve Poizner has not yet displayed the same degree of intensity of focus as his predecessor did on these issues.  The Department has the option to appeal the OAL decision or to commence some alternative, APA-compliant proceeding in order to produce a statewide rule, but has not announced any specific plan. 

~~~

FOR FURTHER READING:

Insurance Journal's original report on the petition to the Office of Administrative Law, which includes a more detailed description of the terms of the American Reliable settlement, is available here.

State Farm to Mississippi: "So Long, and Thanks a Lott"

Business Insurance posts a Reuters report on State Farm's decision to withdraw substantially from the Mississippi property insurance market in light of its recent legal woes in that state.  The first two paragraphs sum things up:

State Farm Mutual Automobile Insurance Co. said it will stop writing new homeowners and commercial insurance in Mississippi following a legal battle with state homeowners resulting from Hurricane Katrina.

'It is no longer prudent for us to take on additional risk in a legal and business environment that is becoming more unpredictable,' said Bob Trippel, senior vp of the largest home insurer in the United States.

There you have it: when an insurer cannot confidently predict how its policies will be interpreted, issuing new ones is little more than a gamble.  For that, Mississippi has, or had, casinos.

No doubt David Rossmiller and Martin Grace, each of whom has been doing excellent work on the Mississippi morass these past months, will be weighing in with more insightful commentary shortly.

Everyone, Out of the Pool?

Commenting on last week's LA Times story-torial (previously cited here), Jon Coppelman of Workers Comp Insider wonders whether increasingly sophisticated computer modeling and data mining will mark "The End of Insurance" as we know it.  Says he:

We'll see.  The insurance industry is undergoing a paradigm shift of enormous importance.  The new model will probably generate some hefty profits, but the party may not last very long.  There will be howls of protest from the millions who, for one reason or another, have been deemed to be 'bad risks.'  Then the rhetoric will explode: 'Bad risks of the world, Unite!  You have nothing to lose but your (coverage) chains!'

Jon's item is one of an interesting dozen recent posts highlighted as part of Cavalcade of Risk #14, hosted on the Cato-at-liberty weblog by Michael Cannon, who adds his own commentary:

Insurance is a tool for dealing with uncertainty (i.e., by subsidizing uncertain losses).  How do we know that?  Because people generally don’t buy actuarially fair insurance to pay for certainties.  When additional information moves a potential loss from the 'uncertainty' to the 'certainty' end of the spectrum, people understandably decry the loss of that subsidy.  But I find it bewildering when some call that 'the end of insurance' or a market failure.  First, unless we’re close to eliminating uncertainty, we will always have insurance.  Second, in cases where uncertainty is reduced, insurance markets are doing exactly what they should: replacing the subsidy with some very valuable information.  Finally, just because the insurance subsidy is gone, that does not prevent society from subsidizing those losses in other ways.

Coincidentally, I gave a presentation today to a group of regulators from the California Department of Insurance -- no pressure there, eh? -- talking about the Times article and other recent instances of what might be seen as result-driven analysis.  (The Louisiana flood exclusion case -- ably discussed in posts by Martin Grace at RiskProf and David Rossmiller on his Insurance Coverage Blog -- was another example I cited.)  In post-talk questions and discussion, while no one indicated knowledge of anything specific on the immediate horizon, several attendees seemed to expect that public pressure will inevitably grow on regulators at some point to "do something" if the "one on one" model of information-intensive underwriting is perceived to be supplanting the traditional "throw them all into an amorphous mashup" model.

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UPDATE [120706]:  David Rossmiller also weighs in today on the Los Angeles Times story.  His particular contribution to the discussion turns on this well-taken and well-stated point:

[T]he purpose of insurance is not a transfer of wealth to achieve social leveling, it is a transfer of risk from a present 'you' or group of 'you's' with similarly classed risks to a future you or a future group of people like you.

The Times Says: "Things, They Are A-Changin'" for Insurers and Insureds

This is seemingly a big week for risk and insurance articles in the popular press.

First, in this week's issue of TIME magazine, the Cover Story is all about Risk, and the irritating and self-defeating human capacity for ignoring large and persistent risks while obsessing over risks that, albeit often more "dramatic" and colorful, pose far lesser dangers:

Shadowed by peril as we are, you would think we'd get pretty good at distinguishing the risks likeliest to do us in from the ones that are statistical long shots.  But you would be wrong.  We agonize over avian flu, which to date has killed precisely no one in the U.S., but have to be cajoled into getting vaccinated for the common flu, which contributes to the deaths of 36,000 Americans each year.  We wring our hands over the mad cow pathogen that might be (but almost certainly isn't) in our hamburger and worry far less about the cholesterol that contributes to the heart disease that kills 700,000 of us annually.

We pride ourselves on being the only species that understands the concept of risk, yet we have a confounding habit of worrying about mere possibilities while ignoring probabilities, building barricades against perceived dangers while leaving ourselves exposed to real ones. . . .

More interesting is the very long front page story by reporter Peter G. Gosselin running in today's Los Angeles Times under the title, "Insurers learn to pinpoint risks -- and avoid them."  The article is so lengthy that I confess I haven't finished reading the whole thing yet, and will need to return to it in a further post. 

The purported thrust of the piece is that insurers have become increasingly sophisticated at identifying the particular risks posed by a particular insured, to the extent that there is a move away from "pooling" of heterogeneous risks -- so that large groups of not-necessarily similar insureds pay essentially the same premium, with lower risk insureds effectively subsidizing higher risk insureds -- and toward case-by-case pricing, in which those who individually face heightened and particularized perils are charged accordingly high premiums -- to which the LATimes piece implicitly adds: "Whether they can afford it or not."

This is definitely reporting with a point of view, which seems to be roughly that insurance should be priced more on the basis of ability to pay than on the basis of the risk that the insurer is agreeing to undertake.  The article is the latest in an ongoing series by Mr. Gosselin, not all of which have focused on private insurance, that the LATimes has titled "The New Deal."  That link leads to a page on which the entire series is collected, and which features this statement of the persistent underlying premise of Mr. Gosselin's reporting:

Los Angeles Times reporter Peter G. Gosselin is examining an American paradox: Why so many families report being financially less secure even as the nation has grown more prosperous.  The answer lies in a quarter-century-long shift of economic risks from the broad shoulders of business and government to the backs of working families.  Safety nets that once protected Americans from economic turbulence — safeguards like unemployment compensation and employer loyalty — have eroded or vanished.  Families are more vulnerable to sudden shifts in the economy than any time since the Great Depression.  The result is a daunting 'New Deal' for many working Americans — one that compels them to cope, largely on their own, with financial forces far beyond their control.

(Emphasis added.)

As I said, I have not yet read today's article completely, and have not had the opportunity to sift and comment upon its assertions, evidence and assumptions.  For now, I simply call it to your attention.  I will return to it, and I encourage other risk, insurance and legal weblogs to contribute their own comments.  Happy reading.

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UPDATE [1700 PST]:  I do intend to follow up on this article, as promised above, but in the meantime Martin Grace has a detailed and authoritative take on many aspects of the piece, and on some of its more egregious lapses in logic, on his RiskProf weblog.

Thanks to Martin for his link earlier today to this post, and for kindly not taking me to task for being a bit sloppy in my terminology vis-a-vis heterogeneity and homogeneity of risk.

This Just In: Trial Lawyers Linked to Tentacled Sea Creatures

Always on top of late-breaking news, the Los Angeles Times catches up to the ATLA/AAJ name change story with an editorial in today's edition.  The Times is no more impressed than anyone else:

ATLA's name change, apparently triggered by the successful efforts to demonize the term 'trial lawyer,' is a classic example of abstract euphemism replacing — and distorting — a perfectly specific phrase.  George Orwell denounced such linguistic evasion in his classic 1946 essay, 'Politics and the English Language.'  'The great enemy of clear language is insincerity,' Orwell wrote.  'When there is a gap between one's real and one's declared aims, one turns as it were instinctively to long words and exhausted idioms, like a cuttlefish spurting out ink.'

And is there a more 'exhausted idiom' than the unassailable ideal called 'justice'?  Trial lawyers, by comparison, are controversial, and rightly so.  Conservatives insist that they do more harm than good by seeking huge jury judgments from which they take a disproportionate cut.  Liberals counter that without enterprising — and, yes, self-interested — plaintiffs' lawyers, injustices would go unchallenged and workplaces would be less safe.

It's an important debate, and one that trial lawyers should be eager to join without shrouding the work they do in generic language. . . .

So far, the decision to become the American Association for Justice seems to have earned the trial lawyers nothing but scorn.  A professional negligence claim against their high-priced Re-Naming Consultant may be in order, to recover for the substantial emotional distress even now being sustained by the organization's thousands of members who have become the objects of so much pointing and laughter.

"The American Academy of Inky Cuttlefish" -- now that has a nice ring to it.