INSURANCE REGULATO RYEXAMINERS SOCIETY What market...

Could welding rodsbe the nextasbestos for triallawyers, insurers?by Scott HooberSpecial to The Regulator

By one estimate, the insuranceindustry's asbestos liability couldone day total $65 billion — morethan the total paid out for 9/11 andHurricane Andrew combined.

Since much of that money iscollected with the promise of alarge contingent-fee payout to alawyer somewhere, you can seewhy, to the plaintiff bar, asbestoslitigation is akin to the Holy Grail.And why every new potential lia-bility is touted as the next asbestos.

One of the hottest newprospects for the title is weldingrod litigation. The process of weld-ing produces fumes, and one of thecomponents of those fumes hasbeen implicated in Parkinson-likesymptoms.

What market conduct examiners needto know about financial re g u l a t i o nby Victoria Savoy

Virginia market conduct examiners will tell you that they only needto know two things about financial regulation of insurance compa-nies: phone numbers of the Bureau’s financial regulation staff –

and where our cubicles are! Seriously, though, knowing how an insurance company is regulated

from a financial perspective will give market conduct examiners a morecomplete picture of insurance company operations, which will in turn help

them as market conduct examiners. The sametheory holds (in reverse) for financial exam-

iners and analysts. This article is based upon my experi-

ence with the Virginia State CorporationCommission’s Bureau of Insurance. Eachstate may be slightly different in its finan-

cial regulation of insurance companies.

Licensing standardsFinancial regulation of an insurance company starts when a company

submits a license application, because in order to transact the business ofinsurance in Virginia, by law, and with limited exceptions, an insurancecompany must be licensed by the Bureau. When an application is submit-ted, staff reviews the material and submits a recommendation to approveor disapprove. For the application to be approved and a license granted, aninsurer must meet certain criteria, many of which are financial.

A company that is already licensed in another state must:• Meet separate minimum capital and surplus requirements (currently

set at $1 million and $3 million for Virginia),• Report profitable operations over the last three years, • Be actively engaged in the lines of business it intends to transact in

Virginia,• Provide a satisfactory examination report from the state of domicile

that is no more than five years old, and • Post a security deposit in Virginia, for the benefit of Virginia policy-

holders.Currently, the Bureau receives about 40 license applications annually.

About one in five of these are disapproved each year. Roughly eight ofevery ten applications are from property and casualty companies.

Virginia participates in the Uniform Certificate of Authority

I N S U R A N C E R E G U L A T O R Y E X A M I N E R S S O C I E T Y

continued on page 13

JULY 2004

continued on page 3

President's column 2A court decision threatens the stability of the California market 6See you in Denver 9State chapter news 12Regulatory Roundup 17

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2 The Regulator/JULY 2004

Wayne Cotter, Editor [email protected]

Kathleen McQueen, Associate Editor

IRES PUBLICATIONS COMMITTEEPolly Chan, CIE, California, CHAIR

Angela Ford, CIE, North Carolina, VICE CHAIRWayne Cotter, CIE, New York • Pamela Donnewald, CIE,

Illinois • Kathleen McQueen, New York • Gerald A. Milsky,CIE, Virginia • Kashyap Saraiya, AIE, New York • Christel

Szczesniak, CIE, retired • Linda Yarber, California

IRES Officers & Board of DirectorsExecutive CommitteePresident Bruce R Ramge, CIE, NE 402-471-4607President-elect Kirk R. Yeager, CIE, CO 303-894-7749Vice President Stephen E. King, CIE, unaff i l i a t e d 540-819-7079Secretary Polly Y. Chan, CIE, CA 213-346-6685Treasurer Douglas A. Freeman, CIE, MO 636-236-9642Past President Paul J. Bicica CIE, VT 802-828-4884At Large Jo LeDuc, CIE, WI 608-267-9708

Board of DirectorsPaul J. Bicica. CIE Ve rm o n t Jo A. LeDuc, CIE, Wi s c o n s i nPolly Chan, CIE, Californ i a H o w a rd L. Magill, CIE, Te n n e s s e eG a ry L. Domer, CIE, unaff i l i a t e d Ed Mailen, CIE, KansasPamela Donnewald, CIE, Illinois Stephen M. Martuscello, CIE, New Yo r kDudley B. Ewen, AIE, Mary l a n d Lee V. McLellan, AIE, District of ColumbiaAngela K. Ford, CIE, North Caro l i n a Gerald A. Milsky, CIE, Vi rg i n i aDouglas A. Freeman CIE Missouri B ruce R. Ramge, CIE, NebraskaJoseph Fritsch, CIE, New Yo r k Eugene T. Reed, Jr., DelawareJann Goodpaster, CIE, Ore g o n John H. Reimer, CIE, KansasMichael W. Hessler, CIE, Illinois Cynthia E. Campbell, CIE, MissouriKatie C. Johnson, Vi rg i n i a Christel L. Szczesniak, CIE, ColoradoShirley H. Jones, CIE, North Caro l i n a Nancy S. Thomas, CIE, DelawareStephen E. King, CIE, unaff i l i a t e d Kirk R. Ye a g e r, CIE, Colorado

COMMITTEE CHAIRS

Executive Bruce R. Ramge, CIE, NE, chairAccreditation & Ethics Kirk R. Yeager, CIE, CO, chairMeetings & Elections Jo LeDuc, CIE, WI, chair

Publications Polly Chan, CIE, CA, chairEducation Paul J. Bicica, CIE, VT, chairMembership Stephen E. King, unaffiliated, chair

Finance Douglas A. Freeman, CIE, MO, chairLEGAL COUNSEL: Craft-Fridkin-Rhyne, Kansas City

IRES Section ChairsMARKET CONDUCT RATES & FORMS: PROPERTY-CASUALTY

Katie Johnson, Virginia Barbara Fitzgerald, AIE, CaliforniaFINANCIAL RATES & FORMS: LIFE-HEALTH

Donald Carbone, CIE, New York Jamie Key, AIE, WisconsinCONSUMER SERVICES & COMPLAINT HANDLING ENFORCEMENT & COMPLIANCE

Violetta R. Pinkerton, AIE, Colorado Frank M. Smith, AIE, MissouriPRODUCER LICENSING & CONTINUING ED

John E. Braun, Jr., CIE, Utah2004 CDS Chair

Jo A. LeDuc, CIE, Wisconsin

THE REGULATOR is published every other month by the

IN S U R A N C E RE G U L AT O RYEX A M I N E R S SO C I E T Y

12730 S. Pflumm Rd., Suite 102 • Olathe, Kansas 66061913-768-4700 • FAX: 913-768-4900IRES Continuing Education Line: 913-768-NICE

From the President

Passing the Torch

My time as IRES president has passed quick-ly.

During the year, my admiration for IRES andits members has grown tremen-dously (no small feat since itbegan at such a high level). It’struly amazing to observe first-hand how a disparate group ofpeople from across the countrycan — through committees, con-ference calls, occasional meet-ings and e-mails —make this atop-notch organization. And theydo it year after year.

This year’s executive committee members(Paul Bicica, Kirk Yeager, Stephen King, DougFreeman, Jo LeDuc and Polly Chan) have beengreat to work with and are extremely support-ive of IRES. We are fortunate to have them atthe helm. Each member of each standing com-mittee (Education, Accreditation & Ethics,Membership, Finance, Meetings & Electionsand Publications) has worked hard behind thescenes to keep our programs running smoothly.

The Past President’s Council continues tolend advice and assistance with development ofthe Market Conduct Examiner Certification pro-gram. We are receiving excellent feedback onthe proposal outline.

Our Board of Directors, the CDS Chair, theSection Chairs and the State Chairs are reallywhat IRES is about. They help bring about theprograms that our members want, at both thestate level and at a national level, through ourCDS.

IRES is also fortunate to have the ongoingsupport of the IRES Foundation, a separateorganization whose fundraising and marketconduct school assist generously with our pro-grams.

IRES also continues to benefit from theadministrative services provided by DavidChartrand and his accomplished staff at TheChartrand Companies.

continued on next page

Ramge

TMw w w. g o - i r e s . o r gOpinions expressed in this publication are theauthors' and do not necessarily represent theopinions of the authors' employers or IRES.

©2004 All Rights Reservedby the Insurance Regulatory

Examiners Society

e-mail us at i r e s h q @ s w b e l l . n e t

I would also like to extend a sincere“thank you” to everyone (too numerous tomention by name) who has worked diligentlyto assist IRES this year. On behalf of IRES, Iask for your continued support. Even thoughmy term is over, I plan to stay involved andassist in any way that I can.

As IRES members, here are a few thingswe have to look forward to:• Ongoing market conduct and regulatory

reforms, on both the state and nationallevel, will provide IRES with an opportunityto offer additional support and educationto its members.

• IRES has opportunities to partner withother insurance education and complianceorganizations for joint ventures, such asseminars and articles.

• IRES’s ongoing commitment to careerdevelopment and continuing education.

• Lively and thought-provoking news andfeatures in The Regulator.Lastly, I would like to extend my congratu-

lations to Colorado’s Kirk Yeager, to whom Iwill pass the torch this August. Kirk hasworked tirelessly for IRES over the years andwill be an outstanding president of our organ-ization.

I look forward to seeing all of you inDenver.

Bruce R. Ramge, CIEIRES President

The Regulator/JULY 2004 3

Application (UCAA) licensing process developed bythe National Association of Insurance Commissioners(NAIC). Simply put, this means that Virginia hasagreed, along with all other participating states, torequire a standard group of documents and informa-tion as part of a license application. The application isstill subject to Virginia’s standards, but the decision isbased on standard information included in the UCAA.As a UCAA state, Bureau staff is obliged to reviewmost license applications in a 60- to 90-day timeframe.

Occasionally, a license application is receivedfrom a new insurance company that wants Virginia tobe the state of domicile. Different standards are usedto judge a newly formed domestic company applica-tion, since it won’t have operating history to use as aguide. The Bureau looks closely at how the companyis organized, if it is part of a holding company and ifso, what other companies are part of the group. Wealso look at management and service agreements,officers, and the company’s business plan.

Reporting and exam requirementsOnce licensed, an insurance company becomes

subject to routine financial reporting and examinationrequirements. These requirements vary according towhether the company is domiciled in Virginia or else-where. Virginia-domiciled companies are subject tocloser scrutiny by the Bureau, and therefore are sub-ject to additional reporting requirements.

As in most states, all companies, both domesticand foreign are required to file quarterly and annualfinancial statements, and an annual independent certi-fied public accountant report. Specific companiesmust also file monthly financial statements.

Domestic companies are subject to additionalrequirements. These include:

• State specific forms, such as the “Analysis ofExcess Capital and Surplus Investments.” Thisform breaks down a company’s invested assets bytype, and also compares them to the limitationsestablished in the statute.

• If applicable, routine holding company filings thatdescribe holding company activity during the pre-vious calendar year are also required. Other typesof holding company filings may be receivedthroughout the year, such as requests for approval


Financial regulationcontinued from page 1

Remembering Art Chartrand Sr.Arthur A. Chartrand, patriarch of

The Chartrand Group in Olathe, Kan.,passed away June 16. He was 79.

The Chartrand Group has beenIRES’s association management firmsince the Society was founded. Untilhis health failed in the past year, Artsupervised most banking-related tasksfor IRES.

Many IRES members will remem-ber Art’s friendly face at the Society’searly Career Development Seminars. His sons, David andArthur, continue to manage the various Chartrand familybusinesses.


of extraordinary dividends, or participation inreinsurance arrangements, management agree-ments, etc. The Bureau must approve theserequests before the transaction can occur.

• In addition, of course, domestics are subject toon-site financial examinations. By law, an examof a domestic insurer is required once every fiveyears, but the Bureau usually conducts them atleast every three years. Like most state insurancedepartments, the Virginia Bureau of Insurancefocuses on Virginia insurance companies. TheBureau relies on the stateof domicile to examineforeign insurers that oper-ate in Virginia. However,Virginia law does allowthe Bureau to examine anyinsurer that is licensed inVirginia and the Bureaumay participate with thestate of domicile in theexamination of a foreigninsurance company.Examinations also allow a

state insurance department to: • Detect as early as possible those insurers in finan-

cial trouble, or that are engaging in unlawful orimproper activities, and

• Develop information and support documentationthat is necessary for timely, appropriate, and fea-sible regulatory action.The focus of financial examinations is on verifi-

cation of the financial statements that have been filedwith the Bureau, as well as compliance with applica-ble laws and regulations. Focus is also placed onassessing the quality and technical ability of manage-ment to perform critical functions, the internal-controlenvironment, and the accounting system that producesthe financial statements.

There are two types of examinations:• Full-scope examinations, which report on an

insurance company’s financial position as awhole, can last anywhere from a couple of daysfor a small single-state company, up to a year orlonger, for a large group.

• Limited-scope examinations focus on one or more

specific areas, such as investments, reinsurance,holding company activity, etc., and are completedin between full-scope examinations.Examinations are conducted in accordance with

the NAIC Financial Condition Examiners Handbook.This reference book, similar to the NAIC MarketConduct Examiners Handbook, establishes guidelinesfor calling, planning, and conducting an examination,as well as creating the examination report, and docu-menting findings. The book also includes “SpecificRisk Analysis” objectives and procedures, samplingprocedures, sample work papers, and an overview of

reinsurance.

GAAP/ SAP differencesInsurance accounting is

not the same as GenerallyAccepted AccountingPrinciples (GAAP) accounting(the accounting one learns incollege). Insurance accountingis also known as “statutoryaccounting” because theaccounting methods are speci-fied in the state statutes.

Statutory accounting principles (SAP) focus on acompany from a solvency basis. Assets and liabilitiesare valued conservatively, to determine a company’sability to satisfy its obligations to policyholders. Thebalance sheet is the main focus of the financial state-ment.

Examples of some differences between GAAPand SAP accounting include the fact that fixed assets,such as furniture and equipment, are not recognizedas assets in statutory accounting. Reserve calculationscan be different – usually statutory reserves are moreconservative than GAAP. And certain investmentreserves must be established to recognize defaultrisks, interest rate changes, and market value adjust-ments in the investments held by certain insurancecompanies. The important thing to remember is thatfinancial statements prepared on a statutory basis arenot the same as financial statements prepared on aGAAP basis.

CodificationIt is not uncommon for the term ‘Codification’ to

come up when discussing financial reporting and

What market conduct examiners continued from page 3

Codification is a com -prehensive guide to

statutory accounting principles,for use by insurance depart -ments, insurers and auditors,that was adopted inmost states in 2001.


examinations. Codification is a comprehensive guideto statutory accounting principles, for use by insur-ance departments, insurers, and auditors, that wasadopted in most states in 2001. The AccountingPractices and Procedures Manual, published by theNAIC, contains the Statements of StatutoryAccounting Principles and supporting appendices, aswell as a Preamble.

Codification has resulted in more complete dis-closures and more comparable financial statements, aswell as uniform accounting rules. Although a state’slaws may still pre-empt codified statutory accounting,if that occurs, disclosure of the financial effect will berequired in the annual statement and the annual CPAreport.

Basically, this means an analyst can look at afinancial statement for an insurance company any-where in the United States, and be fairly certain thatthe same accounting treatment has been used to pre-pare the statement. The disclosure that is requiredwhen a company deviates from statutory accountingis prominently included in the ‘Notes to FinancialStatement’ in the Annual Statement. It helps the finan-cial analysts that are assigned to monitor the solvencyof foreign insurers because the dollar effect of devia-tions can easily be determined. The Bureau has takenaction against a number of foreign insurance compa-nies that have accounting practices that do not followVirginia law. (Examples include allowing large dis-counts on reserves, or the admittance of normallynon-admitted assets.)

One financial area that both the analysts andexaminers look at closely is investments. The Code ofVirginia limits the types and amounts of investmentsthat an insurance company can hold. An entire chap-ter in the Code of Virginia is dedicated to investmentsheld by insurance companies. For example, an insur-ance company cannot invest more than 5% of itsadmitted assets in common stock of banks or trustcompanies. There are also per obligor and per issuerlimits. Basically, one could consider these limits a“forced diversification.”

Why does the Bureau put so much effort into reg-ulating investments? Because they represent a largeportion of the balance sheet assets of many insurancecompanies.

The insurance industry has more than $3 trillionin invested assets. More than 70% of this amount is

held by companies filing an NAIC Life AnnualStatement.* This makes sense because premiums maybe paid on a life policy for 40 years or more beforeany claims are paid out. In contrast, auto and home-owners’ companies, which are subject to losses of amuch shorter duration, do not have nearly as muchpremium to invest as life companies.

Regulatory actionsWhat happens if a company is in declining or

poor financial shape? Standards have been establishedin Virginia that the Bureau can use as a guide foridentifying domestic and foreign insurers found to bein a condition that would render their continued oper-ation hazardous to policyholders, creditors, or thepublic. These standards have been enacted in moststates.

When a company appears to be operating in ahazardous financial condition, the Bureau will usuallywork with the company to try and get it headed in theright direction. When an insurance company’s surplusto policyholders falls below the statutory requirement,it is impaired and action is quick. Generally, the com-pany is given ten days to eliminate the impairment,which is often accomplished through an infusion offunds from a parent company. If the company cannotcorrect the impairment within ten days, the Bureauusually recommends official regulatory action. Thiscan be a fairly common occurrence.

If the State Corporation Commission agrees withthe Bureau’s recommendation, it issues an Orderwhich places the insurer’s license in an impaired sta-tus, and gives the company a limited amount of time,usually 60 to 90 days to eliminate the impairment.From an operating perspective, this means that theinsurance company cannot write any new business inVirginia while its license is impaired.

Other regulatory “tools” the Bureau has to assurecompliance with the law include fines, orders request-ing a company to “cease and desist” from certain actsof noncompliance, prohibiting a company from writ-ing new business, and, more common with foreign oralien companies, suspending or even revoking a com-pany’s license to transact insurance.

When the problems cannot be rectified, there are

need to know about financial regulation

continued on page 11

* 2003 Best’s Aggregates and Averages, 2003 Edition.A.M. Best Company, Oldwick, N.J.


by Dan Dunmoyer, President,Personal Insurance Federation of California

If after more than 16 years of on-and-off courtcases attempting to interpret the ambiguous andcontradictory language of Proposition 103 isn’t

enough, another interpretation was handed down inApril 2004 from the Second District Court of

Appeals. The ruling, from a caseknown as Donabedian v. Mercury,states that under Proposition 103, anycitizen has the right to act as a “pri-vate citizen attorney general” anddirectly sue any insurance company ifhe or she disagrees with the compa-ny’s rates, rules or underwriting planswhich have been approved by the

California Department of Insurance (CDI).Sam Donabedian, a private citizen, filed a lawsuit

against Mercury Insurance Co. in the CaliforniaSuperior Court, claiming that under Proposition 103,it was illegal for the company to use a prior insurancerecord — approved by CDI — as part of its under-writing and pricing practices. Judge Carolyn Kuhlagreed with Mercury’s argument that only theInsurance Commissioner, not the courts, can hear con-sumer complaints. The judge cited a 1947 law givingthe State Insurance Department regulatory authorityover the insurance industry. The case was then takento the Appellate Court. Interestingly, two friends-of-the-court briefs were filed: one by Harvey Rosenfield,author of Proposition 103 and counsel to theFoundation for Taxpayer and Consumer Rights, andthe second by CDI.

In his brief, Insurance Commissioner JohnGaramendi threw a bombshell into the court case. Heurged the court to approve citizen lawsuits againstinsurance companies, explaining that CDI “simplylacks sufficient resources to pursue every allegation.”

CDI told the court that it did not have the“resources” to check every single activity of the insur-ance industry in California, but welcomed private citi-zen lawsuits to help CDI do its job. CDI has morethan 1,350 employees, making it the second largestinsurance department in the United States. CDI also

has the largest budget of any insurance department inthe United States — $170 million for fiscal year2004. Yet the Appellate Court reversed the lowercourt decision and concluded that consumers do havethe right to sue and thus enforce Proposition 103 bydoing it through the state’s Unfair Competition Law(UCL). The Personal Insurance Federation ofCalifornia (PIFC) disagrees with the Appellate ruling.

The following is taken directly from the Califor-nia Insurance Commissioner’s Web site, indicatingwhat the commissioner believes are the duties of CDI:

“Insurance is a $106-billion-a-year industry inCalifornia. Overseeing the industry and protecting thestate’s insurance consumers is the responsibility of theCalifornia Department of Insurance (CDI). CDI regu-lates, investigates and audits insurance business toensure that companies remain solvent and meet theirobligations to insurance policyholders.”

As administrator, the Commissioner enforces thelaws of the California Insurance Code and promul-gates regulations to implement these laws. That seemsvery clear to PIFC.

What the insurance law statesProposition 103 changed the insurance commis-

sioner’s position from an appointed position to astatewide elected post.The reason for this is to ensurethat the Commissioner is accountable to the peoplefor his actions as Insurance Commissioner. TheAppellate Court ruling allows private citizen lawsuitsagainst insurance companies for rating plans approvedby the Commissioner.

However, Proposition 103 explicitly states: 1)“Insurance Code section 1860.1 grants to theCommissioner original and exclusive jurisdictionover insurance ratemaking matters.” It states that noinsurance rate may be charged unless approved by theCommissioner. With the massive budget and staffavailable to the Commissioner, why would Mr.Garamendi require help from the public to regulatethe California insurance industry?

California insurance law also states: “TheCommissioner is charged with enforcement of theInsurance Code, and in particular with the review and

A court decision threatens the stabilityof California’s insurance market

Dunmoyer


approval of proposed rates and class plans to ensurethat rates are not “excessive, inadequate, unfairly dis-criminatory, or otherwise in violation of Chapter 9 ofDivision 1, Part 2 of the Insurance Code.”

Therefore, by allowing any of the 36 million pri-vate California citizens the right to sue an insurancecompany over lawfully approved rates violates thevery spirit — and letter — of what Proposition 103intends, because Proposition 103 gives only theCalifornia Insurance Commissioner exclusive originaljurisdiction over the rate-making process. TheInsurance Commissionerwould also be in violation ofProposition 103 because pri-vate citizens would be permit-ted to sue over rates thatshould be exclusively approvedby the Commissioner himself.

The ramifications of theappellate ruling go even deep-er. There is also a “double-enrichment” aspect to the newcourt ruling. Let me explain.First, under the AppellateCourt ruling, any insurance company that wants toraise or lower its rates would, under Proposition 103,proceed with a filing request to CDI, which couldtake up to 18 months or longer for approval, amend-ment or denial.

But waitBut didn’t the author of Proposition 103, Harvey

Rosenfield, also write a section into the initiative thatallows consumer groups, like the author’s own group— Foundation for Taxpayer and Consumer Rights(FTCR) — to intervene on any insurance filing orprocedure by any insurance company before the CDI?So not only can his group or any qualified groupunder the Proposition 103 definition, intervene in pro-ceedings, they also get hourly wages, and expenses —including hotels, taxis and meals while participatingin the proceedings – all paid for by the insurancecompanies appearing before CDI.

Since 1988, when Proposition 103 narrowly

passed by 51%, Harvey Rosenfield’s groups have col-lected more than $2 million in intervenor fees throughthe CDI, which is paid for by insurance companies.Some of these interventions even occurred whensome of those companies applied for rate reductions!Rosenfield’s groups intervened in some rate decreasehearings and demanded that the companies be grantedlarger decreases than those filed.

Double-enrichment.Under the Appellate Court ruling, if and when the

filing for a rate change isgranted to an insurance com-pany, the author ofProposition 103 and his part-ners, who may have inter-vened in a CDI hearing con-cerning a rate request, cannow sue the company, statingthey believe the approved rateis illegal. It’s a double lotterywindfall for the so-called con-sumer groups, and a giant biteout of the wallets of con-

sumers, who eventually will have to pay all of theexorbitant, unnecessary costs collected from insurersby the consumer groups.

Here’s Auto Insurance Report publisher BrianSullivan’s take on the subject, from one of his recentissues:

“An insurance company uses territory as its mostimportant rating factor. Under rules promulgated bythe insurance department, this is allowed. But a con-sumer group says it believes that Proposition 103 for-bids this practice, and earlier court rulings supportingthe regulation are wrong. So they sue personally to tryand overturn the rules. It means that the insuranceindustry in California now has 36 million citizen reg-ulators who can sue and 1,400 insurance departmentemployees who scrutinize every filing, setting theinsurance companies up for lawsuits under thisAppellate Court ruling.”

Mercury Insurance Company has filed a petitioncontinued on next page

Commissioner JohnGaramendi threw abombshell into the

court case. He urged the courtto approve citizen lawsuitsagainst insurancecompanies.


for review with the California Supreme Court in theDonabedian case. Meanwhile, a similar case, Poirerv. State Farm Mutual Auto Insurance Company, ispending in the Court of Appeals. Although the case issimilar, there are some differences. Vanessa Wells,State Farm’s legal counsel in the Poirer case, is con-fident that at some point the courts will realize thedamage a plaintiff’s verdict would bring to the highlyregulated insurance business.

“As a matter of both law and public policy, thereis no question that a decision that would allow everyDepartment of Insurance-approved rate filing to bechallenged in front of a jury would be as much anti-consumer as it would be anti-insurer,” she said.

“We are confident the courts will recognize thatconsumers need a healthy, and competitive insuranceindustry in the state and a decision that creates regu-latory gridlock by the courts will lead to neitherindustry health nor competition.”

My hope is that the courts will agree and bringresolution to this troubling matter. n

Next month: Harvey Rosenfield explainswhy he supports a private right of actionfor California insurance consumers.

Donabedian v. Mercurycontinued from previous page

The heart of the annual Career Development Seminar is theintensive professional-development sessions — though equal -

ly valuable are interactions with peers. See P. 16 to sign up.

CDS: Rewarding, fun too

THIS JUST IN . . .California High Court Won'tHear 'Persistency' Case ©2004 Best's Insurance News, reprinted with permission

California's Supreme Court has let stand a lower court rulingfinding that auto insurers can be sued by their customers over thepremium they charge, even where those rates were previouslyapproved by the Department of Insurance.

Denying an appeal by the Mercury Insurance Co., the highcourt announced it would not review the Second District Court ofAppeals' March ruling that policyholder Sam Donabedian waswithin his rights — under the state's Proposition 103 — to bringaction against the insurer for failing to provide him with the same"persistency" discount they grant to drivers with comparable driv-ing records, but who, unlike Donabedian, had previously held unin-terrupted insurance coverage.

Passed by voters in 1988, Prop. 103 requires auto insurers todetermine rates, premiums and insurability based only on allowedrating factors, and includes a provision mandating that "absence ofprior automobile coverage, in and of itself, shall not be a criterionfor determining eligibility for a Good Driver Discount policy, or gen-erally for automobile rates, premiums or insurability."

The Santa Monica-based Foundation for Taxpayer andConsumer Rights, which authored Prop. 103, has filed suitsagainst Safeco, Auto Club and GEICO, claiming each is violatingthe same provision.

However, Mercury General attorneys had argued that,because former Insurance Commissioner Harry Low declined tohear Donabedian's complaint when it was brought to him inJanuary 2002, the company's use of "persistency" as one of theoptional rating factors allowed to auto writers was consistent withstate law that gave ultimate authority to approve or deny rates tothe Department of Insurance.


by Kirk Yeager, CIEIRES President-Elect

Welcome back to Denver! For those of you whoattended the last IRES conference here more than adecade ago, you will find many surprises since your lastvisit. In this short time, the city has added three newworld-class sports arenas, an international airport, anaquarium, a convention center, a state-of-the-art library, amajor amusement park and blocks of new restaurantsand clubs for exciting night life.

As for the attractions you enjoyed on your last visit,those are still flourishing and include excellent shopping,easy access to the most beautiful vacationdestinations in the country and, of course, amild summer climate.

Although Denver is now a vibrant finan-cial center, its history is one of dynamicdevelopment, riding out the booms and bustsof the national economy for more than twocenturies. The city, built by gold miners, cat-tlemen and railroaders, has grown in surgesbeginning with the discovery of gold, silver,copper and other minerals in the 19th centu-ry. The 20th century continued to bring mod-ern pioneers to the region in waves to extracturanium, coal and oil shale from the RockyMountains. By the millennium Denver hadbecome a center of high-tech commercefocusing on energy, communications, aerospace andcable television.

Since Denver and its surrounding area provide somany wonderful attractions, you will probably want toextend your stay. While in the Denver Marriott CityCenter, you’ll find much is easily accessible by free shut-tle busses that run the length of the 16th Street Mallevery few minutes.

Going southeast on 16th from the hotel, you’ll find theColorado Capitol and the Denver County and CityBuilding, which face each other across Civic Center Park.Near this complex are the Denver Art Museum, the newCity Library, the Historical Society Museum and theByers-Evans house, which served as the home of one ofColorado’s leading families for four generations.

Taking the mall shuttle to the northwest will lead youto historic Larimer Square and many fun shops andrestaurants. Taking the shuttle further in the same direc-tion, you’ll discover Lodo, Denver’s new nightlife center,

featuring restaurants and clubs for all tastes. This areaboasts more brew pubs than any other city in the country!

To see Denver’s cultural side, just go several blockswest of the hotel. Here you will find the Denver Center forthe Performing Arts (DCPA). Oh, by the way, did I men-tion the new Buell Theater with the other new stuff? TheBuell, part of DCPA, is home to many Broadway andopera productions. Next door is the Boettcher Center,which features the Denver Symphony. Information regard-ing performances and tickets is available at www.denver-center.org.

Since our conference is in August, football and hock-

ey fans will miss the Broncos and the Avalanche, butbaseball aficionados can catch the Colorado Rockies atCoors Field. Gamblers can find tour buses for an eveningat the casinos in Blackhawk and Central City. And racingenthusiasts should know that Downtown Denver willsponsor Grand Prix auto races in mid-August.

If you’re a golfer, don’t pass up the many spectacularpublic golf courses close to the center of the city, includ-ing City Park, Kennedy and the Welshire. And even ifyour game isn’t what it used to be, these courses allboast spectacular views of the Denver skyline as well asthe magnificent peaks of the front range of the RockyMountains.

Within a short cab ride, shoppers who want toexplore beyond 16th Street, can visit Cherry Creek Mall.There you’ll find everything from Saks and NiemanMarcus to local specialty shops. Also within a short cabride is the Denver Museum of Nature and Science, homeof some awesome dinosaurs and neighbor to the Denver

See you in Denver!

Tall mountains, clear streams, people in hiking boots . . . yes, there’s plenty of thiskind of recreation around Denver — but there’s lots to do in town too!



City Zoo. And don’t forget the Molly Brown House, theVictorian home of the colorful Denver socialite who sur-vived the sinking of the Titanic and was made famous onBroadway as The Unsinkable Molly Brown.

Short trips from the city include RockyMountain National Park’s Trail Ridge Road,the highest paved highway in the continentalUnited States, plus treks to Pike’s Peak,Mount Evans or St. Mary Glacier.

Further into the mountains, former boom-towns such as Leadville, Marble andGeorgetown can provide a glimpse of thearea’s exciting past. Current mountain“boomtowns” include the resort communitiesof Vail, Aspen, Breckenridge and WinterPark. Although known primarily as ski desti-nations, these communities thrive in the sum-mer months as centers for hiking, bicycling,sightseeing and music and art festivals.

You may wish to check the following Web sites forfurther information regarding vacationing in the RockyMountain region: www.denver.org, www.denver.milehighcity.com, www.colorado.com, www.colorado.rockies.mlb.com

See you in Denver. n

Kirk Yeager, who lives and works in Denver, is deputycommissioner of market regulation for the ColoradoDivision of Insurance. Kirk will be sworn in as IRES presi -dent during next month’s CDS.

The Denver Pavilion is one of many shopping and dining destinations in Denver,many of them a short walk or ride from our hotel. Other attractions include PrehistoricJourney and Ocean Journey (right), two of the many historical and cultural activitiesavailable to CDS-goers and their families. And then there’s Coors Field (lower right),home of the Denver Rockies.


additional steps the Bureau can take to deal with atroubled insurance company. If the troubled insurer isforeign, the decision is simpler; suspend or revoke thelicense, or request that the company withdraw itslicense, depending on the circumstances. If a domesticinsurer is involved, the options are different, andrange from rehabilitation of the insurance company toliquidation.

The Code of Virginia contains a chapter thatspecifically discusses the rehabilitation and liquida-tion of insurers. Although this chapter does allow theCommission to put a foreign insurance company intorehabilitation or liquidation, in reality we defer to thestate of domicile.

What’s it all mean?So what does all of this mean to the market con-

duct examiner?When conducting a market conduct examination,

reviewing a rate filing, or researching a complaint,there are some activities that generally demand a clos-er look. These activities often involve the holdingcompany, or the other insurance companies within agroup. The NAIC has compiled a list of operationaland financial factors and activities that may indicate apotentially troubled company in its TroubledInsurance Company Handbook. Activities observedby the Bureau, and noted by the NAIC, include:

• Numerous purchases and sales of business. Thiscan take the form of whole companies or blocksof business (policies). It can indicate that aninsurance company is trying to buy market share,which might be okay. If a company is sellingprofitable blocks of business, it can mean that thecompany is trying to raise cash for some reason,possibly to offset bad business it cannot unload.

• Unusual asset transfers between affiliates. Thiscan also indicate that an insurance company needsto increase its liquidity, or dispose of assets thatwould be considered non-admitted in statutoryaccounting, in order to boost surplus. Examplesinclude the sale of furniture and equipment, orreceivables.

• Management or service fee arrangements thatappear excessive. Often in a troubled companysituation, one company is subsidizing another bymeans of management fees. Management fees aresupposed to be reasonable, and service fee

arrangements are usually “at cost.” By statute, theBureau has prior approval authority over manage-ment contracts for domestic insurers. So, anymanagement agreement involving a domesticinsurance company that has not been filed forapproval is definitely a red flag!

• Personnel changes, especially managementchanges. Routine personnel changes can beexpected, but when the changes appear excessiveor a wholesale change in management occurs, itmight indicate internal turmoil, or disagreementwith the company’s goals or business practices.

• Churning of invested assets. Excessive purchasesand sales of invested assets, such as bonds andstocks, can indicate problems. Is the insurancecompany trying to create positive cash flow byselling off assets?

• Is there a lot of regulatory correspondence withstates in which the company is operating? That is,does the company appear to be in violation ofstate statutes in other states.

• An increase in the licensing of agents, which canindicate relaxed underwriting standards. (placingbad business on the books in order to generaterevenue and cash flow).

• An increase in holding company activity, which isexplained simply as being “tax-driven,” withoutdetails being provided.

• Frequent changes in actuarial or auditing firms.Perhaps the insurance company and the firm can-not agree on findings. This by no means is an exhaustive list. In

Virginia, there are separate market conduct and finan-cial examination sections, and separate examinationsare conducted. Therefore, the market conduct examin-ers may not observe all of the above scenarios. Inthose states where joint market conduct and financialexaminations are conducted, an examiner may bemore likely to uncover this type of activity. No matterhow a department is set up, market conduct examinersand financial examiners need to work in tandem whenfulfilling their regulatory duties under the insurancelaws of their respective states. n

Victoria Savoy serves a chief financial auditor for theVirginia State Corporation Commission, Bureau ofInsurance.

Financial examinationscontinued from page 5


Quote of the Month“NCOIL has grave concerns that the proposed ‘Oxley-BakerRoadmap’ mandating national insurance regulatory standardscould have [a] disastrous impact on state insurance regulation.While well intentioned, NCOIL believes that such a proposalcould create a legislative vacuum whereby Congress would estab-lish insurance regulatory standards and the state insurance com-missioners would enforce them. That could nullify state legislators’ability to respond to specific marketplace and consumer protectionissues.”

— Florida State Senator Steven Geller, President, National Conference ofInsurance Legislators (NCOIL), from a June 11 letter to U.S. HouseFinancial Services Committee Chairman Michael Oxley (R-Ohio). For moreon Oxley-Baker, see the May 2004 issue of The Regulator.

Colorado — In May, Tom Abel of the Division ofInsurance did a presentation on long term disability insur-ance entitled “LTD Insurance 101: Everything You Want toKnow About Long Term Disability Insurance But WereAfraid to Ask!” Martin Wolf, Ph.D., from the NationalCouncil on Compensation Insurance presented a sessionregarding economic developments in Colorado.— Dayle Axman; [email protected] — Sam Brooks of our Life & Annuities Divisionspoke on the Life Insurance Contact Database at our Aprilmeeting. The nominating committee members were namedand were charged with obtaining a list of prospective can-didates for the election of officers at our June meeting.

Ballots were e-mailed to all active Chapter membersin June. — Larry Hawkins; [email protected]

Nebraska — The April chapter meeting featured BettyJohnson, Driver and Vehicle Records Administrator withthe Nebraska Department of Motor Vehicles, who providedan informative presentation outlining the newly establishedMotor Vehicle Insurance Database. She explained that thecreation of the database would allow the Department ofMotor Vehicles to electronically verify liability insurancecoverage during the vehicle registration process. Changesto the motor vehicle salvage title laws were also dis-cussed. Bruce Ramge, Chief of Market Regulation withthe Department of Insurance and current IRES president,

concluded the chapter meeting with a review of the IRESFoundation’s National Insurance School on MarketRegulation, held in April.— Karen Dyke; [email protected]

Oregon — Our April guest speakers were TimothyKemp of First American Title Insurance Company andRichard Carlston and Sunny Knight of the law firmMiller, Starr & Regalia. They discussed mortgage impair-ment/lien priority insurance. In May, the guest speaker wasJohn Mangan of the American Council of Life Insurerswho reviewed state legislative and regulatory develop-ments in annuity products. All of the speakers were veryinformative and did an outstanding job conveying the cur-rent state of the industry.— Gary Holliday; [email protected]

Virginia — The May Virginia IRES Chapter meetingfeatured a program on Virginia’s new insurance statutes,the NAIC/NCOIL draft Market Conduct Surveillance ModelLaw and the Market Analysis Handbook. DeputyCommissioner Gerry Milsky, Assistant DeputyCommissioner Jackie Cunningham, and Bob Wright,Principal Insurance Analyst, summarized the new Virginialaw for IRES members. Weldon Hazlewood, Supervisor,Life and Health Market Conduct, gave a brief summary ofthe NAIC/NCOIL Draft Model Law and the new MarketAnalysis Handbook. Thirty-six members attended.— Weldon Hazlewood; [email protected]

IRES State Chapter News


If you don't think the trial lawyers are salivatingat the prospects, go to Google and enter "weldingrod." You'll have to go halfway down the first page tofind anyone simply selling welding rods. Most of theentries, and most of the sponsored links (those are thepaid listings on the right) are from law firms trollingfor plaintiffs.

So does it look as if welding rods are the nextasbestos?

Asbestos vs. moldAt first, the parallels seem pretty strong. After all,

a great many people have been exposed to asbestosand welding fumes over the years. In fact, one of thefirst industries to expose workers to asbestos insula-tion in large numbers — World War II ship-building— also involved lots of welding.

The problem is that, while asbestos clearly causesserious health problems to consumers as well asworkers, the evidence is a whole lot less compellingfor manganese, the key target of welding-rod litiga-tion.

(Never mind that some people allege that, to date,the majority of asbestos money has gone to peoplewho have been exposed to asbestos but don't yet showany symptoms. There are in fact many people withserious, debilitating, even fatal lung conditions linkedby solid science to having inhaled asbestos particlesyears before.)

Upon closer examination, though, welding rodsseem closer to mold than to asbestos when it comes toliability.

As with mold, many people have been exposed tomanganese fumes without harm. And, again as withmold, the epidemiological evidence linking thealleged toxin with actual harm is pretty scanty.

Abraham Lieberman, M.D., a neurologist whospecializes in Parkinsonism, agrees that there's plentyof interest in whether or not environmental toxins cancause Parkinson.

In the first place, what some toxins may cause is aParkinson-like disorder, not Parkinson itself. "Theterm Parkinson-like disorder is used, in place ofParkinson disease, because the changes in the brainassociated with the toxins are not the changes ofParkinson disease," he said.

There have been some correlations in researchdone to date.

"Toxins that have been identified [as possiblyleading to Parkinson-like symptoms] include carbonmonoxide (prolonged exposure with a period ofcoma), manganese poisoning (in manganese minerswho inhale large quantities of manganese dust) andMPTP, a street drug," Lieberman has written in anarticle on the National Parkinson Foundation's Website.

There have also been studies of whether organicchemicals, such as pesticides, can cause parkinson-ism. "The evidence is circumstantial and not com-pelling," says Lieberman, though there does seem tobe some relationship between exposure to hydrocar-bon solvents and development of Parkinson.

1 + 1 = 3Then there’s synergy. Take those World War II

shipyards. If you were a welder in a Kaiser shipyard,there’s a good chance you were exposed to both weld-ing fumes and asbestos. Now, no one has yet accusedasbestos of being a neurotoxin, but what if inhaling itincreases the effects of welding fumes?

Could there be synergies between manganese andother elements of those fumes?

And how about smoking? There are data indicat-ing that welders are more likely to smoke than otherAmericans. Does smoking increase the effect of inhal-ing welding fumes?

Unlikely? Sure. But can you prove it?That’s the essence of the problem with blaming

manganese or other elements of welding fumes forParkinson’s or anything else. There just aren’t a wholelot of data, and what studies have been done aren’tnecessarily conclusive.

"It's pretty well known that exposure to man-ganese leads to a condition called manganism,whichis different from parkinsonism” said Jim Antonini,Ph.D., a toxicologist with the National Institute ofOccupational Safety and Health (NIOSH).

“The lawyers are seeing there's a potential tocause these neurological problems. And now if anywelder or former welder has any kind of neurologicalproblem, they're trying to blame that on exposure to

Welding rods: the next asbestos?continued from page 1



welding fumes.”The trouble is that the relationship is based more

on assumptions and anecdotes.“We've done a real complete search of all the

medical literature,” Antonini said, “and there are veryfew cases where manganese and welding fumes causeproblems for welders.

“In most cases, where there are problems, it'swhen welders are exposed to very high concentra-tions: maybe working in a confined space, or in anarea that isn't well ventilated.

“If welders are in a well-ventilated area, whereexposure limits are met, it appears that it's not a prob-lem. But it seems to be a hot area of research rightnow.”

One often-cited study that seems to prove the linkinvolves manganese miners. But miners are most like-ly exposed to much higher levels of manganese thanwelders. If ill effects occur independent of dose —i.e., at very low levels of exposure — you’d expect tosee a whole lot more problems.

As Antonini put it: “There are hundreds of thou-sands of welders in the world [400,000 in the U.S.alone by one estimate], and you would think that ifthis was a major problem, there would be thousandsof welders with these neurological problems.

“That doesn't seem to be the case.”This isn’t to say that welding fumes aren’t toxic.

Just that there doesn’t seem to be the kind of clear-cutcause-and-effect — and clear-cut liability — that per-suades juries to hand out deep-pocketed corporations’money to plaintiffs (and, incidentally, their lawyers).

The scienceWelding involves joining metals together by elec-

tric arc with a filler material, known as a consumable,that's usually a coated electrode or wire that con-tributes metal to the joint. In any of the four kinds ofwelding — tungsten inert gas, metal inert gas, metalactive gas and manual metal arc — as the arc meltsthe parent metal and the consumable, fumes and gasesare produced (with 80-95% of them from the consum-able).

Those fumes can contain fluorine, manganese,zinc, lead, arsenic, calcium, sulfur, chrome and nickel,as well as several gases, including carbon monoxide,carbon dioxide and fluorine.

If lead were a common byproduct of welding, noone would be talking about manganese, since lead hasbeen known to cause neurological problems for a lotlonger than manganese. Yet in reality, lead is onlyoccasionally part of the fumes that welders areexposed to.

In the absence of hard data, a number of reputableorganizations have simply assumed there’s a hazard.

"A number of health problems are attributed towelding fumes," according to one study published onwww.parkinson.org.

"Welding may cause acute upper respiratorysymptoms, pulmonary edema (water on the lung),pulmonary fibrosis (scarring of the lung) and lungcancer,” the article continues. “Welding has also beenassociated with bladder and throat cancers. Cataractformation from ultraviolet radiation may be producedby the arc if eye protection is not worn. Neurologiccomplications of welding include confusion and delu-sions, probably from exposure to the fumes ( called'fume fever'), and lead poisoning caused by heatinglead-based paint."

The MSDS (material safety data sheet) for weld-ing consumables lists Parkinson disease as a "poten-tial hazard."

Yet no study has yet established a direct relation-ship — statistical or causative — between exposure towelding fumes and Parkinson-like symptoms.

Welding certainly releases noxious fumes, andwelders have long been known to be prone to variousailments. It’s simply going too far to say that, withoutquestion, welding causes parkinsonism.

And, by corollary, that manufacturers of weldingrods (and their insurers) should pay through the nose.

LiabilityManufacturers have begun putting warning labels

on their products. The trial lawyers have counteredthat it’s too late, that their clients were exposed toharm years ago, before there were labels.

Whether that argument persuades a jury is up tothe jurors. Outside of the courtroom, what’s clearlyneeded is additional research. Which is underway atNIOSH.

As Fred Blosser of the agency put it: “Earlier thisyear, NIOSH published the single most comprehen-sive review of scientific literature on health effects

Welding rodscontinued from previous page


associated with welding. “The article, ‘Health Effects of Welding,’ noted

that past investigations have found bronchitis, airwayirritation and other respiratory illnesses in large num-bers of welders. However, critical differences betweenthe studies and a shortage of dose/response data makeit difficult to compare results and confidently linkgiven exposures with given effects.

“Some studies have suggested that welding fumesmay pose risks for lung cancer and nervous systemdamage,” he added. “This isbecause such fumes maycontain nickel, chromiumand manganese.

“Nickel and hexavalentchromium are classified aspotential occupational car-cinogens, while studies haveassociated chronic exposureto manganese with a risk fora Parkinson’s-like disease.But data are lacking for 1)determining whetherwelders are exposed to thoseor other fume components at levels that could triggersuch effects and 2) understanding how exposures atgiven levels may lead to serious, long-term effects.”

NIOSH is in the midst of both toxicological andepidemiological studies to learn more about the risksof welding — including work at the agency’s HealthEffects Laboratory Division in Morgantown, W.Va.,where a sophisticated robotic arm can be programmedto weld at specific intensities, using specified tech-niques, for given durations. The arm has an exhausttrunk that collects the resulting fumes and sends themto a chamber for further use in exposure tests.

Besides looking at the manganese-parkinsonismlink, NIOSH is looking at the role that welding fumesmay play in immunosuppression, lung cancer, neuro-toxicity, skin damage, reproductive disorders and thelike.

Antonini predicts that rather than a ban, or recom-mendations that welders wear respirators on the job,the outcome of the research is likely to be exposurelimits and other such rule changes

One law firm active in this area boldly asserts:“Exposure to high levels of manganese by inhalation

in humans results primarily in central nervous systemeffects. Inhalation of fumes or dusts of manganesecauses neurological symptoms. Exposure to heavyconcentrations of dusts or fumes for as little as threemonths may produce the condition.”

But as the NIOSH study makes clear, it’s simplytoo early to make any such claims. Too early to makethem in scientific journals, anyway, though perhapsnot too early to make them in a courtroom in someplaintiff-friendly venue.

Where it will end upMeanwhile, in the absence of

any hard data that might comeout of those tests, allegations ofneurological damage continue tostream into court.

Antonini says that of all thecases filed over the last five orsix years, only one has been set-tled — that of Larry Elam, a 65-year-old maintenance workerwho has Parkinson's and whowas awarded $1 million in dam-

ages. Trial lawyers claim there’s evidence that manu-

facturers of welding rods and equipment knew allabout the health risks as far back as the ‘30s and didnothing to protect workers. But then again, if there’slittle good data today, there had to be even less backthen.

Some might say that based on Elam v. BOCGroup, Inc., (filed in the renowned “judicial hellhole”of Madison County, Ill.) there’s not much of a case(or simply that it’s too early to detect a trend). Or, ashas been argued, that this one win might emboldentrial lawyers to file more such cases.

So where’s the welding rod issue going?Antonini’s a toxicologist, not an attorney, but he

seems to have a pretty good fix on things. Are largesettlements in the future?

“Based on the science, I would predict no, butyou never know with juries and lawyers. And there's alot of money behind the lawyers.” n

As the NIOSH studymakes clear, it’s simplytoo early to make any

such claims. Too early to makethem in scientific journals, any -way, though perhaps not tooearly to make them ina courtroom in someplaintiff-friendly venue.


IRES 2003 Career Development SeminarJ U LY 27-29, 2003

HYAT T RE G E N C Y SC O T T S D A L ETH E HYAT T GA I N E Y RA N C H RE S O RT

Official Registration FormFill out and mail to: The Insurance Regulatory Examiners Society

130 N. Cherry, Suite 202, Olathe, Kansas 66061

Call for more details:913-768-4700. Or see IRESWeb site: www.go-ires.org

Yes! Sign me up for the 2003 IRES Career DevelopmentSeminar. My check payable to IRES is enclosed.

Name

Title First name for badge

Insurance department or organization

Mailing address Indicate: Home Business

City, State, ZIP

Area code and phone Amount enclosed

Hotel rooms: You must book your hotel room directlywith the Hyatt Regency Scottsdale. The room rate forIRES attendees is $135 per night for single-doublerooms. Call group reservations at 480-991-3388.The IRES convention rate is available until June 30,2003, and on a space-available basis thereafter. Ourroom block is often sold out by early June, so guestsare advised to call early to book rooms. See thehotel's Web site at http://scottsdale.hyatt.com.

CANCELLATIONS AND REFUNDS

Your registration fee, minus a $25 cancellation fee, can berefunded if we receive written notice before June 30, 2003.No refunds will be given after that date. However, your regis-tration fee may be transferred to another qualifying registrant.Refund checks will be processed after Sept. 1, 2003.

If registering after June 30, add $40.00.No reservation is guaranteed until pay-ment is received by IRES

A $25 cancellation fee will be assessedif cancelling for any reason.

SP E C I A L N E E D S: If you have special needs addressed by theAmericans with Disabilities Act, please notify us at 913-768-4700 at least five working days before the seminar.The hotel's facilities comply with all A D A r e q u i r e m e n t s .

SP E C I A L D I E T S: If you have dietary needs, please circle:D i a b e t i c K o s h e r Low salt Ve g e t a r i a n

Seating for all events is limited. IRESreserves the right to decline registration forlate registrants due to seating limitations.

Seminar Fees(includes lunch, continental bre a k f a s t

and snack breaks both days)Check box that applies

IRES Member $ 2 8 5

Industry Sustaining Member $ 4 6 0

Non-Member Regulator $ 4 1 0

R e t i red IRES Member $ 1 1 0

Industry, Non-SustainingM e m b e r $ 7 1 0

Spouse/guest meal fee $ 8 0

Spouse/guest name

$

ArtCraft:Substitute

Denver form


CONNECTICUT – Legislation concerning theexclusion of mold-related losses from insurancecoverage dies in committeeThe Senate Insurance and Real Estate Committeerecently declined to report out of committeeConnecticut S.B. 417, which places restrictions oninsurers’ exclusion of mold-related losses from cover-age under personal and commercial risk policies. TheBill prohibits, among other things, the exclusion orlimitation of coverage for loss from mold or remedia-tion where the proximate cause of the loss is fire orlightning. The Bill also prohibits the inclusion of adeductible that applies only for loss from mold orremediation. In testimony before the Senate Insuranceand Real Estate Committee, Connecticut InsuranceCommissioner Susan F. Cogswell recently expressedher concerns with the Bill. Commissioner Cogswellidentified distinctions between S.B. 417 and theDepartment’s existing guidelines (issued on Aug. 7,2002) on mold exclusions. She pointed out, for exam-ple, that, while the Department’s guidelines separatelyaddress property coverage and liability coverage, theBill does not. As a result, the Bill’s provisions as tocommercial policies appear to conflict with other pro-visions in the Bill. Commissioner Cogswell also com-municated the following position on mold legislationgenerally: “The Department does not believe a statuteis necessary for mold. The current guidelines allow usto have the necessary flexibility to regulate what thecompanies are doing and to continue to monitor thesituation and revise the bulletin to reflect marketchanges. The insurance regulators from the northeast-ern states continue to discuss market issues relating tomold coverage affecting this region of the country.”To view Senate Bill 417, visit www.cga.state.ct.us/2004. To view the Department’s guidelines, datedAugust 7, 2002, visit http://www.ct.gov/cid/lib/cid/moldguid.rtf.

TEXAS – Department of Insurance adopts regula-tions concerning underwriting based on molddamageThe Texas Department of Insurance recently adoptedamendments to Section 21.1007 of Title 28 of theTexas Administrative Code concerning underwritingguidelines based upon previous mold damage, molddamage claims, water damage claims and appliance-related claims. The regulations are intended to imple-ment recent legislation enacted by the TexasLegislature. The stated purpose of Section 21.1007, asrevised, is “to protect persons and property frombeing unfairly stigmatized in obtaining residentialproperty insurance by previous mold damage or bythe filing of mold damage claims, a water damageclaim, or certain appliance-related claims, under a res-idential property insurance policy.” Among otherthings, the amendments to Section 21.1007 prohibitthe use of previous mold damage or a claim for molddamage in underwriting residential property insurancewhere: (i) the applicant has property that is eligiblefor such insurance coverage, (ii) such property hasbeen the subject of mold damage, (iii) subsequentmold remediation has been performed and (iv) aCertificate of Mold Damage Remediation (MDR-1)has been obtained in accordance with the regulation.Section 21.1007 also requires insurers to file with theTexas Department of Insurance all underwritingguidelines pertaining to water damage claims, previ-ous mold damage or mold damage claims. RevisedSection 21.1007 became effective on January 1, 2004.To view Section 21.1007, visit www.tdi.state.tx.us.

SOUTH DAKOTA – Legislature enacts commer-cial lines regulatory modernization legislationOn March 2, 2004, Governor Rounds signed into lawSouth Dakota Senate Bill 37, which exempts fromspecified filing requirements certain property/casualtyinsurance policy forms and rates issued to exemptcommercial policyholders. “Exempt commercial poli-cyholder” is defined to mean any applicant for proper-ty/casualty insurance, other than workers’ compensa-tion insurance, who uses a qualified risk manager andwho meets at least two of several enumerated qualifi-

Regulatory Roundupby

Stroock & Stroock & Lavan LLP

The New York-based Stroock & Stroock & Lavan LLPInsurance Practice Group includes partners Donald D.G a b a y, Martin Minkowitz, William D. Latza and Wi l l i a mRosenblatt. The Insurance Practice Group also includesinsurance finance consultants Vincent Laurenzano andCharles Henricks. They gratefully acknowledge the assis-tance of Todd Zornik, an associate of the group. This col-umn is intended for informational purposes only and doesnot constitute legal advice.


cations. The enumerated qualifications include,among others, the purchase of insurance with aggre-gate premiums of at least $150,000 during the mostrecent calendar year, possession of a net worth of atleast $10 million, annual net revenues or net sales ofat least $10 million, and employment of 100 or morefull-time employees. An insurer or insurance produc-er, as applicable, must provide an exempt commercialpolicyholder and its risk manager with a notice thatpremiums or rates and policy forms may be used thatare not subject to rate and form filing requirements.Insurers selling any insurance to an exempt commer-cial policyholder are required to maintain for fiveyears specified records relating to such insurancesales. To view Senate Bill 37, visithttp://legis.state.sd.us/sessions/2004/index.cfm.

MASSACHUSETTS – Legislature considers com-mercial lines regulatory modernization legislationThe Massachusetts House of Representatives haspassed House Bill 1700 relating to the regulation ofcertain commercial contracts of insurance. As of April5, 2004, the Bill had been referred to the SenateSteering and Policy Committee. As in South DakotaS.B. 37 (described above), Massachusetts H.B. 1700would likewise exempt from specified rate and formfiling requirements certain property/casualty policiesthat are issued to large commercial policyholders.Similar to the definition of “exempt commercial poli-cyholder” in S.D. Senate Bill 37, House Bill 1700also requires a “large commercial policyholder” tomeet at least two of several enumerated qualifica-tions. However, those qualifications differ in severalways. For example, H.B. 1700 includes qualificationsspecifying net revenue or net sales of $5 million (S.D.Senate Bill 37 requires $10 million) and the employ-ment of more than 25 employees per individual com-pany or more than 50 employees per holding compa-ny in the aggregate (S.D. Senate Bill 37 requiresemployment of at least 100 full-time employees,either individually or in the aggregate among affili-ates). In addition, the risk manager requirement underMassachusetts House Bill 1700 is not a stand-alonerequirement as it is under S.D. Senate Bill 37; rather,it is included among the enumerated qualifications,two of which must be satisfied to meet the definitionof large commercial policyholder. Additionally, H.B.1700’s minimum aggregate property/casualty insur-

ance premiums ($30,000) is a stand-alone require-ment. The minimum insurance premiums requirement($150,000) in S.D. Senate Bill 37, in contrast, isincluded among the enumerated qualifications. Toview Massachusetts House Bill 1700, visitwww.state.ma.us/legis/bills/house.

FLORIDA – Legislature considers legislationamending state’s insurer insolvency lawThe Florida House Insurance Committee has favor-ably reported House Bill 1687, which, if enacted,would amend the state’s laws governing insurer insol-vency. Among other provisions, the Bill would givethe Circuit Court of Leon County exclusive jurisdic-tion over assets and property of any insurer (andclaims against such assets and property) subject to anorder of conservation, rehabilitation or liquidation.According to the legislative analysis accompanyingHouse Bill 1687, certain real property actions involv-ing a company in receivership currently can be filedin the county where the property is actually located.The Bill would require all such actions to be filed inthe Second Judicial Circuit, thereby reducing thecosts incurred by the Florida Division of Insurance inresponding to such actions. House Bill 1687 wouldalso void any arbitration provision contained in anyagreement to which an insurer in receivership is aparty and replace it with a specified arbitration provi-sion. That arbitration provision requires settlement ofdisputes pursuant to the American ArbitrationAssociation Commercial Arbitration Rules andChapter 682 of the Florida Statutes. Disputes are tobe settled by a panel of three arbitrators, one to bechosen by each party and a third by the two selectedarbitrators. Arbitrators must possess at least 10 yearsof experience in the insurance industry. House Bill1687 would further void any transfer or lien involvingthe property of an insurer that inures to the benefit ofcertain “insiders” of the insurer (e.g., directors, offi-cers, employees, managing general agents or any rela-tives of such individuals), if such transfer or lien ismade or created between four months and one yearprior to the commencement of any delinquency pro-ceeding. If enacted, House Bill 1687 will becomeeffective on the date of its enactment. To view HouseBill 1687, visit www.flsenate.gov.

Regulatory Roundupcontinued from previous page

CHARLES IVESThis year marks the 50th anniversary of the death of one

of the 20th century’s most influential classical composers,Charles Ives. Big deal, you say, and what’s that have to dowith insurance?

Well, more than any other artist, Charles Ives ponderedthe links between insurance and music. After all, he co-owned one of the most successful life insurance agencies inNew York City, Ives & Myrick.

Ives would compose symphonies on his daily commutefrom Connecticut to his New York agency. He also devotedinordinate portions of his weekends to his musical composi-tions.

Ives was also a firm believer in life insurance andviewed the gradual acceptance of the product in the earlyyears of the 20th century as evidence that man had reached anew plateau. In fact, Ives’ passion for life insurance rivaledhis passion for music. “My work in music helped my busi-ness,” said Ives, “and my work in business helped my music.”

Ives effectively stopped composing original material in1927 due to failing health, and left his insurance business in1930 for the same reason. The remaining 24 years of his lifewere devoted to revising, finishing and publishing his exist-ing works.

In 2004, Charles Ives will be remembered throughoutthe musical world in a series of special concerts, including aNew York Philharmonic tribute. But let’s not forget that thisexceptional man also served the insurance community withgrace and dignity. After all, if Ives had chosen, say, bankingover insurance, who knows whether we’d be celebrating hismusic today.

ANYTHING’S POSSIBLEDon’t tell author Stephen Frey that accounting is boring.

He doesn’t believe it for a second. In fact, Frey viewsaccountants as the linchpins of corporate chicanery in his lat-est suspense thriller, Shadow Account. “Remember,” saysone hot-shot accountant in Frey’s tale, “almost anything ispossible if accountants comply.”

Shadow Account has its share of uncorrupted account-ants as well, but it’s those evil CPAs that drive this chillingtale of financial intrigue, duplicity and murder. Frey delvesinto holding company transactions, short selling and mergerand acquisition activity to weave a tale that should send themost savvy number-cruncher’s head spinning.

Author Stephen Frey worked for years at J. P. Morganand other similar financial services firms and blends in actu-al accounting firms (Deloitte and Touche) with ersatz ones(Baker Mahaffey). Readers who get confused can be assuredthat all evil accounting firms are fictional in this tale. (Freyalso knows libel law.)

The book is highly recommended summer reading, espe-cially for IRES members who toil in the shadows of statuto-ry accounting. After finishing Shadow Account, IRES mem-bers should be thankful they’re employed in the public sec-tor. They may be underpaid, but at least they don’t worryabout bullets in their back. Oh yes, Shadow Account mayalso prompt you to take a second look at those CPA-auditedfinancial statements.

— W.C.


PENNSYLVANIA – Senate passes legislationaddressing insurer insolvency issuesThe Pennsylvania Senate recently passed S.B. 815,which, if enacted, would amend existing law to clarifycertain issues involving the administration of insol-vent insurers. The Bill provides, for example, that col-lateral held by an insolvent insurer under a deductibleagreement is to be used to secure the policyholder’sobligation to fund or reimburse claims payments with-in the deductible amount. Where a claim that is sub-ject to a deductible agreement is not covered by aguaranty association and the policyholder does notagree to assume payment of the noncovered portion ofthe claim, the receiver is to adjust and pay the non-covered claims using the collateral in accordance withthe Bill’s provisions. Claims by third-party claimantsagainst such collateral will not constitute a claimagainst the insurer’s estate for the purpose of releas-ing the policyholder to the extent of policy coverage.

Once such collateral has been exhausted, and aclaimant is unable to obtain the difference from thepolicyholder directly, the claim is to be treated as aclaim against the insurer’s estate. The insolvency ofan insurer does not constitute a defense to a policy-holder’s payment of the deductible amount. In caseswhere the insurer has not contractually agreed toallow the policyholder to fund its own claims withinthe deductible amount, and guaranty fund coverageapplies, the receiver must promptly bill the policy-holder for any corresponding guaranty fund payments.The receiver must promptly reimburse the guarantyfund upon receipt of such deductible amount from thepolicyholder. If the policyholder fails to pay within 60days of billing, the receiver must reimburse the guar-anty fund out of the collateral and may pursue collec-tions against the policyholder. To view Senate Bill815, visit legis.state.pa.us.

Casual Observations

BULLETIN BOARD

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Published by theInsurance Regulatory Examiners Society12730 S. Pflumm Rd., Suite 102, Olathe, Kansas 66061

e-mail: [email protected]

√ Past IRES President and current IRES Boardmember Gerry Milsky has left the VirginiaInsurance Department. He has asked that hisname be withdrawn as a nominee for re-electionto the Board. He is also requesting that IRESmembers not vote for him at the CDS, eventhough his name will be appearing on the ballot.Gerry, thanks for all you've contributed to IRESover the years. We look forward to seeing you inDenver.

√ In addition, C. Kenneth Johnson hasresigned his position with the South CarolinaInsurance Department and will no longer beworking as a regulator. He too has asked that hisname be withdrawn as a nominee for election tothe Board. We wish the best of luck to Mr.Johnson as he embarks on a new career.

√ Norris Clark, a 31-year veteran of theCalifornia Department of Insurance, has retiredas deputy commissioner, financial surveillance,effective Aug. 1. A founding IRES member, Clarkwas a past president of SOFE.

√ If you’re interested in how your Society is run,we welcome you to attend a meeting of the IRESBoard of Directors during the Career Develop-ment Seminar in Denver. The current board willbe meeting at 4 p.m. Sunday, and the new boardat 4 p.m. Tuesday. Both meetings are open tothe public.

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