Court Upholds State Farm Causation Language

A federal appeals court panel in New Orleans rejected a lower court's ruling that permitted a Mississippi couple to pursue a hurricane damage claim even when policy-excluded flood damage was involved.

The decision by the 5th U.S. Circuit Court of Appeals overturns a ruling by U.S. District Court Judge L.T. Senter Jr. in Gulfport, Miss., that ruled out a portion of State Farm's policy language as ambiguous.

State Farm was sued by Long Beach, Miss., homeowners John and Claire Tuepker after their home was reduced to a foundation slab by Hurricane Katrina and the insurer refused to pay for the damage.

At issue was language in the State Farm policy's anti-concurrent causation (ACC) clause that rules out payment for covered wind damage claims when they occur at the same time as flooding, which the policy does not cover.

The appeals court found that “the ACC clause in State Farm's policy is not ambiguous and should be enforced under Mississippi law.” Under the appeals court ruling the Tuepker case is effectively ended because before a jury could rule whether State Farm owed the couple damages, the insurer reached a settlement where the amount to be paid would be based on the outcome of the appeal. Had the Tuepkers won the appeal, their settlement would have been higher.

Fitch Reports Capital Levels Soared in 2006

The U.S. life insurance industry has been overcapitalized, and that level of overcapitalization increased in 2006. Douglas Meyer, a managing director in Fitch Ratings' Chicago office, gave that assessment during a teleconference focusing on the firm's Prism capital model.

Fitch has incorporated the Prism model, which relies on stochastic forecasting techniques, into the rating process the firm uses both for life insurers and property/casualty insurers. Stochastic modeling involves use of computer simulations to determine how a product or company might perform under a wide range of randomly changing conditions.

The U.S. life industry ended 2006 with $253 billion in capital, or about $54 billion more capital than it needed to meet the Prism aggregate AAA rating standard, Meyer said.

At the end of 2005, the industry had $249 billion in capital, or about $45 billion more capital than it needed to meet the AAA standard, Meyer said. The average Prism score for the U.S. life universe as a whole held steady in 2006 at AA plus.

For the life insurance sector and large mutual insurers, the overall Prism rating was AAA.

The overall Prism rating was AA plus for the annuity sector, large stock companies, foreign-owned companies, and life/health companies.

Spain's MAPFRE Buys Commerce Group

Spain's largest insurer, MAPFRE, and the Webster, Mass.-based Commerce Group, Inc., have signed an agreement for MAPFRE to acquire the auto carrier in a $2.2 billion cash deal. MAPFRE said it will purchase 100 percent of Commerce share capital.

Domingo Sugranyes, MAPFRE vice president, said the purchase was part of his company's plan to establish “a presence in the United States with a well-developed plan to address the Hispanic community” and the population as a whole and to move step by step into other states. Commerce, he said, would serve as a “very solid platform.”

He noted MAPFRE already has a small bilingual operation in Florida that can be used in other states, and MAPFRE Re can provide reinsurance solutions for Commerce.

The company, Sugranyes indicated, is investing “when the exchange rate is very favorable.”

When completed, Commerce shareholders would receive $36.70 per share, representing a 22.5 percent premium over the average share price of the past 30 days.

Senate Passes TRIA Extension Bill

The Senate whisked through without comment legislation extending the federal backstop for insurers' terrorism risk for seven years, through 2014. The decision, through a unanimous consent procedure, represents a virtual barebones extension of the current legislation, the Terrorism Risk Extension Act of 2005.

It sets up a confrontation with the House, whose leadership insists at least some of the provisions of its more expansive legislation be included in the final bill. But the fact the bill passed before Congress departs for a two-week break means talks between House and Senate staff to reconcile the different bills can take place before the Senate returns to work Dec. 3 and the House Dec. 4.

That means, even though Congress has a huge backlog of must-do work to complete before it recesses for the year, it may be able to move promptly.

In comments several weeks ago in Boston, Rep. Barney Frank, D-Mass., vowed not to accept the latest Senate version, saying he was prepared to ask for an extension of the current bill until April 30 so meaningful talks on a compromise can take place.

However, the Senate appears to hold most of the cards, especially since the Bush administration has indicated it would “not oppose” the Senate bill but would consider a veto if more provisions were added to it.

Learn Predictive Technology or Die, Insurers Told

Insurers that don't master both the art and science of predictive technology are at risk of falling behind their competitors, cautioned the head of Insurance Services Office at an industry conference. “We are at the beginning of an intellectual and technological arms race that will remake the insurance business,” said Frank J. Coyne, chairman, president, and chief executive officer of ISO.

Coyne spoke at the ISOTECH technology conference in New Orleans. “Insurers that succeed in developing and deploying advanced analytics all along the value creation chain can look forward to a long and prosperous future if they continue to invest in new and better analytics and new and better data,” he said. “Other insurers face a far different future, with even the best of the best today being at risk of falling behind as new technologies come online.”

Coyne noted “escalating competitive pressures cut the number of insurers serving the United States by a third in a decade and a half,” and carriers face a prospect of ever-increasing catastrophe losses. Rapid technology advances mean “huge changes are just over the horizon for lines ranging from personal auto to workers' comp.”

California Fire Losses Mount; State Farm Tallies 2,000-Plus Claims

A catastrophe modeling firm has estimates California wildfire losses will go well above $1 billion, and the state's largest home insurer–State Farm–said it already has logged 2,000 claims. Meanwhile, there was divided opinion on the amount of claims litigation that could result once the flames are extinguished.

The latest modeling firm estimate came from Boston-based AIR Worldwide Corp., which said insured losses were likely to exceed $1.5 billion. There also was an estimate from Impact Forecasting, a unit of Aon Corporation, that insured losses would be between $1.2 billion and $1.6 billion.

Previously, Risk Management Solutions said estimated damage could range from $900 million to $1.6 billion. Eqecat in Oakland, Calif., put out an estimate of a $1 billion loss it said could go higher.

State Farm said of the claims it has received, nearly 500 of the homes involved are either destroyed or damaged to the point they are uninhabitable. The number of claims should rise, the company said, as claims adjusters, local claims staff, and agents make contact with policyholders who evacuated their homes.

LISA Blasts STOLI Alert

The Life Insurance Settlement Association is criticizing a recent industry group warning against “stranger-owned life insurance.”

The American Council of Life Insurers and the National Association of Insurance and Financial Advisors issued the third in a series of “STOLI Alert” last month.

The latest notice describes the groups' position on STOLI and regulatory efforts to keep strangers from helping consumers buy life insurance mainly to create policies that can be sold through the life settlement market. LISA said the latest STOLI notice is “highly misleading and full of errors.”

LISA has responded to the STOLI Alert by issuing its own notice, “Be Alert to STOLI Alert,” in which it warned, “The STOLI Alerts are put forth in broad mailings to agents and policy makers as if they are factual and documented. The truth is that these STOLI Alerts are, at best, highly misleading and inconsistent efforts. The STOLI Alerts contain assertions which contradict the ACLI's own positions and which misinterpret the cases and examples which they cite.”

LISA objects to an alert statement suggesting STOLI transactions are hard to detect.

Some of the STOLI court cases the STOLI alert authors have identified show STOLI transactions can be easily identified, LISA said.

Insurance Sector Hit Hardest By Economic Crime

Among industry sectors, the insurance business is the biggest victim of economic crime, a global study by a major consulting group has found.

Total average cost of economic crime losses for insurance businesses over two years is $5.5 million, while average direct losses were $4.47 million, according to the annual “Global Economic Crime Survey,” by PricewaterhouseCoopers.

The loss figures for insurers were almost double the global average for businesses and slightly above that of the industrial manufacturing sector, which PwC said had an average fraud cost of about $5 million.

Steven L. Skalak, leader of PwC investigative practice, believes the survey found the level of economic crime has been consistent. “We're not having a wave of economic crime, but it is continuing unabated,” he said.

The company defines economic crime as asset misappropriation that can involve stealing physical or cash assets or, in the case of insurers, false claims. “Insurance is attacked by outsiders. Most businesses are attacked by their own employees,” Skalak said.

Hartford Reports Security Breach

Hartford Financial Services Group said it appears to have “misplaced” computer tapes with sensitive personal information belonging to 237,000 property/casualty customers.

The insurer reported it noticed the data was missing in late September and notified the Ohio Department of Insurance of the data security breach. In addition to searching for the three backup tapes, the company explained it is investigating the incident and notifying all affected individuals.

Mary Jo Hudson, Ohio Department of Insurance director, announced she had asked the carrier for more information about the missing data and for documentation of The Hartford's established security procedures. She asked for a written response by Nov. 16.

Shannon Lapierre, The Hartford spokesperson, said the company has no information the tapes have been stolen or the information on them has been improperly accessed. She said the information on the tapes can only be accessed with sophisticated equipment.

She added as a precaution, all the affected individuals are being given identity theft protection service at no cost, free credit file monitoring, and $20,000 in identity theft insurance.

Special Reports /

Court Upholds State Farm Causation Language; Fitch Reports Capital Levels Soared in 2006; Spain's M

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