Former Senior Deputy Superintendent of the New York State Insurance Department and Attorney at Law

The Board of Commissioners of the state insurance fund announced the appointment of James J. Wrynn as Executive Director of the large state chartered workers compensation carrier.

A partner in the law firm of MacKay, Wrynn & Brady, LLP, with offices in Douglaston, Queens, New York and Hoboken, New Jersey, Mr. Wrynns appointment was approved unanimously by the board. He assumed his role May 11th.

I look forward to serving the New York State Insurance Fund, Mr. Wrynn said. I want to thank Governor David Paterson and the Board of Commissioners for the confidence they have placed in me to guide such an important organization and an experienced staff, for the opportunity to further the mission of being the leading provider of workers compensation and disability benefits insurance in New York State.

Mr. Wrynn has an extensive background as a practicing attorney representing and counseling insurance agents and brokers, risk retention groups and insurance companies in most lines of insurance and excess insurance, reinsurance, self-insurance and captive insurance. He also has extensive experience in insurance accounting and tax issues for entities doing business both on and offshore. He is a life-long resident of Queens and a graduate of Holy Cross High School, St. Johns University College of Business Administration and St. Johns University School of Law.

Wrynn takes over the reins of the massive agency/insurer hybrid organization that both competes against private workers compensation and disability carriers for business and acts as the carrier of last resort for New York employers who are unable to obtain insurance in the private market. In return for its residual market responsibilities, SIF enjoys many statutory advantages over its private competitors such as, rate and form freedom and a requirement that its policyholders must give it notice at least 30 days prior to the end of the policy period, that the policyholder intends to leave SIF. While SIF does not use any public monies to operate (it operates solely on revenue generated by insurance sales and investment income) it is an agency of the state government and its workers are civil servants subject to all rights and procedural process provided in the civil service system. While it is a state agency, SIF owns real property and pays premium taxes to the state.

There will be many challenges facing the new Executive Director. There are indications that the insurance market is hardening, which has traditionally been a time of significant growth in SIFs market share. Many private insurers have always sought to legislatively take away SIFs market advantages to create a more level playing field. Further, there is talk that SIF should be sold and privatized to raise money for state coffers.

The workers compensation system is constantly changing as the market continues to grapple with the new provisions of the 2007 reform bill, which are still being implemented. The entire compensation system has recently come under fire from the New York Times for being too slow and unresponsive to injured workers needs.

As a former employee of SIF, I understand fully the difficulties and challenges faced by that organization every day. As such, I wish Mr. Wrynn all the best and hope his transition from practicing attorney to the executive head of a massive insurer with thousands of employees and billions of dollars in capital and reserve is a smooth one.

Another Attempt at the Interstate Compact

Senator Neil D. Breslin of Albany, Chairman of the Senate Insurance Committee has introduced legislation (S. 4869) that would authorize New York to join the other 35 states who are members of the Interstate Product Regulation Compact (the Interstate Compact) for life, disability, annuity and long term care insurance products. The compact provides a one-stop location to obtain approval for policy forms in each of the participating states.

The bill to enable New York to join the Interstate Compact was first introduced into the New York legislature in the 2004 term and then each term thereafter without ever getting serious consideration or movement. I do not believe that the bill had ever been introduced in the State Assembly. The Insurance Department has given lip service to the bill in the past without ever truly pushing for its passage.

The Interstate Compact has come a long way since the days in 2002 when it was an idea floated by the leadership of the National Association of Insurance Commissioners (NAIC) as part of an effort to answer proponents of federal insurance regulation. Many industry leaders had voiced increasing frustration with the fact that they had to spend the time and money to obtain approval for policy forms in each state in which that form would be sold. For large national insurers, that meant 50 separate form approval efforts. The problem was further exacerbated by the fact that approval standards varied from state to state requiring different forms of the same product. In its most absurd form, many states require different size type for similar fraud warnings. All efforts to standardize the form approval process prior to the Interstate Compact effort had met with little or no success.

I participated in the drafting process of the NAIC model law during 2002 and 2003. The project moved through the national organization with uncharacteristic speed. Inasmuch as many regulators involved in the process seemed to give the project little chance of success, even as the drafting process proceeded, I noticed that the idea of the compact took on a life of its own. Each time a seemingly insurmountable problem arose with respect to voting rights, expenses or individual state enforcement authority, the various state representatives always developed a compromise. The end result is the bill you can see today as S. 4869, which has been enacted in 35 other states.

One of the major issues with the Interstate Compact legislation has to do with State autonomy. To enact the legislation, a State legislature must be willing to defer authority for policy form approval from its home state insurance department to the national compact commission located in Washington, D. C. Once this is enacted, responsibility for the consumer protective aspects of policy form approvals moves from the home state commissioner (or Superintendent) to compact officials, who are not directly responsible to the elected officials of any state. The home state commissioner becomes merely one vote on a governing committee. To opt-out of a particular policy standard, a state must either pass a regulation or a statute. The legislation does provide that the home state continues to retain enforcement authority over violations of the approved policy provisions.

Along with the loss of control aspect, another primary concern for the legislature is the product standards that will be employed by the Interstate Compact. New York has traditionally had one of the highest levels of consumer protective product standards in the United States. Will the standards developed by the Interstate Compact adequately protect consumers of life insurance products? This is a question that legislators will be asking. One advantage that Compact proponents have today that they didnt have in 2004 is that the Interstate Compact is now a living and breathing entity with a defined track record (albeit a short one). There are product standards in place for many life products which can be examined and compared to the New York standards so that an intelligent decision may be made as to how well the Compact will protect consumers. Legislative leaders should ask for such comparisons.

Also, it will be important for legislators to ask what kind of ethical standards exist which will govern the conduct of Compact employees and representatives. The Interstate Compact Commission now has an ethical code for employees. Care should be taken to look at the code and comparisons should be made to New Yorks public officers ethical standards.

Product form standards and requirements can be very detailed and complicated. However, to make an informed decision on this legislation, state legislators will need to thoroughly examine many of the details. The bill is extensive and will take a lot of time and effort to fully comprehend. Based upon the lateness of the introduction, and the fact that there appears to be no same as introduction in the Assembly chamber, it is not likely that the legislature will be moving this bill for passage in the current session.

In the legislative off season however, this bill should get some serious consideration. Perhaps the time has come for the State Senate to hold public hearings on the matter. With the constant drumbeat nationally for federal regulation of insurance, the compact represents a creative and intriguing approach to state regulation of insurance. The goal, obviously, is to have high national standards for products because a consumer in Idaho has the same needs as a consumer in Brooklyn. What is not desired is that standards be very low on a nationwide basis. With the right standards in place, the Interstate Compact can be a valuable tool to increase efficiency for life companies while freeing up state regulator resources to pursue bad actors in the marketplace, instead of performing policy reviews.

The Interstate Compact is an idea whose time has come, and it deserves serious consideration from the legislature.

New Yorks Highest Court Rewrites Insurance Policies

New Yorks highest court, in two cases issued on the same day, has ruled that an insurer may be found responsible for extra-contractual liability if it improperly delayed full payment. The first case, Bi-Economy Market, Inc. v. Harleysville Insurance Company, 10 N.Y.3d 187 (2008), the insured, a retail meat market, suffered a major fire resulting in considerable lost business income. The insurer disputed the extent of the claim for damages and paid approximately $160,000 in damages. After over a year of disputes, the claimant was awarded an additional $244,000 for damages. Bi-Economy also claimed the policy limit of 12 months of lost business income but the insurer only paid seven months. Without insurance payments, the company could not survive and, after nine months the companys creditors called in their loans and the claimant went out of business. Bi-Economy then filed suit against Harleysville for breach of contract alleging that it had suffered consequential damages arising from the complete demise of its business operation and that the demise of the business was a direct and foreseeable consequence of Harleysvilleswrongful conduct. Id.

In the second case, Panasia Estates, Inc. v. Hudson Insurance Company, 10 N.Y.3d 200 (2008), the insured owner of commercial real estate property sustained extensive property damage when rainwater entered the building through the roof. The carrier disclaimed coverage under the policy, indicating that its investigation revealed that the loss was the result of repeated water infiltration over time, and wear and tear, rather than from a covered risk. The carriers position was found to not have been developed in good faith.

The Court of Appeals allowed the cause of action for consequential damages to go forward to trial despite express provisions in both policies which prohibited consequential damages. Relying on the case of Kenford v. County of Erie, 73 N.Y.2d 312, (1989) the high court held that consequential damages would be appropriate if they were contemplated by the parties at the time of contract. Such damages, the court ruled, are compensatory in nature, not punitive.

The court ruled that consequential damages were contemplated by the parties due to the nature of the insurers obligation to the insured. This contemplation was based on two facts; first, the nature of business interruption insurance contemplates, by its very definition, the collapse of the business if there is a breach of the obligation. Second, the insurance contract carries with it an obligation for the insurer to act in good faith. The good faith obligation transforms the insurance contract from one which merely provides for the payment of money to one which provides for peace of mind. Consequential damages are thus necessary to make the insured whole

The dissent by Judge Smith argued that no matter what label the majority put on the damages, their potential award is punitive in nature. He stated that punitive damages are not generally awarded for breach of an insurance contract. Further, the dissent wrote that the covenant of bad faith is breached when one party otherwise complies with the terms of the contract but does so in a way that undermines the purposes of that contract. Since, in this case the contract was definitively breached; there was no need to invoke the good faith obligation. Thus, the damages that could be awarded by the jury in these cases were punitive in nature, essentially reversing a long held judicial policy in this state against such punitive damage awards for breach of insurance contracts

The two cases have been out for some time and insurers are no doubt attempting to adapt to the fact that they are on notice that if they are found to have acted in bad faith, they can be exposed to awards well excess of policy limits. The Courts logic in reasoning that consequential damages were contemplated in an insurance contract that expressly prohibits them is, saying it kindly, strained. There are many reasons that insurance contracts should be treated differently than other business agreements, not the least of which is that the insurer does not cause the original loss or damage that underlies the claim for damages as is the case in most other contractual agreements.

Whatever one feels about the merits of the decision, insurers must deal with the decision as it now represents the law of the state. Insurers will naturally fear that juries will not be able to differentiate between awarding foreseeable damages and punishing a deep pocket insurer. The ultimate effect of these rulings will be to increase the cost of doing business in this state as insurers must develop internal procedures for prompt processing of business interruption claims. Will insurers be pushed to pay questionable claims under threat from a lawsuit? Will everyones rates go up as a result?

Insurers are heavily regulated by the Insurance Department who is able and ready to intervene in cases such as the two that formed the subject of the cases discussed here. There should be some public discussion as to whether consequential damages are necessary for an industry that is subject to stringent government oversight such as the Unfair Claims Settlement Act. Perhaps insurers should seek some clarification of this matter from the state legislature in the waning days of the 2009 session. Legislation more clearly defining insurer obligations under business interruption insurance would help provide clarity and certainty for consumers, insurers and juries.