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Certificates of insurance in the courts again; a reader writes re: fraudulent impersonation; D-Day and insurance.

Will no one rid me of these troublesome Certificate of Insurance issues? The latest case to stir the pot involves a dispute over coverage on a wrap-up project. An electrician employed sub-contractor Urban Power & Lighting, alleged that he was injured and, as usually happens, sued everyone in sight. Among those sued were the owner, Flushing Town Center III, L.P. and the construction managers Muss Development Corp. and Tishman Construction Corp. of New York.

Urban, as is often the case with electricians, was not insured by the wrap-up issued by Illinois National. Urban had its own insurance with Nationwide. Flushing, Muss and Tishman were covered by the Illinois National wrap-up and Illinois undertook the defense of the three. However, it argued that it was excess to the Nationwide policy and that Nationwide should make all payments to defend all three as additional insureds until its policy was exhausted.

Nationwide said that it was only obligated to defend Muss because Flushing and Tishman had no direct contractual relationship with Urban, a policy requirement to obtain additional insured status. What interests us is a part of the decision in which the court writes that Nationwide may be prevented (estopped in legalese) from denying coverage to Flushing.

The court speculated that Flushing might be entitled to coverage even though it had no direct contract with Urban based on the theory that the insurance broker who issued the certificate of insurance to Flushing was acting on the authority of Nationwide. If so, Flushing would be entitled to coverage, its lack of a contract notwithstanding. The court did not decide the issue and returned the matter to the lower court for further adjudication. (1)

There were many other issues in the lawsuit--this was clearly an Attorneys-Full-Employment-Law case. But the possibility that Flushing could be entitled to coverage as an additional insured despite not meeting the clear policy requirement called for by a written contract between the parties is the most important one to producers. Should that view be upheld, it will upend the ordered world insurers thought they were creating with the "blanket" additional insured endorsement.

In addition, this may create a dangerous trap for the producer. If the insurer feels that acts or omissions of the producer led to the estoppel ruling, it may sue the producer for acting without authority. Once again, check your E&O limits.

Fraudulent Impersonation: A Reader Writes

Shortly after my article on Fraudulent Impersonation coverage (also referred to as Social Engineering Fraud) appeared in the 10/12/15 issue of the Advocate, I received an email from Gordon B. Coyle, CPCU, a Rockland County agent. I found it so interesting that I think it's worth reprinting practically verbatim:


So funny that you should write on the topic of social engineering (fraudulent impersonation) for the Insurance Advocate[R]...! was ... thinking (about this) after hearing a story from a new client just last week:

This client is an importer/distributor of metal fasteners. Most of the products are manufactured in the Far East and shipped here to the U.S.... My client received an email from one of his manufacturers in Taiwan, from the person they do business with regularly; at least that's what they thought.

Their supposed contact person emailed them with new banking information on where to wire their August invoice of $69,000. Upon receipt of payment they would ship the order to the freight consolidator for shipment to the U.S. as they normally did every other month. The client wired the full amount of the invoice to the new bank and two days later checked the status of their order, and was surprised to find it still sitting on the manufacturer's dock. They emailed their contact at the manufacturer to inquire why it hadn't been released and the manufacturer said: 'As soon as they we receive your payment, we will release the order as we always do."

My client responds with "we wired the money to your new bank you instructed us to wire to, two days ago, please check your records again." The contact in Taiwan did check his banking records and responds with: "We haven't changed banks, and the wire is not in our account; please advise."

By now you can imagine the dreadful sinking feeling my client has that he's been duped out of almost $70,000! He quickly calls his bank and explains the situation; the branch manager explains that it's gone, there's nothing they can do, but suggests that they (will) contact the FBI. The FBI suggests to the client's banker to call the bank in Taiwan and see if the funds have been distributed. They do so and luckily find out that in just the past week the bank has instituted a new procedure for all incoming foreign wires that places them on hold for 10 days prior to being distributed to their account holders so the money is still in possession of the Taiwanese bank. My client breathes a sigh of relief and with the assistance of his bank and the FBI he recovers the funds.

A very close call! Upon closer inspection my client sees that the emails he received were not from his contact in Taiwan, but from an email address that is very, very similar--only one letter was transposed in the URL domain. What they have figured out was that the manufacturer in Taiwan was hacked, their records were infiltrated and the hacker diligently went about emailing the U.S. customers a change of bank and wiring instructions with the correct balances due! If the Taiwanese bank had not changed their procedure for incoming wires in the prior week, that money would have been gone.

As you can imagine, when we took over the account selling them broadened crime coverage including social engineering (fraudulent impersonation) wasn't too difficult! (Your article was) very timely indeed!

Clearly any firm that does business internationally needs this coverage. But, as I wrote in October, just about any business is a potential victim. Variations on the scheme can trap anyone. Who knows what evil lurks in the hearts of men? The Shadow isn't around to protect us any longer, but insurance will.

Insurance Made NY Times Front Page on D-DAY!

Moving is an ordeal. An insurance professor (Yes, Virginia, there are such things.) once remarked, apropos of nothing in particular, that three moves equal one fire. But there are compensations when you move. One is coming across old saved articles that you've long forgotten. The insurance one that surprised me was a NY Times front page reprint from June 6, 1944. That was D-Day--the day Allied armies landed on the French coast. D-Day warranted an 8-column, 3-line, large type headline.

There were twelve stories on the front page that day. All were war-related but one. The one that wasn't concerned the insurance industry. It reported that the US Supreme Court ruled that insurance was a form of interstate commerce and therefore subject to federal law, including antitrust legislation. The decision reversed 75 years of precedent. Its effects are still being felt today.

In 1869 this Court held that a Virginia statute regulating foreign insurance companies did not violate the interstate commerce clause because issuing a policy of insurance was not a transaction of commerce.

The court reasoned that insurance policies are simply contracts to indemnify the insured against loss by fire or other perils, entered into between corporations and insureds for a consideration (the premium). The court felt that they are not articles of commerce. They are not subjects of trade and barter offered in the market as something having an independent existence and value. They are not commodities to be shipped or forwarded from one state to another and put up for sale. They are like other personal contracts between parties which are completed by their signatures and the payments of the consideration. Such contracts are not interstate transactions, though the parties may be domiciled in different states. They are local transactions, and are governed by the local law. (3) The ruling was upheld numerous times in later cases. Insurance companies became so confident that insurance was not subject to Federal anti-trust laws that they created both single-state and multistate organizations that set rates and agent commissions in their territories. One multi-state rating organization, the South-Eastern Underwriters Association, led to the downfall of the system. In addition to controlling rates and commissions, SEUA members wrote more than 90% of fire and allied lines (what we now call property insurance) in six states: Alabama, Florida, Georgia, North Carolina, South Carolina, and Virginia. SEUA members engaged in coercion and boycotts to force recalcitrant insurers to comply with its regulations.

This would seem to be patently anticompetitive practices banned by the Sherman Anti-Trust law. But the key issue for the court was whether insurance was interstate commerce. The Supreme Court held that insurance companies that conduct significant portions of their business across state lines, were in fact engaging in interstate commerce. The world had changed since the original decision in 1869. Nevertheless the vote to reverse the Paul v. Virginia decision was by a one-vote margin, 4-3 (two justices disqualified themselves). (4)

The insurance community was in a state of shock. They wanted state regulation in preference to Federal regulation and lobbied hard to have a law enacted to do that. The following year, 1945, Congress passed the McCarran-Ferguson Act exempting insurance from Federal regulation if state regulation applied. However, any Federal law that specifically applied to insurance remained in force and insurers could not engage in boycott, coercion or intimidation.

While there have been occasional flurries of attempts to expand federal regulation, for the most part the states remain the regulators of insurance. However, state regulatory oversight has expanded in a large measure due to the SEUA case and McCarran-Ferguson.

One of the few areas where Federal action has been taken concerns producer licensing. Given the country-wide or even world-wide nature of business today, the system of state licensing has become a burden for even medium-sized brokers and agents. To bring some order to the process, the National Association of Registered Agents and Brokers (NARAB) was created. This year NARAB II was enacted as part of the Terrorism Risk Insurance Program Reauthorization Act of 2015. It requires the establishment of a national clearinghouse to streamline market access for nonresident insurance producers. NARAB 1 was not a great success. Well see how NARAB II works. (5)

By Jerome Trupin, CPCU

Jerome "Jerry" Trupin, CPCU, is a partner in Trupin Insurance Services located in Briarcliff Manor, NY. He provides property/casualty insurance consulting advice to commercial, nonprofit and governmental entities. He is, in effect, an outsourced risk manager.

Jerry has been an expert witness in numerous cases involving insurance policy coverage disputes and has taught many CPCU and IIA courses.

Jerry has spoken across the country on insurance topics and is the co-author of over ten insurance texts used in CPCU and IIA programs including Commercial Property Risk Management and Insurance and Commercial Liability Management and Insurance. He regularly contributes articles to CPCU Society publication, the Insurance Advocate*, and others. He can be reached at Thanks to Jerry Trupin for this article and to the CPCU Society for letting us reprint it.

(1) Muss Development, LLC v. Nationwide Ins. Co., No. 13 CV 4848 (RJD) (MDG) (E.D.N.Y. Oct. 20, 2015)

(2) See: Rivkin-Radler New York Insurance Law Update-November 2015 Alan Eagle, editor "Certificate Of Insurance Issued By Agent Might Estop Insurer From Denying Additional Insured Coverage, Eastern District Holds"

(3) Paul v. Virginia, 8 Wall. 168, 183, 19 L.Ed. 357

(4) A personal reminiscence: The New York Fire Insurance Exchange had control over fire insurance in New York similar to SEUA's. The New York Exchange controlled rates and commissions, and even decreed that all premiums must be paid to the insurance company or its agent by the 20th day of the second month following policy inception or cancelled for non-payment. Since most of my father's family worked in the insurance agency field, growing up I quickly learned that the "20th" was a monthly time of tension for my father and his siblings. By the time I entered the insurance business at the beginning of the 1950s, the Exchange's power to enforce its rules was pretty much a thing of the past due to the SEUA decision and McCarran-Ferguson; nevertheless auditors from the Exchange still called at our office and demanded to see our records. It had become a perfunctory examination and they no longer raised any issues. In a few years even that charade of enforcement was a thing of the past.

(5) "Producer Licensing and NARABII" National Association of Insurance Commissions and The Center for Insurance Policy and Research,
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Author:Trupin, Jerome
Publication:Insurance Advocate
Article Type:Reprint
Geographic Code:1U2NY
Date:Dec 21, 2015
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