Two Steps Forward, One Step “Wayback”: Managing Information for Future Success

A guest blog by Carrie Cope of Schuyler, Roche & Crisham, P.C.:

There are times when the unwelcome discovery of a regulatory violation, such as the inadvertent issuance of an insurance policy in a state where the company isn’t licensed, can put an insurer between that proverbial “rock and a hard place.” While disclosure to the governing regulatory agency may be the company’s preferred plan of action to resolve the problem, management may be concerned that voluntarily disclosing it may result in a fine or penalty or uncover more than hypothetical worms under that proverbial rock. As a result, it’s not surprising that insurance companies approach resolving such problems with different strategies.

There are companies that closely monitor compliance laws and work as a team with regulators to solve any problems (my clients), those that believe they own the playing field and that flagrantly flaunt the rules (of these I have only heard fireside tales and whispered rumors), and those that fall somewhere in the middle. In an ideal (and mythical) world, insurance laws and regulations would always be perfectly clear and easy to apply, and human error would not exist. But we live in the “real” world, albeit one transformed by the ability to communicate in cyberspace.  (I admit, it’s a bit anachronistic to use “albeit” and “cyberspace” in the same sentence.) The fact is that many practical aspects of conducting the “business” of insurance have changed due to advances in technology.

In the past, disclosing a regulatory violation to one state’s regulator did not necessarily mean disclosure to all, allowing an insurer’s clean slate with one state to remain unsullied by a problem with another. As more information is stored electronically and accessibility to it increases, those days are now gone. For example, state insurance departments are now able to use an electronic system called “I-Site” that is a compilation of information from other regulatory databases. While it certainly makes sense that any regulator would want to ascertain whether an insurer’s problem in one state is part of a larger systemic problem, under some circumstances, having access to an insurer’s historical record in 50 states may hinder the resolution of some issues. Wading through mounds of information can slow any review process down. In addition, some historical information may be inaccurate or irrelevant to the problem being evaluated, but may still color the recipient’s perception of how an insurer approaches compliance issues.

Of course, increased access to information afforded by advancing technology has its benefits as well. We recently used a helpful source called the Internet “Wayback Machine” which provides access to the Internet Archive’s collection of web pages. We were able to provide support for a client’s position by obtaining historical information that had been lost.  Not surprisingly the mere availability of such information does not mean it can be used in court under all circumstances. In Telewizja Polska USA, Inc. v. EchoStar Satellite Corp., No.02 C 3293, 2004 U.S.Dist. LEXIS 20845 (N.D. Ill. Oct. 14, 2004), the United States District Court for the Northern District of Illinois admitted evidence of what the plaintiff’s website looked like on a certain date where it was accompanied by an affidavit from an Internet archive employee authenticating copies of the website. However, in Specht v Google, Inc., 758 F. Supp. 2d 570(N.D.Ill. 2011),the court struck screen shots of the plaintiff’s website from the record because the exhibits had not been authenticated.

Creative problem solving has always been essential to vanquishing competitors in the business world generally and the insurance industry in particular, and having the right information at the right time is a key ingredient in both problem solving and risk evaluation.  Insurers that are able to access and manage information effectively will be better positioned to move forward in soft or saturated markets, as well as identify new insurance markets. It has long been said that the best predictor of future behavior is the past. Never before have we had better tools to access the past in order to plot our course forward. One challenge faced by all sectors of the insurance industry will be to keep pace with rapid advances in technology while managing the sometimes overwhelming flow of, and unlimited access to, information.

Lance Armstrong’s Troubles May Include the Tax Man

Wherever you stand on the issue, Lance Armstrong’s sudden and complete fall from grace seems like just about the worst thing that could happen to the man. Perhaps not, according to a recent article by Forbes.

For illustrative purposes, let’s look to Armstrong’s most notable achievement: his consecutive Tour titles spanning from 1999 to 2005. During this run of dominance, Armstrong received bonuses from Tour officials for each stage win, each day he wore the leader’s yellow jersey, and of course, each overall victory. These payments are rumored to have totaled nearly $5 million over the seven-year period.

Armstrong’s compensation wasn’t limited to race winnings, however. Tailwind Sports, the owner of Armstrong’s team sponsor during each of his tour victories, had procured insurance contracts that paid Armstrong over $12 million in performance bonuses during that span. Particularly worthy of note was a $5 million reward Tailwind agreed to pay Armstrong upon winning his fifth consecutive title in 2004. The payment was covered by a policy Tailwind had taken out with Texas-based insurer SCA Promotions, who initially balked at paying the bonus amidst rumors that Armstrong’s victories had been fueled by drug use. The case eventually went to arbitration, where SCA was forced to pay $7.5 million to Armstrong, representing the original $5 million bonus and $2.5 million in interest and attorney fees.

Now that Armstrong’s titles have been officially vacated, it’s extremely likely that Tour officials are placing hurried calls to their legal department to start the process of recovering the $5 million in winnings previously paid to Armstrong. For its part, SCA Promotions will quickly stake their place in line, as they were angered during the arbitration process by what they viewed to be arrogant, dismissive behavior by the cyclist’s legal team.

Should all of these claims come to fruition, Armstrong may be cutting a lot of checks in 2013. Which begs the question:  What will be the tax consequence if Armstrong repays race winnings and bonus amounts that were previously included in his taxable income as compensation?

The issue is not one of deductibility. Because the bonuses were originally earned in Armstrong’s trade or business of being a cyclist, any repaid compensation should be deductible as an ordinary and necessary business expense. Rather, the problem Armstrong faces is one of tax benefit.

If the doomsday predictions surrounding Armstrong’s future income stream are to be believed, it’s possible Armstrong may pay out more in bonus restitution during 2013 than he takes in as income. As a result, he may not be able to reap the full tax benefit of the deductions related to his repayments. And even in the event Armstrong is able to fully utilize his deductions in the current year, he may have been subject to a higher tax rate when the bonuses were originally earned — particularly during the pre-Bush tax cut years of 1999-2001 — than he is today. In either scenario, Armstrong would likely enjoy a larger tax benefit if he could travel back in time, exclude the bonus payments from income in the year they were received, and redetermine his prior years’ tax liability.

Stay tuned, as it appears the difficulties for Mr. Armstrong may be just beginning.

What IS the standard of care for seismology predictions?

Our bet is that few (if any) of you are writing E&O coverage for seismologist as, to our knowledge, such a market does not exist. Perhaps there is potential, however, given the recent Italian court ruling that holds six Italian government officials and seismologists criminally and monetarily responsible for inaccurate earthquake predictions. Given the difficulty in predicting these naturally-occurring events would anyone be willing to underwrite such an exposure? From the Washington Post:

“In L’Aquila the trauma is still present and visible,” Italian GlobalVoices blogger Paola D’Orazio wrote in April. ”But stronger yet is the resentment of those families who will never see their homes again, of those who feel abandoned and who believe that not enough has been done, that in three years nothing (or almost nothing) has changed: debris and rubble piled on the streets downtown, houses propped-up in makeshift fashion, windowless buildings make up the cityscape awaiting tourists in the medieval jewel of Abruzzo.”

Italian media have reacted with sustained outrage to the quake, in part, D’Orazio says,  because a number of the victims were college students from other parts of the country, at some points comparing it to the far deadlier Fukushima crisis in Japan. That media pressure for action, as well as residents’ apparent sense of profound wounded resentment, led to what he calls “many judicial inquiries.”

The L’Aquila tragedy, as it persisted after the earthquake, did not concern solely the loss of human life during the catastrophic event: there were many judicial inquiries (some still under way) regarding the handling of the emergency, the responsibility of those companies that chose building materials and designs that were unfit for an earthquake zone (in particular, the construction of public buildings, like student housing, has come under questioning), and regarding lobbyists and other groups interested in receiving a portion of the funds allocated to reconstruction of the city and the entire seismic crater.

It’s easy to see how the public demands for blood might have built momentum for a case that, on its own, would appear absurd.

There are other theories. The Economist quotes a California-based scientist who thinks the Italian physicists got “trapped” into giving a “yes/no answer” because they were trying to downplay a local amateur’s claims of being able to predict earthquakes. A long Nature essay discusses the common misunderstanding that scientific risk assessment is the same thing as a prediction. New Scientists hints that L’Aquila officials, overwhelmed with the burden of protecting against earthquakes in an ancient fault-line city that is poorly equipped to handle them, may have shrugged their decision-making responsibilities onto the scientific advisers.

Read the full article.