• Refusal to hire an otherwise qualified job applicant because of the protected characteristic;
• Disciplinary action that leads to suspension, loss of pay or benefits, or job status change;
• Demotion or an unfavorable transfer to a materially different position;
• Denial of promotion or advancement;
• Failure to engage in an interactive process to evaluate reasonable accommodations;
• Failure to make a reasonable accommodation; and
• Termination or discharge.

1. S/he has a physical or mental disability or medical condition, as those terms are defined in the law (and the new regulations);
2. S/he is qualified for the position she seeks or holds, meaning that s/he is able to perform the essential job functions with or without reasonable accommodation;
3. The district denied an equal employment opportunity by taking an adverse action against him/her; and,
4. A "causal connection" between the individual's disability or perceived disability and the denial of an employment opportunity. In other words, the decision was based, at least in part, on the disability, medical condition or perceived disability.

• Employee can no longer perform essential job functions, even with accommodation;
• Accommodation of the essential functions of own job creates an undue hardship; and
• Agreement with employee that reassignment is preferable to accommodation in U&C.

Is that guy you have doing that work you need done an independent contractor or an employee? Why does it matter? Well, aside from a whole host of other issues, liability for industrial injuries may hinge on whether that worker was an employee or an independent contractor.

Your humble author recently had occasion to visit his uncle Olaf. For those familiar with the exciting sport of competitive clam-breeding, you'll no-doubt have heard of Olaf the Clamtastic, world-famous for his exceedingly rare clam-breeding abilities. He also has a business which sells the Giant Clams he raises, "Olaf's World of Clams." "Uncle Olaf," I said, "who is that nice young man cleaning your prize-winning clams?" Uncle Olaf looked up from his magazine, Clams and Claims, and peered at his Olympic-sized swimming pool, the one where his giant clams ruled and all others feared to tread.

There, scrubbing the giant clams, was a young gentleman with a nervous look concealed by goggles and a breath mask.

"Oh," said Uncle Olaf, "That's Jim — he's my independent contractor helping me keep the Clams clean." As Uncle Olaf turned the page with one of his two hook-hands, I remarked "it's a good thing he's a contract worker and not an employee, those clams can be vicious!" But, the workers' compensation defense attorney in me felt something was amiss. So, being the good nephew that I am, I asked Uncle Olaf, "how do you know he's a contractor and not an employee?"

Uncle Olaf smiled, as if his silly nephew couldn't be any sillier, and said "because I didn't buy workers' compensation insurance for him, of course!"

Poor Uncle Olaf ...

The State of California does not require independent contractors to be covered by workers' compensation insurance. In theory, one could have a thriving business using nothing but independent contractors and saving untold fortunes on workers' compensation policy payments.

But, the law requires employers to either self-insure or obtain workers' compensation insurance for their employees. And, much to Uncle Olaf's surprise, the nature of a relationship, with respect to employer or contractor, is not determined by the possible employer's purchase or failure to purchase workers' compensation insurance. There is another test out there ...

But, let's start with the basics.

California Labor Code section 3353 defines an independent contractor as "any person who renders service for a specified recompense for a specified result, under the control of his principal as to the result of his work only and not as to the means by which such result is accomplished." Section 3353 was enacted in 1930, codifying the common law distinction between employees and independent contractors. But, this distinction wasn't concerned with workers' compensation, but rather with tort law. Whereas an employee could make his employer liable for injuries caused to third parties (imagine an employee-bartender accidentally dropping a crate of fine whiskey on a poor bar patron — an unbearably cruel thought, I know, but one necessary to shock and make the point), the liability buck stopped with an independent contractor.

But, as California Labor Code section 3357 specifically excludes independent contractors from the presumption of employment (and therefore the presumed requirement for the employer to insure or self-insure against those workers' industrial injuries), the issue is an important one — and case-law expanded the test. So, poor Uncle Olaf can't put his checkbook away just because he never took it out to insure against a worker's injuries. Uncle Olaf can't even put his checkbook away just because he doesn't micromanage the work or "control the means by which such result is accomplished."

After all, Uncle Olaf thought that, so long as he doesn't stand over the young gentleman's shoulder ... hovering ... judging ... making little comments and directing his every move ("you missed a spot, scrub that clam harder, put your hand inside the clam to get a better grip ...") the young gentleman could remain an independent contractor and Uncle Olaf could laugh at the competitor Clam stores paying insurance premiums every month.

So, dear readers, there I sat in my beloved Uncle Olaf's kitchen as he ground his hooks into his wooden table, nervously watching the man he hired to clean his prize-winning clams for his Clam sale business, who he thought was his independent contractor but was actually allegedly (your humble author is a zealous defense attorney, after all) an employee, place his hands inside the snappiest of Uncle Olaf's prize-winning clams. "Scrub from the outside!" he shouted, but the young gentleman cleaning the clams couldn't hear him ...

The California Supreme Court issued its opinion in the case of S.G. Borello & Sons, Inc. v. Department of Industrial Relations (1989), outlining the proper analysis for determination of the question of employment or independent contractor status. S. G. Borello & Sons owned farmland near Gilroy (a place with a wonderful Garlic Festival). Although they kept regular employees for the various crops grown on these farms, for cucumbers, the nature of the market dictated another approach. Cucumber harvesting was contracted out to various migrant farm-worker families.

The families were provided with the opportunity to lay claim to a certain amount of plots of cucumbers, were provided with crates into which to harvest the cucumbers, but were otherwise left to their own devices. The cucumbers were sold to a pickle company in the area, and the profits were shared between the land-owners and the harvesters.

For the multi-week cucumber harvesting season, the harvesters were responsible for taking care of the cucumbers, picking only those ripe and ready for picking, and generally seeing about maximizing profits. The most aggressive task-masters in S.G. Borello & Sons employ found themselves absolutely powerless at the edge of the cucumber plots, for no employees dwelt there — only independent contractors.

That is, until, the Department of Industrial Relations issued a stop-work order. Finding that the independent-contractors were actually employees, and uninsured employees at that, the Department of Industrial Relations went on the war path against poor Mr. Borello and his sons (as well, effectively, against all other farmers in the Gilroy area that adopted the same practices).

Borello's argument before the Supreme Court was simple — unlike other crops, cucumbers required a degree of knowledge and skill for harvesting, and the harvest workers were compensated for the final product and not the means of rendering service. But the Supreme Court found that other factors, primarily found in the Restatement Second of Agency, play into the analysis as well, among them:

1. The right to discharge at will, without cause;
2. Whether the worker is engaged in a distinct occupation or business;
3. Whether the occupation, in that locality, is typically performed by a specialist without supervision;
4. The skill required in the particular occupation;
5. Whether the worker supplies the instrumentalities, tools, and the place for doing the work;
6. The length of time for which services are performed;
7. The method of payment (hourly or by task);
8. Whether the work is part of the regular business of the principal; and
9. The intent of the parties.

The Borello Court noted that "under the [Workers' Compensation] Act, the "control-of-work-details" test for determining whether a person rendering service to another is an 'employee' or an excluded 'independent contractor' must be applied with deference to the purposes of the protective legislation."

The Court also noted that the workers made minimal investment in their work — no heavy equipment but just basic tools.

Other cases followed too.

In the case of Jose Luis Lara v. Workers' Compensation Appeals Board (2010), for example, the Court of Appeal examined whether a garden-variety handy-man could be an independent contractor. Lara sustained a pretty serious injury while doing work for a small shop called Metro Diner. Metro Diner didn't have Lara covered by its workers' compensation policy because he had no regular employment — he was called up to do odd work such as trimming bushes along Metro Diner's roofline.

Lara provided his own equipment, paid his own taxes, and, although he was paid by the hour, was hired by the job rather than on a general basis. Nor did Metro Diner set Lara's hours — he was just told to come early or late to avoid interfering with the operation of the Diner.

The workers' compensation Judge found that Lara was an employee, and the Workers' Compensation Appeals Board reversed. In affirming the Workers' Compensation Appeals Board's finding that Lara was a contract employee, the Court of Appeal cited Borello. Specifically, the Court noted that gardening was Lara's line of work (and not the Diner's), that Diner could not control the manner of Lara's work, Lara had his own clients (other than Diner), and Lara had a substantial investment in his business (lots of tools, equipment, etc.).

As Uncle Olaf scratched his head (very carefully, mind you, as those razor sharp hooks hurt!), I could see that he wasn't convinced. His prize-winning, hand-eating, giant-clam-raising mind was working. What else did Uncle Olaf think he had up his sleeve?

Uncle Olaf was beginning to get worried — what if his upstart nephew was right and, even though Uncle Olaf didn't get insurance for the Clam Cleaner, an employment relationship was formed. After all, if Mr. Clam Cleaner was an employee, Uncle Olaf would be liable for any injuries sustained by Mr. Clam Cleaner, and, having lost both hands to giant Clam Bites before, was very much aware of the risks involved.

"I'm pretty sure he is an independent contractor," said Olaf. Just then we heard a loud *SNAP* as a clam slapped shut, and the young gentleman in the Clam tank yanked his hand away just in time. Uncle Olaf breathed a sigh of relief and said "but he signed a contract ... the contract says 'I am not an employee; I am an independent contractor. I will clean Olaf's clams. And if I should lose a hand or two, I will only sue the clam or clams that got me, and not poor Uncle Olaf.'"

I shook my head and told poor Uncle Olaf of the panel decision in the case of Leonard Key v. Los Angeles County Office Education. Leonard Key had signed a contract stating that he was an independent contractor paid to teach music lessons at one of the Los Angeles County schools. However, the Workers' Compensation Judge found that Mr. Key was, in fact an employee, and his injury was compensable. Workers' Compensation in California is compulsory, after all, and Mr. Key was simply an employee by any other name. And, after all, the farmers in the Borello case had signed a contract as well.

The most important thing for Uncle Olaf to remember is the guiding policy of workers' compensation — to shift the costs of industrial injuries to the producers and not the consumers/public. Even the Legislature might make efforts to amend the law, defining a contractor vs. an employee based on a long list of factors.

So, dear readers, what should Uncle Olaf do? Before the young gentleman sticks his hand into another one of Uncle Olaf's clams, should Olaf pull him out of the tank and cease operations until he can get a workers' compensation policy?

Movies about space missions that result in catastrophe can teach us a lot about how not to manage a project (the "successful failure" of Apollo 13 comes to mind). Yet there are actual space mission catastrophes — the loss of the 1999 Mars Climate Orbiter (MCO), for example — that also offer valuable lessons in preventing fundamental mistakes.

The MCO was the major part of a $328 million NASA project intended to study the Martian atmosphere as well as act as a communications relay station for the Mars Polar Lander. Famously, after a nine-month journey to Mars, the MCO was lost on its attempt to enter planetary orbit. The spacecraft approached Mars on an incorrect trajectory and was believed to have been either destroyed or to have skipped off the atmosphere into space. The big question naturally was: What caused the loss of the spacecraft?

After months of investigation, the primary cause came down to the difference between the units of output from one software program and the units of input required by another. How, the media asked, could one part of the project produce output data in English measurements when the spacecraft navigation software was expecting to consume data in metric?

Those of us involved in expensive and high-risk projects would ask the similar question: How could this happen? What follows are a few findings from the Executive Summary of the Mars Climate Orbiter Mishap Investigation Board (MCO MIB), with lessons for us all.

• The root cause of the loss of the MCO spacecraft was the failure to use metric units in the coding of a ground software file used in trajectory models. Specifically, thruster performance data in English units were used instead of metric units in the software application code.
• An erroneous trajectory was subsequently computed using this incorrect data. This resulted in small errors being introduced in the trajectory estimate over the course of the nine-month journey.

That erroneous trajectory was the difference between a successful mission and failure. Lockheed Martin Astronautics, the prime contractor for the Mars craft, claimed some responsibility, stating that it was up to its company's engineers to assure that the metric systems used in one computer program were compatible with the English system used in another program. The simple conversion check was not done. "It was, frankly, just overlooked," said their spokesman.

Just overlooked? Those of us in project management know that large-scale projects require the ability to see not only the big picture — the goals and objectives of the project — but also the details.

While not as prominent as space exploration, insurance software development also has millions of dollars at stake. Insurance products can be very complex, and the interactions required in business systems along with the calculations involved are all critical to producing accurate results.

Errors in the way in which calculations are derived can produce problems ranging from failure to comply with the company's obligations under its filings to loss of revenue. Even apparently simple matters such as whether to round up or down on a calculation can have profound impacts on a company's bottom line.

Although the failure to address the difference between English and metric measurements was identified as the root cause of the problem with the MCO, the real issue at hand is what caused that failure. How was it missed?

Taking a project management perspective requires asking the question, "Why?" Why was a key element overlooked? What led an experienced team to miss a crucial detail?

In the search for answers, it's interesting to look deeper inside the report by the Mars Climate Orbiter Mishap Investigation Board (MCO MIB). In addition to the root cause of failure to use standard units of measurement across the entire project, the report found a series of other issues that also contributed to the catastrophe. The following are other lessons of the MCO mission and how they can be applied more widely to project management.

• Lack of shared knowledge. The operations navigation team was not familiar enough with the attitude controls systems on the spacecraft and did not fully understand the significance of errors in orbit determination. This made it more difficult for the team to diagnose the actual problem they were facing.

  It is likewise common for insurance software projects to have mutually dependent complex areas — for example, between the policy administration system and the billing system. If one team does not fully understand the needs of the other, there can be costly gaps in understanding.

  The MCO MIB recommended comprehensive training on the attitude systems, face-to-face meetings between the development and operations team, and attitude control experts being brought onto the operation's navigation team. Similarly, face-to-face meetings between the policy experts and the billing experts, between the business side and the technology side, will go a long way toward a successful project. In the world of e-mail and instant messaging, I think all of us spend less face-to-face time. Nonverbal communication is 60% of our communication and is often very helpful; there's zero face time when we rely on electronic communication.

• Lack of contingency planning. The team did not take advantage of an existing Trajectory Correction Maneuver (TCM) that might have saved the spacecraft, since they were not prepared for it. The MCO MIB recommended that there be proper contingency planning for the use of the TCM, along with training on execution and specific criteria for making the decision to employ the TCM.

  The need for contingencies in insurance software development is important too. Strong project management will consider project risks and therefore contingencies. And contingency plans are important at every stage — development, implementation, and once the system is live. Issues must be dealt with rapidly and effectively since they have an impact on the entire business. Regular reviews of the contingency plans are also useful.

• Inadequate handoffs between teams. Poor transition of the systems' engineering process from development to operations meant that the navigation team was not fully aware of some important spacecraft design characteristics.

  In complex insurance software projects, there are frequent handoffs to other teams, and the transition of knowledge is a critical piece of this process. These large, complex projects should have a whole team dedicated to ensuring knowledge transfer occurs. No matter how good the specifications, once again, it's vital to get face to face.

• Poor communication among project teams. The report stated there was poor communication across the entire project. This lack of communication between project elements included the isolation of the operations navigation team (including lack of peer review), insufficient knowledge transfer, and failures to adequately resolve problems using cross-team discussion. As the report further notes:

  "When conflicts in the data were uncovered, the team relied on e mail to solve problems instead of formal problem resolution processes. Failing to adequately employ the problem-tracking system contributed to this problem slipping through the cracks."

  This area had one of the largest set of recommendations from the MCO MIB, including formal and informal face-to-face meetings, internal communication forums, independent peer review, elevation of issues, and a mission systems engineer (aka really strong program or project manager) to bridge all key areas. Needless to say, this kind of communication is a critical part of any insurance software project, and these lessons are easily applied. Zealously hold project reviews (walk-throughs). Do them early and often. The time spent will pay you back with success.

• The Operations Navigation Team was inadequately staffed. The project team was running three missions simultaneously — all of them part of the overall Mars project — and this diluted their attention to any specific part of the project. The result was an inability of the team to effectively monitor everything that required their attention.

  Sound familiar? We just experienced this on a software implementation project where the software vendor outsold its capacity to be successful. Projects are expected to run lean because of cost considerations, but it's always important to ensure that staff is not stretched to the point of compromising the project.

• There was a failure in the verification and validation process, including the application of the software standards that were supposed to apply. As the MCO MIB noted:

  "The Software Interface Specification (SIS) was developed but not properly used in the small forces ground software development and testing. End-to-end testing to validate the small forces ground software performance and its applicability to the specification did not appear to be accomplished."

Every project manager will recognize the need to stick to protocol and agreed-upon processes during a software project. Ensuring that project team members know the project/system specifications and standards is essential to successful project delivery.

And so, the devil is in the details. My career in and around insurance technology has spanned three decades now. While I have learned much, two things are abundantly clear:

• There is no substitute for really good project management.
• There is no substitute for great business analysts.
• There is no substitute for great communication.

Okay, make that three things! It's bonus day.

The full MCO report is available here.

Introduction
As we approach April 15 and many of us are thinking about our taxes, we are starting to notice some tax changes and many of these are related to healthcare reform, i.e. the Patient Protection and Affordable Care Act of 2010 (PPACA). Whether or not you are "for" or "against" healthcare reform as currently legislated, you will definitely feel the impact of some new taxes.

This article attempts to identify and list the taxes that are directly related to the Patient Protection and Affordable Care Act. This article is intended to list and identify taxes associated with healthcare reform — it is not intended to take any formal position for or against healthcare reform. In fact, the author has strong opinions that the US healthcare system is desperately in need of serious healthcare reform and that many aspects of the current reform approach outlined in the Patient Protection and Affordable Care Act make serious attempt to address some of the key issues.

Background
Based upon the count of many experts, there appear to be 19 specific taxes or increased taxes directly related to healthcare reform, estimated by some experts to total $500 billion over 10 years. I have ranked the taxes from largest to smallest, with a description of the tax and when it was effective or will be effective for those not yet in effect.

Summary of PPACA Related Taxes

1. Surtax on Investment Income ($123B): By far the largest tax and going into effect January 2013, this is a new 3.8% surtax on investment income for households with more than $250,000 income.¹
2. Increase in Medicare Payroll Tax ($87B): Beginning January 2013, this tax increases the Medicare employee and self-employed tax on wages in excess $200,000 for an individual/$250,000 for a family by 0.9%.²
3. Mandate Tax ($65B): Beginning January 2014, any individual without a qualified health plan will be subject to an income surtax.³ In addition any employer not offering health coverage, and at least one employee qualifies for a health tax credit, will be subject to a tax. Any employer requiring a waiting will be subject to an additional tax.⁴
4. Tax on Health Insurers ($60B): Beginning January 2014, all health insurance companies and health plans are subject to a federal premium tax, which phases in until 2018.⁵
5. Excise Tax on Comprehensive Health Insurance Plans ($32B): Beginning in January 2018, there will be a 40% tax on "Cadillac" health insurance plans.⁶ Cadillac health insurance plans are those with very rich benefits and are determined by a comparison to an inflation adjusted premium level.
6. "Black Liquor" Tax ($24B): This is a tax on a special type of bio-fuel.⁷ Tax in effect during 2007 - 2009, ended in January 2010 as part of healthcare reform bill.
7. Tax on Innovator Drug Companies ($22B): $2.3 Billion annual tax on the industry imposed relative to sales made that year. Began in January 2010.⁸
8. Tax on Medical Device Manufacturers ($20B): Beginning January 2013 there is a 2.3% excise tax on all items >$100.⁹
9. High Medical Bills Tax ($15B): Beginning January 2013, the threshold for deducting high medical bills was increased to 10% of adjusted gross income.¹⁰
10. Flexible Spending Account Cap ($13B): Beginning January 2013, the formerly unlimited FSA is now capped at $2,500. This tax has been called the "special needs kids tax" since this eliminates the option of families with special needs children to tax effectively pay for tuition for these children.¹¹
11. Medicine Cabinet Tax($5B): As of January 2011, Health Savings Accounts(i.e., HSA) are no longer able to purchase non-prescription, over-the-counter medicines other than insulin.¹²
12. Elimination of Prescription Drug Subsidy($5B): As of January 2013, employers no longer able to deduct prescription drug subsidy for coordination with Medicare Part D drug program.¹³
13. Codification of "economic substance doctrine" ($5B): Beginning January 2010, new provision permitting the IRS to disallow legal tax deductions when the IRS deems the action lacks "substance."¹⁴
14. Tax on Indoor Tanning Services ($3B): Beginning July 2010, new 10% excise tax on indoor tanning salons.¹⁵
15. HSA Withdrawal Tax Increase ($1.4B): Beginning January 2011, taxes for withdrawals were increased from 10% to 20%.¹⁶
16. Health Insurance Executive Compensation Limit ($0.6B): Beginning January 2013, PPACA establishes a $500,000 limit for annual executive compensation.¹⁷
17. Blue Cross Blue Shield Tax Increase ($0.4B): Beginning January 2010 a special tax deduction is permitted only if loss ratio is greater than 85%.¹⁸
18. Excise Tax on Charitable Hospitals (minimal): Beginning January 2010, new $50,000 tax on hospitals if they fail to meet specific rules established by CMS.¹⁹
19. Employer Reporting of Health Insurance on W-2 (minimal): Requires employers to include additional information on W-2's regarding health insurance plans.²⁰

Bottom Line
Although there may be many well intended uses for these taxes, it is clear that healthcare reform has significantly increased tax revenues. The outstanding question remains, will the Patient Protection and Affordable Care Act reduce the cost of health care, increase the access to care, and improve the quality of care for everyone? These were and have been the primary objectives of any healthcare reform effort. As we as a country look forward to our financial futures, we need to carefully assess the impact of health care reform, make modifications where appropriate, and refocus on the key objectives to be sure we achieve what we all know to be the key issues at hand: reduce costs, improved access, and maximum quality of care.

¹ Reconciliation Act, pages 87-93.

² Reconciliation Act, pages, 87-93, 2000-2003.

³ PPACA, page 317-337.

⁴ PPACA, Pages 345-346.

⁵ PPACA, Pages 1986-1993.

⁶ PPACA, Pages 1941-1956.

⁷ Reconciliation Act: Page 105.

⁸ PPACA, Pages 1971-1980.

⁹ PPACA, Pages 1980-1986.

¹⁰ PPACA, Pages 1994-1995.

¹¹ PPACA, Pages 2388-2389.

¹² PPACA, Pages 1957-1959.

¹³ PPACA, Page 1994.

¹⁴ Reconciliation Act, Pages 108-113.

¹⁵ PPACA, Pages 2397-2399.

¹⁶ PPACA, Page 1959.

¹⁷ PPACA, Pages 1995-2000.

¹⁸ PPACA, Page 2004.

¹⁹ PPACA, Pages 1961-1971.

²⁰ PPACA, Page 1957.

In April of 2013 the ISO modified the Commercial Property Forms. It was one of the biggest changes in forms that we have seen in years with the majority of forms taking on some type of change.

Effective April 2013, many of the Commercial General Liability forms also have a new edition date. Some of the changes are minor but carry new edition dates of existing form numbers, and there are some forms that are first being introduced. It is a multistate revision and some of the specific state forms have also taken a change or introduced new forms. Some of the ISO changes have already been adopted in insurance company forms while other changes represent clarification of the "intent" of the form.

There are new multistate endorsements that are being introduced:

• Primary And noncontributory — Other Insurance Condition Endorsement
• Additional Insured — Owners, Lessees or Contractors — Automatic Status for Other Parties When Required in Written Construction Agreement
• Total Pollution Exclusion For Designated Products Or Work Endorsement
• Liquor Liability — Bring Your Own Alcohol Establishments Endorsement
• Amendment of Personal and Advertising Injury Definition Endorsement
• Designated Location(s) Aggregate Limit Endorsement

Specifically we will highlight those changes that have any significant impact and new endorsements to the form series. It goes without saying that any form that narrows coverage requires that we notify our insureds to avoid any gap in coverage as they renew on the new CGL edition date. All of these changes will be discussed in more detail in the Insurance Community class on March 19th.

Liquor Liability Form Revisions
One of the areas that has taken on a significant change is in the area of Liquor Liability. There are several forms that have taken the new edition date including:

As with most liability changes there is case law that gives rise to the need for clarification and form revision. Some of the specific court cases relating to this change are:

• PENN-AMERICA INS.CO. v. PECADILLOS, INC. (27A.3d259 (2011) Superior Court of Pennsylvania;
• McGuire v. Curry and Park Jefferson Speedway, Inc., a South Dakota Corporation (766 N. W. 2d 501 (2009);
• SIMMONS V. HOMATAS (925 n. e. 2D 1089 (2010; 236 ill. 2D 459) Supreme Court of Illinois., to name a few.

In the case of PENN-AMERICA INS.CO. v. PECADILLOS, INC. (27A.3d259 (2011) Superior Court of Pennsylvania, two customers entered the bar after visiting several other drinking establishment where they drank in excess. They continued to drink at Pecadillos, became further intoxicated, and were asked to leave even though they were in no condition to drive. The patrons left, caused an accident, killed two individuals and injured two others. The insured argued that the allegations in the underlying action against them fell outside the related CGL policy's liquor liability exclusion. The court ruled that a "duty to defend" was triggered when an insured was alleged to have continued to serve intoxicated patrons and then ejected them in a dangerously inebriated condition.

In the case of McGuire v. Curry and Park Jefferson Speedway, Inc., a South Dakota Corporation (766 N. W. 2d 501 (2009), a racetrack employer allowed an unsupervised, underage employee access to alcoholic beverages. The employee was a runner hired to deliver alcohol and other supplies to the racetrack's concession stands and bars. One day after the employee's shift ended, he drove his vehicle off the racetrack's premises while intoxicated and injured a passenger on a motorcycle. The plaintiff's suit filed against the racetrack alleged negligent hiring, retention and supervision of an underage employee. The court concluded that the racetrack did have a duty to supervise the employee and to disallow access to alcoholic beverages.

In the last case, SIMMONS V. HOMATAS (et al On Stage Productions, Inc.,) (925 n. e. 2D 1089 (2010; 236 ill. 2D 459) Supreme Court of Illinois, the Illinois court had to rule on whether a business that does not serve alcoholic beverages but allows patrons to bring in alcohol is considered in the business of selling alcoholic beverages. In this case the club, operated by Stage Productions, is a nude strip club that does not serve alcohol but allows its patrons to bring their own alcohol and sells them set ups — providing glasses, mixers, ice, etc. Homatas and his companion brought in a fifth of rum and vodka and became intoxicated. They left the club and retrieved their car from valet parking. The valet parker opened the driver's door and told Homatas to leave the premises. Fifteen minutes later, Homatas collided with another vehicle, resulting in the death of four individuals.

The case had to deal with whether the business can be liable for injuries that arise, not as a result of serving alcohol, but as a result of actions in connection with allowing patrons to consume alcohol that they brought on the premises. The court concluded that the plaintiff's common law claims were not preempted by the state's Dram Shop laws. The court went on to state that the business was not in the business of selling liquor even though they provided the set ups for the liquor that was brought in by the patrons.

Due to these cases and others, the ISO has revised the Liquor Liability exclusion in the various GL coverage forms to clearly state that the Liquor Liability exclusion applies even if the claims against any insured allege the negligence or other wrongdoing in:

• The supervision, hiring, employment, training or monitoring of others; or,
• Providing or failing to provide transportation with respect to any person that may be under the influence of alcohol;

if the "occurrence" which caused the "bodily injury" or "property damage" involved that which is described in Paragraph (1), (2) or (3) of the exclusion.

There is further clarity that a Bring Your Own Alcohol Establishment (BYO) is not considered in the business of selling, serving or furnishing alcoholic beverages. There is a new endorsement available in the series that specifically deals with the BYO exposure titled: Liquor Liability Bring Your Own Alcohol Establishment.

Pollution Form Revisions
There are a couple of forms relating to Pollution that have been modified with the 4/13 change including:

In the Pollution Liability Coverage Forms CG 00 39 and CG 00 40 the "Aircraft, Auto, Rolling Stock or Watercraft" exclusion is revised to clarify coverage as relates claims for negligence in the "supervision, hiring, employment, training or monitoring of others" when the claim involves injury or damage arising out of the use of an automobile. This exclusion has been reviewed in prior form series including in 2000 and 2003. There is a new exclusionary endorsement introduced titled: Total Pollution Exclusion for Designated Products or Work CG 21 99. This new endorsement is similar to the CG 21 98 except that it limits the applicability of the exclusion to the specific product or work described in the schedule on the endorsement. Caution when reviewing the endorsement — it is broadening if the CG 21 99 replaces the CG 21 98. However, addition of the endorsement to a policy that does not contain the CG 21 98 would result in a reduction in coverage.

Additional Insured Endorsements
There are approximately 24 Additional Insured Endorsements that have taken the new edition date. These changes are due, in part, to the various state laws that have "anti-indemnification" laws that prohibit provisions in construction contracts which require one party to indemnify another against liability for the other party's own negligence or fault. Also, there are some states that prohibit providing insurance to an additional insured for the party's own negligence.

One of the clarifications in the new Additional Insured Endorsements is to add new language that will provide insurance to an additional insured "only to the extent provided by law." Further clarification is that the coverage provided under the Additional Insured Endorsement cannot be broader coverage than that provided to the named insured. There is a new Additional Insured endorsement introduced in this form series titled: Additional Insured-Owners, Lessees or Contractors — Automatic Status for Other Parties When Required in Written Construction Contract Agreement (CG 20 38). This endorsement provides additional insured status to parties to whom the named insured has become obligated due to written contract or agreement to name an additional insured under their policy.

Primary and Non-Contributory — Other Insurance Endorsement CG 20 01 04 13 — New Form
A new form has been introduced to clarify that coverage is made available to an additional insured on a "primary and non-contributory" basis. This change is particularly important for the construction client because construction contracts oftentimes require that the additional insured is provided coverage on a "primary and noncontributory" basis. The provisions require that:

• The additional insured is a named insured on other insurance available to them; and
• A written contract or agreement has been entered into by the insured stating that the insured's policy will be primary and wound not seek contribution from any other insurance available to the additional insured.

There are several other forms that have taken a change in edition date that we will be discussing in our upcoming New Commercial General Liability Form class taught on March 19th. The class is being taught by Marjorie Segale, AFIS, CISC, CIC, RPLU, CRIS, ACSR, CISR. Marjorie is the Vice President and Director of Education for the Insurance Community Center and President of Segale Consulting Services, LLC.

This is a listing of the forms that have changed. If it form is marked in "red" it is a new form to the series.

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Call it what you want ... lead generation, business development, canvassing, door to door, talking with referrals, follow up from a networking event, asking for referrals or even making the "Dreaded Cold Call." You can disguise it anyway you want. You are prospecting!

Prospects may come from a variety of sources that include your warm or natural market. You may also receive a steady flow of prospects from centers of influence, such as attorneys, doctors, accountants or VIPs in your community. What about referrals from clients or friends? You may even belong to associations and business networking groups. What about social media? (compliance permitting).

Skeptics say that prospecting is dead. It's not. And it never will be. The decision to prospect is yours alone.

True, the old way of selling is dead and gone forever, but prospecting continues to be the foundation of all successful businesses and salespeople. So what is prospecting?

Prospecting is defined as "in search of" or "to labor for." What are we all searching for? We should be prospecting for (or searching for) new customers, or new business from our existing customers. It's that simple.

Question — If you had the cure for cancer, how many cancer patients would you approach each day? Of course you would approach as many as you could. Make sense?

Why then, do we stop prospecting? The simple answer is that it is hard work. We get lazy and complacent. After all, it's easier to check your voicemail or email isn't it? Voicemail can't object, email doesn't challenge our value. We get caught up in all the stuff that really doesn't matter.

In closing: The following quote from Frank Bettger's book How I Raised Myself from Failure to Success in Selling says it straight out, "You can't make a sale, until you write some business; You can't write some business, until you have had a conversation; And you can't have a conversation until you make the call!" Are you ready to have more conversations, write more business, and make more sales? The decision is yours and yours alone.

Happy Prospecting!

Epoxy is a magnificent substance used in many important applications where strength, hardness, moisture protection and strong adhesion are a requirement. Epoxy coatings are used to protect industrial applications from factory floors to reinforcement bar embedded in concrete. When applied correctly to a strong surface, few coatings are as tough as epoxy.

Recently, epoxy manufacturers have developed a lining process to coat the inside of an old potable water system with epoxy. This method is touted as a fast, 60 year, non-invasive, and inexpensive alternative to re-piping a whole building. However, when applied incorrectly, epoxy coatings can create a dangerous sense of false security especially where hidden from view such as the internal surface of a pipe.

Many epoxy failures are appearing in the field where litigation is often protected by gag orders thereby never reaching the public domain. This document identifies a wrinkle in the market that supports the rapid liner industry as well as the consequences of an unseen failure, should they occur.

This article arrives at the following conclusions:

• The potential for epoxy liner failures may be high in galvanized steel potable water systems.
• There is no reliable way to inspect the adhesion of epoxy inside a pipe.
• If an adhesion failure is found, there is no practical way to repair it except re-pipe — so, why not just re-pipe?
• Epoxy liner failures may typically occur at the precise location where the galvanized steel pipe is already at its weakest.

These observations are very important for the insurance underwriter who would otherwise classify a water system that has been repaired with epoxy liner as a "new" system. These observations are important for the forensic analyst that may determine the cause of a major water system failure on a condition other than being weakened by the epoxy coating. These observations are very important to the insurance broker who may inadvertently force a condominium community into an epoxy liner "solution" as a condition for maintaining coverage on their property.

Recommendation
Insurers should allow their condominium clients to perform a condition assessment without threat of cancellation. A small leak does not necessarily mean that the big rupture is imminent. In any case, epoxy does very little to eliminate the risk of a large rupture and possibly increases the likelihood. Then the insurance industry should work with the community to save enough money to perform a superior re-pipe with new materials such as polypropylene or copper. Together, a strong case can be made for the reserves or lending process. In the long run, a superior re-pipe may cost several times less than an epoxy "solution."

The Vicious Circle
Something as simple as a pinhole leak can generate thousands of dollars of water damage claims. Imagine what a fracture in a main riser cascading down 10 floors of luxury condos can cost? Unfortunately, many insurance underwriters believe that after a few small water claims, the big one is imminent. This may not necessarily be the case. Yet, many a condo is put on notice that they will lose their coverage unless the whole system is immediately replaced.

Long before the first pinhole leak, insurance companies stipulate in their policies that they are not responsible for a pipe failure if the condominium board is aware of the problem and fails to take corrective action. This condition essentially removes the incentive for the condo board to perform a quantitative piping condition assessment — if they don't know that there is a problem, they are insured. If they do know that there is a problem, they are not insured. This creates a compound moral hazard because they have no basis for saving reserve funds for a replacement.

After awhile, a few small leaks may appear leading to some minor insurance claims — this can trigger the threat of insurance cancellation for the condo. But this is the least of their worries; the condominium construction market is renowned for litigation, and many insurance companies make it very difficult or impossible for a contractor to be insured for condominium work. Condominium homeowners associations quickly learn that many contractors are simply unable or unwilling to work on condominiums.

If the homeowners association fails to save for a re-piping project, they are forced into an expensive bank loan from lenders who are equally wary of litigation ... this can become a huge mess far beyond the knowledge and capability of a condo board to manage effectively. The inability to manage a project in a litigious environment leads invariably to more litigation!

Herein lies the wrinkle in the market caused largely by the insurance industry betting against itself thereby creating a vicious circle that has very little to do with actual plumbing. In the midst of this condo / contractor / insurance / banking madness arises the epoxy liner salesman who is quick to provide everyone with exactly what they need — a cheap, fast fix.

The Epoxy Liner Process
The epoxy liner process involves isolation of sections of the existing pipe, drying the pipes with hot air and then sandblasting the inside walls with pressurized air and an abrasive mineral that is supposed to remove all corrosion, leaving bare metal in order to prepare the pipe walls to accept adhesion of the epoxy liner. Once prepared, the paint-like epoxy is blown through the pipes in a liquid state using pressurized air. The epoxy is then "cured in place" either by the application of heat and/or the passage of time (pot life).

A Case Study
A reputable plumbing contractor in the Seattle Area provided samples of epoxy liner sections that were removed from at least three properties and which failed within 4-7 years of entering service.

Failure Modes
The following video demonstrates common epoxy liner failure modes correlated to available literature on epoxy liner vulnerability. The most common vulnerabilities of the epoxy lining system are associated with the planning and quality of the preparation as well as training of the applicator personnel.

The Anatomy of an Epoxy Failure: The following photographs demonstrate the progression of an epoxy failure where the surface has been improperly prepared.

When an epoxy failure does happen, it is likely to occur at the location where the pipe is already at it's weakest — pitted areas and threads.

Pipe threads are especially vulnerable: The photo below shows corrosion in steel pipe near pipe threads. Sandblasting with epoxy would weaken the threaded area further. A crack in the epoxy at this location would allow the corrosion to continue unknown to the residents. In many cases the existing pipe is better off left alone until a full re-pipe can take place.

Literature Review
Epoxy coating of steel is a widespread practice in construction and mainline water service^{2 3 4}. While epoxy is tested safe to drinking quality standards by independent studies¹ and national water quality standards⁶, any such "certification" is dependent upon actual adhesion to the surface of the pipe. The failure modes and vulnerabilities of epoxy are widely known and highly consistent in the progression⁷ of adhesion failure. It is also widely recognized that the project planning, surface preparation, and precise measurement and application of the ingredients to the substrate are the most significant variables in determining the probability of a successful epoxy coating assignment.

These factors are addressed in significant detail by the U.S. Army Corp of Engineers³, The American Water Works Association⁹, the American Society of Testing and Materials¹⁰, the Society of Protective Coatings, etc., who have all developed standards for the planning, preparation, measurement, and application of epoxy coatings. It can be assumed that if, and only if, these standards are followed and documented, then failures in epoxy coatings will not occur.

A comprehensive collection of tests and inspection criteria has been developed for epoxy coatings in any number of applications including internal water pipe coatings.³ Such tests as the knife blade test or those tests specified in ASTM F2831 are simple, fast and conclusive.¹⁰

The Epoxy Paradox
Epoxy coating is extremely strong and adherent if, and only if, applied correctly.⁷ The question arises that if an application should fail a test, inspection, or in service, what is the contingency plan to remediate the flaw? How will the epoxy be removed and how will the re-coating be applied? If re-pipe is the answer, why wasn't re-pipe considered in lieu of epoxy in the first place? If a single failure is found, what test sampling strategy must be applied to give a high likelihood that no other flaws exist in the system? Under what warranty claim would a failure be covered and to what extent will total coverage be warranted? These questions would be imminent in any litigation related to epoxy failures.⁵

Double Jeopardy: When an epoxy failure does happen, it is likely to occur at the location where the pipe is already at its weakest; i.e., pitted areas and threads. As such, a poorly applied epoxy liner could weaken a pipe considerably.⁶ The result could be a catastrophic high-volume pipe failure requiring a high insurance payout, which would not otherwise be attributed to epoxy coating.

Therefore, engineering and construction management representation and oversight can help assure that the epoxy liner material and contractors are aware of the expectation that industry standards will be applied. Independent testing should be applied as a condition of the contract bidding and warranty claims so that they may adjust their pricing to meet customer expectations. Again, epoxy is an amazing substance when applied correctly. But what if it is not?

References

¹ Impact of an Epoxy Pipe Lining Material on Distribution System Water Quality by Ryan Price and supervised by Andrea M. Dietrich, PhD., Chair, Environmental Engineering, Virginia Polytechnic Institute.

² Epoxy Adhesison Testing Sponsored by the Texas Department of Transportation.

³ PUBLIC WORKS TECHNICAL BULLETIN 420-49-35 15 June 2001 IN-SITU EPOXY COATING FOR METALLIC PIPE; Department of The Army; U.S. Army Corp or Engineers.

⁴ INVESTIGATION REPORT ON THE FAILURE OF MAKKAH-TAIF WATER TR.

⁵ Canadian law suit brought against the epoxy applicators.

⁶ Potable Water Pipe Condition Assessment For A High Rise Structure In The Pacific Northwest.

⁷ Layman's Guide to Epoxy Paint / Coating Failures.

⁸ NSF/ANSI Standard 61 Drinking Water System Components.

⁹ AWWS C210-3; Liquid-Epoxy Coating Systems for the Interior and Exterior of Steel Water Pipelines.

¹⁰ ASTM F2831 - 12: Standard Practice for Internal Non Structural Epoxy Barrier Coating Material Used In Rehabilitation of Metallic Pressurized Piping Systems.

Disclaimer
Engineering opinions rendered by any author are solely for the purpose of education and are not engineering advice. If you use any opinion presented in this document or on the website in any way whatsoever, you agree to hold The Engineer and the website harmless of your use of those opinions.

Introduction
Now that health care reform is gradually rolling out into the market, the concept of the "actuarial value" of a specific set of benefits is increasingly important. The Patient Protection and Affordable Care Act of 2010 defines four metallic categories of benefit plans ranging from Bronze to Platinum. The actuarial value of these categories range from 60% for Bronze increasing by 10% for Silver, Gold and capping out at Platinum at 90%. The benefit plans offered through the public exchanges will be required to offer benefit plans that are valued within ±2% of each of the metallic levels. This limitation is critical to benefit plan sponsors as they evaluate their current benefit plans.

Actuarial Value Defined
The actuarial value of a specific health plan is the ratio of net value of the actual benefits to the value of these same benefits without copays, deductibles, limits, and/or coinsurance or other items paid for by the individual covered under that plan. For example, in the case of a plan with an actuarial value of 70% (i.e., the Silver plan), this suggests that 30% of the cost is the responsibility of the individual and 70% is paid for by the health plan or carrier involved. Similarly a Gold plan (i.e., 80%) would cover 80% of the cost with the individual responsible for 20%.

As long as the plan has an actuarial value within 2% of the metallic target it would qualify for that metallic level. For example, a plan with an actuarial value in the range of 68% to 72% would qualify as a Silver Plan. A plan with a value outside of the 2% range would not quality as a specific metallic plan and could not be offered. As a result, it is critical to be sure you know the actuarial value of your plan and what metallic plan it qualifies for.

Actuarial Cost Model
The primary tool used to derive the actuarial value of a specific set of benefits is the actuarial cost model. This is a tool used by actuaries which presents detailed utilization, unit cost information, Per Member Per Month cost information, value of copays/ deductibles/ coinsurance, etc. The actuarial cost model typically includes assumptions for each of the major service types which could include as many as 50 or 60 categories of service. The standard definition used by our company includes the following categories:

Categories are often modified based upon the needs of the actual situation. However, for each of the specific categories of service, the critical assumptions are presented. These assumptions are for a specific population, managed in a specific way, with specific demographics, assumed charge levels, assumed health status, and assumed benefits.

An example of a specific set of utilization and cost assumptions is shown in the following table:

Illustrative Cost Model For Hospital Patient Services

The utilization is shown on a "Per 1,000" basis and the claims cost is shown on a PMPM basis. PMPM stands for per member per month. The total shown above for Hospital Inpatient suggests that the overall inpatient hospital cost per covered life would be $151.66 per month prior to any offsets for deductibles, copays, coinsurance, provider discounts, medical management, demographic adjustments, etc. Similar assumptions are available for the rest of the categories previously shown. This information was developed for a typical commercially insured under age 65 population.

Developing Actuarial Values
Once the benefit design is determined, the information from the actuarial cost model is adjusted for variation in benefit design with the overall value of the benefits determined. The ratio of the value of the benefits to the overall value of covered services is the actuarial value of the benefit plan.

This is a fairly complex process. The government has developed their version of this process and has published a Federal AV Calculator. The final version of this was released on February 20, 2013. Most consulting firms have developed their own calculator to help their clients understand the process prior to the release of the Federal AV Calculator. Since the final calculator was released, there continues to be some serious concern by health actuaries as to the reasonableness of the federal calculator. We continue to use our own AV Calculator in addition to the Federal AV Calculator to better help our clients understand what variations in benefits lead to various AV values. This is a dynamic process with varying opinions depending upon the various plan designs and resulting AVs.

The following chart shows an illustrative result using our firm's AV calculator. This was prepared for a specific plan design in a specific geographic region. It is illustrative only to show the various components of cost variation.

View Chart

The above table shows each of the key variables affecting the actuarial value. Each is important to appropriately incorporate into the calculation. The starting Claim Cost in the first column is determined from the actuarial cost model previously discussed and will be adjusted for:

• Geographic region
• Health status
• Smoking/non-smoking
• Medical management
• Utilization and cost inflation trend
• Demographics

The first adjustment reflects the overall nature of the health benefit plan. A richer plan is associated with higher utilization, a lesser benefit plan is associated with lower utilization. The copay/deductible adjustment either raises or lowers the starting claims cost. The next step eliminates any costs that are excluded from the eligible expenses.

This particular example excluded brand drugs.

The next step evaluates the value of various copays (i.e., office visit copays, pharmacy copays, etc.). These are deleted from the value of the benefit costs since they are paid by the individual. Next coinsurance and deductible values are deducted. This example was developed for a $1,750 deductible 80% coinsurance plan. The last two adjustments are for the value of a family deductible limit and the out-of-pocket limit yielding the final cost. In this situation the final cost was $218.30. This was compared to the net value of benefits after excluded benefits (i.e., $309.85) with a ratio of 70.45% or a "silver" plan per our model.

Assuming this was consistent with the "authorized AV calculator" this plan could become a qualified plan under the Patient Protection and Affordable Care Act.

Complications
As you can see there are many different steps in the process to determine the actuarial value of a benefit plan. There are even more assumptions that have to be made to obtain these estimates of value. Armed with this information the plan sponsor can make informed decisions as to what benefit plan is appropriate and what they want to offer, if any.

These calculations are frequently based upon considerable amounts of professional judgment. Not all actuaries think alike so there oftentimes can be professional differences of opinion. It is critical that the plan sponsor obtain professional input they can trust and rely upon.

The American Academy of Actuaries is the primary organization granting credentials that are relied upon in the industry. One approach to obtaining relevant and reliable input is to insist that your advisor is a qualified health actuary with credentials from the Academy. In most situations, this individual would have both an FSA and MAAA credential and be a recognized member of the Society of Actuaries Health Section. Others are qualified to provide this type of input but valid actuarial credentials provide increased assurance that good input is being offered.