The Insurance Services Office (commonly referred to as the “ISO”) is involved with virtually person, business, association, and governmental entity in the United States. Most people have no idea what it is and how important of a role it plays in the background of risk, finance, and insurance. Today, many businesses want transparency in the form of internal documents to know what role it played making all risk business interruption policy forms and virus exclusions which insurers claim allegedly does not afford coverage for their income losses caused by COVID-19.
A 2013 Market Conduct Examination of the ISO provides a fairly good history:
The Insurance Services Office was formed on April 1, 1971 as a national voluntary, non-profit Unincorporated association of insurers through the consolidation of various state, regional and national rating bureaus for various lines of property/casualty insurance. Over the decades that followed its formation, ISO made a series of changes in its operations and structure. Effective January 1, 1983, Insurance Services Office changed its legal form from that of a non-profit association to that of a non-profit corporation. Its name changed from Insurance Services Office to Insurance Services Office, Inc. (ISO). By 1989, ISO started making advisory loss costs instead of advisory rates and transferred complete decision making authority on all rate related matters, including actuarial methodology, to ISO staff from insurer committees. By 1994, insurers relinquished control of ISO to a member board that included seven non-insurer directors. In 1997, ISO became an independent for-profit corporation. Insurers may only own stock in ISO that have very restricted voting rights, primarily limited to the election of a minority of the board of directors and matters involving a substantial change to the structure or business purposes of the corporation. In 2008, Verisk Analytics was established, which serves as the parent holding company of ISO. In 2009, Verisk completed its Initial Public Offering and became a publicly-traded company.
ISO Data, Inc. a subsidiary of ISO, applied to the states for designation as a statistical agent on July 6, 2001.
The Market Conduct Study also noted the basic function of the ISO:
ISO’s functions include developing programs to help insurers define and manage insurance products provide information to help insurers determine their own independent premium rates. Insurers use ISO offerings primarily in their product development, underwriting and rating functions.
ISO serves insurers, reinsurers, insurance producers, insurance regulators, risk managers and other participants in the property/casualty insurance marketplace. The following is a list of the advisory organization products and services ISO offers:
• Data to help insurers make independent decisions about their pricing
• Statistical and actuarial services
• Insurance policy language
• Rules needed to write and rate insurance policies
• Tools for predictive modeling and scoring of risk
• Information about specific properties and communities
Regarding policy forms and changes, the Market Conduct Study noted:
ISO communicates changes to participating insurers through circular memos (Circulars) throughout the review and implementation process,
ISO modifies forms through a defined process that includes employee and manager sign off, quality assurance, and legal review. Once a form is deemed as final, all prior versions if applicable, are removed from production.
A 2007 Market Conduct Examination made for New York indicated that as of the end of 2004, the ISO also had outside liaison and advisory panels:
In addition to the committees of the board, ISO has established User Advisory Panels and Liaison Panels. User advisory panels have no decision making authority but make recommendations in their area of expertise. Commercial Lines, Personal Lines, and Actuarial Advisory Panels are some of the user advisory panels. Members of user advisory panels are employees of suitable senior position of a member or a subscriber of the corporation. National, regional and/or state liaison panels are established for the purpose of obtaining input and comment with respect to matters of significant concern from such non-insurers and non-insurer industry organizations, including but not limited to, associations of agents, brokers, underwriters, actuaries, regulators and risk managers.
Regarding policy forms and endorsement, that 2007 Market Conduct Examination noted:
ISO submits revisions to its insurance programs (policy forms and endorsements, manual rules and pricing considerations) as needed to reflect changes in New York statutes, regulations and Department circular letters as appropriate. ISO also makes changes to its programs in response to general developments in the marketplace, societal changes, competitive needs and general advancements in the property/casualty industry.
One such development during the examination period was related to terrorism coverage. Following the events of September 11, 2001, ISO began to re-examine exclusionary policy language in property and liability policies related to terrorism coverage. In response to the Terrorism Risk Insurance Act of 2002 (TRIA), ISO filed various forms related to losses from “certified acts of terrorism” for insurers to use on existing, new, and renewal policies. It also developed and filed loss costs for terrorism coverage for Commercial Property, General Liability, Commercial Auto and Businessowners policies.
These standardized forms and changes to them are supposed to be carefully reviewed by each Department of Insurance. The National Association of Insurance Commissioner’s explains:
What are regulators trying to accomplish with the process that calls for the filing and review of policy forms, endorsements, riders, and other insurance contract language? Policy form review ensures protection for the public and the filer. In spite of the importance of insurance contracts in people’s lives, the public does not generally take the time to read and understand the coverages, policy limits and coverage limitations, and duties of the insured and insurer spelled out in great detail in insurance policies and other related contractual documents. These documents affect the benefits that a person is entitled to receive and the obligations that the individual has to protect and obtain those benefits. Also, insurers might inadvertently draft contractual language that delivers benefits that are unintended or fails to comply with provisions contained in state law and/or regulation. Insurers also benefit from the services offered by the contract review analyst. A contract review analyst is probably much more familiar with the requirements contained in state laws and regulations for the products that they are assigned to review than any insurer employee. The analyst also sees product filings from multiple insurers and is able to benefit from an understanding of a particular market in ways that an insurer’s employees cannot duplicate. This allows the contract review analyst to review a policy form, rider, or endorsement with a vast knowledge base that can be helpful to insurers. For example, if an insurer has inadvertently failed to comply with a law or regulation, the contract review analyst can point out the shortcomings of the filing and ask the filer to make appropriate changes. Insurance companies oftentimes want to use the same product in multiple states and, therefore, a specific requirement in a particular state might not be adequately addressed and the contract review analyst will be able to help the filer accordingly.
Policy form review ensures that high standards of quality are maintained. These include delivery of generally expected benefits to the policyholder, avoidance of contractual abuse by the filer, inclusion of mandatory provisions that are specified in law or regulation, exclusion of provisions that are prohibited by law or regulation, and assurance that the insurance contract has an acceptable appearance for its intended audience.
Regulators must give forms careful scrutiny to ensure that they contain the essential elements required by statute and/or regulation. In some states, the review of policy forms includes the review of advertising material for specified lines of business.1
How did the Insurance Services Office come under the control of Verisk? A November 2009 SEC filing states:
Insurance Services Office… enable risk-bearing businesses to better understand and manage their risks. The Company provides its customers proprietary data that, combined with analytic methods, creates embedded decision support solutions. The Company is one of the largest aggregators and providers of data pertaining to property and casualty (‘P&C’) or P&C insurance risks in the United States of America (‘U.S.’). The Company offers solutions for detecting fraud in the U.S. P&C insurance, mortgage and healthcare industries and sophisticated methods to predict and quantify loss in diverse contexts ranging from natural catastrophes to health insurance. The Company provides solutions, including data, statistical models or tailored analytics, all designed to allow clients to make more logical decisions. The Company was formed in 1971 as an advisory and rating organization for the P&C insurance industry to provide statistical and actuarial services, to develop insurance programs and to assist insurance companies in meeting state regulatory requirements. Over the past decade, the Company has broadened its data assets, entered new markets, placed a greater emphasis on analytics, and pursued strategic acquisitions.
Verisk was established on May 23, 2008 to serve as the parent holding company of the Company upon completion of the proposed IPO. On June 27, 2008, the Company’s stockholders approved certain corporate governance changes necessary to allow the Company to proceed with a proposed IPO. On October 6, 2009, the Company effected a corporate reorganization whereby the…common stock of the Company was exchanged by the current stockholders for the common stock of Verisk on a one-for-one basis…. On October 9, 2009, the Company completed its IPO. Upon completion of the IPO, the selling stockholders sold 97,995,750 shares of Class A common stock of Verisk, which included the 12,745,750 over-allotment option, at the IPO price of $22.00 per share. The Company did not receive any proceeds from the sales of common stock in the offering. Verisk trades on the NASDAQ Global Select Market under the ticker symbol ‘VRSK.’…
In its 2008 prospectus to potential investors, Verisk, which was really the ISO since Verisk was just a made-up name for the of the previously privately held ISO, indicated the breath of the risk analysis it provides to insurance companies:
Risk Assessment: We are the leading provider of statistical, actuarial and underwriting data for the U.S. P&C insurance industry. Our proprietary and unique databases describe premiums and losses in insurance transactions, casualty and property risk attributes for commercial buildings and their occupants and fire suppression capabilities of municipalities in addition to other properties and attributes. Our largest P&C insurance database includes nearly 14 billion records, and, in each of the past three years, we updated the database with over 2 billion validated new records. We use our data, for example, to create policy language and proprietary risk classifications that are industry standard and to generate prospective loss cost estimates used to price insurance policies.
Decision Analytics: We provide solutions in each of the four processes of the Verisk Risk Analysis Framework by combining algorithms and analytic methods, which incorporate our proprietary data. Our unique data sets include approximately 600 million P&C insurance claims, historic natural catastrophe data covering more than 50 countries, data from more than 13 million applications for mortgage loans and over 300 million U.S. criminal records. Customers integrate our solutions into their models, formulas or underwriting criteria to predict potential loss events, ranging from hurricanes and earthquakes to unanticipated healthcare claims. We are a leading developer of catastrophe and extreme event models and offer solutions covering natural and man-made risks, including acts of terrorism. We also develop solutions that allow customers to quantify costs after loss events occur. Our fraud solutions include data on claim histories, analysis of mortgage applications to identify misinformation, analysis of claims to find emerging patterns of fraud and identification of suspicious claims in the insurance, healthcare and mortgage sectors.
It is no wonder that businesses that have been denied claims of lost income from COVID-19 want to see what the internal ISO documents say about their policies being interpreted to cover for their losses and then the effect of the virus exclusions written by the ISO. The insurance companies are vigorously fighting against this ISO disclosure in the same manner tobacco companies in cigarette litigation fought against internal memos suggesting that cigarette smoking was addictive.
One recently filed business interruption lawsuit2 directly sued the ISO claiming that it conspired with the insurance company and the American Association of Insurance Services to misrepresent to regulators the coverages caused by a virus and the impact of the virus circulars:
315. As alleged above, ISO and AAIS, and through them Berkshire, made misrepresentations to the NJ DOI and the Insureds regarding the Virus Exclusion, aimed at convincing the state insurance regulators that the Virus Exclusion was merely clarifying coverage, not reducing the scope of coverage.
316. Defendants made such false representations with knowledge of the truth and/or reckless and/or negligent disregard and intent that the Insureds and/or the NJ DOI and other regulators would rely upon the statements thereof.
317. The Insureds and/or NJ DOI reasonably and justifiably relied upon one or more of such representations to their detriment as evidenced by the fact that the Virus Exclusion was approved by state insurance regulators based on misrepresentations by ISO and AAIS…
It has been nearly a year since we first started into this COVID mess. Yet, the subsequent COVID business interruption litigation is pretty common to my prior insurance catastrophe litigation experiences. The insurance companies through their attorneys and publicists are saying the same things they did fifteen years in the Hurricane Katrina slab litigation:
- People and businesses are claiming too much and that the losses are not covered.
- Policyholder attorneys are overstepping and creating a mountain out of a molehill.
- There is no need for discovery of internal documents regarding coverage and of insurance company conduct.
One of the blessings that I am grateful for is having met with and shared information and ideas with bright and hardworking attorneys working to help businesses similarly situated in litigation in this battle seeking coverage against their own insurance companies. Now, if we can only get a breakthrough on this discovery of the internal documents with the Insurance Services Office….
Thought For The Day
The Song Remains The Same is not a great film, but there’s no point in making excuses. It’s just a reasonably honest statement of where we were at that particular time. It’s very difficult for me to watch it now, but I’d like to see it in a year’s time just to see how it stands up.
—Jimmy Page, Lead Guitar, Led Zeppelin
Song of The Day
1 Product Filing Review Handbook at 65 (NAIC Aug 2016).
2 The Learning Experience v. Berkshire Hathaway Specialty Ins. Co., No 2:20-cv-14013 (D. N.J. Complaint filed Oct. 7, 2020).