Predicting Claims Severity
Using predictive modeling in workers’ compensation cases isn’t a magic wand but it is a valuable tool.
“What models do is identify a claim before you may know it’s a bad claim,” said Frank Murray, senior vice president, claims, ESIS, at a November 12 session, “Optimizing Predictive Modeling: Georgia-Pacific’s Experience” at the National Workers’ Compensation and Disability Conference® and Expo.
“This is a powerful tool.” — Tim Starks, director of casualty, Georgia Pacific
Modeling, said Tim Starks, director of casualty, Georgia Pacific, “helps us put the blinders on and focus on the right cases where we can make the best impact.”
“This is a powerful tool,” he said, cautioning, however, that “it’s not a panacea. It’s not a magic tool.”
The data is important, he said, but the company must use the data to “get resources mobilized in the right way.”
Predictive modeling, Starks said, doesn’t necessarily change the claims process, but it accelerates it so outcomes are improved. It also doesn’t replace the knowledge of claims adjusters, he said, noting that his company relies on both the model and an adjusters’ experience.
Each claim receives a severity score for probability of cost. The model takes into account up to 20 variables related to the claim – such as age, body part injured, comorbid conditions and facility location, as well as text mining the intake notes — to determine the likelihood of an adverse development.
A model of claims open at three months forecasts the likelihood that the claims may breach $100,000; for claims open at 12 months, it focuses on the $250,000 level.
In the three years the 12-month model has been in effect, ESIS has seen $4.7 million in savings on open claims, and $3.56 million in savings on closed claims, Murray said.
Focus on Behavioral Issues
As a keen observer of the evolution of health and medical care, Dr. Arthur Southam points to socioeconomic factors and fee-for-payment health care as major issues for workers’ compensation professionals.
In his keynote address opening the National Workers’ Compensation & Disability Conference® and Expo in Las Vegas on November 11, Southam, executive vice president, health plan operations, Kaiser Foundation Health Plan Inc., said medical care must focus on quality, not volume.
“The more you do, and the more it costs and the more times you do it, the more you get paid,” he said of the current fee-for-payment system.
The Affordable Care Act, with its emphasis on accountable care organizations, is beginning to change that, by focusing on “paying providers by the package rather than the price.”
“Improving the walkability of our workforce is the highest thing we can do.” — Dr. Arthur Southam, executive vice president, health plan operations, Kaiser Foundation Health Plan Inc.
He noted that a study by the RAND Corp. found that socioeconomic issues are “the most powerful determinant of health,” and that chronic diseases, primarily driven by behavior, are one reason America spends 50 percent more on medical care than any country in the world.
“A large portion of our costs in America could be dramatically reduced if we ate less, moved more, stopped smoking, slept sometimes and we were careful with the substances we ingest,” he said.
The issue of an inactive workforce “should be front and center in your workplace,” Southam said. “Improving the walkability of our workforce is the highest thing we can do.”
Depression also is a leading cause of morbidity, he said.
A striking cause of death, he said, is medical error.
Every year, he said, 98,000 people die from medical errors. That’s equivalent to two 747 jets crashing into each other each week, killing all passengers.
“Our hospitals and medical care system are not as safe as they should be,” he said.
“We have some spectacular outcomes but also some shortcomings.”
The increasing use of electronic health records will help medical providers be more effective and efficient as well as enhance transparency and coordination of care, he said.
But the ubiquitous cell phone, which offers access to tens of thousands of health-related apps and hundreds of biometric measurement tools, may be “the most important advance” in medical treatment.
That digital transformation “takes much of medical care out of the offices and institutions to put it in your home, to put it in your place of work, to put it in your pocket, to put it in your hand.”
The use of voice, video and data in telehealth operations – which is “just starting to scratch the surface” — will also transform health care delivery by improving access to primary and specialty care.
Court: Misrepresentation Voids Claim
An 18-year-old employee of Sky High Athletics in Nevada attempted to do a backflip when being trained as a trampoline instructor and broke his neck, leaving him a quadriplegic.
Sky High, which runs trampoline-lined fitness centers, filed a workers’ compensation claim for the worker with Companion Property and Casualty Group, which agreed to provide benefits.
After an investigation, however, Companion discovered that, contrary to statements on the fitness center’s application, employees routinely used the trampolines at the center. The application stated that employees were stationed at the front desk and dining area, and “they do not teach nor are they out on the trampolines,” according to documents.
In November 2012, Companion sued Sky High, claiming it misrepresented information in its workers’ compensation application, according to documents. Sky High countered that Companion knew employees used the trampolines because they had already paid benefits for such injuries. It filed counterclaims against the insurer for delaying payments to the employee.
After a trial in U.S. District Court for the District of Nevada, a jury decided on Sept. 21 that Sky High made a “negligent misrepresentation” to the insurance company, but ruled that Companion was also negligent in the case.
It ordered Sky High to pay $8 million in damages to Companion for making false statements, but decreased the amount by 40 percent, due to Companion’s own negligence in the case.
That reduced the award to $4.8 million, which was further reduced to $3.49 million because of some setoffs in the case, according to published reports.
The brokers involved in the case were also sued by Companion, but reached a settlement prior to trial.
Scorecard: The fitness center must pay $3.49 million for misrepresentations in its workers’ compensation insurance application.
Takeaway: False statements on insurance applications will void coverage.
Insurers Unable to Recoup $132.5 Million
On Sept. 12, 2008, Robert Sanchez, engineer of a passenger train owned by Metrolink and operated by Connex, ran through a red signal in the Chatsworth area of Los Angeles because he was distracted by text messages on his cell phone, according to a federal investigation.
The train collided with a Union Pacific freight train, injuring more than 100 people and killing 24, including Sanchez.
Lloyd’s of London and other insurers paid out $132.5 million from excess railroad claims made policies issued to Metrolink and Connex, and other layers of excess insurance totaling $146 million, over a $4 million self-insured retention.
Subsequently, the insurers filed suit seeking reimbursement from Connex, and its parent company, Veolia Transportation Inc., claiming the policies excluded coverage for bodily injury “which the insured intended or expected or reasonably could have expected.”
The insurance companies argued that the railroad had knowledge of “multiple violations” of its no-cell-phone-usage policy by train employees and that such a disaster “reasonably could have been expected,” according to court documents.
In dismissing the case on Sept. 18, Los Angeles Superior Court Judge Elihu Berle said that argument was not sufficient under New York law, under which the case was tried.
The insurers’ argument “fundamentally fails to meet the more stringent New York standard, which requires that a reasonable person in [the railroads’] position would know that the injuries and damage resulting from the Chatsworth accident would flow immediately and directly from [the railroads’] intentional acts.”
He noted that neither Sanchez nor any other Connex engineer ever previously caused injury or damage because of a violation of the cell phone policy, and that Connex was not aware of the cell phone violation until the National Transportation Safety Bureau investigation.
At the same time, Berle dismissed a suit by the railroads against the insurance companies, arguing breach of contract, bad faith and fraud because the litigation was filed after a “policy release and agreement,” which “released all of the claims [insurers] had against [the railroads] at the time.”
The court ruled the claims in the lawsuit filed by the insurers fell within the scope of the agreement.
Scorecard: The insurers will not be reimbursed for $132.5 million in claims following the train crash.
Takeaway: An intentional act, even if it ultimately causes damage, is considered accidental under New York law unless the damage flows “directly and immediately from the act.”
Insurers Need Not Defend in Spyware Case
On July 30, 2010, Crystal and Brian Byrd leased a laptop computer from Aspen Way, a rent-to-own franchisee of Aaron’s Inc. On Dec. 22, 2010, an Aspen Way store manager came to repossess the computer, under the mistaken impression that the couple’s account was delinquent.
The store manager showed Brian Byrd a picture taken with the computer’s webcam that showed Byrd using the computer, and the Byrds later discovered that Aspen Way had installed spyware known as “Detective Mode” on the computer.
Detective Mode gave Aspen Way access to private emails, keystroke logs for user names and passwords, financial information and personal photos, according to court documents.
The Byrds filed a class-action lawsuit alleging a violation of the U.S. Electronic Communications Privacy Act (and some other claims that were later dismissed) against Aaron’s and Aspen Way (collectively called Aspen Way) in May 2011.
They said their computer was accessed nearly 350 times and that the information was “transmitted via unencrypted email and forwarded to unknown persons and locations.”
Aspen Way sought defense and indemnification from Hartford Fire Insurance Co. and three Liberty Mutual Insurance Corp. subsidiaries, which had issued primary and umbrella policies. All agreed to defend under a reservation of rights.
The insurers sought a court judgment that they need not defend Aspen Way, and on Sept. 25, the U.S. District Court for the District of Montana, Billings Division, ruled in their favor.
The court ruled that coverage was triggered in all of the policies by the allegations of “personal and advertising injury,” which was defined as injury arising out of publication “of material that violates a person’s right of privacy.”
However, because a Recording and Distribution Exclusion precluded coverage for any “violation of a federal statute that prohibits the transmitting or distribution of material or information,” the court ruled defense and indemnity was not covered.
The court also ruled the insurance companies did not owe a duty to defend Aspen Way in a Washington State lawsuit, which was settled in February 2015, when Aspen Way entered into a consent decree that required it to pay $150,000 to the state and agree not to install any such software, while not admitting any violations of the state’s Consumer Protection Act and Computer Spyware Act.
Scorecard: The insurers need not pay to defend or indemnify Aspen Way. The Liberty Mutual subsidiaries may be due reimbursement of funds they paid for defense already, depending on further court proceedings.
Takeaway: Although Aspen Way argued the exclusion was ambiguous due to the phrase “arising directly or indirectly out of any action or omission,” court rulings determined that a policy term is not automatically invalidated because it is found to be ambiguous.