Jury Rules in Favor of Insured
Sometime between Jan. 12, 2009 and February 5, 2009, one or more individuals entered the disc jockey’s room at the Cabo Wabo Cantina and Memphis Blues nightclub in Fresno, Calif., and stole about $140,000 of electronic equipment including HD televisions, speakers and sound mixers.
Fresno Rock Taco, which operated the cantina and nightclub, reported the theft to the police upon the advice of its broker, and filed a claim with National Surety Corp., a Fireman’s Fund Co., for the equipment, property damage and for loss of business income. It had two insurance policies with respective limits of $2.6 million and $6.1 million.
Fresno Rock, along with Zone Sports Center LLC, owner of the property at the time of the theft, filed suit against National Surety when the claim was denied.
The insurance company alleged the loss of equipment was due to repossession rather than theft, according to court documents.
Cabo Wabo denied repossession was involved, and noted in court documents that a search of the premises by the state Department of Insurance for possible insurance fraud “revealed no wrongdoing of any kind and no charges of insurance fraud or any other crime have been filed against anyone connected to this matter.”
After a trial in the U.S. District Court for the Eastern District of California, Fresno Division, a jury ruled on Aug. 22 that Cabo Wabo and Zone Sports had suffered a covered loss and did not make a false claim to the insurance company.
It ordered the insurer to pay $2.2 million to Cabo Wabo for business interruption losses and about $275,000 to the property owner for property damage losses.
Scorecard: The insurance company was ordered to pay $2.5 million for the claim.
Takeaway: National Surety’s belief that the theft was questionable and that security measures were inadequate did not sway the jury.
Insurer Need Not Pay Auto Settlement
Tyler Roush was driving his mother’s car on Aug. 3, 2009 when he struck and severely injured a pedestrian, Lloyd Miller.
Miller and his wife Nancy filed suit against Roush and his parents, Sharon and George Roush, and Brash Tygr, which owned and operated a Sonic Drive-In restaurant in Carrollton, Mo. The parents owned 75 percent of Brash Tygr; Tyler and his brother Brandon each owned another 5 percent.
The company was covered as part of a commercial lines master policy issued to Sonic Insurance Advisory Trust by Hudson Specialty Insurance Co. The CGL policy had a Hired and Non-Owned Auto Liability endorsement, under which the family and franchise sought coverage.
Hudson provided a defense, under a reservation of rights, until the family rejected that defense and settled the Millers’ lawsuit for $5.8 million in compensatory and punitive damages, according to court documents. At the same time, the family admitted that Tyler Roush was “conducting the business of Brash Tygr” during the accident.
Tyler Roush, who had not worked for the restaurant for a long time, had been on some errands for his mother at the time of the accident. While he was depositing his mother’s paycheck at a local bank, an employee had handed him some bank deposit bags for use by Sonic Drive-In, according to court documents.
Because of that action, the U.S. District Court for the Western District of Missouri-Kansas City ruled that Roush had “a dual purpose” in his travels and was acting “in the course of [the restaurant’s] business.”
On appeal, the U.S. 8th Circuit Court of Appeals on Oct. 7 disagreed. In a 2-1 decision, the majority ruled there was no dual business purpose. It ruled that “picking up the bags was a matter of convenience, not necessity, for Brash Tygr and the Sonic Drive-In.”
In his dissent, Judge Kermit Bye said it was uncontroverted that Brash Tygr used such deposit bags and that the company did not have “a limitless supply.” Thus, at some point, an employee would have needed to “make a special trip to the bank for deposit bags if Tyler Roush had not brought them to his parents’ home.”
The court also ruled that Hudson had not been given an opportunity to contest coverage in the wake of the family’s admission that Tyler Roush had been acting in the course of business.
Scorecard: The insurance company did not have to cover any of the $5.8 million in settlement costs.
Takeaway: Accepting the deposit bags “was a ‘casual and incidental’ aspect of a purely personal trip that did not give that trip a dual business purpose under Missouri law,” according to the court’s majority opinion.
Insurer Must Pay for Explosion Costs
In 2009, A.H. Meyer’s plant in Winfred, S.D., exploded for the second time in five years. The cause was heptane, a highly volatile solvent manufactured by Citgo Petroleum Corp., which is used in the production of beeswax.
After the first explosion in 2004, A.H. Meyer redesigned the plant so that electrical switches were at least five feet away — the recommended distance — from the 150-gallon storage “kettle” of heptane at the factory. In the previous plant, the distance had only been four feet. The company also added a ventilation system, as recommended.
Nonetheless, an explosion occurred in 2009 when heptane spilled from the kettle and an employee pressed a switch to turn off a pump, according to court documents. Nationwide Insurance Co., which paid for the damage, filed a subrogation suit against Citgo, the manufacturer, and Barton Solvents, the supplier of the heptane.
It argued the companies were liable and negligent because the warnings were inadequate. A safety expert it hired said that the ventilation system meant to reduce risk was actually the reason for the explosion.
Nationwide also argued the companies had provided an express and implied warranty of the heptane.
Both the Circuit Court of the Third Judicial Lake County and the state Supreme Court disagreed, granting the defendants’ motion for summary judgment.
The South Dakota Supreme Court ruled that both the supplier and manufacturer “collectively warned that heptane was volatile and explosive,” and that A.H. Meyer complied with all safety recommendations.
“Ultimately, Nationwide’s inadequate warning claim is based on nothing more than the fact of the accident, speculation, and conjecture,” it ruled.
It also said that pointing out danger is not the same as a warranty, which implies a promise.
Scorecard: Nationwide’s attempt to subrogate the costs for repair were denied.
Takeaway: A safety warning is “an alert,” while a warranty is a “promise that the thing being sold is as represented,” the court ruled.
Buying in to Workers’ Comp
Private equity’s interest in the workers’ compensation industry isn’t going to diminish anytime soon, according to three P/E senior executives.
“I think you will continue to see significant activity in the workers’ compensation space,” said Hunter Philbrick, managing director of Hellman & Friedman, whose firm (along with Stone Point Capital) acquired Sedgwick Claims Management Services in 2010 and sold it to Kohlberg Kravis Roberts & Co. earlier this year.
P/E firms get a bad reputation for ripping apart companies, he said. “That’s a very small minority and not really true of any of our firms up here.”
Philbrick was joined on the panel by Jeffrey McKibben, managing principal of Odyssey Investment Partners, which acquired majority interest in York Risk Services in 2010, and acquired and later sold One Call Care Management; and Camilo Horvilleur, principal of H.I.G. Capital, which acquired PMSI Group in 2008, selling it in October 2013, after which it merged with Progressive Medical and became Helios.
Moderating the “Private Equity’s Major Deals and Their Impact on Workers’ Compensation” panel, presented at the 2014 National Workers’ Compensation and Disability Management Conference & Expo in Las Vegas, was Joseph Paduda, principal of Health Strategy Associates.
McKibben said his firm looks for companies that “add value for their clients” and whose leaders are team oriented and flexible.
“We push, we pull and add resources and jet fuel … so they can do more,” he said.
“Chemistry,” said Horvilleur, “is very, very important. … If you don’t like us, run for the hills because you are going to be stuck with us for years.”
That’s not to say, he said, that private equity firms come in to micromanage their portfolio companies. “Most of our investment in workers’ comp, we had a great team that we backed early on,” noting that his firm focuses on small entrepreneurial companies.
What H.I.G. Capital does is help visualize what it can do to help the company grow and help support the management team, he said.
There must be clarity of purpose and alignment between the company and P/E firm on the vision for the future, Philbrick said.
“Our goal is to make our companies more critical, more tied in and better for their own customers,” he said. “I think at the end of the day, it should be a net positive.”
Focusing on Results
Partnering with medical providers that deliver top quality care leads to better results for workers while lowering claims, treatment duration, indemnity costs and incidents of permanent partial disability, according to presenters at an “Improving Claims Outcomes Using Outcomes-Based Networks” session, presented at the 2014 National Workers’ Compensation and Disability Management Conference & Expo in Las Vegas.
“It has helped us by driving our costs down,” said Randy Triplett, manager, workers’ compensation & IDM, The Goodyear Tire & Rubber Co., who was joined on the panel by Jane Ish, national networks manager, commercial insurance, Liberty Mutual Insurance.
Instead of focusing on weeding out “bad” medical providers, it’s better to focus on attracting a medical eco-system with the best physicians, hospitals and groups, said Ish.
“We are looking to attract honey instead of vinegar,” she said.
“Physician evaluation is key to creating our networks,” she said, noting that partnering with claims and medical management professionals to get information on physicians is crucial. “We need to understand what his tools are, what his referral patterns are.”
It is not a simple task, however, she said. Sometimes, there is not enough claims data to support selection into a network and sometimes geographic limitations – such as a lack of providers or facilities – can hamper creation of an effective OBN.
But the results are impressive, said Triplett. His company’s North Carolina plant saw a 64 percent reduction in lost work days, while Goodyear’s top six plants saw a 33 percent decrease in lost work days.
In putting its network together, Goodyear needed to persuade unionized workers, who by contract have the right to choose their physicians. The company’s focus on safety and its mantra of “the right treatment at the right time” helped convince workers, he said.
“It’s taken more than seven years working hard to build confidence that what we are trying to do is in their best interests,” he said.
Even in states where the company cannot direct the care of injured workers, the employees will often ask the company for physician referrals.
“We have been a paternalistic company for our entire existence. … Our associates expect the best from us,” Triplett said.
“Any time there is a positive interaction between a network provider and an associate, it builds a stronger relationship,” he said.
Orthopedic injuries – shoulder, knee and back “in that order” – are the top employee issues, he said.
The company has onsite medical facilities staffed by physician assistants, nurse practitioners and, for two or three days a week, doctors. Initial examinations are nearly always held at the plants, Triplett said.
The company also invites all outside medical staff to tour the facilities once a year to create a better understanding of the business and locations.
When employees are released to return to work, Goodyear puts the employees through a process of “work hardening” to ensure they are ready for full duty, he said.
One hospital group recently made the RTW transition easier by releasing injured workers to onsite physicians when they believed they were ready to return to work, he said.
“It allows us to manage that last part of that care and get our associates back to work. It’s all about outcomes and finding networks and physicians that will work with you to return your associates to work,” he said.