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.
Court Upholds Reservation of Rights
Wellons Inc. created two thermal oxidation energy systems in 2002 for Langboard Industries in Quitman, Ga., that were designed to generate electricity to be sold to Georgia Power.
During the construction phase in 2004, a “tube bundle” collapsed, causing extensive property damage, but the system was ultimately placed in service by June 2005, at which time leaks were discovered in the “superheater” portion of the system, according to court documents.
To fix the leaks and seal weld the joints, Wellons hired Hunt Construction, which completed the work in March 2006. The superheater was put back into service even though leaks still occurred. Two weeks later, one of the superheater tubes “completely severed.” Wellons claimed Hunt’s faulty repair work was responsible.
Langboard requested a new superheater, at a cost of $850,000, to be designed and installed as the current system was “not conducive to long term operation.” Wellons agreed, but did not immediately notify Lexington Insurance Co., which had issued a commercial general liability policy, with a per occurrence limit of $1 million. Lexington also had issued an umbrella policy, with a per occurrence limit of liability of $10 million.
Two months later, Hunt filed suit against Wellons for monies owed for its work. Lexington was notified through its agent, referencing the CGL policy and not the umbrella policy. Lexington issued a reservation of rights letter, notifying the company it was “investigating this matter.”
Langboard eventually filed suit against Wellons in 2007. Lexington sent another, similar reservation of rights letter.
After a jury trial in 2010, Langboard was awarded $8.4 million for breach of the purchase and construction agreements. A month later, Lexington advised Wellons it had “no obligation” to defend or indemnify it.
Wellons filed suit seeking a court declaration that the verdict was a covered loss under its CGL or umbrella policy. Both it and Lexington sought summary judgments.
The U.S. District Court for the Northern District of Georgia ruled in Lexington’s favor. On appeal to the U.S. 11th Circuit Court of Appeals, Wellons argued the reservation of rights notification needed to be more specific to comply with Georgia law.
The appeals court disagreed in May, saying that Lexington’s “defenses of noncoverage were not known … until it concluded its investigation… .” The court also found that Wellons had never notified the company of a claim under the umbrella policy.
Scorecard: Lexington Insurance did not have to cover an $8 million jury verdict resulting from faulty construction of an energy system.
Takeaway: Insurers “must” give insureds notification of a reservation of rights, but Georgia law only recommends that specific policy terms be part of that notification.
Imitation is Not Disparagement
In 2010, Gary-Michael Dahl, manufacturer of the Multi-Cart, filed a lawsuit against Ultimate Support Systems claiming that Ultimate’s Ulti-Cart infringed on Dahl’s patent and trademark, and damaged its business and reputation, among other issues.
Both the Multi-Cart and Ulti-Cart are collapsible carts designed for the musical industry to transport music, sound and video equipment.
Ultimate sought defense under its commercial liability policy issued by Hartford Casualty Insurance Co., which denied coverage, claiming that “disparagement” was not covered by the personal and advertising injury policy terms.
The insurance company also said the policy did not cover violations of intellectual property rights.
After Ultimate sued for coverage, the California Superior Court dismissed the lawsuit. That decision was affirmed by the Court of Appeal, and on further appeal to the California Supreme Court, Ultimate lost once again.
The state’s high court ruled in June there was no disparagement, either explicit or inferred.
The possible confusion between the two products does not imply inferiority of the Multi-Cart, the court ruled. In addition, Dahl’s claim that Ulti-Cart was a “knock-off” of the Multi-Cart, and thus derogatory of the Multi-Cart, was disputed by Dahl’s own claim that the two products were “nearly identical.”
Scorecard: Hartford did not have to provide a defense to Ultimate Support Systems in a trademark infringement lawsuit.
Takeaway: The ruling limits the scope of an insurer’s duty to defend a policyholder when the allegations involve disparagement.
Court Rules on Additional Insureds
On Sept. 13, 2010, workers of Fast Trek Steel were tightening safety cables on steel beams at Yale University’s Science Area Chilled Water Plant Shell when the unsecured beams dislodged and collapsed. One ironworker, Robert Adrian, fell to his death. Three others were injured by the falling beams.
Adrian’s estate and the injured men filed suit alleging negligence against, among others, Shawmut Woodworking & Supply Inc., general contractor of the construction project, and Shepard Steel Co., a steel fabrication subcontractor.
Because of workers’ compensation laws, there were no lawsuits filed against Fast Trek, which, as required by its contract with Shepard, had obtained a general liability policy from First Mercury Insurance Co. with a $1 million per occurrence coverage limitation, and an excess liability policy from National Union Fire Insurance Co., with up to $10 million of coverage.
Both Shepard and Shawmut sought defense and indemnification from First Mercury as “additional insureds” of that Fast Trek policy. Liberty Mutual — which had issued a liability policy to Shepard and is currently providing a defense to Shepard and Shawmut under a reservation of rights — also demanded that First Mercury assume that defense.
First Mercury demurred, contending, among other reasons, that Shawmut was not included in the definition of additional insured, and that even if Shawmut and Shepard were included, there was no coverage because Fast Trek was not named in the underlying lawsuits.
The U.S. District Court for the District of Connecticut disagreed.
It ruled that when Shepard hired Fast Trek as its subcontractor — and as Shawmut’s sub-subcontractor — the agreement expressly incorporated the Shawmut-Shepard contract, and that it was “immaterial” that there was not a “direct contractual relationship” between Shawmut and Fast Trek.
In addition, it ruled that the accident was arguably caused by Fast Trek and that the reason Fast Trek was not named in the underlying lawsuits was due to the exclusive remedy rule of workers’ compensation law.
Scorecard: First Mercury must defend and indemnify the general contractor and subcontractor in the workplace death and injury lawsuit.
Takeaway: A sub-subcontractor need not be explicitly included in a contract for coverage to be extended.