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Employee Misclassification

Premium Fraud in the Spotlight

A Grand Jury report suggest that workers' comp premium fraud in New York is rampant.
By: | April 11, 2014 • 2 min read

Unpaid workers’ comp premiums are costing New York hundreds of millions of dollars, according to an official. In the wake of a grand jury’s report, New York County Prosecutor Cyrus Vance is calling for major changes to the system.

The release of the report by the New York State Supreme Court Grand Jury coincided with the 103rd anniversary of the Triangle Shirtwaist Factory Fire in Greenwich Village that killed 146 people. The state’s workers’ comp law was closely associated with the tragedy.


“The widespread premium fraud detailed by this Grand Jury Report is deeply troubling and underscores the critical need to reform the workers’ compensation system,” Vance said in a statement. “My office’s Tax Fraud and Money Laundering Unit will continue to pursue those who cheat the system, but the best protection for New York’s workers is a system that is itself protected from fraud and abuse.”

The report followed investigations by the unit into false information provided to the New York State Insurance Fund in connection with applications for, and audits of, workers’ comp policies, the statement said. Vance said investigations by his office looked at incidents of insurance premium fraud that, among other things, cost New York City and state “substantial revenue.”

As Vance explained, an employer’s premium is based on each covered employee’s job classification. Rates for a relatively safe job can be much lower than that for a dangerous job.

“This system, which requires employer self-reporting, is easily abused by unscrupulous employers who misclassify employees,” Vance said. “Employers can easily lie about what work a particular employee performs, for example, reporting a roofer as a clerical worker, and thus paying a significantly lower premium. More egregious is fraud where an employer misclassifies a worker who is required to be insured under the system as an independent contractor, but is an employee.

Estimates indicate New York City’s construction industry in 2011 cost the city and state about $500 million due to worker misclassifications. This lost money is typically made up by cost shifting from somewhere else.

The grand jury’s report included a variety of recommendations from the following categories:

  • Increased penalties to ensure that sentences are proportionate to the magnitude of the fraud.
  • Increased transparency by reforming the application and audit process, thereby making it more effective and less susceptible to fraud.
  • Increased dissemination of information into the hands of those charged with investigating and prosecuting fraud.
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  • Increased education for employees and the community at large about the workers’ comp system and its value to the public, so that everyone is better able to protect the system from fraud.

“A well-functioning workers’ compensation system not only generates significant revenues for the City and the state, but also fosters equality in the marketplace and allows small businesses to flourish, creating the sorely-needed jobs. It benefits every employer, every employee, every consumer, and every taxpayer,” the report said.

Nancy Grover is co-Chair of the National Workers’ Compensation and Disability Conference and Editor of Workers' Compensation Report, a publication of our parent company, LRP Publications. She can be reached at
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Directors' & Officers' Liability

Closing the Property Gap

Sticky language in D&O property exclusions is causing headaches for some in the property and construction spaces.
By: | April 7, 2014 • 10 min read

A complaint is filed against your organization’s board of directors. The board did nothing wrong — but they’ll still need to be defended against the claims. The good news: You have a D&O policy in place to protect them. The bad news: It may not be enough.


Nonprofit organizations and private companies whose business is in or related to property may, in certain circumstances, be faced with the unpleasant discovery that there’s a chink in their D&O armor. That chink comes in the form of the property exclusion included in all D&O policy forms.

The property exclusion seems an innocuous enough passage. And it’s there for a valid reason: Property policies — not D&O policies — should cover property damage. D&O underwriters don’t want to get stuck paying for things they never agreed to cover. So the language used in policy forms is intended to address every possible angle. But there are instances where policy language can inadvertently go a step too far, excluding exactly the type of claims that organizations use D&O policies to protect themselves from.

The primary sticking point, as it is with any exclusion, is a matter of language. Consider this sample wording from one D&O policy form:

“Insurer shall not be liable for loss … for actual or alleged bodily injury, sickness, disease or death of any person, or damage to or destruction of any tangible property including loss of use thereof; whether or not such property is physically injured … .”

The language is pretty straightforward, and does what it sets out to do — it excludes any claim that alleges the directors and officers’ actions caused damage to property. Got damage? Look to your property policy. Case closed.

By contrast, consider the exact same exclusion as written on another D&O policy form:

“This insurance does not apply to any ‘loss’ or ‘defense costs’ in connection with any claim made against an insured, arising out of, directly or indirectly resulting from, or in consequence of, or in any way involving any actual or alleged bodily injury, sickness … damage to or destruction of any tangible property including any loss of use or slander of title … .”

On its face, that wording could be used to exclude just about anything related to property damage in any way, including common complaints that should trigger coverage, such as failure to set adequate reserves or failure to have adequate insurance. If those acts can be tied to property damage in any peripheral way, the carrier can refuse to defend the board.

Mark Weintraub, insurance and claims counsel, Lockton

Mark Weintraub, insurance and claims counsel, Lockton

Explained Mark Weintraub, insurance and claims counsel for Lockton’s southeast region: “If the board makes a decision — ‘OK, an elevator broke and we’re going to repair it’ — they know that’s part of the property damage exclusion. They’re not worried about that. But if it’s ‘we’re going to make a global decision about reserving funds … or a decision based on disclosures or assessments,’ that’s something that the property damage exclusion shouldn’t reach.

“There’s that danger for anyone who deals with property on a regular basis that the property exclusion could reach out and steal away coverage for basic fiduciary acts,” said Weintraub. “It’s not something that I think anyone intends, but it can happen, especially as claims get larger. Carriers will look at their policies to try and see what they can do to restrict coverage — that’s just human nature.”

Court Rulings Clash

A handful of cases brought the property exclusion debate to the courts in 2013, with mixed results.


In a Florida case, Commodore Plaza Condominium Association vs. QBE Insurance Corp., a building suffered damage during Hurricane Wilma. The property managers allegedly made multiple missteps after the fact, causing additional damage to the property.

The court held that all claims related to that damage were subject to the property damage exclusion — not a surprise. But the court also held that the exclusion applied to other alleged acts such as failing to provide security; breaching the duty to not interfere with peaceful possession of property; failing to follow all valid laws, zoning ordinances, and regulations; hiring unlicensed and unqualified workers; and failing to perform repairs in accordance with the Florida Building Code.

The court determined that the damage from the hurricane was the underlying cause of all of these alleged breaches and, therefore, they all fell under the property exclusion. And while there’s arguably some gray area, the court’s decision amounts to this: Not only are breaches of duty that result in property damage excluded, but so are breaches of duty caused by property damage.

The following month, an Illinois court offered a particularly troublesome decision in Hess vs. Travelers Casualty and Surety Co. The court, as might be expected, upheld an exclusion of coverage for an alleged breach of a duty to make repairs related to a construction defect. However, the court also excluded coverage for the failure to establish a reserve fund for repairs — an occurrence that took place years before the issue of property damage would even be raised.

“If a board is going to be second-guessed by its carrier for claims saying the board breached its fiduciary duty by levying an assessment, really — what are they paying for? What is going to be covered in the end?” —Mark Weintraub, insurance and claims counsel, Lockton

The decision whether or not to establish a reserve fund is clearly and wholly a fiduciary matter, and one related to economic harm independent from property damage. Put another way — the lack of a reserve fund cannot cause property damage. As such, it might seem that it should be cut and dried that a carrier would have a duty to defend an insured against a complaint that its negligent reserving decision led to economic harm. That is, after all, one of the points of having a D&O policy.

However, the court in Hess didn’t see it that way. It reasoned that the claim for breach of fiduciary duty arose out of, or originated from, the construction defect. Therefore, it fell under the policy’s exclusion language. The board, in this case, was left squarely between a rock and hard place. The complaint didn’t fall under the organization’s D&O policy — but it didn’t fall under the property policy either. Board members were left to their own devices.

A later case, Pulliam vs. Travelers Indemnity Co., also involved multiple complaints including failure to establish a reserve fund and failure to disclose conflicts of interest in a developer-controlled property owner’s association. In this case, however, the court diverged from the Illinois court’s interpretation in Hess, making a clear distinction between property and economic damage:

“The duty to establish a reserve fund, while related to the property damage, did not result in physical damage to tangible property as required by the policy. The failure to establish a reserve fund resulted in respondents having to expend more from their own pockets to make the repairs than they might have otherwise had to expend — economic damage. Likewise, allegations that [the board] breached its fiduciary duty … do not allege a physical injury to tangible property constituting property damage.”

Weintraub said he’s seeing a slight uptick in this type of friction with D&O policies. “I’m not saying this is some growing, dangerous trend, but I have seen it coming up more, and I see that these cases could give it additional steam because they have case law to rely on.”

Closing the Gap

In these cases, as with any related cases, the underlying truth is that none of the insureds ever expected to find themselves battling their policy coverage in court. They assumed they could rest easy knowing they had protected their directors and officers with a D&O policy if a complaint arose.


But sometimes just a few key words can get in the way. And that can have deeper implications for those whose lifeblood depends upon property. Consider this scenario: A property management group fails to maintain a roof on one of its buildings. The roof begins to leak and massive property losses follow. There’s no occurrence, so the property policy isn’t triggered. So the occupants turn to the board for relief and discover there are inadequate reserves set aside for repairs.

“That’s exactly what happens in the gap,” said Steve Shappell, managing director of Aon Risk Solutions’ financial services group.  “We didn’t have an occurrence so we can’t go to our CGL, we can’t go to our property insurer because we didn’t trigger the cover, but [the claim] is clearly related to and arising out of property damage.

It’s not all that hard to see how the lines could blur further.

“If you take this out to the extreme, let’s say … a decision in the assessment world; that’s always unpopular in a condominium,” said Weintraub. “If an assessment is levied, usually your residents are going to be up in arms because it’s going to cost them money, so that usually leads to claims. And if a board is going to be second-guessed by its carrier for claims saying the board breached its fiduciary duty by levying an assessment, really — what are they paying for? What is going to be covered in the end?”

It’s How You Write It

On the surface, the solution is in the language.

“If you want to trigger defense, what you need to do with that policy language is strike the ‘alleged, arising from’ language and use the words ‘for,’ ‘from’ or other soft words that don’t have that kind of restrictive component to them,” said Monica Minkel, senior vice president of executive protection at Poms & Associates Insurance Brokers Inc.

But Minkel and others acknowledged that may be easier said than done.

“The quick answer is to say get rid of that language,” said Weintraub. “But sometimes that can simply be impossible.”

“The devil’s in the details,” said Shappell. “Can you get rid of it completely? If you buy an A side only policy — which is not very popular with the nonprofts and the private companies — you probably can get rid of the property exclusion, but it doesn’t make a whole lot of sense because it only covers non-indemnifiable scenarios and you’ve got to have a lot of cash to operate that way.”

Whether or not the language can be negotiated — deciding which elements of the policy are make-or-break — is a judgment call that brokers and insureds need to work out together.

“You could check 100 components, but are you going to move the business if eight of those components don’t match what you had before or they’re not the best you can get? Some carriers will negotiate and some won’t,” said Minkel.

That said, there are other considerations that will help ensure that a D&O policy responds, Minkel said. The first is whether a duty to defend policy form is used and the other is the cost allocation language.

“We’re looking for 100 percent predetermined defense cost allocation. What that means is if you get a claim in the door that has five causes of action and two of them are in a gray area or clearly shouldn’t be covered under the policy … they’re going to defend you for 100 percent of the claim, they’re not going to allocate the defense expenses based on covered and uncovered loss.”

Weintraub said it’s up to brokers to make sure that insureds understand what the property exclusion is and how it can lead carriers to deny defense.


“Awareness is half the battle. If they know a property damage exclusion could leap up and bite them when they’re not expecting it, then the key is to just keep that in mind when they’re making their decisions — especially with clients who are property managers,” he said.

That also means documenting decisions to make it clear that they’re not property related, he added.

“Directors and officers should be free to make fiduciary decisions and they should know what’s on the table and what isn’t as far as coverage goes ahead of time,” said Weintraub. “You don’t want it to be something of a gotcha.”

Michelle Kerr is associate editor of Risk & Insurance. She can be reached at
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Sponsored: Aspen Insurance

Minimize the Risks of Client Lawsuits

Approach client communications as if you were writing directly to a future jury. If a client ever sues, it could save the day.
By: | April 7, 2014 • 4 min read

When a top litigator prepares a case for a trial, part of the process is mapping out a clear, written story to put in front of a jury. Professionals looking to avoid or minimize the impact of client lawsuits would be smart to follow that lead, according to Christopher Piety, underwriting counsel, Professional Lines Risk Management, Aspen Insurance.

“Just like when a talented lawyer faces a jury, the better prepared you are, the stronger your case will be and the more likely you will prevail,” Piety said. “That means being very clear when writing an email or a letter to a client. Approach these communications as if you were writing directly to a future jury.”

Piety explained that in the wake of several recent sizeable professional liability claims, lawyers and other professionals (i.e., accountants, architects and engineers) must deliver clear, concise written communications, to create a record of what happened along the way. “On some of the larger claims that I’ve been involved in, whether it is with lawyers, accountants, architects or engineers, it really boils down to managing client expectations. And to do that requires effective written documentation,” he said.

For example, Piety said that in a recent professional liability claim, a lawyer did nothing wrong other than failing to put into writing advice that the circumstances of the client’s case changed, which typically translates to an added risk that the desired outcome may not be achieved.

SponsoredContent_Aspen“When you write an email or letter, it’s critical to include specifics. It will go a long way to avoid potential trouble, especially if the situation ends up in court,” Piety said. “A good defense is a strong offense.”
– Christopher Piety, underwriting counsel, Professional Lines Risk Management, Aspen Insurance

“The attorney didn’t spell out in writing that the evidence no longer supported the client’s seven-figure expected outcome,” Piety said. The client eventually dropped the case and then sued the lawyer for malpractice, claiming that the attorney’s failures cost them a positive result. Without written documentation advising the client about the risks, the attorney could not prove the client had been advised.

Screen for Bad Apples

“Professionals need the courage to ‘fire’ a potential problem client should any serious red flags emerge,” Piety said. “Not every piece of business is a good one.” Along those lines, he offered a few bits of advice to avoid potential problems when choosing clients:

  • Obvious Red Flag: A potential client that “burned through” multiple professional services firms. Worse, have they sued any of them?
  • Reputation Check: After completing a credit check and/or litigation search, research the potential client’s reputation in the local business community.
  • Financial Stability: Check to see if the client is financially sound.  Sometimes, problem clients manage to transfer their financial problems to their professionals in the form of unpaid fees and/or malpractice claims.
  • Available Staff: Make sure your firm is prepared and staffed to properly do the work requested.

Clarity is Critical

“When you write an email or letter, it’s critical to include specifics. It will go a long way to avoid potential trouble, especially if the situation ends up in court,” Piety said. “A good defense is a strong offense.”


Professionals need to carefully detail the scope of work when starting a new project or case, particularly if the client is also new. From a risk management perspective, it’s most critical to completely outline limitations and risks.

In addition, specific risks to various types of professionals may include:

  • Law Firms: Never offer guarantees for specific results, and understand that silence can be interpreted by a jury as agreeing with a client’s unrealistic expectations.
  • Architects and Engineers: Specify what you will and will not be responsible for. Never agree to indemnify anyone outside the firm.
  • Accountants: Advise clients and others using your work that attest engagements only provide limited assurance of no material misstatement in the financials, but do not guarantee the absence of fraud or financial problems with the attest client’s business.

Communicate Frequently

“Throughout the entire business relationship, it’s a good idea to document any ongoing changed circumstances, no matter how seemingly small, and advise clients of any new related risks and/or performance limitations,” Piety said. He outlined these examples:

  • Accountants: Quickly advise clients in writing when the client’s own poor record-keeping is causing the audit work to be more expensive and/or creating risk of material misstatement requiring additional client action.
  • Lawyers: Advise clients in writing when discovering evidence that may potentially change the value of the case.
  • Architects and Engineers: Communicate in writing when change orders on a project require expensive design changes that may negatively impact the overall project budget.

“Just like when a talented lawyer faces a jury, the better prepared you are, the stronger your case will be and the more likely you will prevail. That means being very clear when writing an email or a letter to a client. Approach these communications as if you were writing directly to a future jury.”

Act Promptly

Piety said the failure to act quickly often causes confusion, which can in turn lead to unnecessary and unforeseen problems. To stop that from occurring, he offered these insights:

  • Communicate immediately, via writing, any emerging issues that affect a client’s expectations and your ability to meet them.
  • Clients who fail to pay in a timely manner or seem unhappy early on in the relationship probably have an issue that should be addressed immediately.

In the end, only by having a clear written record of what actually occurred can professionals ensure they will reduce, or even prevent, the threat of a claim. Do not give your future opponent an opportunity to fill in the gaps with their own version of reality designed to sway a jury against you.

“Always focus on the fundamentals because fundamentals are what will really help a defense,” Piety concluded. “In so many cases, written communication will prove to be the critical factor between winning and losing.”

This article was produced by Aspen Insurance and not the Risk & Insurance® editorial team.
This article is provided for news and information purposes only and does not necessarily represent Aspen’s views and does constitute legal advice. This article reflects the opinion of the author at the time it was written taking into account market, regulatory and other conditions at the time of writing which may change over time. Aspen does not undertake a duty to update the article.

Aspen Insurance is a business segment of Aspen Insurance Holdings Limited. It provides insurance for property, casualty, marine, energy and transportation, financial and professional lines, and programs business.
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