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The Law

Legal Spotlight: November 2014

A look at the latest decisions impacting the industry.
By: | November 3, 2014 • 5 min read
You Be the Judge

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.

11012014_legalspotlight_electricityAfter designing and providing the systems to Langboard, at a cost of $13.7 million, Wellons agreed in 2003 to install them, at a cost of $3 million.

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.

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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.

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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.

11012014_legalspotlight_beamsAdrian’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.

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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.

Anne Freedman is managing editor of Risk & Insurance. She can be reached at afreedman@lrp.com.
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Claims Trends

Examining Claims Losses

Marine, aviation and energy sector losses accounted for much of the losses. Employee training would help.
By: | September 24, 2014 • 7 min read
090113RiskReport_CostaConcordia

Marine-related claims — skewed by the expensive Costa Concordia loss — resulted in the highest insurance claim losses, by dollar amount, according to a recent report by Allianz Global Corporate & Specialty.

The top causes of claims losses between 2009 and 2013 were, in order: ship and boat grounding, fire, aviation crash, earthquake, storm, bodily injury (including fatalities), flood, professional indemnity, product defects and machinery breakdown, according to AGCS’ Global Claims Review 2014.

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The report listed the top causes of loss and emerging trends, based on more than 11,000 major business claims in 148 countries, each costing more than €100,000 ($136,455).

“This report is the first of its kind, and it demonstrated the kind of technical understanding we have and the fact that we continue to invest in our claims departments and technical training,” said Terry Campbell, AGCS vice president, regional claims head, in New York City.

“While the losses analyzed are not representative of the industry as a whole, they give a strong indication of the major risks which dominate industrial insurance,” according to the report, which noted that the claims involve other carriers as well.

Within the marine industry, rising claims inflation along with the growing problem of crew negligence and the high cost of wreck removal have all contributed to a worrying rise in the cost of claims, according to the report.

However, frequency of claims, especially from cargo losses, appears to be declining.

Repair costs resulting from a grounding have increased in recent years due to improved technology of underwater machinery, said Rob Winn, area vice president, marine claims, Arthur J. Gallagher & Co. (AJG)

Items such as drop-down thrusters and multi-pitch props are often damaged in a grounding and are very expensive to repair, he said.

Video: This CNN segment shows some of the salvage operation involving the Costa Concordia.

While the grounding numbers in 2012 were skewed by the Costa Concordia loss in 2012, groundings were relatively infrequent (8 percent) in the insurer’s report. Crew negligence was more often a main driver of claims, with it being listed as a potential contributing factor in more than six in 10 claims over $1.4 million.

“Those companies that invest in training and education can see a significant reduction in the number of ship groundings and related incidents,” Campbell said.

Bumpy Triche, regional executive vice president at Arthur J. Gallagher Risk Management Services Inc. in New Orleans, said shipping companies involved in global trade rely heavily upon foreign crews, and so it’s “imperative” that training and operational manuals are done in the preferred languages of their multinational crews.

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Crew training also should be done on the particular navigational electronic system used on the vessel where the crew will be assigned, he said.

“Boats working in our local waters here in Louisiana need to be aware of the impacts of diminishing wetlands and coastal erosion and the effect on bayous and other inland waterways,” Triche said. “They may not realize they are now in much shallower water than what the navigational charts might depict, and can get stuck.”

Not only are the vessels operating in shallower water as a result of coastal erosion, but they are also encountering pipelines that were originally on land, Winn said. Those pipelines are not properly buried and are hazards to navigation.

As “blue water” vessels age and offshore vessels become larger and more sophisticated, companies should proactively address maintenance problems and “not use their hull policy as a maintenance program,” Triche said.

Aviation Claims Rising

Improvements in airline safety have led to far fewer catastrophic losses overall, despite 2014’s extraordinary loss activity, according to the AGCS report.

However, the cost of aviation claims is rising, driven by the widespread use of new materials and rising aircraft complexity, as well as more demanding regulation and the continuing growth of liability-based litigation.

Video: The Canadian Broadcasting Corp. reports on the shooting down of MH 17 over Ukraine, which may result in insurers’ insisting that airlines avoid “hot spots.”

While aviation crashes were the top causes of loss in terms of number of claims (23 percent) and value (37 percent), on-the-ground incidents accounted for 18 percent claims in number, and 15 percent in value, according to the report.

Bird strikes were a notable cause of loss, averaging $22.8 million every year from 2009 to 2013, with a total of 34 incidents.

Bradley Meinhardt, AJG area president and managing director, aviation, in Las Vegas, said that aviation safety innovations over the past several decades include enhanced ground proximity warning systems, terrain awareness and warning systems,and traffic collision avoidance systems.

Such systems offer pilots increased situational awareness in a semi-autonomous environment, reacting to synthetic voice instructions, he said.

“Even in a potentially disastrous situation contemplating an airspace controller’s error, the aircraft may be saved by these on-board systems,” Meinhardt said. “These innovations have literally changed the landscape of aviation safety.”

While all of these systems reduce workload, pilots still need to be prepared to fly the aircraft themselves if the systems go awry, he said.

“Pilots should manually fly their aircraft every so often – one airline pilot tells me he routinely flies one of the five flights he has on a given day,” Meinhardt said.

Aircraft manufacturers are using alternative, lightweight materials to make aircraft lighter and more capable to fly longer distances, said Peter Schmitz, chief executive officer of Aon Risk Solutions’ national aviation practice in New York City.

However, manufacturers need to continue to improve newer generation aircraft and perhaps consider making them more capable to withstand issues like severe turbulence and outside interferences, he said.

“Airlines also have to seriously consider whether they should fly over hot spots where there is conflict, after what happened to Malaysian Airlines over Ukraine this summer,” Schmitz said.

“But the commercial issue becomes, how far does the plane have to go around such hot spots. Is the public willing to spend longer periods onboard the plane and potentially pay more to satisfy those safety requirements?”

Energy Sector

For the energy sector, the cost of claims is increasing due to higher asset values combined with increasingly complex and interrelated risks, according to AGCS. The rising cost of business interruption and emerging risks such as cyber threats and new technologies will also make for a more challenging future environment.

Fire is the No. 1 cause of energy losses, according to the report, both by number (45 percent) and value (65 percent), followed by blow-out (18 percent and19 percent, respectively).

Machinery breakdown, explosion, natural hazards such as storms and contingent business interruption, were the other main causes of loss, according to the report.

Bruce Jefferis, chief executive officer of Aon’s energy practice in Houston, said that because the energy sector has very high-valued assets, losses are typical more costly than losses in many other industries.

“Even if it’s a relatively minor incident at a refinery or a petrochemical plant, it doesn’t take much to lose a lot of dollars,” Jefferis said.

“Even with the best safety and loss control procedures, natural disasters and other incidents can still cause damage which results in significant loss of property and business interruption.”

Stuart Wallace, AJG area executive vice president, energy practice, in Houston, said the energy sector is growing “incredibly,” both in traditional markets like Texas, Oklahoma and Louisiana, and new areas of the country like the Bakken Formation in Montana, North Dakota, South Dakota and parts of Canada.

“But with the growth comes a higher demand for people, and at times, the hiring pool becomes a big challenge, and energy companies are likely not hiring the most experienced, trained, people to work on crews or drive vehicles — and that tends to lead to accidents,” Wallace said.

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Moreover, energy companies are now in areas that historically haven’t had infrastructure such as pipelines and roads, he said.

With the lack of infrastructure, trucking accidents have seen an increase due to road conditions, less qualified drivers and start-up transportation companies with less experience in transporting oil or gas.

“To lessen accidents, it starts at the beginning with better hiring practices, then ongoing training, continuing education, and monitoring of employees’ performance and accident rates, particularly for workers’ compensation and automobile liability,” Wallace said.

Katie Kuehner-Hebert is a freelance writer based in California. She has more than two decades of journalism experience and expertise in financial writing. She can be reached at riskletters@lrp.com.
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Sponsored: Healthesystems

Changing the WC Medical Care Mindset

Having a holistic, comprehensive strategy is critical in the ongoing battle to control medical care costs.
By: | November 3, 2014 • 6 min read
SponsoredContent_HES

Controlling overall workers’ compensation medical costs has been an elusive target.

Yet, according to medical experts from Healthesystems, the Tampa, Fla.-based specialty provider of innovative medical cost management solutions for the workers’ compensation industry, payers today have more powerful options for both offering the highest quality medical care and controlling costs, but they must be more thoroughly and strategically executed.

Specifically as it relates to optimizing patient outcomes and controlling pharmacy costs, the key, say those experts, is to look beyond the typical clinical pharmacy history review and to incorporate a more holistic picture of the entire medical treatment plan. This means when performing clinical reviews, taking into account more comprehensive information such as lab results, physician notes and other critical medical history data which often identifies significant treatment plan concerns but frequently aren’t effectively monitored in total.

Healthesystems’ Dr. Robert Goldberg, chief medical officer, and Dr. Silvia Sacalis, vice president of clinical services, recently weighed in on how using a more holistic, comprehensive strategy can make the critical difference in the ongoing medical care cost control battle.

Fragmentation, Complexity Obscure the Patient Picture

According to Dr. Goldberg, fragmentation remains one of the biggest obstacles to controlling overall healthcare costs and ensuring the most successful treatment in workers’ compensation.

Robert Goldberg, MD, discusses obstacles to controlling overall medical costs and ensuring the best treatment in workers’ compensation.

“There are several hurdles, but they all relate to the fact that healthcare in workers’ comp is just not very well coordinated,” he said. “For the most part, there is poor communication between all parties involved, but especially between the payer and the provider. Unfortunately, it’s rare that all the stakeholders have a clear, complete picture of what’s happening with the patient.”

Dr. Goldberg explains that health care generally has become a more complex landscape, and workers’ comp adds another level of complexity. Physicians have less time to spend with patients due to work loads and other economic factors, and frequently there isn’t adequate time to develop a patient specific treatment strategy.

“Often we don’t have physicians properly incentivized to do a complete job with patients” he said, adding that extra paperwork and similar hurdles limit communication among payers, nurse case managers and other players.

In fact, Dr. Sacalis emphasized that it’s not only the payer, but often the healthcare provider who is not getting a complete picture. For example, a treating doctor may not be the primary care physician and therefore they may not have access to the total healthcare picture for the injured worker.

SponsoredContent_HES“Most of all, payers need to adopt a more collaborative approach in their relationships with physicians, employers and patients, as well as networks involved. It will result in getting people back to work through appropriate medical care and moving the case along to a prompt closure.”
– Robert Goldberg, MD, FACOEM, Chief Medical Officer, Healthesystems

“It’s often difficult for multiple physicians to communicate and collaborate about what’s happening because they may not be aware of each-others involvement in that patient’s care,” she said. “Data sharing is lacking, even in integrated healthcare systems where doctors are in the same group.”

Done Right, Technology Can Bridge the Treatment Strategy Gap

Dr. Sacalis explained the role technology advancements can play in creating a more holistic picture of not only an injured workers’ post-accident state or pace of recovery, but also their overall health history. However, the workers’ comp industry by and large is not there yet.

“Today’s technology can be very useful in providing transparency, but to date the data is still very fragmented,” she said. “With technology advancements, we can get a more holistic patient view. However, it is important that the data is both meaningful and actionable to promote effective clinical decision support.”

Silvia Sacalis, PharmD, explains the role that technology advancements can play in creating a more holistic picture of an injured worker’s overall health.

Healthesystems, for example, offers an advanced clinical solution that incorporates a comprehensive analysis of all relevant data sources including pharmacy, medical and lab data as part of a drug therapy analysis. So, for example, the process could uncover co-morbidities – such as diabetes – that may be unrelated to a workplace injury but should be considered in the overall treatment strategy.

“Healthcare professionals must ensure there are no interactions with any
co-morbidities that may limit or affect the treatment plan,” Dr. Sacalis said.

In the majority of cases where Healthesystems has performed advanced clinical analysis, information gathered from the various sources has uncovered critical information that significantly impacted the overall treatment recommendations. Technology and analytics enable the implementation of best practices.

She cites another example of how a physician may order a urine drug screen (UDS), yet the results indicating the presence of a non prescribed drug were not reflected in the treatment regimen as evidenced by the lack of modification in therapy.

“Visibility and transparency will help with facilitating a truly effective treatment plan,” she said, “Predictive analytics are necessary tools for proactive monitoring and detection of trends as well as early identification of cases for intervention.”

Speaking of Best Practices …

Dr. Goldberg highlighted that the most important overall best practice needed to secure the optimal outcome is centered around getting the right care to the right patient at the right time. To him, that means identifying patients who need adjustments in care and then determining medical necessity during the entire case trajectory.

“It means using evidence-based medical treatment guidelines that are coordinated,” he said.

“You must look at the whole patient, which means avoiding the typical barriers in the workers’ comp treatment system, issues such as delays in authorizations, lengthy UR processes or similar scenarios that are well intentioned but if not performed effectively they can get in the way of expedited care.”

Dr. Goldberg and Silvia Sacalis provide recommendations for critical steps payers should take to achieve the best outcomes for everyone.

Dr. Goldberg noted that seeking out the most effective doctors available in geographic locations is another critical best practice. That requires collecting data on physician performance, patient satisfaction and medical outcomes, so payers and networks can identify and incentivize them accordingly.

“This way, you are getting an alignment of incentives with all parties,” Dr. Goldberg said, adding that it also means removing outlier physicians, those whose tendencies are to over-treat, dispense drugs from their office or order unnecessary durable medical equipment, for example.

SponsoredContent_HES“Visibility and transparency will help with facilitating a truly effective treatment plan. Predictive analytics are necessary tools for proactive monitoring and detection of trends as well as early identification of cases for intervention.”
– Silvia Sacalis, PharmD, Vice President of Clinical Services, Healthesystems

“Most of all, payers need to adopt a more collaborative approach in their relationships with physicians, employers and patients, as well as networks involved,” he said. “It will result in getting people back to work through appropriate medical care and moving the case along to a prompt closure.”

Dr. Sacalis added that from a pharmacy perspective, another best practice is becoming more patient-centric, using a customized and flexible approach to help payers optimize outcomes for each patient.

“Focus on patient safety first, and that will naturally drive cost containment,” she said. “Focusing on cost alone can actually drive results in the wrong direction.”

Additional Insights 

Dr. Goldberg explains how consolidation in the health care and WC markets can impact the landscape and quality of care.

Dr. Goldberg and Silvia Sacalis discuss if injured workers today are getting better treatment than they were twenty years ago.

SponsoredContent

BrandStudioLogo

This article was produced by the R&I Brand Studio, a unit of the advertising department of Risk & Insurance, in collaboration with Healthesystems. The editorial staff of Risk & Insurance had no role in its preparation.


Healthesystems is a leading provider of Pharmacy Benefit Management (PBM) & Ancillary Benefits Management programs for the workers' compensation industry.
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