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Financial Institutions

Assessing Third Party Risk

Companies must assess the risks of vendors that provide critical operations or have access to customer information.
By: | October 21, 2014 • 4 min read
RMA Survey

The financial services industry is in “high gear” to reassess third-party risk management practices in response to regulatory guidance.

Institutions are investing in technology to improve reporting and analytics, so that third-party risks are appropriately assessed and that controls are effective, according to the Third Party/Vendor Risk Management Survey, recently released by the Risk Management Association and sponsored by MetricStream.

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It’s not just about assessing the risks from vendors and their subcontractors, but also affiliates, debt buyers, agents, channel partners, and correspondent banks, to name just a few third parties that banks and credit unions work with, said Edward DeMarco, RMA’s general counsel and director of operational risk/regulatory relations/communications.

Best practices are in “an evolutionary state,” DeMarco said.

“Prudent third-party risk management requires that the third party be risk-assessed in connection with the enterprise and not simply any one individual business line.” — Edward DeMarco, general counsel, Risk Management Association

“Multiple business lines and functional units within an institution might have their own special relationship with the same third party,” he said. “Prudent third-party risk management requires that the third party be risk-assessed in connection with the enterprise and not simply any one individual business line.”

Institutions are also increasingly putting pressure on to make sure third parties assess the risks of their own contractors, DeMarco said.

“For example, a bank might hire XYZ appraisal company, and that company might sub out to appraisal companies 1, 2, 3 and 4,” he said. “While the bank won’t require a report because they are not in control of those relationships, the banking company does expect its third party to assess their risks.”

Other survey findings include:

• Nearly 50 percent of the respondents said their institution’s risk management functions were responsible for oversight of vendor risk.

• More than 50 percent said their institutions send questionnaires to vendors for risk management purposes.

• Roughly one-third said they have more than 25 “enterprise critical” suppliers that have the potential to affect their entire organization in the event of a failure.

• More than 75 percent have in place a supplier code of conduct that suppliers must acknowledge.

Negotiations with third parties and vendors can be time consuming — and cyber insurance coverage is “an integral part” of those conversations. –Michael O’Connell, managing director and financial Institutions practice leader, Aon Risk Solutions.

Peter Foster, executive vice president and one of the leaders of the cyber risk group at Willis, said that many of his financial institution clients require their vendors to complete a Statement on Standards for Attestation Engagements (SSAE) No. 16, which is a guidance from the American Institute of Certified Public Accountants.

“But this is the minimal of what a vendor should be doing to demonstrate how they are protecting their systems,” Foster said.

“That report really doesn’t get deep into the weeds whether or not the security around the data or around operational applications is really secure.

“Financial institutions should take a step further with a set of questions or a physical audit of a vendor, particularly if the application is more critical to operations or contains customers’ personally identifiable information.”

Institutions should also require third parties to have a technology errors and omissions policy with cyber insurance built into the one policy, he said.

An institution should require third parties to name it as an “additional insured” and provide it with certificates of insurance to cover any disruptions, including liability to cover unauthorized access or unauthorized use of data.

An institution should also have coverage for vicarious liability and direct liability under its own cyber policy, which would cover a data breach resulting from outsourcing, Foster said. That way, the institution will be covered if its third party doesn’t have a policy or its policy doesn’t provide such coverage.

Such is often the case with cloud computing firms, he said.

“We recommend [third parties provide coverage] because it should be the first line of dense — the vendor who causes the breach should be paying for the breach,” Foster said. “But we’re also cognizant of the fact that many vendors will not provide that coverage and that the bank needs to use that vendor.”

Negotiations with third parties and vendors can be time consuming — and cyber insurance coverage is “an integral part” of those conversations, said Michael O’Connell, managing director and financial Institutions practice leader at Aon Risk Solutions.

“Also, a critical part of these discussions centers around who is liable for what part and how much of the loss, especially when there is a breach of confidential data,” he said.

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From a risk management perspective, he recommended that vendor risk assessments include answers to these questions:

• Does the insurance fully cover the liability of the insured due to an incident caused by third-party providers?

• Are regulatory investigations, fines and penalties addressed?

• Are first-party business interruption and crisis management included within the cyber policies and are there full limits or sublimits?

“Additionally, the contingent business interruption component must include increased attention to the number and complexity of third-party relationships,” O’Connell said.

Firms must have a complete plan for loss mitigation, restitution, and a response to the potential reputational damage that may be caused, he 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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The Law

Legal Spotlight: October 1, 2014

A look at the latest decisions impacting the industry.
By: | October 1, 2014 • 5 min read
You Be the Judge

Firms Given More Control Over Independent Counsel

Signal Products Inc. manufactured handbags and luggage using a design known as the “Quattro G Pattern executive in brown/beige colorways,” in accordance with its license from Guess? Inc.

10012014_legal_spotlight_gucci_230x300In 2009, Gucci America Inc. filed suit against Guess?, Signal and others, claiming the design “infringed on a distinctive Gucci trade dress known as the ‘Diamond Motif Trade Dress.’ ” Signal’s share of the infringement claim was $1.8 million.

Signal filed suit in U.S. District Court in California after its insurers — American Zurich Insurance Co., which had issued a primary commercial general liability policy, and American Guarantee and Liability Insurance Co., which had issued an umbrella liability policy — refused to pay $1.9 million in defense costs.

Zurich countersued, seeking a summary judgment that it was not required to reimburse Signal for a $750,000 interim legal payment to the primary legal firm retained by Guess? (of a total $1.9 million in fees for Signal) or for $1.2 million in legal fees for a second law firm that represented Signal in the action.

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The insurers argued they were not required to pay fees to the second law firm because Signal had already retained another law firm to represent it, and that the fees were not incurred in connection with Signal’s defense.

U.S. Judge Christina Snyder in August rejected requests from both sides for summary judgment, ruling more information was needed to determine reasonableness of legal fees and other “genuine issues of disputed material fact.”

However, she did rule, in this case of first impression, that Signal could use more than one law firm as independent counsel when there is a potential conflict of interest in insurance cases.

“Having accepted that multiple attorneys may serve as … counsel, there does not appear to be any principled grounds for requiring as a matter of law that all of those attorneys need to be employed at the same law firm,” she wrote.

Scorecard: The insurers may have to pay up to $1.2 million to the second of two law firms, in addition to possibly having to pay up to $1.9 million in litigation costs to the primary firm.

Takeaway: California law allows an insured to retain more than one law firm as independent counsel in an insurance dispute.

Attorneys’ Fees Not Included in Damages Exclusion

10012014_legal_spotlight_check_230x300Several years ago, two class-action lawsuits were filed against PNC Financial Services Group, each claiming the bank improperly charged customers $36 overdraft fees.

Both actions were settled by PNC: One in 2010 for $12 million — which included $3 million in attorneys’ fees, $77,857 in costs and expenses, and $15,000 toward incentive fees for the representative plaintiffs — and one in 2012 for $90 million, including $27 million for attorneys’ fees, $183,302 for reimbursement of costs, and $30,000 in plaintiffs’ incentive awards.

On May 21, a U.S. judge in the Western District of Pennsylvania recommended that the insurers cover the settlement costs. Both Houston Casualty Co. and Axis Insurance Co. had issued policies with a $25 million liability limit, subject to a $25 million retention.

In June, U.S. Judge Cathy Bissoon in that district disagreed. She ruled that the insurers were not responsible for the part of the settlements that returned overdraft fees to customers — since fees were excluded from the definition of “damages” in the policy.

Attorneys’ fees and costs totaling $30.3 million, she ruled, were not excluded. She ordered more proceedings on the claims expenses and damages.

Scorecard: Two insurers are responsible to cover up to $30.3 million for attorneys’ fees and costs that were included in settlements of two class-action lawsuits.

Takeaway: The fee exception to damages does not extend to the entirety of settlement costs, particularly attorneys’ fees, costs and incentive awards.

Underwriters Must Pay Recall Costs

When Abbott Laboratories agreed in December 2000 to acquire the global operations of Knoll Pharmaceutical Co., it notified its Lloyd’s of London carriers, in accordance with its product recall insurance coverage. That coverage stated the new entity would automatically be covered, but additional premiums would have to be negotiated.

10012014_legal_spotlight_tablets_230x300As part of the negotiation with a group of underwriters led by Beazley and American Specialty Underwriters, Abbott indicated there was no “current situation, fact or circumstance” that would lead to a claim under the Accidental Contamination policy (which would include any government drug recalls).

A premium was eventually paid and accepted in July 2001, even after the company advised the underwriters that the U.S. Food and Drug Administration may pull Knoll’s popular thyroid drug Synthroid from the market.

The company and its underwriters did execute in October 2001 a “tolling agreement … that would allow the parties to preserve their rights with respect to any Synthroid-related claims.”

On March 6, 2002, the Italian Ministry of Health suspended all sales and marketing of sibutramine (manufactured by Knoll as Meridia).

Abbott filed a claim under the policy, and on May 16, 2003, the underwriters informed Abbott the tolling agreement was cancelled because Abbott “had not fully responded to their document and information request.” When it asked what information was needed, Abbott received no response.

On June 2, 2003, the underwriters filed suit to rescind the policy, while Abbott countersued for a declaratory judgment for coverage, breach of contract and “vexatious delay damages.”

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A judge rejected the underwriters’ claim for recission, noting that the insurers had accepted the additional premium and that the Synthroid situation had been disclosed in a timely manner.

For damages, the court put the company’s losses at $155.2 million. Minus a deductible and 10 percent coinsurance, the underwriters were told to pay $84.5 million, plus about $2.8 million in costs and interest.

A three-judge panel on the Appellate Court of Illinois, First Judicial District, upheld that decision on appeal on July 28.

Scorecard: The underwriters have to pay $84.5 million plus $2.8 million in costs and interest.

Takeaway: By accepting the premium and failing to pursue issues of due diligence, the underwriters undercut their argument for a “material misrepresentation” by the company.

Anne Freedman is managing editor of Risk & Insurance. She can be reached at afreedman@lrp.com.
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Sponsored: Helmsman Management Services

Six Best Practices For Effective WC Management

An ever-changing healthcare landscape keeps workers comp managers on their toes.
By: | October 15, 2014 • 5 min read

It’s no secret that the professionals responsible for managing workers compensation programs need to be constantly vigilant.

Rising health care costs, complex state regulation, opioid-based prescription drug use and other scary trends tend to keep workers comp managers awake at night.

“Risk managers can never be comfortable because it’s the nature of the beast,” said Debbie Michel, president of Helmsman Management Services LLC, a third-party claims administrator (and a subsidiary of Liberty Mutual Insurance). “To manage comp requires a laser-like, constant focus on following best practices across the continuum.”

Michel pointed to two notable industry trends — rises in loss severity and overall medical spending — that will combine to drive comp costs higher. For example, loss severity is predicted to increase in 2014-2015, mainly due to those rising medical costs.

Debbie discusses the top workers’ comp challenge facing buyers and brokers.

The nation’s annual medical spending, for its part, is expected to grow 6.1 percent in 2014 and 6.2 percent on average from 2015 through 2022, according to the Federal Government’s Centers for Medicare and Medicaid Services. This increase is expected to be driven partially by increased medical services demand among the nation’s aging population – many of whom are baby boomers who have remained in the workplace longer.

Other emerging trends also can have a potential negative impact on comp costs. For example, the recent classification of obesity as a disease (and the corresponding rise of obesity in the U.S.) may increase both workers comp claim frequency and severity.

SponsoredContent_LM“The true goal here is to think about injured employees. Everyone needs to focus on helping them get well, back to work and functioning at their best. At the same time, following a best practices approach can reduce overall comp costs, and help risk managers get a much better night’s sleep.”
– Debbie Michel, President, Helmsman Management Services LLC (a subsidiary of Liberty Mutual)

“These are just some factors affecting the workers compensation loss dollar,” she added. “Risk managers, working with their TPAs and carriers, must focus on constant improvement. The good news is there are proven best practices to make it happen.”

Michel outlined some of those best practices risk managers can take to ensure they get the most value from their workers comp spending and help their employees receive the best possible medical outcomes:

Pre-Loss

1. Workplace Partnering

Risk managers should look to partner with workplace wellness/health programs. While typically managed by different departments, there is an obvious need for risk management and health and wellness programs to be aligned in understanding workforce demographics, health patterns and other claim red flags. These are the factors that often drive claims or impede recovery.

“A workforce might have a higher percentage of smokers or diabetics than the norm, something you can learn from health and wellness programs. Comp managers can collaborate with health and wellness programs to help mitigate the potential impact,” Michel said, adding that there needs to be a direct line between the workers compensation goals and overall employee health and wellness goals.

Debbie discusses the second biggest challenge facing buyers and brokers.

2. Financing Alternatives

Risk managers must constantly re-evaluate how they finance workers compensation insurance programs. For example, there could be an opportunity to reduce costs by moving to higher retention or deductible levels, or creating a captive. Taking on a larger financial, more direct stake in a workers comp program can drive positive changes in safety and related areas.

“We saw this trend grow in 2012-2013 during comp rate increases,” Michel said. “When you have something to lose, you naturally are more focused on safety and other pre-loss issues.”

3. TPA Training, Tenure and Resources

Businesses need to look for a tailored relationship with their TPA or carrier, where they work together to identify and build positive, strategic workers compensation programs. Also, they must exercise due diligence when choosing a TPA by taking a hard look at its training, experience and tools, which ultimately drive program performance.

For instance, Michel said, does the TPA hold regular monthly or quarterly meetings with clients and brokers to gauge progress or address issues? Or, does the TPA help create specific initiatives in a quest to take the workers compensation program to a higher level?

Post-Loss

4. Analytics to Drive Positive Outcomes, Lower Loss Costs

Michel explained that best practices for an effective comp claims management process involve taking advantage of today’s powerful analytics tools, especially sophisticated predictive modeling. When woven into an overall claims management strategy, analytics can pinpoint where to focus resources on a high-cost claim, or they can capture the best data to be used for future safety and accident prevention efforts.

“Big data and advanced analytics drive a better understanding of the claims process to bring down the total cost of risk,” Michel added.

5. Provider Network Reach, Collaboration

Risk managers must pay close attention to provider networks and specifically work with outcome-based networks – in those states that allow employers to direct the care of injured workers. Such providers understand workers compensation and how to achieve optimal outcomes.

Risk managers should also understand if and how the TPA interacts with treating physicians. For example, Helmsman offers a peer-to-peer process with its 10 regional medical directors (one in each claims office). While the medical directors work closely with claims case professionals, they also interact directly, “peer-to-peer,” with treatment providers to create effective care paths or considerations.

“We have seen a lot of value here for our clients,” Michel said. “It’s a true differentiator.”

6. Strategic Outlook

Most of all, Michel said, it’s important for risk managers, brokers and TPAs to think strategically – from pre-loss and prevention to a claims process that delivers the best possible outcome for injured workers.

Debbie explains the value of working with Helmsman Management Services.

Helmsman, which provides claims management, managed care and risk control solutions for businesses with 50 employees or more, offers clients what it calls the Account Management Stewardship Program. The program coordinates the “right” resources within an organization and brings together all critical players – risk manager, safety and claims professionals, broker, account manager, etc. The program also frequently utilizes subject matter experts (pharma, networks, nurses, etc.) to help increase knowledge levels for risk and safety managers.

“The true goal here is to think about injured employees,” Michel said. “Everyone needs to focus on helping them get well, back to work and functioning at their best.

“At the same time, following a best practices approach can reduce overall comp costs, and help risk managers get a much better night’s sleep,” she said.

To learn more about how a third-party administrator like Helmsman Management Services LLC (a subsidiary of Liberty Mutual) can help manage your workers compensation costs, contact your broker.

Email Debbie Michel

Visit Helmsman’s website

@HelmsmanTPA Twitter

Additional Insights 

Debbie discusses how Helmsman drives outcomes for risk managers.

Debbie explains how to manage medical outcomes.

Debbie discusses considerations when selecting a TPA.

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


Helmsman Management Services (HMS) helps better control the total cost of risk by delivering superior outcomes for workers compensation, general liability and commercial auto claims. The third party claims administrator – a wholly owned subsidiary of Liberty Mutual Insurance – delivers better outcomes by blending the strength and innovation of a major carrier with the flexibility of an independent TPA.
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