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

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: Healthcare Solutions

Diversifying Top Management in Workers’ Comp

Inaugural Women in Workers’ Compensation (WiWC) Forum focuses on advancing more women into top leadership roles.
By: | January 7, 2015 • 5 min read

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The panel at the inaugural Women in Workers’ Compensation (WiWC) Forum. From left to right: Eileen Ramallo, Elaine Vega, Nina Smith-Garmon, Nancy Hamlet, Michelle Weatherson, Nanette de la Torre, Danielle Lisenbey.

Across the country, the business community is engaged in a robust conversation about women being under-represented among c-level positions.

Why aren’t more women breaking into upper management roles? Does gender bias still exist? And, perhaps more importantly, what can women and men do to add more diversity to top leadership ranks?

Elaine Vega and Nancy Hamlet, of Healthcare Solutions, the Duluth, Ga.-based health services provider to the workers’ compensation and auto liability/PIP markets, have discussed the issue between themselves many times over the years.

The duo agreed that starting an industry-wide conversation would be an effective start to addressing the challenge. After three years of internal discussions, the inaugural Women in Workers’ Compensation (WiWC) Forum became reality. Judging by the attendance, content and feedback, it was an auspicious, very successful, debut.

Nancy Hamlet, Senior Vice President of Marketing, Healthcare Solutions

Nancy Hamlet, Senior Vice President of Marketing, Healthcare Solutions

Specifically, Healthcare Solutions and LRP Publications teamed up at the National Workers’ compensation and Disability Conference (NWCDC), held Nov. 18-21, 2014 in Las Vegas, to present the first WiWC event focused on the development of women as leaders within the industry. The WiWC debut featured a keynote speaker, a panel discussion and a networking cocktail hour.

“We believe this is just the beginning for the WiWC organization,” said Hamlet, senior vice president of marketing, adding that the event’s main theme was the conversation regarding challenges that still exist for women in the workplace is “current, real … and relevant.”

Originally the forum was allocated a room to hold 150 people. Vega and Hamlet worried about the room being too large, so they asked LRP what the contingency would be to make the room smaller if they couldn’t fill it. They needn’t have worried, as more than 400 women, and some men as well, registered and attended, requiring an even larger room.

“Clearly, the topic is relevant and there was plenty to discuss,” said Vega, senior vice president of account management.

Hamlet explained that WiWC was formed to create an open forum to promote a strong sense of community and support for current and future female leaders in the workers’ compensation industry. Going forward, the WiWC forum will provide insight and ideas with opportunities for members to:

  • Engage … with accomplished industry professionals and build lasting relationships.
  • Enrich … their knowledge base with tactical insights from speakers and panelists.
  • Explore … opportunities and challenges facing women leaders today.
  • Encounter … senior executives’ perspectives on leadership.
  • Examine … leadership strategies and how to effectively apply the strategies.
  • Empower … themselves and others to achieve success and groundbreaking results.

At the inaugural event, keynote speaker Peggy Holtman, co-author of “Leading at the Edge: Leadership Lessons from the Extraordinary Saga of Shackleton’s Antarctic Expedition,” discussed how a seemingly unconnected historical event can offer critical lessons on leadership in the workplace, especially for women looking to move into top executive spots.

Elaine Vega, Senior Vice President of Account Management, Healthcare Solutions

Elaine Vega, Senior Vice President of Account Management, Healthcare Solutions

After Holtman’s talk, a panel discussion, moderated by Vega, offered the perspectives of five workers’ compensation industry executives on ways in which women can navigate past the glass ceiling. Panelists included Eileen Ramallo , EVP Healthcare Solutions; Danielle Lisenbey, CEO Broadspire; Nanette de la Torre, VP Zenith; Nina Smith-Garmon, EVP Mitchell International; and Michelle Weatherson, Director, Claims Medical and Regulatory Division, State Fund of Calif.

The panelists discussed a wide range of topics related to women in workers’ compensation. For example, one topic focused on the need to take the big risks when it comes to moving past workplace barriers. Other topics included the importance of women in higher positions serving as sponsors and advocates for younger, less experienced women; and the impact of industry consolidation on women’s careers and how to best manage that change. Another topic was how women could best master conflict and emotions in the workplace.

“What’s clear is conflict has to be managed; it will not go away. It will only get worse,” said Healthcare Solutions’ Ramallo. “It then can create other rifts that won’t necessarily be visible immediately, but can have a very large impact. You have to be able to understand what it is early on from another’s perspective, why the situation exists, and then encourage and try to resolve a conflict situation, whatever may be driving it.”

In the wake of the first WiWC Forum, Hamlet noted that while there are countless general reports showing that women have not yet achieved equal representation in top leadership positions in the workplace, studies deal with averages rather than individual stories. And while women must continue to look at the data and work toward closing the gap, hearing from accomplished women in the workers’ compensation industry at NWCDC drove home critical messages on a person level.

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Today, Vega and Hamlet are looking to expand WiWC to make it “truly owned” by the industry. For example, they expect to recruit companies interested in becoming sponsors, forming an advisory council, creating a charter and discussing future possibilities for the organization on both the national and regional levels.

“Much remains to be done, but I have confidence that we will come together and make the organization stronger so that it prospers for years to come,” Hamlet said. “After all, it’s clear that our industry is filled with talented women who can make things happen!”

Vega added that WiWC has already received requests to live stream the event in the future, so it will examine the feasibility of that option in an effort to be even more inclusive.

“We have a shared vision for improving opportunities for current and future women leaders in workers’ compensation,” Vega said. “It doesn’t matter our gender or our title, it’s all about supporting the greater vision. As was said several times at the event, this is just the beginning. We hope more women and men will join us in this continued dialogue.”

For more information about the WiWC, send email to wiwcleadership@healthcaresolutions.com or join our WiWC group on LinkedIn.

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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 Healthcare Solutions. The editorial staff of Risk & Insurance had no role in its preparation.




Healthcare Solutions serves as a health services company delivering integrated solutions to the property and casualty markets, specializing in workers’ compensation and auto liability/PIP.
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