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The Law

Legal Spotlight

The latest decisions impacting the industry.
By: | December 10, 2014 • 5 min read
You Be the Judge

Jury Rules in Favor of Insured

Sometime between Jan. 12, 2009 and February 5, 2009, one or more individuals entered the disc jockey’s room at the Cabo Wabo Cantina and Memphis Blues nightclub in Fresno, Calif., and stole about $140,000 of electronic equipment including HD televisions, speakers and sound mixers.

Fresno Rock Taco, which operated the cantina and nightclub, reported the theft to the police upon the advice of its broker, and filed a claim with National Surety Corp., a Fireman’s Fund Co., for the equipment, property damage and for loss of business income. It had two insurance policies with respective limits of $2.6 million and $6.1 million.

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Fresno Rock, along with Zone Sports Center LLC, owner of the property at the time of the theft, filed suit against National Surety when the claim was denied.

The insurance company alleged the loss of equipment was due to repossession rather than theft, according to court documents.

Cabo Wabo denied repossession was involved, and noted in court documents that a search of the premises by the state Department of Insurance for possible insurance fraud “revealed no wrongdoing of any kind and no charges of insurance fraud or any other crime have been filed against anyone connected to this matter.”

After a trial in the U.S. District Court for the Eastern District of California, Fresno Division, a jury ruled on Aug. 22 that Cabo Wabo and Zone Sports had suffered a covered loss and did not make a false claim to the insurance company.

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It ordered the insurer to pay $2.2 million to Cabo Wabo for business interruption losses and about $275,000 to the property owner for property damage losses.

Scorecard: The insurance company was ordered to pay $2.5 million for the claim.
Takeaway: National Surety’s belief that the theft was questionable and that security measures were inadequate did not sway the jury.

Insurer Need Not Pay Auto Settlement

Tyler Roush was driving his mother’s car on Aug. 3, 2009 when he struck and severely injured a pedestrian, Lloyd Miller.

Miller and his wife Nancy filed suit against Roush and his parents, Sharon and George Roush, and Brash Tygr, which owned and operated a Sonic Drive-In restaurant in Carrollton, Mo. The parents owned 75 percent of Brash Tygr; Tyler and his brother Brandon each owned another 5 percent.

The company was covered as part of a commercial lines master policy issued to Sonic Insurance Advisory Trust by Hudson Specialty Insurance Co. The CGL policy had a Hired and Non-Owned Auto Liability endorsement, under which the family and franchise sought coverage.

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Hudson provided a defense, under a reservation of rights, until the family rejected that defense and settled the Millers’ lawsuit for $5.8 million in compensatory and punitive damages, according to court documents. At the same time, the family admitted that Tyler Roush was “conducting the business of Brash Tygr” during the accident.

Tyler Roush, who had not worked for the restaurant for a long time, had been on some errands for his mother at the time of the accident. While he was depositing his mother’s paycheck at a local bank, an employee had handed him some bank deposit bags for use by Sonic Drive-In, according to court documents.

Because of that action, the U.S. District Court for the Western District of Missouri-Kansas City ruled that Roush had “a dual purpose” in his travels and was acting “in the course of [the restaurant’s] business.”

On appeal, the U.S. 8th Circuit Court of Appeals on Oct. 7 disagreed. In a 2-1 decision, the majority ruled there was no dual business purpose. It ruled that “picking up the bags was a matter of convenience, not necessity, for Brash Tygr and the Sonic Drive-In.”

In his dissent, Judge Kermit Bye said it was uncontroverted that Brash Tygr used such deposit bags and that the company did not have “a limitless supply.” Thus, at some point, an employee would have needed to “make a special trip to the bank for deposit bags if Tyler Roush had not brought them to his parents’ home.”

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The court also ruled that Hudson had not been given an opportunity to contest coverage in the wake of the family’s admission that Tyler Roush had been acting in the course of business.

Scorecard: The insurance company did not have to cover any of the $5.8 million in settlement costs.
Takeaway: Accepting the deposit bags “was a ‘casual and incidental’ aspect of a purely personal trip that did not give that trip a dual business purpose under Missouri law,” according to the court’s majority opinion.

Insurer Must Pay for Explosion Costs

In 2009, A.H. Meyer’s plant in Winfred, S.D., exploded for the second time in five years. The cause was heptane, a highly volatile solvent manufactured by Citgo Petroleum Corp., which is used in the production of beeswax.

After the first explosion in 2004, A.H. Meyer redesigned the plant so that electrical switches were at least five feet away — the recommended distance — from the 150-gallon storage “kettle” of heptane at the factory. In the previous plant, the distance had only been four feet. The company also added a ventilation system, as recommended.

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Nonetheless, an explosion occurred in 2009 when heptane spilled from the kettle and an employee pressed a switch to turn off a pump, according to court documents. Nationwide Insurance Co., which paid for the damage, filed a subrogation suit against Citgo, the manufacturer, and Barton Solvents, the supplier of the heptane.

It argued the companies were liable and negligent because the warnings were inadequate. A safety expert it hired said that the ventilation system meant to reduce risk was actually the reason for the explosion.
Nationwide also argued the companies had provided an express and implied warranty of the heptane.

Both the Circuit Court of the Third Judicial Lake County and the state Supreme Court disagreed, granting the defendants’ motion for summary judgment.

The South Dakota Supreme Court ruled that both the supplier and manufacturer “collectively warned that heptane was volatile and explosive,” and that A.H. Meyer complied with all safety recommendations.

“Ultimately, Nationwide’s inadequate warning claim is based on nothing more than the fact of the accident, speculation, and conjecture,” it ruled.
It also said that pointing out danger is not the same as a warranty, which implies a promise.

Scorecard: Nationwide’s attempt to subrogate the costs for repair were denied.
Takeaway: A safety warning is “an alert,” while a warranty is a “promise that the thing being sold is as represented,” the court ruled.

Anne Freedman is managing editor of Risk & Insurance. She can be reached at afreedman@lrp.com.
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Retail Data Exposures

Emerging Ways to Pay

New e-payment systems offer some data security advantages but they face implementation difficulties.
By: | November 17, 2014 • 6 min read
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With massive data breaches among big box retailers and major banks consistently making headlines, the cry for more secure consumer payment methods has reached a crescendo.

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Yet, the critical question remains: Will emerging technologies — from “chip/pin” credit cards to Apple Pay, Google Wallet and other similar e-payment products — stem the data risk tide?

And if so, will there be a winner among the group? Will there be a single payment system that can give both retailers and their customers a sense of security that currently doesn’t exist?

It’s much too early to tell, experts said. The main challenge now may be sorting through the various technological options — in addition to the potential cost and difficulty of implementing a new standard system.

Video: Mashable took Apple’s new payment system to the streets of New York City to see how it worked.

For example, some large retailers such as Wal-Mart, Rite Aid and CVS recently announced they would not accept Apple Pay, which uses the iPhone and major credit cards as its “touchless” payment delivery system.

Those large retailers and others are planning to use an alternative e-payment technology, called CurrentC, which bypasses major credit cards completely. The retailers favor that system because it eliminates the transaction fees charged by credit card companies to retailers.

According to Aaron Press, director of e-commerce and risk solutions at LexisNexis Risk Solutions in Dallas, each of the various mobile wallet systems has its own advantages.

One key benefit of systems such as Apple Pay and CurrentC is that they do not pass actual card data to the merchant, so there is no account information either in storage or in transit that can be compromised.

“If the wallet systems are secure, then consumers benefit from not sharing their payment credentials with merchants,” he said. “This means that even in the event of a breach, the consumer will not have to worry about their information being stolen and dealing with the hassle of disputing fraudulent charges or receiving new account numbers.”

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In addition, said David Katz, leader of the privacy and information security practice group at Nelson Mullins in Atlanta, Apple Pay’s biometric Touch ID technology makes it “difficult for a thief or imposter to use an iPhone to complete transactions fraudulently.

“Consumers whose phones are stolen or misplaced can easily use the ‘Find my iPhone’ feature to suspend all payments,” he said.

“Even if the world magically adopted chip/pin technology overnight, hackers would simply find a new way to turn card data into money.” — Russ Spitler, vice president of product management, AlienVault

However, he added, with 800 million credit cards on file — not to mention the brand new watch/fitness trackers that contain large amounts of health data — Apple may have succeeded in making itself the primary target.

Press noted that it is not yet clear whether Apple Pay or CurrentC will be vulnerable to fraudulent use.

E-wallet providers must ensure that the credentials being provisioned and used actually belong to the consumer attempting to use them, and that the applications, processes and infrastructure are secure, he said. The biometrics used with the Apple Pay process are helpful, but not a panacea.

Biometric Advances

Apple Pay, however, represents a security improvement over magnetic stripe architecture since it requires stealing a victim’s phone and successfully duplicating their fingerprint to commit fraudulent transactions, said Paco Hope, principal consultant at security consulting firm Cigital, in Dulles, Va.

Apple Pay also includes architecture (such as proxy numbers instead of account numbers) that contributes additional security, he said.

Russ Spitler, vice president of product management at AlienVault, a security provider in San Mateo, Calif., called Apple Pay a “major move” for the payment industry.

While the underlying technology is not new, Apple has the market share and mindshare to make it popular, he said. Shifts in payment technology are driven by consumer demand, not retailer preference.

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“In the past, Apple has proven to manage private data very responsibly — they take encryption seriously and implement it well,” Spitler said. “They are still prone to attacks against their users such as the recent iCloud issues — but they are working to add more features to help safeguard even in that situation.

“With Apple Pay, I am hopeful we will turn the corner on the horrible status quo of credit cards,” he said.

Structural Challenges

Because the U.S. adopted credit cards faster than they spread across Europe, Spitler said, the infrastructure in the U.S. is antiquated and entrenched, such as the point-of-sale (POS) systems reliant on magnetic stripe technology.

Moving past that to new EMV-based credit cards (also referred to as chip-and-PIN, chip-and-signature, chip-and-choice, or generally as chip technology) will require a major retrofit of a very distributed payment system in use for a long period of time, he said.

Video: A brief look at some of the advantages and challenges with EMV technology.

“Each corner store will have to invest in new technology at great cost to themselves and without any demand from the consumer; that’s a really difficult request to make of a small business,” he said.

EMV supports dynamic authentication (numbers change with each transaction), which means a cardholder’s data is more secure on a chip-enabled payment card than on a magnetic stripe card, and is much more difficult to copy or counterfeit.

“Magnetic stripe technology makes it dirt simple to clone a card once you have the electronic data associated with it,” Spitler said.

However, he said, the use of chip/pin technology does not guarantee the long-term elimination of risk.

“Even if the world magically adopted chip/pin technology overnight, hackers would simply find a new way to turn card data into money,” Spitler said.

Hope said that payment networks are introducing risk management beyond simply accepting or denying charges. Contactless payment systems deployed in the UK, for example, are usually dependent upon a variety of limits on total amount, number of transactions and transactions per time period.

“This is what it looks like when modern risk management meets the retail experience: the strength of the security measures in place,” he said. “Retail customer data in the future will be much more carefully protected using similar designs.”

Cyber Coverage

Regardless of what type of payment system is used, Collin Hite, who leads the insurance recovery group at Hirschler Fleischer in Richmond, Va., said all businesses should have cyber insurance, even though many companies still don’t believe they are likely targets.

The first party aspects of such coverage can be critical to a business since the insurance pays for forensic investigation and re-securing the network, in the event of a data breach, he said.

“This is typically the largest cost — not the actual loss of information of the consumers,” he said.

“While we know the Fortune 500 to 1000 are considering specific cyber coverage, middle-market businesses need to understand that they are as vulnerable as the ‘big boys,’ ” he said.

Craig Young, a mobile security researcher for Tripwire, in Portland, Ore., said the best risk management strategy is to move to the next technology as quickly as possible.

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“The ancient swipe and sign technology that dominates American retail is long overdue for a funeral,” he said. “For years, credit cards have been low-hanging fruit for thieves with a variety of techniques to steal card data, reproduce cards and start spending.”

LexisNexis’ Press added that it’s way too early to declare a front runner in mobile payments, and that magnetic stripe cards will be around for several more years.

“There is no security salvation or fraud magic bullet, but many of the new technologies offer a lot of promise,” Press said. “EMV will drastically improve POS security and reduce counterfeit fraud.  Biometrics is a promising option for identity verification.”

But, he warned, new technologies can open the window to new problems while shutting the door to known issues. Adding new technologies such as mobile, he said, increases the number of potential blind spots.

“Companies need to evaluate the risks and benefits of adding any new commerce technology or channel to their environment,” Press said.

Tom Starner is a freelance business writer and editor. He can be reached at riskletters@lrp.com.
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Sponsored: Liberty Mutual Insurance

Passion for the Prize

Managing today’s complex energy risks requires that insurers match the industry’s dedication and expertise.
By: | December 10, 2014 • 6 min read

In his 1990 book, The Prize: The Epic Quest for Oil, Money and Power, Pulitzer Prize winning author Daniel Yergin documented the passion that drove oil exploration from the first oil well sunk in Titusville, Penn. by Col. Edwin Drake in 1859, to the multinational crusades that enriched Saudi Arabia 100 years later.

Even with the recent decline in crude oil prices, the quest for oil and its sister substance, natural gas, is as fevered now as it was in 1859.

While lower product prices are causing some upstream oil and gas companies to cut back on exploration and production, they create opportunities for others. In fact, for many midstream oil and gas companies, lower prices create an opportunity to buy low, store product, and then sell high when the crude and gas markets rebound.

The current record supply of domestic crude oil and gas largely results from horizontal drilling and hydraulic fracturing methods, which make it practical to extract product in formerly played-out or untapped formations, from the Panhandle to the Bakken.

But these technologies — and the current market they helped create — require underwriters that are as passionate, committed and knowledgeable about energy risk as the oil and gas explorers they insure.

Liability fears and incessant press coverage — from the Denton fracking ban to the Heckmann verdict — may cause some underwriters to regard fracking and horizontal drilling with a suppressed appetite. Other carriers, keen to generate premium revenue despite their limited industry knowledge, may try to buy their way into this high-stakes game with soft pricing.

For Matt Waters, the chief underwriting officer of Liberty Mutual Commercial Insurance Specialty – Energy, this is the time to employ a deep underwriting expertise to embrace the current energy market and extraction methods responsibly and profitably.

“In the oil and gas business right now, you have to have risk solutions for the new market, fracking and horizontal drilling, and it can’t be avoidance,” Waters said.

Matt Waters, chief underwriting officer of Liberty Mutual Commercial Insurance Specialty – Energy, reviews some risk management best practices for fracking and horizontal drilling.

Waters’ group underwrites upstream energy risks — those involved in all phases of onshore exploration and production of crude oil and natural gas from wells sunk into the earth — and midstream energy risks, those that involve the distribution or transportation of oil and gas to processing plants, refineries and consumers.

Risk in Motion

Seven to eight years ago, the technologies to horizontally drill and use fluids to fracture shale formations were barely in play. Now they are well established and have changed the domestic energy market, and consequently risk management for energy companies.

One of those changes is in the area of commercial auto and related coverages.

Fracking and horizontal drilling have dramatically altered oil and gas production, significantly increasing the number of vehicle trips to production and exploration sites. The new technologies require vehicles move water for drilling fluids and fracking, remove these fluids once they are used, bring hundreds of tons of chemicals and proppants, and transport all the specialty equipment required for these extraction methods.

The increase in vehicle use comes at a time when professional drivers, especially those with energy skills, are in short supply. The unfortunate result is more accidents.

SponsoredContent_LM“In the oil and gas business right now, you have to have risk solutions for the new market, fracking and horizontal drilling, and it can’t be avoidance.”
— Matt Waters, chief underwriting officer, Liberty Mutual Commercial Insurance Specialty – Energy

For example, in Pennsylvania, home to the gas-rich Marcellus Shale formation, overall traffic fatalities across the state are down 19 percent, according to a recent analysis by the Associated Press. But in those Pennsylvania counties where natural gas and oil is being sought, the frequency of traffic fatalities is up 4 percent.

Increasing traffic volume and accidents is also driving frequency trends in workers compensation and general liability.

In the assessment and transfer of upstream and midstream energy risks, however, there simply isn’t enough claims history in the Marcellus formation in Pennsylvania or the Bakken formation in North Dakota for underwriters to rely on data to price environmental, general and third-party liability risks.

That’s where Liberty Mutual’s commitment, experience and ability to innovate come in. Liberty Mutual was the first carrier to put together a hydraulic fracking risk assessment that gives companies using this extraction method a blueprint to help protect against litigation down the road.

Liberty Mutual insures both lease operators and the contractors essential to extracting hydrocarbons. As in many underwriting areas, the name of the game is clarity around what the risk is, and who owns it.

When considering fracking contractors, Waters and his team work to make sure that any “down hole” risks, be that potential seismic activity, or the migration of methane into water tables, is born by the lease holder.

For the lease holders, Waters and his team of specialty underwriters recommend their clients hold both “sudden and accidental” pollution coverage — to protect against quick and clear accidental spills — and a stand-alone pollution policy, which covers more gradual exposure that unfolds over a much longer period of time, such as methane leaking into drinking water supplies.

Those are two different distinct coverages, both of which a lease holder needs.

Matt Waters discusses the need for stand-alone environmental coverage.

The Energy Cycle

Domestic oil and gas production has expanded so drastically in the past five years that the United States could now become a significant energy exporter. Billions of dollars are being invested to build pipelines, liquid natural gas processing plants and export terminals along our coasts.

While managing risk for energy companies requires deep expertise, developing insurance programs for pipeline and other energy-related construction projects demands even more experience. Such programs must manage and mitigate both construction and operation risks.

Matt Waters discusses future growth for midstream oil and gas companies.

In the short-term, domestic gas and oil production is being curtailed some as fuel prices have recently plummeted due to oversupply. In the long-term, those domestic prices are likely to go back up again, particularly if legislation allows the fuel harvested in the United States to be exported to energy deficient Europe.

Waters and his underwriting team are in this energy game for the long haul — with some customers being with the operation for more than 25 years — and have industry-leading tools to play in it.

Beyond Liberty Mutual’s hydraulic fracturing risk assessment sheet, Waters’ area created a commercial driver scorecard to help its midstream and upstream clients select and manage drivers, which are in such great demand in the industry. The safety and skill of those drivers play a big part in preventing commercial auto claims, Waters said.

Liberty Mutual’s commitment to the energy market is also seen in Waters sending every member of his underwriting team to the petroleum engineering program at the University of Texas and hiring underwriters that are passionate about this industry.

Matt Waters explains how his area can add value to oil and gas companies and their insurance brokers and agents.

For Waters, politics and the trends of the moment have little place in his long-term thinking.

“We’re committed to this business and to deeply understanding how to best manage its risks, and we have been for a long time,” Waters said.

And that holds true for the latest extraction technologies.

“We’ve had success writing fracking contractors and horizontal drillers, helping them better manage the total cost of risk,” Waters said.

To learn more about how Liberty Mutual Insurance can meet your upstream and midstream energy coverage needs, contact your broker, or Matt Waters at matthew.waters@libertymutual.com.

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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 Liberty Mutual Insurance. The editorial staff of Risk & Insurance had no role in its preparation.


Liberty Mutual Insurance offers a wide range of insurance products and services, including general liability, property, commercial automobile, excess casualty, workers compensation and group benefits.
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