When Insurers Say No
After 23 years managing risk at a company with a product line that includes respirators that protect workers from toxins created during sandblasting, Roger Andrews has learned a thing or two about complex claims.
As director of risk management for personal protective equipment maker E.D. Bullard Co., Andrews has handled thousands of lawsuits over the years, including those stemming from occupational disease claims in which plaintiffs have sought damages for asbestosis and silicosis — diseases that may be contracted 10 to 15 years or more before any symptoms or actual claims arise.
Some cases have emerged because workers used Bullard’s safety gear sporadically or not at all.
Whatever the merits of the underlying cases, it’s no surprise that historically such lawsuits have led insurers to balk at supplying policyholders with indemnification or defense. Clearly, the long-tail nature of occupational disease claims has led to disputes over items including applicable coverage triggers, policy duration, and sufficient notifications (or the lack thereof).
Nevertheless, Andrews said it is rare now that he faces conflicts with insurers, and that is largely due to ongoing relationship-building efforts to ensure he and his underwriters and claims adjusters are on the same page.
Andrews has worked with some carriers for 18 years. “It still makes sense to meet with them regularly once a year, usually in August just prior to our October renewals,” Andrews said, “just to get a feel for the marketplace, any rate increases, and what the situation is if we encountered any unique risks.
“It may be that we haven’t seen any claims or that we’ve seen lots of claims, and we’d talk through that.”
Working to solidify insurer relationships won’t always do the trick, of course. Most experts agree that insurance challenges continue to become more complex across commercial property as well as liability lines.
Industry attorney Ty Childress, a partner and head of the insurance recovery group at Jones Day in Los Angeles, said there are numerous cases where insurers are apt to deny claims — particularly when the stakes are high and large dollar amounts are at issue.
Such claims include “asbestos and environmental exposures covering multiple policy years,” he said.
Nor are the problems confined to liability insurance, Childress said, noting that the nature of business interruption can also make claims valuation difficult and subject to differing views from legal and insurance experts.
So, what are risk managers to do? Attorneys, brokers and other risk experts have several recommendations for insureds hoping to avoid insurer litigation or failing that, manage such cases more deftly.
One basic step risk managers should take is, prior to policy issuance or during annual meetings with underwriters, make sure any attorney you plan to use is on your insurers’ approved list in case litigation arises, Andrews said.
“One good rule of thumb is to anticipate that litigation will arise under most policies,” said Andrews.
“Not having your preferred attorney or law firm on the insurer’s ‘panel counsel’ list is a source of litigation in and of itself and can really prejudice the effective management of the litigation,” he said.
In addition to tightening the connection with insurers, risk managers should also ask to select the independent adjuster who will work on their account, said John Dempsey, managing director and practice leader, claims preparation, advocacy and valuations at Aon Global Risk Consulting.
Business Interruption Disconnect
Dempsey said there have been some real changes occurring in the property-catastrophe sector of late, in terms of how business interruption (BI) risks are interpreted.
For example, when a law firm noticed its billable hours fell following Superstorm Sandy and tried to collect under its BI policy, the lead insurer on the program interpreted the coverage clause in a somewhat novel way.
“The insurer said, ‘Let’s look at each lawyer [at the firm] and whether the reduced billings were the result of physical damage to the law firm’s property, or other causes such as trees blocking their driveways, gas shortages, or time spent repairing their damaged houses,’ ” Dempsey said.
“Not having your preferred attorney or law firm on the insurer’s ‘panel counsel’ list is a source of litigation in and of itself and can really prejudice the effective management of the litigation.”— Roger Andrews, director of risk management, E.D. Bullard Co.
“If other ‘causes’ were found, the business income claim was reduced, accordingly. Yet, all of these causes were inextricably linked to Sandy and its effects. There’s a disconnect here,” he said.
Clearly, that storm helped to illustrate that insurance products have not kept up with the changing risks companies are facing, he said.
For one thing, because coastal flooding caused significant damage, it was important to know whether that peril was classified as “flood” or “storm surge” under the policy. In some cases, insureds without adequate flood coverage were out of luck, he said.
Furthermore, whereas many businesses did not suffer direct property damage, which is generally required for the recovery of business interruption losses, the wider effects of Sandy meant that thousands of employees had trouble getting to work due to infrastructure damage in the storm’s aftermath.
Others suffered losses because financial institutions closed down for two days.
The result: Although many businesses sustained Sandy-related financial losses, without direct physical damage to trigger coverage, many insureds found they lacked protection under their property BI policies.
That has led some underwriters to urge risk managers to lower their claim recovery expectations.
“They do not wish to insure all of the things that could go wrong following a natural catastrophe like Superstorm Sandy or a terrorist event like 9/11,” Dempsey said.
Insurance company claims adjusters have pointed to the broader economic impact of large-scale events such as Sandy or 9/11 and theorized that certain losses would have been incurred even if a business did not take a direct hit.
This came as a shock to businesses that thought their policy covered all BI losses stemming from Sandy.
And, in fact, this theory — put forth by insurers and insurance adjusters — often has no basis in the policy wording, Dempsey said.
To minimize surprises going forward, Dempsey generally recommends that his clients have a role in selecting the independent adjuster and other insurance company experts working on their account.
“That may sound unusual,” he said. “But so much of the claims process comes down to personal relationships,” he said.
“Knowing the adjuster and the other experts, and being able to come to a meeting of the minds in terms of objectives and working through problems will pay huge dividends,” he said.
Here are some tips for dealing with complex claims litigation involving insurers:
- Timing issues often create conflicts
One problem that can frustrate risk managers is claims-made liability coverage, which requires policyholders to give notice of circumstances that may give rise to a claim in the future, said attorney Mark Garbowski, a shareholder at Anderson Kill.
“That’s caused disagreements as to whether a new claim related back to an earlier claim or circumstance, and as to which tower of policies it went into,” said Garbowski, whose practice concentrates on insurance recovery on behalf of policyholders, with particular emphasis on professional liability coverages.
He advises insureds with claims-made coverage to expand their notification to insurers about potential claims.
“You might have a claim that comes in today and that relates back to a notice of circumstances two years ago. In that case, I suggest you give notice to policies in effect today as well as those in force two years ago,” he said.
- Know state law
Frequently, when liability cases emerge, the third-party plaintiff will demand to see all communications between the insured and its underwriters. It is of paramount importance to know the law in your state, said Childress.
“Policyholders need to be wary of whether or not their communications with their insurers may be revealed to the underlying plaintiff,” he said. The answer may depend upon whether the insurer is a primary or defending insurer.
- Review coverage extensions and exclusions annually
“When meeting with underwriters — something that should take place once a year at least — risk managers should discuss coverage extensions or exclusions that may be or should be on the policy and that could be of particular concern,” said Andrews of E.D. Bullard.
“A lot of the time, litigation arises because the risk manager thinks there’s coverage and the claims person says no, there’s this or that exclusion,” he said. “You want to know [in advance] what conditions might be imposed on the policy.”
- Understand Your Cyber Liability Coverage
As cyber liability becomes a growing area of concern, risk managers need to be increasingly careful about what they’re buying.
“In the case of data breach, you’ve got to notify every single person that’s been affected,” Andrews said, and the costs can be monumental. If you want indemnification for such expenses, make sure whatever program you choose includes breach mitigation coverage.
Open to Improvement
U.S. risk professionals with significant hurricane and other CAT-prone exposures are looking for a clearer picture when it comes to catastrophe loss modeling, an area fraught with confusion and increasing criticism.
Time and again, those whose risks are being evaluated have complained that they have too little control over how their specific exposures generate loss estimates, and how those estimates are calculated.
“Open” systems and “transparency” have become the buzzwords of the catastrophe modeling community of late, but how user-friendly will the newest catastrophe models really become over the next year or so?
It’s a question that the Oasis Loss Modeling Framework hopes to help answer. The London-based nonprofit represents a total of 25 insurers, reinsurers and brokers, including units of Allianz, Zurich, SCOR, Liberty Mutual, Willis, Guy Carpenter, Hiscox, RenaissanceRe and PartnerRe.
Oasis announced in January that its framework would bring down the cost of modeling, and provide transparency and greater flexibility for users via a program that is open to anyone with an interest in creating new catastrophe risk models.
Hopes are high. Still, the reality is that thus far, Oasis has no models available for U.S. hurricane and quake, though program developers hope to have such models available by the end of the year, said Dickie Whitaker, Oasis project director.
Initially, Oasis will offer models of floods in Great Britain and Australia, earthquake in North Africa and the Middle East, and brush fire in Brazil, Whitaker told Risk & Insurance®.
Scott Clark, risk and benefits officer for the Miami-Dade County Public School system, said he wants to see Oasis offer a global open platform that would allow those most knowledgeable about the school system’s risks to go into a modeling system and enter information that will produce the best outcomes — as opposed to the rather limited current system.
“I would like to be able to drill down into second- and third-tier modifiers to best affect the modeling outcomes including roof strapping, roof construction, etc.” — Scott Clark, risk and benefits officer for the Miami-Dade County Public School system
“I would like to be able to drill down into second- and third-tier modifiers to best affect the modeling outcomes including roof strapping, roof construction, etc.,” said Clark.
Currently, critics said, traditional models have been too focused on the aggregation of risk that insurers tend to calculate — rather than individual exposures and properties.
The modelers are also criticized for changing models from year to year in ways that do not reflect actual changes in loss exposure.
“There is a tremendous variation between RMS 11 and RMS 13,” said John Burkholder, director of risk management for Broward County, Fla.
For example, when Marsh compared the two models, it found that medium-term rates (which represent storm activity potential based on climate conditions over the next five years) were reduced 28 percent in RMS version 13 for CAT 3 to CAT 5 events, while the nationwide average was reduced 16 percent.
“How could you have that much variation in risk exposure over just a two-year period?” asked Burkholder. “It’s difficult to reconcile those models with the actual individual risks.”
Claire Souch, senior vice president of business solutions at RMS in London, said that the main drivers of change between RMS 11 and RMS 13 came from new insights into hurricane activity: the number of hurricanes per year, where hurricanes are formed and where they make landfall.
“The scientific view of hurricane activity has changed since 2011, in part because of the considerable research RMS and other organizations have carried out to determine what drives hurricane landfall frequency,” she said.
“Ocean temperatures in the Atlantic have been increasing,” she said.
“Yet, over the last few years we’ve seen very low levels of hurricanes making landfall, something that the change between the 2011 and 2013 model versions reflected,” said Souch.
Clark of Miami-Dade County schools echoed the concerns of many risk managers.
He recalled the impact of the controversial RMS version 11, which initially more than doubled the school district’s probable maximum losses (PML) to $1.9 billion, making it difficult for Clark to assemble the insurance limits he needed — until he got another modeling firm to reassess the risk.
The way it’s worked traditionally using RMS, AIR or EQECAT modeling, there is a huge blind spot for risk managers and others wanting to know how the models project losses, he said.
Karen Clark of catastrophe risk modeling firm Karen Clark & Co. in Boston, said she understands risk managers’ concerns.
Traditional models may lack quantifiable data and can change quickly and dramatically, she said. When risk specialists are dealing with countrywide exposures, geographical changes may be less critical.
“The traditional models are not robust for individual locations and concentrated exposures.” — Karen Clark,co-founder and CEO, Karen Clark & Co.
Traditional models were never designed with risk managers in mind but with insurers in mind, she said.
“The traditional models are not robust for individual locations and concentrated exposures,” she said.
Models and Granularity
Often, risk managers and their brokers need to bring their underwriters’ attention to outliers that don’t fit with the usual assumptions.
That is one of the problems with traditional models, said Burkholder of Broward County.
“We’ve got a bulkhead at Port Everglades which models as a building,” Burkholder said.
However, it is not nearly as vulnerable.
“It is constructed solely of concrete and steel, so the model should, for loss modeling purposes, recognize its actual characteristics in the results to more accurately reflect the correct exposure,” he said.
In an effort to address some of the problems — particularly with making their systems more transparent to users, all three of the major CAT modeling vendors have released new products: Touchstone from AIR Worldwide, Risk Quantification & Engineering (RQE) from EQECAT and RMS(one) from RMS.
Souch of RMS said that RMS(one) provides “an exposure and risk management platform that enables any company to store and analyze all of the information they have about their risk, acting as a system of record for all of the risk items in the business, with the ability to run RMS and other models.”
She said RMS(one) is exposure and model agnostic so it allows companies to use catastrophe models to simulate what the impact of a hurricane or other disaster might be for all the exposures they have.
In addition, RMS’ models on RMS(one) are open and enable users to understand the impact of different scenarios, she said, such as if three hurricanes made landfall in one year instead of a single hurricane.
AIR Worldwide’s Touchstone is “an open platform, allowing clients to import third-party hazard layers or run multiple alternative models on a single platform for a more complete view of risk,” according to the company.
The major CAT modeling vendors have attempted to address some of the criticisms related to transparency.
Once more, the emphasis is on transparency and user interface.
“For example, say you believe losses from CAT 3 hurricanes should be 10 percent higher than AIR’s standard model says they are,” said Rob Newbold, senior vice president with AIR Worldwide.
A user can go into Touchstone and modify losses to better reflect their loss experience, or their own underwriting policies.
“However, there will always be the AIR default view, alongside any modified views,” said Newbold.
Several firms are now providing data and models through Touchstone. These include Ambiental, ERN, EuroTempest, IHS Inc., KatRisk, Met Office, PERILS, and SSBN.
EQECAT has its own take on the “open model” approach.
Rodney Griffin, senior vice president of client solutions and product management for CoreLogic EQECAT, said that RQE’s simulation platform “runs 181 natural catastrophe probabilistic models for 90 countries across the globe.
The RQE platform is inherently open in that additional models or components such as the hazards or vulnerabilities can be added to the platform.
“CoreLogic EQECAT is committed to being transparent and this is reflected in the granularity of reports down to individual site levels and the very extensive documentation which includes analyses of the key drivers of risk,” Griffin said.
On the compliance side, with respect to Solvency II in Europe and ORSA in the United States, he said the company “provides tailored documentation to transparently support these requirements.”
Oasis, meanwhile, promises to offer perspectives from multiple modeling firms, including Karen Clark & Co. Clark noted that her company’s platform, RiskInsight, allows risk managers to build their own models.
At the same time, she said, companies can also take advantage of Oasis to see what other models say.
Other Oasis modelers include JBA Risk Management, Spa Risk LLC, and Long Beach, Calif.-based ImageCat, which plans to focus specifically on earthquake risk via SesmiCat.
“The compelling case for the Oasis is that risk managers will be able to have access to the best of breed models tailored for specific hazards and specific regions through a single portal and at a reasonable cost,” said Charles Huyck, executive vice president at SesmiCat creator ImageCat, Inc.
“SeismiCat, for example, can potentially provide risk managers access to a host of sophisticated earthquake modeling capabilities previously utilized only by the structural engineering community in the United States,” he said.
So how exactly does a risk manager tap Oasis?
A risk manager can join as an associate member, which is free, said Whitaker. Full members are financial institutions or underwriters, all of whom pay a membership fee, he said.
Risk managers can download the software and search for a model of the geographical region and peril in question, and then negotiate their fee with the provider, he said.
Karen Clark said that the costs to access Oasis or RiskInsight will undoubtedly be a lot less than for the traditional modelers.
“Quite simply, you’re going to get more models on it,” Clark said when asked why industry members might want to tap Oasis versus an individual modeler like her firm.
“Via Oasis, you’ll be able to look at many different models’ views. That’s the [whole] idea,” Clark said.
Six Best Practices For Effective WC Management
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.
“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:
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?
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.
Debbie discusses how Helmsman drives outcomes for risk managers.
Debbie explains how to manage medical outcomes.
Debbie discusses considerations when selecting a TPA.
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.