Recall Mitigation Relies on Risk Managers
This is turning out to be a record year for auto-related recalls and, with the astronomical costs associated with them, insurance companies that offer accidental contamination or malicious product tampering policies are on alert.
This type of insurance is primarily used by food manufacturers, distributors, retailers and auto parts suppliers to cover business expenses related to a recall. And in light of recent events, you can be sure that parts suppliers are working closely with their insurers to see what losses are covered and what the damage will be to their bottom line.
Those with insurance are the lucky ones, as the costs associated with a recall can be significant, but even for those organizations, the results of the recall and subsequent insurance coverage rely heavily on the assessments of risk managers.
One of the key concerns for risk managers is cost containment.
Typically, an insurance company becomes engaged with the manufacturer when the recall is about to happen or has just happened. To get started on remediation, the insurer must determine the total loss of product and what services are needed.
Then, the insurer will pull impacted lots and have them tested by an independent company to confirm that a full recall is necessary. Risk managers must ensure that lot sizes and distribution channels are optimized to minimize the impact on the bottom line depending on the likelihood of a recall.
Throughout a recall event, a lack of effective risk management can cause manufacturers to make missteps that cost millions of dollars and negatively impact insurers.
For example, if organizations don’t have the ability to identify and isolate contaminated products from safe ones, they may end up crediting a retailer for the full lot and not just the impacted products – resulting in a cash loss.
Also, manufacturers may incur compliance fines as they scramble to meet all of the regulatory requirements surrounding recalls. Lastly, the complex logistics involved in a recall may prolong the process and expose the brand to greater risk.
Here are some best practices for risk managers to consider when faced with a recall:
• Ensure access to good data and tracking on impacted products, including information on where it is located and what the value of lost product is.
• If the origin of the recall is known, contact the source to see what damages they will pay and determine if legal action is needed.
• Encourage the organization to be recall-ready with a designated recall team and plan, and an understanding of the supply chain partners’ recall protocol.
As the global supply chain continues to become more complex, risk managers need to be vigilant when preparing for internal and supplier issues.
And for companies of all sizes, product contamination is a loss exposure that cannot be ignored. It’s occurring with alarming frequency in the U.S. and globally catching many organizations by surprise.
Companies that fall victim to these incidents often incur staggering costs in damage control and significant lag time in restoration of profits and reputation.
The Thrill of the Risk
In the ever-constant battle for the scariest rides, amusement park risk managers have their work cut out for them.
Owners constantly push the envelope in ride design to create an atmosphere of heightened risk to attract thrill-seeking patrons. That risk is only supposed to be an illusion, but it can become all-too-real thanks to the subjective decisions of park owners, ride operators and patrons themselves.
Case in point: In 2013, Rosa Esparza, a heavyset woman was allowed to ride a roller coaster at Six Flags Over Texas, but then fell out of the car and to her death when the ride turned upside down. Esparza’s family is now suing Six Flags and its parent companies, as well as the ride’s manufacturer, Gerstlauer Amusement Rides in Münsterhausen, Germany.
Video: ABC News reports on the deadly accident on the ‘Texas Giant’ roller coaster ride at Six Flags amusement park in July 2013.
Roughly 297 million people visit the 400 U.S. amusement parks annually and take 1.7 billion safe rides, according to the 2011 Fixed-Site Amusement Ride Injury Survey of the Association of Amusement Parks and Attractions. The chance of being seriously injured on a ride at a fixed-site park in the U.S is 1 in 24 million, and 61 of the 1,415 ride-related injuries, or less than 5 percent, required some form of overnight treatment at a hospital.
Most parks design and operate rides with the utmost safety in mind, but the tricky part is making sure the rides seem like they’re very risky, said Robert Murphy, global entertainment and events practice leader at Marsh in Philadelphia.
“If a park is marketing itself for thrill-seekers, they are typically pushing the big coaster speed rides,” Murphy said. “Then it becomes the battle for the most advanced ride – the fastest, tallest, most loops. There’s this constant competition to upgrade.”
Loss of public trust may be a park’s greatest exposure. “That’s what will kill your company.” — Jim Petersen, attorney specializing in risk management litigation
Likewise, risk managers of water parks have to contend with their own set of challenging risks, particularly patron drowning, or water-borne illnesses that may affect not just one or two patrons, but hundreds, he said.
The risks assumed by a park can rarely be transferred, but they can be shared by patrons and “designer engineers,” said Boyd F. Jensen II, owner of Garrett & Jensen law firm in Riverside, Calif., who sits on the safety and ASTM executive committee of the International Association of Amusement Parks and Attractions.
Personal injury lawsuits against park owners can be more easily defended if the owners provide documentation that their rides have been operated in a safe manner by trained employees, maintained routinely, complied with accepted safety standards and passed periodic inspections, Jensen said.
Park owners should document incidents as specifically and thoroughly as possible, ideally accompanied with photos and statements, he said. Owners should also demonstrate that they have posted signs and audible warning of known risks, and have ensured that patrons can witness a ride’s characteristics prior to boarding.
Impact on Reputation
But lawsuits can still be challenging because of the resulting perception that the park is not safe, Jensen said. Parks often settle to avoid additional public scrutiny, even though sometimes they could have shown that the patrons did not heed warnings, such as if they had existing heart or back trouble.
“Substantial sums of money can be wasted in settlements and jury verdicts due almost entirely because of inexperienced advisers,” he said.
Indeed, loss of public trust can often be the greatest exposure for a park, said Jim Petersen, a Chicago attorney specializing in risk management litigation. “That’s what will kill your company.”
When theme parks are under pressure to build the next biggest, fastest, tallest rides, certain biases can enter into the risk assessment process, Petersen said.
There is the bias of confidence based on the fact that ride designers have been good at what they’ve done up until this point, so park owners and managers assume they’re going to be good at whatever they do in the future.
Moreover, park managers tend to assume that that the scale of risk rises in a linear way – for example, if they build a ride that’s 10 percent bigger, that means a 10 percent increase in risk, Petersen said. However, increases in risk are typically exponential, so park managers need to prepare instead for greatly elevated risk levels.
“If theme parks are under pressure to get it done … to start the revenue stream, they may be hurt by these biases and build something far more risky — or move too quickly in disregard of the need for a higher degree of prudence,” Petersen said. “They need to slow down and be careful enough to not only think of the risks they do know, but conceive of things they might not know.”
“A theme park can only transfer the monetary loss to insurers, but not the legal liability and loss of reputation if they are sued.” — Frankie Hau, risk and environmental manager, Ocean Park, Hong Kong
Frankie Hau, risk and environmental manager at Ocean Park in Hong Kong, said that too few parks focus on enterprise risk management, and many risk managers tend to focus more on the insurance program for high-risk rides than managing risks across the entire enterprise.
“A theme park can only transfer the monetary loss to insurers, but not the legal liability and loss of reputation if they are sued,” Hau said. “If there is gross negligence that results in worst-case scenarios such as a fatality, then directors can go to jail.”
Ride manufacturers are generally responsible for the mechanics for the life of the ride, but parks must strictly follow procedures outlined in the manufacturers’ operations and maintenance manuals, or they will be found liable in court, he said.
In the current Six Flags case, Gerstlauer has filed a cross-complaint against the Texas park for not using a “test seat” that the manufacturer provided to test weight loads on the restraint system. Attorneys for Six Flags, Gerstlauer and the Esparza family did not return phone calls seeking comment.
Typically local authorities require that parks load test each of their rides with dummies, sand bags or concrete buckets per the manufacturer’s test weight recommendations, said Michael Greear, director of risk control services with Aon Risk Solutions’ entertainment practice in Denver.
Many manufacturers have training sessions on their rides for park mechanics, and completion of courses should be documented and presented in court cases.
But the weight of patrons can be a very challenging issue for parks, Murphy said.
“You can’t put a scale at the ride entrance and require people to stand on it — it has to be by sight, and so basically the park has to say to the operator to use their best judgment,” he said.
Patrons should be able to fit into the seat and have the safety bar closed, locked and fully supporting them, Murphy said. Moreover, if the ride malfunctions, operators have to be able to help the heavy person out of the car and down steps.
It helps to have another employee there to maintain “zero tolerance,” and if there is a disagreement, the other operator can call the supervisor, he said. Many parks try to screen for height and weight at the beginning of the ride’s line, so the person doesn’t have to wait in line or face even greater embarrassment.
For water parks, lifeguards must routinely patrol pools not only to watch for drownings, but also floating debris that could contaminate the pool, Hau said. Then, they must clear the pool, retrieve the substance, sanitize the water with a suitable dose of chlorine and then test the condition of the pool.
In the event of a claim for sickness, parks need to provide documentation to the court that they constantly tested the water’s quality, making sure chlorine, acidity and turbidity levels conform to international standards.
Risks increase on busy days when operators take shortcuts about cleaning testing, treating and then reopening pools, Greear said. “Many times, a business decision is a risk acceptance decision.”
From an insurance perspective, park risk managers can avoid some headaches if they understand what their policy covers and doesn’t cover — understanding the exclusions, coverage limits and requirements for reporting a claim if an event occurs, he said.
Risk managers should also work with their carriers and brokers as partners, because they have a great deal of expertise in loss control within their health and safety groups.
“By doing so, an operator could either avoid an incident or claim altogether or be in a position, through training and documentation, to show that they took the reasonable steps to reduce or eliminate a risk,” Greear said.
Achieving More Fluid Case Management
Risk management practitioners point to a number of factors that influence the outcome of workers’ compensation claims. But readily identifiable factors shouldn’t necessarily be managed in a box.
To identify and discuss the changing issues influencing workers’ compensation claim outcomes, Risk & Insurance®, in partnership with Duluth, Ga.-based Healthcare Solutions, convened an April roundtable discussion in Philadelphia.
The discussion, moderated by Dan Reynolds, editor-in-chief of Risk & Insurance®, featured participation from four tenured claims management professionals.
This roundtable was ruled by a pragmatic tone, characterized by declarations on solutions that are finding traction on many current workers’ compensation challenges.
The advantages of face-to-face case management visits with injured workers got some of the strongest support at the roundtable.
“What you can assess from somebody’s home environment, their motivation, their attitude, their desire to get well or not get well is easy to do when you are looking at somebody and sitting in their home,” participant Barb Ritz said, a workers’ compensation manager in the office of risk services at the Temple University Health System in Philadelphia.
Telephonic case management gradually replaced face-to-face visits in many organizations, but participants said the pendulum has swung back and face-to-face visits are again more widely valued.
In person visits are beneficial not only in assessing the claimant’s condition and attitude, but also in providing an objective ear to annotate the dialogue between doctors and patients.
“Oftentimes, injured workers who go to physician appointments only retain about 20 percent of what the doctor is telling them,” said Jean Chambers, a Lakeland, Fla.-based vice president of clinical services for Bunch CareSolutions. “When you have a nurse accompanying the claimant, the nurse can help educate the injured worker following the appointment and also provide an objective update to the employer on the injured worker’s condition related to the claim.”
“The relationship that the nurse develops with the claimant is very important,” added Christine Curtis, a manager of medical services in the workers’ compensation division of New Cumberland, Pa.-based School Claims Services.
“It’s also great for fraud detection. During a visit the nurse can see symptoms that don’t necessarily match actions, and oftentimes claimants will tell nurses things they shouldn’t if they want their claim to be accepted,” Curtis said.
For these reasons and others, Curtis said that she uses onsite nursing.
Roundtable participant Susan LaBar, a Yardley, Pa.-based risk manager for transportation company Coach USA, said when she first started her job there, she insisted that nurses be placed on all lost-time cases. But that didn’t happen until she convinced management that it would work.
“We did it and the indemnity dollars went down and it more than paid for the nurses,” she said. “That became our model. You have to prove that it works and that takes time, but it does come out at the end of the day,” she said.
The ultimate outcome
Reducing costs is reason enough for implementing nurse case management, but many say safe return-to-work is the ultimate measure of a good outcome. An aging, heavier worker population plagued by diabetes, hypertension, and orthopedic problems and, in many cases, painkiller abuse is changing the very definition of safe return-to-work.
Roundtable members were unanimous in their belief that offering even the most undemanding forms of modified duty is preferable to having workers at home for extended periods of time.
“Return-to-work is the only way to control the workers’ comp cost. It’s the only way,” said Coach USA’s Susan LaBar.
Unhealthy households, family cultures in which workers’ compensation fraud can be a way of life and physical and mental atrophy are just some of the pitfalls that modified duty and return-to-work in general can help stave off.
“I take employees back in any capacity. So long as they can stand or sit or do something,” Ritz said. “The longer you’re sitting at home, the longer you’re disconnected. The next thing you know you’re isolated and angry with your employer.”
“Return-to-work is the only way to control the workers’ comp cost. It’s the only way,” said Coach USA’s Susan LaBar.
Whose story is it?
Managing return-to-work and nurse supervision of workers’ compensation cases also play important roles in controlling communication around the case. Return-to-work and modified duty can more quickly break that negative communication chain, roundtable participants said.
There was some disagreement among participants in the area of fraud. Some felt that workers’ compensation fraud is not as prevalent as commonly believed.
On the other hand, Coach USA’s Susan LaBar said that many cases start out with a legitimate injury but become fraudulent through extension.
“I’m talking about a process where claimants drag out the claim, treatment continues and they never come back to work,” she said.
Social media, as in all aspects of insurance fraud, is also playing an important role. Roundtable participants said Facebook is the first place they visit when they get a claim. Unbridled posts of personal information have become a rich library for case managers looking for indications of fraud.
“What you can assess from somebody’s home environment, their motivation, their attitude, their desire to get well or not get well is easy to do when you are looking at somebody and sitting in their home,” said participant Barb Ritz.
As daunting as co-morbidities have become, roundtable participants said that data has become a useful tool. Information about tobacco use, weight, diabetes and other complicating factors is now being used by physicians and managed care vendors to educate patients and better manage treatment.
“Education is important after an injury occurs,” said Rich Leonardo, chief sales officer for Healthcare Solutions, who also sat in on the roundtable. “The nurse is not always delivering news the patient wants to hear, so providing education on how the process is going to work is helpful.”
“We’re trying to get people to ‘Know your number’, such as to know what your blood pressure and glucose levels are,” said SCS’s Christine Curtis. “If you have somebody who’s diabetic, hypertensive and overweight, that nurse can talk directly to the injured worker and say, ‘Look, I know this is a sensitive issue, but we want you to get better and we’ll work with you because improving your overall health is important to helping you recover.”
The costs of co-morbidities are pushing case managers to be more frank in patient dialogue. Information about smoking cessation programs and weight loss approaches is now more freely offered.
Managing constant change
Anyone responsible for workers’ compensation knows that medical costs have been rising for years. But medical cost is not the only factor in the case management equation that is in motion.
The pendulum swing between technology and the human touch in treating injured workers is ever in flux. Even within a single program, the decision on when it is best to apply nurse case management varies.
“It used to be that every claim went to a nurse and now the industry is more selective,” said Bunch CareSolutions’ Jean Chambers. “However, you have to be careful because sometimes it’s the ones that seem to be a simple injury that can end up being a million dollar claim.”
“Predictive analytics can be used to help organizations flag claims for case management, but the human element will never be replaced,” Leonardo concluded.