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.
Legal Spotlight: October 1, 2014
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.
In 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.
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
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.
As 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.”
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.
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.