Disclaimer: The events depicted in this scenario are fictitious. Any similarity to any corporation or person, living or dead, is merely coincidental.
The scenario begins with the brief video below:
It’s five weeks since the day Reggie first felt that twinge in his knee. The pain is still not so great that Reggie can’t live with it, but he’s getting a little tired of it.
After work one day, Reggie is having beers with Smitty Cheeks, one of the company’s mid to long-range truckers, who’s done driving for the week and will be spending the weekend in Memphis.
Smitty and Reggie are engaged in game of 8-Ball at their local blues and barbecue joint. Smitty slams the 8 ball into the corner pocket, winning the game.
“My game,” says Smitty.
Reggie eyes the waitress delivering food to their nearby booth.
“Good thing,” Reggie says. “ ’Cause our food is here.”
The two are tearing into some serious barbecue when Reggie notices Smitty pulling a pill from a vial in his pocket. Reggie’s already had a couple of beers, which makes him a little bolder.
“Watcha’ got there partner?” Reggie says.
“Vicodin,” Smitty says.
“My back’s a mess and I’ve been taking these Vicodins for a while. They help a good deal. Probably not best to drink and use these, but hey, whatever gets you through the night,” Smitty says with a beery wink.
Reggie pauses and then blurts out.
“Could you hook me up with a few of those? I’ve been having some aches and pains myself.”
Smitty pauses, then very efficiently strips the smoked meat off of a turkey wing.
“I can get you all you need buddy and the price is right,” he says, his lips smeared with barbecue sauce and this time not smiling.
The next day, Reggie, whose become more inactive and out of condition since his knee injury, is coming out of the bathroom at home with a towel around his waist.
He’s limping worse than he has been recently. The knee has begun to lock on occasion and feels like it might be giving out. His wife Arlene addresses him.
“When are you going to see a doctor?” she says to him with a worried expression on her face.
“I really don’t know,” says Reggie.
“I really think you should,” she says. “You don’t know what’s going on there and you should at least get it checked out.”
Reggie pauses, embarrassed. Arlene is looking at him compassionately and it softens his defenses.
“I tweaked my knee at work a while back. Tell you what, I’ll tell my boss on Monday and go see somebody.”
“Good,” Arlene says. “You don’t want to go too long before figuring out what’s up.”
Reggie tells his supervisor about his injury. Reggie’s injury is in turn reported to the company’s insurance carrier. But neither the claims adjuster or the employer discuss the idea of Reggie being offered modified duty.
Reggie is referred to an in-network physician, an occupational medicine specialist. The Occ-Med prescribes an anti-inflammatory for Reggie. He also orders an MRI for him and gives him a prescription for four sessions of Physical Therapy and orders him a hinge knee brace, due to the “giving out” feeling Reggie has reported in his knee.
The Occ-Med specialist gets the MRI results, which reveals a tear. Without calling Reggie into have another look at him or gauge how he’s done in therapy, the Occ-Med refers Reggie to an orthopedic surgeon.
Reggie is in the surgeon’s office looking at the MRI results with the surgeon when he gets the news.
“The MRI scan reveals a 4 mm acute medial meniscus tear, Reggie,” the surgeon says.
“We’re going to want to repair this,” he continues.
“You mean surgery?”
“Yes. I don’t want to let this sort of thing go in a man your age,” the surgeon says, patting Reggie on the shoulder compassionately.
Mollified by the surgeon’s kindly tone, Reggie doesn’t question the decision or seek a second opinion.
Reggie doesn’t think to ask about a less invasive approach, like more physical therapy, and the surgeon doesn’t bring it up. The surgeon puts in a request for surgery, which is approved by the adjustor with no follow up or questioning as to its necessity.
Reggie undergoes preauthorized, minor arthroscopic surgery and is initially given six weeks off of work under the direction of the surgeon.
The carrier’s claims adjustor makes a note of the surgery but doesn’t contact the employer or Reggie to check in on his condition.
“It’s a pretty minor procedure,” she tells herself while alternating between looking at her computer monitor, where the details of Reggie’s case are displayed, and checking her cell phone.
Then her phone rings.
“This is Janice,” she says, and clicks to another screen on her computer. Reggie’s case is out of sight, out of mind.
No one from Reggie’s company checks in with him to discuss the future possibility of modified duty or to check on his overall welfare.
The Wheels Come Off
It’s one week post-op and Reggie pays a visit to the surgeon for a wound check.
“Let’s have a look here,” the surgeon says, gently peeling off the adhesive bandage.
“Looking good,” he says.
“Good,” Reggie says.
The surgeon swabs Reggie’s knee with some antiseptic and distracts Reggie as he pulls out the sutures with a discussion about planning for the way forward.
“So, I’m going to give you a prescription for therapy. I want to see you do at least 12 visits to work on regaining full range of motion in the knee and getting your strength back.”
“Got it,” said Reggie.
“How’s your pain?” the surgeon says.
“It hurts, no doubt,” Reggie said.
“Well let me know if you need more pain medication,” the surgeon says.
“I just might do that,” Reggie says before gingerly slipping down from the table.
It’s a week later and Reggie is sitting on the couch at home with the channel changer in his hand and his leg up.
Reggie checks his iPhone, scanning his e-mail inbox.
“Have you heard anything about your physical therapy appointment?” Arlene says from the kitchen where’s she’s pouring some tea for her and Reggie.
“Nothing,” Reggie says.
“I think I’m going to call them,” she says. “We need to get you into physical therapy.”
“Go ahead. I doubt they’ll call you back,” Reggie says. He’s not out of it but his manner is resigned and sluggish.
“It hasn’t been approved or processed yet by the insurance company.”
“Has anybody from your company ever contacted you?” Arlene says.
“Nope. But I’m still getting my workers’ comp checks, I guess I can be thankful for that,” Reggie says.
Reggie palms a pain pill from a vial and swallows it with a sip of water. Arlene can’t see him do this from her vantage point in the kitchen.
“I don’t like it, they should be in touch,” Arlene says.
“You’re probably right,” Reggie says, over his shoulder, taking a break from look at the television.
It’s another week before Reggie gets into therapy. The therapist greets Reggie as he’s ushered into the treatment area.
“Hi, I’m Maggie,” the therapist says. “Come on over to this table and lie down. I want to put some electrical stimulation on your knee and then we’ll get to work on it a little bit.”
Reggie walks over to the table, limping noticeably.
“You had surgery when?” Maggie the therapist says.
“Three weeks ago,” Reggie says.
“Hmmm, you’re late getting in here,” the therapist says.
“After we get through our work here today, I’m going to give you some home exercises to help you get caught up. We need to keep this knee moving and build your strength back up,” she says.
We cut forward to see the therapist working on Reggie’s knee. She flexes the knee slightly and Reggie almost jumps off of the table.
“This joint is stiff,” the therapist says.
“It sure is,” Reggie says.
Reggie’s reacting to the pain and eyes the therapist warily.
Reggie’s back at home and back in front of the television set. This time he’s got the pain medication bottle out in full view.
Arlene comes in carrying some groceries.
“Have you done your therapy exercises today?” she says.
“Not yet,” Reggie says.
She eyes the vial of pills on the table next to Reggie.
“I thought you were done with those,” she says.
“I’m not taking that many of them,” Reggie says. “And I did move. I went to the bathroom.”
Arlene just looks at him. She’s concerned but clearly doesn’t want to start an argument.
Without another word, Arlene heads to the kitchen with the groceries.
It’s five weeks since Reggie’s last visit to the orthopedic specialist and he uses a cane to get into the examination room. The use of the cane was approved by the adjustor.
The surgeon enters the room and sees the cane propped next to Reggie as Reggie sits on the examination table.
The surgeon is very alarmed.
“What’s the cane for?” he says. “I didn’t order you one.”
“I need it to walk,” Reggie says. “My knee’s still killing me and it’s hard to move it.”
“Where’d you get it, the cane?” the surgeon says, clearly disturbed.
“The therapist gave it to me,” Reggie says.
The surgeon quickly scans his electronic pad, looking for the report from the therapist.
“You had six visits. You were late getting in there but you had six visits. Although you should have had 12,” the doctor says, not quite panicking but clearly unnerved.
“You should have been going twice a week.”
Reggie ignores him.
“You said I could have more pain pills if I needed them, right?”
“What?” the doctor says, jarred that Reggie is ignoring him and taking up another subject.
“Yes I said that but I didn’t think you’d…” the doctor says before Reggie interrupts him.
“I’m gonna’ need more pain pills,” Reggie says with an edge.
The doctor says nothing. He’s at a loss.
“Doctor, I want more pain pills,” Reggie says.
This scenario was originally presented at the 2015 National Workers’ Compensation and Disability Conference in Las Vegas.
As part of the discussion, panelists discussed key aspects presented in the scenario.
Panelists included Dr. Robert Goldberg, chief medical officer, Healthesystems; and Dr. Jeffrey Sugar, Associate Medical Director, Sharp Rees-Stealy Medical Group. The session was moderated by Tracey Davanport, director, National Managed Care, Argo Group.
Insights from their discussion are highlighted below:
Disclaimer: The events depicted in this scenario are fictitious. Any similarity to any corporation or person, living or dead, is merely coincidental.
Jill Heald is a woman that loves to focus and hates distractions.
Heald paid close attention when an earthquake struck Japan in 2011 and a typhoon flooded Thailand that same year.
The press and the trade press laid out the gory details. Major companies; auto manufacturers, electronics companies and telecommunications companies were hit with supply chain losses they did not see coming. And the losses were big.
As the risk manager for Auto-Spire, an electronics manufacturer that makes integrated circuits used in the automotive industry, the Thailand and Japan losses made a deep impression on Heald. She vowed to herself that that sort of thing would never happen to her company.
Post-2011, shifts in Auto-Spire’s procurement process resulted in the company sourcing semi-conductors from an up and coming Malaysian manufacturer. Looking ahead to 2016, Heald in mid-2015 began thinking about and seeking approval for an ambitious contingent time element coverage insurance package.
“How big are we talking?” her broker asked her when she first sketched her plan in a phone call.
“Based on a brief meeting I had with Auto-Spire procurement folks, I believe a $25 million program should be sufficient, given the redundancy of our supply chain,” Heald told her broker.
“Well, we’re not going to get it all in one place,” the broker said. “Let me make some calls,” he said.
“How about we set up some face-to-face meetings with some of the underwriters?” Heald said.
“No need,” the broker said. “This is what you’re paying me for,” he said.
Unease gnawed at Heald after she hung up with the broker. It would make her feel a lot better to meet with the underwriters and some of their claims teams.
But the broker was who he was. Nobody had his contacts and he was a wizard with carrier relationships, or so everybody said.
Two days later the broker called her back.
“Okay I’ve got some ideas but we’ve got some work to do,” the broker said.
The nut was this: The CTE program that Heald was envisioning was going to require the participation of two, maybe three carriers. The way the broker presented the story, he’d been burning the midnight oil to connect with underwriters in the U.S. and Bermuda.
“So let me see if I’ve got this straight,” Heald said.
“We’ve got one U.S. carrier on the primary layer at $15 million.”
“Correct,” the broker said.
“And two carriers in the second layer at $5 million a pop. Both based in Bermuda,” Heald said.
“Again, correct,” the broker said.
They both agreed the premium prices were historically very good. The location of the semi-conductor maker was not a high flood risk. And the soft property market was another blessing.
Heald and her broker bound the coverage before Thanksgiving for the year 2016.
In April of 2016, Typhoon Lumba-Lumba, Malaysian for dolphin, strikes Malaysia as a CAT 4.
The morning after the typhoon strikes, Heald is online and on the phone trying to determine if the city where the Auto-Spire semi-conductor supplier is located was heavily damaged in the storm.
The good news is that it did not appear to be. The bad news comes within days when deliveries of semi-conductors from Malaysia to Auto-Spire’s U.S. factories slow to a crawl.
“Do we know what’s going on?” Heald said to an Auto-Spire executive in procurement at the end of the week.
“The communication there is horrible Jill,” the procurement executive said. “I wish I could tell you more, but right now I have next to nothing.”
“How could you have next to nothing?” Heald said to no one after she hung up with procurement. “It’s your job.”
Using her broker’s more robust international contacts, Heald pushes hard and gets some information. It’s just that the information she gets is not comforting.
The information is sketchy but it appears that several suppliers to the semi-conductor maker were knocked out by the typhoon.
Facing millions in lost sales, Heald and her broker file a claim on their CTE coverage for $20 million.
Heald is immediately descended upon by underwriters for the three carriers. The underwriters are demanding answers to a number of questions.
“We see there is no claims handling agreement associated with this program. Who’s the adjuster of record?” an underwriter for the U.S.-based carrier on the primary layer asked Heald.
“Adjuster of record? I’ve never heard of the phrase,” Jill Heald said.
With no claims handling agreement in place between Auto-Spire and the carriers on the CTE program, Heald spends weeks responding to the various carriers’ document requests.
Three weeks after the storm struck, Heald’s broker calls her with his version of good news.
“Hey, I talked to Ajax Ltd., they’re going to cut you a check for $1 million as an advance while these CTE claims get sorted out,” the broker said.
With semi-conductor shipments from Malaysia at a trickle, Heald takes little solace in this.
“Really? I guess I’ll take it,” Heald says. But the truth is that she’s worn down to a nub in all the back and forth between the carriers.
The lack of a claims handling agreement has translated into weeks of delays in getting claims information filed and adjusted. Each carrier has a different process for adjusting the claim.
All three carriers use the services of outside forensic accountants. Unfortunately, each carrier uses a different accounting firm.
There are also different terms and conditions between the different policies. Whether there could be coverage gaps created by those differing terms and conditions is an ongoing source of stress for Heald.
“There’s got to be a better way to do this,” she told her broker on the phone one day. “We should have had transparency into this ahead of time.”
“Look Jill, I’ve been doing this a long time,” the broker said.
“I don’t care how long you’ve been doing it. You and I could have done it better,” Heald shot back.
And one million is looking like a drop in the bucket next to lost sales to the automakers that are starting to reach into the tens of millions.
It’s now six weeks after the storm hit and the Malaysian supplier is still not fully back up to speed.
A Hellish Grind
The typhoon that struck Malaysia and clipped Auto-Spire’s supply chain resulted in $45 million in lost sales.
Heald heaps the blame on herself, even though this is an organizational failure. Heald was led to believe that $25 million of CTE was sufficient but Auto-Spire’s dependence on third party suppliers was increased due to the recent shift in its procurement process.
It wasn’t that the carriers on the program didn’t pay the claim, they eventually did. But the delays caused by the lack of a claims handling agreement created serious tension between Heald and the Auto-Spire C-suites. Not to mention cash flow problems on top of the lost sales due to the crimp in Auto-Spire’s supply chain.
“A promise to pay is a promise to pay…. in a timely manner,” her CFO thundered at her when she broke the news to him that due to delays in adjusting the Malaysia claims the carriers still hadn’t cut Auto-Spire checks.
“They are going to pay Jim, it’s just that the claims process got extended more than we would like,” Heald told him.
“It’s not the carriers’ fault,” she added.
“How do you mean?” he said.
“It’s my fault actually,” Heald said.
“I should have had a pre-loss claims handling agreement in place. That would have streamlined the process much more and given all parties a clearer picture of the claims handling process.
“But you didn’t do that,” the CFO said.
“No, I didn’t,” Heald said.
“What about your broker, shouldn’t he have put something like this in place?”
“I don’t want to blame him either. The fact is that we didn’t do it,” Heald said.
“So how much time do you think that cost us, in terms of getting paid,” the CFO said.
“Hard to say,” Heald said. “Six weeks minimum,” she added.
“Do you know what it costs to borrow $20 million for six weeks?” the CFO said.
“Not off of the top of my head,” Heald said.
“A lot,” the CFO said. “A lot.”
It is also clear to Heald that she needs to develop a better channel of communication with the procurement group so that she can be in a better position to procure adequate insurance for the needs created by Auto-Spire’s supply chain.
She thought she was doing the right thing in putting together a substantial CTE program. Now it all feels like a cruel joke.
Risk & Insurance® partnered with FM Global to produce this scenario. Below are FM Global’s recommendations on how to prevent the losses presented in the scenario. This perspective is not an editorial opinion of Risk & Insurance®.
What to Do Before a Loss
In most cases, you’ll receive no warning before disaster strikes. If you experience a sizable loss, the loss itself may be your smallest issue. You might also be worried about injuries, deaths, lost market share, revenue stream, notifying shareholders or something else.
When a loss happens, it is similar to the start of a professional sports game. It is a culmination of all the practice leading up to the game, only the practice is the pre-loss planning. That’s why pre-loss planning is so important. Before a loss occurs, work with your broker and/or insurer(s) to develop a plan for loss management that is carefully tailored to meet your unique needs.
The following is a list of the key information your loss management plan should cover:
- procedures and guidelines for handling loss, including a clear delineation of who will report the loss to your insurance partner(s).
- a detailed list of names and contact information of members of your emergency response team
- key contacts at your subsidiaries and remote offices
- contingency arrangements with emergency services and critical suppliers
- tailored loss-handling and claims cooperation agreements with other program participants
- global coordination requirements
- assignment of emergency duties for local plant personnel, your corporate insurance department, your broker and others
- a designated liaison to work with the adjuster
Without pre-loss planning, there can be fear of the unknown. However, with pre-loss planning it can be reassuring to know that you just have to pick up the phone and make only one call when a loss occurs, know who is coming to your site and know how your insurer will respond.
Many emotions come with an actual loss. Pre-loss planning can provide you that much needed level of confidence when you need it most in your job.
Helping Investment Advisers Hurdle New “Customer First” Government Regulation
This spring, the Department of Labor (DOL) rolled out a set of rule changes likely to raise issues for advisers managing their customers’ retirement investment accounts. In an already challenging compliance environment, the new regulation will push financial advisory firms to adapt their business models to adhere to a higher standard while staying profitable.
The new proposal mandates a fiduciary standard that requires advisers to place a client’s best interests before their own when recommending investments, rather than adhering to a more lenient suitability standard. In addition to increasing compliance costs, this standard also ups the liability risk for advisers.
The rule changes will also disrupt the traditional broker-dealer model by pressuring firms to do away with commissions and move instead to fee-based compensation. Fee-based models remove the incentive to recommend high-cost investments to clients when less expensive, comparable options exist.
“Broker-dealers currently follow a sales distribution model, and the concern driving this shift in compensation structure is that IRAs have been suffering because of the commission factor,” said Richard Haran, who oversees the Financial Institutions book of business for Liberty International Underwriters. “Overall, the fiduciary standard is more difficult to comply with than a suitability standard, and the fee-based model could make it harder to do so in an economical way. Broker dealers may have to change the way they do business.”
As a consequence of the new DOL regulation, the Securities and Exchange Commission (SEC) will be forced to respond with its own fiduciary standard which will tighten up their regulations to even the playing field and create consistency for customers seeking investment management.
Because the SEC relies on securities law while the DOL takes guidance from ERISA, there will undoubtedly be nuances between the two new standards, creating compliance confusion for both Registered Investment Advisors (RIAs)and broker-dealers.
To ensure they adhere to the new structure, “we could see more broker-dealers become RIAs or get dually registered, since advisers already follow a fee-based compensation model,” Haran said. “The result is that there will be likely more RIAs after the regulation passes.”
But RIAs have their own set of challenges awaiting them. The SEC announced it would beef up oversight of investment advisors with more frequent examinations, which historically were few and far between.
“Examiners will focus on individual investments deemed very risky,” said Melanie Rivera, Financial Institutions Underwriter for LIU. “They’ll also be looking more closely at cyber security, as RIAs control private customer information like Social Security numbers and account numbers.”
Demand for Cover
In the face of regulatory uncertainty and increased scrutiny from the SEC, investment managers will need to be sure they have coverage to safeguard them from any oversight or failure to comply exactly with the new standards.
In collaboration with claims experts, underwriters, legal counsel and outside brokers, Liberty International Underwriters revamped older forms for investment adviser professional liability and condensed them into a single form that addresses emerging compliance needs.
The new form for investment management solutions pulls together seven coverages:
- Investment Adviser E&O, including a cyber sub-limit
- Investment Advisers D&O
- Mutual Funds D&O and E&O
- Hedge Fund D&O and E&O
- Employment Practices Liability
- Fiduciary Liability
- Service Providers D&O
“A comprehensive solution, like the revamped form provides, will help advisers navigate the new regulatory environment,” Rivera said. “It’s a one-stop shop, allowing clients to bind coverage more efficiently and provide peace of mind.”
Ahead of the Curve
The new form demonstrates how LIU’s best-in class expertise lends itself to the collaborative and innovative approach necessary to anticipate trends and address emerging needs in the marketplace.
“Seeing the pending regulation, we worked internally to assess what the effect would be on our adviser clients, and how we could respond to make the transition as easy as possible,” Haran said. “We believe the new form will not only meet the increased demand for coverage, but actually creates a better product with the introduction of cyber sublimits, which are built into the investment adviser E&O policy.”
The combined form also considers another potential need: cost of correction coverage. Complying with a fiduciary standard could increase the need for this type of cover, which is not currently offered on a consistent basis. LIU’s form will offer cost of correction coverage on a sublimited basis by endorsement.
“We’ve tried to cross product lines and not stay siloed,” Haran said. “Our clients are facing new risks, in a new regulatory environment, and they need a tailored approach. LIU’s history of collaboration and innovation demonstrates that we can provide unique solutions to meet their needs.”
For more information about Liberty International Underwriters’ products for investment managers, visit www.LIU-USA.com.
Liberty International Underwriters is the marketing name for the broker-distributed specialty lines business operations of Liberty Mutual Insurance. Certain coverage may be provided by a surplus lines insurer. Surplus lines insurers do not generally participate in state guaranty funds and insureds are therefore not protected by such funds. This literature is a summary only and does not include all terms, conditions, or exclusions of the coverage described. Please refer to the actual policy issued for complete details of coverage and exclusions.
This article was produced by the R&I Brand Studio, a unit of the advertising department of Risk & Insurance, in collaboration with Liberty International Underwriters. The editorial staff of Risk & Insurance had no role in its preparation.