Legal Spotlight: February 2014
Subrogation Attempt Rejected
St. Paul Mercury Insurance unsuccessfully sought to recover $14.5 million from a security company after a propane tank exploded in an insured’s building.
A tank of liquefied petroleum — which later was determined to be damaged or defective prior to delivery — had been delivered to a jeweler who rented space in the building.
St. Paul Mercury Insurance, as subrogator for Mallers, claimed the security company was negligent and breached its contract by not stopping or reporting the delivery of the propane tank. The insurer argued that Aargus “knew or should have known” that it was creating “a dangerous condition.”
The contract between the building owner and the security company did not include specific responsibilities regarding the inspection of deliveries.
The Circuit Court of Cook County, Illinois, rejected the insurer’s argument, granting a summary judgment. That court also rejected affidavits from experts, who offered their opinions that appropriate security procedures would not permit delivery of propane tanks. On appeal, the court agreed, ruling that neither expert was part of the contract between the building owner and security company, and that their views on high-rise security were “irrelevant.”
The appeals court upheld the lower court’s decision that the security company “never undertook a duty to check on propane tanks” as part of its responsibilities.
Scorecard: St. Paul Mercury Insurance Co. will not recoup the payment of $14.5 million it paid in claims following an explosion.
Takeaway: A court will not expand a defendant’s duties beyond what the parties agreed upon in their contract.
Insurer Need Not Pay for Atrium Collapse Settlement
The U.S. Fourth Circuit Court of Appeals upheld a summary judgment which allowed ACE American Insurance Co. to reject reimbursement of a $26 million settlement claim.
The claim resulted from the Sept. 5, 2007 collapse of an 18-story, 2,400 ton glass atrium that was being built as part of a $900 million Gaylord National Resort and Convention Center in Oxon Hill, Md. Gaylord hired PTJV, a joint venture between Perini Building Co. and Turner Construction Co., to serve as construction manager.
A year after the collapse of the atrium, PTJV filed a complaint against Gaylord for establishment and enforcement of a mechanic’s lien, breach of contract, quantum meruit, and violation of the Maryland Prompt Payment Act. PTJV alleged Gaylord owed it nearly $80 million. Gaylord countersued for breach of contract and breach of fiduciary duty, seeking reimbursement of about $65 million due to PTJV’s alleged failure to properly manage scheduling and costs, and failing to build a high-quality project at the agreed-upon price.
Gaylord and PTJV agreed to settle the Gaylord action on Nov. 28, 2008, with Gaylord paying an additional $42.3 million and PTJV crediting back $26 million. PTJV did not seek ACE’s consent prior to entering the settlement agreement, and did not seek reimbursement for the settlement amount until about six months afterward, according to court documents.
ACE denied payment, and PTJV filed suit alleging breach of contract and bad faith. A district court upheld ACE’s subsequent motion for a summary judgment because of the lack of prior consent to the settlement, and the appeals court agreed with that decision.
Scorecard: ACE will not need to pay a $26 million insurance claim, following an insured’s settlement of litigation without prior consent.
Takeaway: The decision breaks away from the trend of courts requiring evidence of prejudice when an insurance company denies coverage due to lack of notice.
ERISA Time Limits Upheld
The U.S. Supreme Court denied the petition of a Wal-Mart public relations executive to litigate the denial of long-term disability benefits under the retail store’s plan, administered by Hartford Life & Accident Insurance Co.
A unanimous decision of the High Court ruled that Julie Heimeshoff failed to abide by the three year statute of limitations in filing her request for judicial review of the insurance company’s denial of benefits.
Although Heimeshoff filed the litigation within three years after the final denial of benefits, she did not file it within three years after “proof of loss,” as was required in the plan documents.
Suffering from lupus and fibromyalgia, Heimeshoff stopped working in June 2005. In August of that year, she filed a claim for long-term disability benefits, listing her symptoms as “extreme fatigue, significant pain, and difficulty in concentration.” That claim was ultimately denied by Hartford when her rheumatologist never responded to requests for additional information.
Hartford later allowed her to reopen the claim without need for an appeal, if the physician provided the requested information. After another physician evaluation and report, Hartford’s physician concluded Heimeshoff was able to perform the “activities required by her sedentary occupation.”
In her complaint, which was joined by the U.S. government, Heimeshoff argued the controlling statute should be the Employee Retirement Income Security Act, which provides a two-tier process of internal review and litigation. A district court granted a motion by The Hartford and Wal-Mart to dismiss the lawsuit. That was upheld by the U.S. Second Circuit Court of Appeals. The High Court agreed, ruling the statute of limitations was reasonable and there were no contrary statutes that should control the process.
Scorecard: The Hartford need not pay long-term disability benefits to the employee.
Takeaway: The U.S. Supreme Court’s decision resolves a split among various federal appeals courts, some of which had upheld plan provisions and others which found they were not enforceable.
Court Reverses Product Liability Decision
Indalex was seeking duty-to-defend coverage from the insurer under a commercial umbrella policy as a result of lawsuits filed in five states alleging the company’s doors and windows were defectively designed or manufactured, resulting in water leakage, mold, cracked walls and personal injury.
The trial court ruled there was no obligation to defend or indemnify Indalex as the claims involved “faulty workmanship” and thus did not constitute an “occurrence.” It dismissed the lawsuit.
On appeal, the higher court found that the underlying claims did count as “occurrences” because the defective products led to damages elsewhere and were “neither expected nor intended from the standpoint of the Insured.”
The court ruled that the lower court improperly ignored legally viable product-liability-based tort claims, rejecting the use of the state’s “gist of the action” doctrine, which prevents a “plaintiff from re-casting ordinary breach of contract claims into tort claims.” The case was remanded to the lower court for further action on the claims.
Scorecard: National Union may incur claims up to $25 million as Indalex defends itself from the underlying lawsuits in five states.
Takeaway: The decision provides an expansive reading of an insurance company’s obligations in commercial general liability coverage.
Coping with Cancellations
Airlines typically can offset revenue losses for cancellations due to bad weather either by saving on fuel and salary costs or rerouting passengers on other flights, but this year’s revenue losses from the worst winter storm season in years might be too much for traditional measures.
At least one broker said the time may be right for airlines to consider crafting custom insurance programs to account for such devastating seasons.
For a good part of the country, including many parts of the Southeast, snow and ice storms have wreaked havoc on flight cancellations, with a mid-February storm being the worst of all. On Feb. 13, a snowstorm from Virginia to Maine caused airlines to scrub 7,561 U.S. flights, more than the 7,400 cancelled flights due to Hurricane Sandy, according to MasFlight, industry data tracker based in Bethesda, Md.
Roughly 100,000 flights have been canceled since Dec. 1, MasFlight said.
Just United, alone, the world’s second-largest airline, reported that it had cancelled 22,500 flights in January and February, 2014, according to Bloomberg. The airline’s completed regional flights was 87.1 percent, which was “an extraordinarily low level,” and almost 9 percentage points below its mainline operations, it reported.
And another potentially heavy snowfall was forecast for last weekend, from California to New England.
The sheer amount of cancellations this winter are likely straining airlines’ bottom lines, said Katie Connell, a spokeswoman for Airlines for America, a trade group for major U.S. airline companies.
“The airline industry’s fixed costs are high, therefore the majority of operating costs will still be incurred by airlines, even for canceled flights,” Connell wrote in an email. “If a flight is canceled due to weather, the only significant cost that the airline avoids is fuel; otherwise, it must still pay ownership costs for aircraft and ground equipment, maintenance costs and overhead and most crew costs. Extended storms and other sources of irregular operations are clear reminders of the industry’s operational and financial vulnerability to factors outside its control.”
Bob Mann, an independent airline analyst and consultant who is principal of R.W. Mann & Co. Inc. in Port Washington, N.Y., said that two-thirds of costs — fuel and labor — are short-term variable costs, but that fixed charges are “unfortunately incurred.” Airlines just typically absorb those costs.
“I am not aware of any airline that has considered taking out business interruption insurance for weather-related disruptions; it is simply a part of the business,” Mann said.
Chuck Cederroth, managing director at Aon Risk Solutions’ aviation practice, said carriers would probably not want to insure airlines against cancellations because airlines have control over whether a flight will be canceled, particularly if they don’t want to risk being fined up to $27,500 for each passenger by the Federal Aviation Administration when passengers are stuck on a tarmac for hours.
“How could an insurance product work when the insured is the one who controls the trigger?” Cederroth asked. “I think it would be a product that insurance companies would probably have a hard time providing.”
But Brad Meinhardt, U.S. aviation practice leader, for Arthur J. Gallagher & Co., said now may be the best time for airlines — and insurance carriers — to think about crafting a specialized insurance program to cover fluke years like this one.
“I would be stunned if this subject hasn’t made its way up into the C-suites of major and mid-sized airlines,” Meinhardt said. “When these events happen, people tend to look over their shoulder and ask if there is a solution for such events.”
Airlines often hedge losses from unknown variables such as varying fuel costs or interest rate fluctuations using derivatives, but those tools may not be enough for severe winters such as this year’s, he said. While products like business interruption insurance may not be used for airlines, they could look at weather-related insurance products that have very specific triggers.
For example, airlines could designate a period of time for such a “tough winter policy,” say from the period of November to March, in which they can manage cancellations due to 10 days of heavy snowfall, Meinhardt said. That amount could be designated their retention in such a policy, and anything in excess of the designated snowfall days could be a defined benefit that a carrier could pay if the policy is triggered. Possibly, the trigger would be inches of snowfall. “Custom solutions are the idea,” he said.
“Airlines are not likely buying any of these types of products now, but I think there’s probably some thinking along those lines right now as many might have to take losses as write-downs on their quarterly earnings and hope this doesn’t happen again,” he said. “There probably needs to be one airline making a trailblazing action on an insurance or derivative product — something that gets people talking about how to hedge against those losses in the future.”
Changing the WC Medical Care Mindset
Controlling overall workers’ compensation medical costs has been an elusive target.
Yet, according to medical experts from Healthesystems, the Tampa, Fla.-based specialty provider of innovative medical cost management solutions for the workers’ compensation industry, payers today have more powerful options for both offering the highest quality medical care and controlling costs, but they must be more thoroughly and strategically executed.
Specifically as it relates to optimizing patient outcomes and controlling pharmacy costs, the key, say those experts, is to look beyond the typical clinical pharmacy history review and to incorporate a more holistic picture of the entire medical treatment plan. This means when performing clinical reviews, taking into account more comprehensive information such as lab results, physician notes and other critical medical history data which often identifies significant treatment plan concerns but frequently aren’t effectively monitored in total.
Healthesystems’ Dr. Robert Goldberg, chief medical officer, and Dr. Silvia Sacalis, vice president of clinical services, recently weighed in on how using a more holistic, comprehensive strategy can make the critical difference in the ongoing medical care cost control battle.
Fragmentation, Complexity Obscure the Patient Picture
According to Dr. Goldberg, fragmentation remains one of the biggest obstacles to controlling overall healthcare costs and ensuring the most successful treatment in workers’ compensation.
Robert Goldberg, MD, discusses obstacles to controlling overall medical costs and ensuring the best treatment in workers’ compensation.
“There are several hurdles, but they all relate to the fact that healthcare in workers’ comp is just not very well coordinated,” he said. “For the most part, there is poor communication between all parties involved, but especially between the payer and the provider. Unfortunately, it’s rare that all the stakeholders have a clear, complete picture of what’s happening with the patient.”
Dr. Goldberg explains that health care generally has become a more complex landscape, and workers’ comp adds another level of complexity. Physicians have less time to spend with patients due to work loads and other economic factors, and frequently there isn’t adequate time to develop a patient specific treatment strategy.
“Often we don’t have physicians properly incentivized to do a complete job with patients” he said, adding that extra paperwork and similar hurdles limit communication among payers, nurse case managers and other players.
In fact, Dr. Sacalis emphasized that it’s not only the payer, but often the healthcare provider who is not getting a complete picture. For example, a treating doctor may not be the primary care physician and therefore they may not have access to the total healthcare picture for the injured worker.
“Most of all, payers need to adopt a more collaborative approach in their relationships with physicians, employers and patients, as well as networks involved. It will result in getting people back to work through appropriate medical care and moving the case along to a prompt closure.”
– Robert Goldberg, MD, FACOEM, Chief Medical Officer, Healthesystems
“It’s often difficult for multiple physicians to communicate and collaborate about what’s happening because they may not be aware of each-others involvement in that patient’s care,” she said. “Data sharing is lacking, even in integrated healthcare systems where doctors are in the same group.”
Done Right, Technology Can Bridge the Treatment Strategy Gap
Dr. Sacalis explained the role technology advancements can play in creating a more holistic picture of not only an injured workers’ post-accident state or pace of recovery, but also their overall health history. However, the workers’ comp industry by and large is not there yet.
“Today’s technology can be very useful in providing transparency, but to date the data is still very fragmented,” she said. “With technology advancements, we can get a more holistic patient view. However, it is important that the data is both meaningful and actionable to promote effective clinical decision support.”
Silvia Sacalis, PharmD, explains the role that technology advancements can play in creating a more holistic picture of an injured worker’s overall health.
Healthesystems, for example, offers an advanced clinical solution that incorporates a comprehensive analysis of all relevant data sources including pharmacy, medical and lab data as part of a drug therapy analysis. So, for example, the process could uncover co-morbidities – such as diabetes – that may be unrelated to a workplace injury but should be considered in the overall treatment strategy.
“Healthcare professionals must ensure there are no interactions with any
co-morbidities that may limit or affect the treatment plan,” Dr. Sacalis said.
In the majority of cases where Healthesystems has performed advanced clinical analysis, information gathered from the various sources has uncovered critical information that significantly impacted the overall treatment recommendations. Technology and analytics enable the implementation of best practices.
She cites another example of how a physician may order a urine drug screen (UDS), yet the results indicating the presence of a non prescribed drug were not reflected in the treatment regimen as evidenced by the lack of modification in therapy.
“Visibility and transparency will help with facilitating a truly effective treatment plan,” she said, “Predictive analytics are necessary tools for proactive monitoring and detection of trends as well as early identification of cases for intervention.”
Speaking of Best Practices …
Dr. Goldberg highlighted that the most important overall best practice needed to secure the optimal outcome is centered around getting the right care to the right patient at the right time. To him, that means identifying patients who need adjustments in care and then determining medical necessity during the entire case trajectory.
“It means using evidence-based medical treatment guidelines that are coordinated,” he said.
“You must look at the whole patient, which means avoiding the typical barriers in the workers’ comp treatment system, issues such as delays in authorizations, lengthy UR processes or similar scenarios that are well intentioned but if not performed effectively they can get in the way of expedited care.”
Dr. Goldberg and Silvia Sacalis provide recommendations for critical steps payers should take to achieve the best outcomes for everyone.
Dr. Goldberg noted that seeking out the most effective doctors available in geographic locations is another critical best practice. That requires collecting data on physician performance, patient satisfaction and medical outcomes, so payers and networks can identify and incentivize them accordingly.
“This way, you are getting an alignment of incentives with all parties,” Dr. Goldberg said, adding that it also means removing outlier physicians, those whose tendencies are to over-treat, dispense drugs from their office or order unnecessary durable medical equipment, for example.
“Visibility and transparency will help with facilitating a truly effective treatment plan. Predictive analytics are necessary tools for proactive monitoring and detection of trends as well as early identification of cases for intervention.”
– Silvia Sacalis, PharmD, Vice President of Clinical Services, Healthesystems
“Most of all, payers need to adopt a more collaborative approach in their relationships with physicians, employers and patients, as well as networks involved,” he said. “It will result in getting people back to work through appropriate medical care and moving the case along to a prompt closure.”
Dr. Sacalis added that from a pharmacy perspective, another best practice is becoming more patient-centric, using a customized and flexible approach to help payers optimize outcomes for each patient.
“Focus on patient safety first, and that will naturally drive cost containment,” she said. “Focusing on cost alone can actually drive results in the wrong direction.”
Dr. Goldberg explains how consolidation in the health care and WC markets can impact the landscape and quality of care.
Dr. Goldberg and Silvia Sacalis discuss if injured workers today are getting better treatment than they were twenty years ago.
This article was produced by the R&I Brand Studio, a unit of the advertising department of Risk & Insurance, in collaboration with Healthesystems. The editorial staff of Risk & Insurance had no role in its preparation.