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.”
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.