A Paramount Parable
Disclaimer: The events depicted in this scenario are fictitious. Any similarity to any corporation or person, living or dead, is merely coincidental.
Home for the Holidays
Neal Chambers surveyed the holiday turkeys on display at his local grocer on Nov. 23 and mused. Fresh or frozen? Tom or hen? Free range or kosher? Locally produced or from the foothills of the Smoky or the Sierra Mountains?
Chambers threw thrift to the wind and plunked down $52 for a 16-pound organic bird from Upstate New York.
What the heck? After four brutally slow years, the construction company he managed risk for was showing signs of reemergence.
True, the company’s estimators were not happy. Where once they needed to bid 10 jobs to land one, each job now took 30 or 40 bids to land.
Neal’s company, Paramount Construction Co., based in Des Moines, Iowa, worked with larger companies historically.
But in order to land projects, it was now moving down to the middle market and competing against smaller regional operators with local expertise. This was not an easy road to hoe.
But Paramount was doing what it felt it needed to do to compete successfully.
At the office holiday party on Dec. 19, held at the River Bluff Country Club, Neal could see signs that the C-suites were feeling a little better about things. Nice carving station, good wine in the glasses and some generous door prizes. He took in a deep breath and let it out.
Things had been tough for a while. He’d been working hard. He’d been worried.
“Go ahead, have a drink,” he told himself. “It’s free and now is as good a time as any.”
Neal had one glass of wine in him and was waiting his turn to fill his plate at the sushi appetizer table when he saw one of the vice presidents, Tom Murphy, lift his phone to his ear.
As he listened to the caller, Murphy turned and looked at Neal. With his other hand, he gestured to Neal to join him. Murphy’s hand was free because he did not drink at company functions … ever.
“It’s Constantine,” Murphy said in a whisper when Neal got closer. “Something’s up. He tried to reach you but…”
Murphy shrugged non-judgmentally.
Constantine, head of operations. Good guy. No nonsense.
“This is Neal Chambers,” Neal said into Murphy’s phone.
“Neal, it’s Jonny Constantine. We’ve got a bit of a situation.”
“Shoot,” Neal said.
Constantine exhaled audibly into the phone. Neal could tell that Constantine was a little upset.
Neal shot a look of worry at Murphy.
“Look, we just had an accident with an excavator operator on the site here in Mille Lacs. We’ve got one seriously injured employee and some structural damage to a neighboring building.”
“How bad is the injury?” Neal said.
“It’s not pretty. I think this poor kid is going to lose his left leg below the knee,” Constantine said.
“And the building?”
“Well. The wall on the demo wasn’t supported right and the operator knocked it into this neighboring wall. It was a pretty big bump.”
Neal hung up with Constantine and gave Murphy his phone back.
As he turned his own phone on to check messages, Neal Chambers felt any holiday warmth drain out of him. The wine that had been so enjoyable 20 minutes ago now struck him like a cheap depressant.
2014 was supposed to be Paramount’s breakout year. But now Chambers had a significant workers’ compensation and general liability claim to worry about.
Looking around the brightly lit room at his fellow employees, Neal Chambers had an uneasy feeling that 2014 wasn’t going to be that great after all.
No Bench Strength
What worried Neal Chambers were the personnel cuts Paramount undertook to survive during the brutal commercial construction downturn that seized the country during the Great Recession.
The most worrisome cuts came in the area of safety, where some highly paid talent had been laid off. But there were also cuts in estimating, where other senior personnel with beefier paychecks left the company.
You couldn’t put the cart before the horse. Although things were turning around, Paramount was not yet at a place where it could hire big ticket talent to fill the gaps. Not yet.
Yet the company was trying to grow again and take on more projects. The combination worried Neal Chambers.
The accident with the excavator in Mille Lacs wasn’t catastrophic. But it was the beginning of a series of workplace accidents that plagued the company through the first six months of 2014.
Neal’s conversations with finance added to his anxiety.
“We’re just not making the money on these projects I thought we were going to be,” said Tom Murphy’s elder brother Pat Murphy, the company CFO.
Bidding for projects in unfamiliar territories and on unfamiliar scales, Paramount’s overworked estimators were missing the mark time and again.
The combination of an increased injury frequency rate and thinner margins was not making a good impression on Paramount’s surety and insurance underwriters.
Both Pat and Neal feared that year-end premium increases could be in the works.
Paramount’s revenue shortfalls created friction with subcontractors.
Jonny Constantine got into several heated arguments with subcontractors, alleging that they were botching projects by not moving more efficiently.
There were now a handful of legal proceedings underway. In those cases, Paramount was alleging that subcontractors violated the terms of their contracts by not completing the work in time, or completing it in substandard fashion.
Win or lose, those lawsuits meant one thing to Neal Chambers and Pat Murphy. They meant more costs, more margin erosion.
“We’re in a tight spot,” Neal Chambers said.
“I know we are,” Pat said, somewhat impatiently.
“The thing is, I don’t know what we can do between now and 2015 renewals to make a better impression,” Neal said.
“It’s almost like a roll of the dice,” he added. “I don’t know what else we can get out of the safety department in terms of management.”
“We need better talent and more of it,” Pat said.
The question was where.
A Horse With No Name
The answer to Neal’s question, as it turned out, was “nowhere.”
The talent crunch that Paramount was experiencing, and which was causing it so much pain, was not isolated to Paramount. But some of its competitors moved more quickly than Paramount in acquiring and retaining the talent to help them take full advantage of the upturn.
Others moved even less effectively than Paramount. But in a competitive economy, being in the middle was no place to be.
As 2014 moved from the second quarter to the third and fourth, adding to Paramount’s workers’ compensation woes and its sinking profit margins came yet another issue.
That issue was increasing commodities prices. Paramount’s overworked estimators, working in the unfamiliar middle market, failed to take into account a gradual increase in the cost of steel, copper wiring and other key construction materials.
There simply was no place to turn to hire the sort of experience in safety or in estimating that could put Paramount back on track.
As Paramount’s executives looked forward to their year-end renewals for their insurance programs, the company was looking at unpalatable premium increases.
“You’re looking at a 30 percent mark-up with your workers’ compensation premiums and at least a 25 percent increase in the amount of collateral you’re going to have to put up in workers’ compensation and in surety,” said the company’s broker, Ed Scarborough. “You’re also looking at an increase in your general liability.”
The construction market continued to recover. But Paramount now needed to play defense.
Faced with insurance and surety increases and declining margins, Paramount had no choice but to do what it didn’t want to do. Already bereft and hamstrung due to a lack of talent, Paramount undertook more layoffs.
One of the first to go was Neal Chambers.
In November of 2014, Neal Chambers and his daughter Annabelle went shopping for a turkey. Annabelle was fourteen and well versed in sustainable agriculture practices at school.
“We’re getting an organic turkey, right?” she asked her father.
“No, Annabelle, I’m afraid not,” Neal said.
Neal reached into the meat freezer and pulled out a frozen Honeybreast turkey and threw it into his shopping cart with a disheartening “clang.”
Risk & Insurance partnered with Liberty Mutual Insurance to produce this scenario. Below are Liberty Mutual Insurance’s recommendations on how to prevent the losses presented in the scenario. These lessons learned are not the editorial opinion of Risk & Insurance.
1. Value is replacing price: It’s no longer enough to be the lowest bidder. Contractors must now prove to clients that they have the capacity to deliver a project that is the most cost-effective in the long term. That means not only delivering a quality product, but having the risk management program and coverage in place to mitigate potential finger pointing and costly litigation down the road.
2. Keep an eye on commodities: Nowhere are the realities of the global economy more evident than in the area of commodities. Demand cycles for copper, steel, coal and other materials in developing or maturing economies are going to have an impact on prices here at home. Models that take into account commodities fluctuations will be increasingly important. In addition, any new rating programs based on Construction Value should be carefully evaluated compared to a payroll based program.
3. Talent rules: Qualified estimators and safety officers left the construction industry in droves during the downturn. Making sure the talent is in place to take advantage of the upturn in the rebounding commercial construction business is an important consideration. Don’t overlook the added value of a well-documented quality assurance program.
4. Understand new geographies: Competing in this new market may mean having to enter new geographic areas to find business. Trying to compete in New York state without understanding its Byzantine labor laws would be a mistake. So would entering into any new geography without an understanding of local regulations and how they could impact costs. Conversely, demonstrating local experience to a client would be a key selling point here.
5. Delivery methods matter: New markets mean new delivery methods. Whether it is design-build, identifying a construction manager at risk, or the complexities of public-private or international partnerships, insurance and risk mitigation are going to have to be adequate to cover these trending delivery methods. Effective communication amongst all parties including contractual relationships continues to be a vital aspect of any project.
The Man on the Jack
Disclaimer: The events depicted in this scenario are fictitious. Any similarity to any corporation or person, living or dead, is merely coincidental.
On the Muscle
When his supervisor waved to him, Early Hart took one hand off of the jackhammer trigger, plucked the earbud out of his right ear and picked up his head in acknowledgement.
“Whatcha got?” Early shouted to his boss, the clattering, echoing din of the jackhammer coming momentarily to a halt.
“Break time!” shouted his boss. “Put that hammer down and come get out of the sun!”
“Don’t want to break. Wanna work,” Early shouted back at him, smiling.
Early wiped at his brow with a grimy backhand. Sweat was pouring down his face, the bulging muscles of his arms and his burly torso.
“Break!” the boss said as an answer, still smiling back. Early did as his boss said and set the jackhammer down to rest on the pile of broken asphalt he was creating in the middle of Green Avenue.
Early strode confidently to where his boss and a handful of other workers were already gathered under an enormous sycamore. The gate to his boss’ pickup truck was down and the guys were pulling drinks of iced tea out of an enormous orange thermos.
The son of a local alderman, Roger Hart, Early made a name for himself at a young age, as a Gloucester County New Jersey high school football star. College wasn’t for him though, and he thought himself lucky to have landed a job with KMF Energy Solutions, working on a gas line replacement crew for the utility.
It didn’t hurt that his boss was his father’s cousin, Frank Walter. Frank eyed Early admiringly as he came forward to join his co-workers under the shade of the tree.
“You’re a strong young man, but if you want to stay strong in this heat you better hydrate!”
Early took the cup of iced tea Frank offered. He had no argument with a cold drink of tea in this heat and humidity.
“It’s all good,” he thought as he sipped his tea. Lowering his cup, he spied his SUV, with two surfboards strapped to the top of it. In two and half hours he’d be in the water.
When Early paddled into the surf break, the other nearby surfers gave him plenty of room.
Early had a reputation as one of the best amateur surfers on the East Coast.
Even without knowing his reputation, anyone with sense could deduce that the owner of muscles like those didn’t need to worry about objections over sharing a wave. He could clearly take care of himself or any shoreline disputes that came his way.
The swells that day were big. Some kind of a storm must have been working its way up from the Caribbean.
Early surfed one big wave, then another. He was joyous in the feeling of immeasurable strength that a young man has in taking on the ocean and feeling no fear.
That’s when it happened.
Early knew these waters well, but no one knows everything, and in this case Early’s undoing was a sand bar that had built up where he wasn’t expecting one. A big breaker drove him into it.
The wave flipped Early and he hit the sand bar hard, with his lower body extending over the edge of it and his lower back taking the brunt of the wave’s force.
It was all Early could do to stagger to the beach. He felt crippled.
“Hey! Hey Early!” one of the other surfers yelled.
Early was mobile, but after being examined by a doctor, he was placed on eight weeks of short-term disability with a severely strained lower back.
An Uneasy Feeling
Back at work, Early was under orders from the doctor to take it easy for a while. His injury was expected to fully heal, but for now a dull pain and unfamiliar physical limitations remained for the normally strong and capable man. But Early’s relative Frank Walter knew the way of the world. Frank felt he needed to protect Early and shield his condition.
Frank gave Early lighter duty, but he didn’t formally ask for an accommodation for Early from human resources. Early was given jobs like operating the hose to keep dust down or working traffic control, but his pay rate and job classification remained the same.
Frank walked up to Early one day as Early stood morosely at the edge of the job site, holding a sign that said “stop” on one side and “slow” on the other.
“What’s the matter with you?” Frank asked Early.
“I’m bored,” Early said.
“Be happy you’ve got a job,” Frank said under his breath.
“What do you mean?” Early asked.
“Things are getting tight around here,” Frank said. “I’m hearing some rumors about layoffs.”
One of Early’s co-workers walked by. He was the kind of person who tended not to mind his own business and he liked to start trouble.
“Same pay, lighter duty. Must be nice,” the co-worker said, eyeing Frank and Early malevolently.
“You mind your own business Johnny,” Frank said to him. “Get over there and load the concrete saw onto the truck like I told you to do a half hour ago!”
Johnny ambled off, in no big hurry.
“I’d fire that coyote tomorrow!” Frank said under his breath, for only Early to hear.
But it was Frank who lost his job, the very next day, as part of a KMF management reshuffle.
Early had been back at work only three weeks when he got a new boss, Del Miller. Miller didn’t know Early, but Early’s ginger approach to his work gave Miller a bad first impression, albeit a mistaken one.
“That guy’s just flat-out lazy,” Miller said to himself as he watched Early pick up a single two by twelve at a time instead of two or three like his co-workers did.
“Is there something the matter with you, young man?” Miller asked Early one morning, after they’d been working together for a week.
“No sir, nothing,” Early said, not anxious to be overly candid with a new supervisor he barely knew.
“Mama’s boy,” the troublemaking Johnny said under his breath to Del Miller the next Monday, as Early ducked working the concrete saw and instead picked up a hose and watered the street to keep the dust down.
With KMF’s managers under pressure to cut costs, Early was terminated by the disapproving Del Miller, five weeks after coming back from short-term disability. Del Miller wanted someone who could perform all the requirements of the job.
Roger Hart was not the type to baby his son, but when Early was terminated, Roger consulted with a friend, Avery Fischer, who was known as one of the best labor attorneys in the state of New Jersey.
The Thursday after Early was terminated, he had a meeting with Avery Fischer in Avery’s office in Trenton.
“When you got back to work after your injury, did anyone within KMF discuss with you what you were and weren’t able to do within your job duties?” Avery asked Early.
“No sir, they didn’t,” Early said.
“Did the company offer you any kind of accommodation, say a desk job or a job driving where you wouldn’t be called on to do so much physical labor, or an official adjustment in your current job?” Avery asked Early.
“Not officially. After Frank lost his job, I was back to normal expectations on the same job, working as a laborer on the road crew.”
Roger Hart was at the meeting with Avery and Early, and it was at this point in the conversation that Avery turned to Roger with a meaningful glance.
“It looks to me, Roger, that KMF is in clear violation of the Americans with Disabilities Act Amendments Act here.”
“How so?” Roger said.
“The company initiated no dialogue with Early, made no effort to check in with him, talk to him about his back injury.”
“And?” Roger said, guessing that there was more to it.
“And they made no attempt to determine if a reasonable accommodation would allow him to continue employment. By leaving him on the road crew – in the same job with the same expectations – to get picked off by this new supervisor, they hung an injured man out to dry. That’s a clear violation,” Avery said.
Roger Hart needed to hear no more. KMF had gotten rid of his cousin, who worked for the company for 14 years, and then they’d terminated the apple of his eye, his son Early, who he knew as a hard-working young man, bent on achievement.
“So, what do we do?” Early said, turning to the two older men.
“We sue,” Roger said.
Avery nodded his head in agreement.
KMF’s defense attorneys, displaying the same inadequate knowledge of the ADAAA as the company’s line managers, decided to take the case to court.
They got hammered.
Avery Fischer argued that KMF Energy Solutions failed to comply with the ADAAA in three substantial ways:
- The company failed to maintain a dialogue, in fact didn’t dialogue at all with a worker who had a lingering disability, in Early’s case, an injury-weakened back.
- The company made no attempt to recognize the limitations of their employee and determine whether his current job could be modified to allow him to continue to perform the essential job requirements – or if there was another job within the company he would be qualified for and would be possible within his limitations – a clear violation of the act.
- The company terminated an employee for performance issues without first reviewing all of the facts to ensure whether the situation was truly a performance issue or if the performance issue was due to a medical condition from his recent and known eight-week short-term disability.
The judge agreed and KMF Energy Solutions was hit with a penalty judgment that ran in the low to mid six figures.
The next one to lose his job was Del Miller.
Upcoming Webinar: Compliance crossroads: How are you navigating the intersection of ADA/ADAAA and workers’ comp, disability or leave?
Join Sedgwick, on Wednesday, October 7, 2015 at 1:00pm ET as they delve deeper into ADA/ADAA compliance with our sister publication, Human Resource Executive®. Register here.
Risk & Insurance® partnered with Sedgwick to produce this scenario. Below are Sedgwick’s recommendations on how to prevent the losses presented in the scenario. This perspective is not an editorial opinion of Risk & Insurance®.
1. Appoint your experts: When compliance is on the line, someone in your organization needs to be well-versed in ADA/ADAAA and the interactive process. This may not be your front line managers. Appoint someone to be responsible for triggering the accommodation process and engaging appropriately when employees return from a workplace injury, a non-work injury or illness or another medical need.
2. Document, document, document: Companies need to make sure that standard procedures regarding leave or accommodation under the Family Medical Leave Act or the Americans with Disabilities Act are in place, up to date and triggering interactive process review – as well as clearly communicated to employees and supervisors. A robust information management platform is key to supporting the process and necessary documentation.
3. Alternative options: If you are able, offer a chance for those in need of accommodation to be reassigned to another job, even temporarily. Sometimes time off from work may be the best or only option; although the goal of ADA/ADAAA is to keep people at work and every effort should be made to meet an accommodation request, supervisors need to keep in mind that there may be cases where an accommodation within someone’s current position isn’t possible or advisable due to the nature of their job or the significant hardship it would place on the business.
4. Consistency: Different injured employees with debilitating conditions should be treated with consistency under the Americans with Disabilities Act, regardless of whether their need for accommodation is due to a work-related injury, a non-occupational injury or illness or for another medical need. Don’t treat employees differently based on whether they need temporary vs. permanent accommodation, based on their type of leave or based on personal feelings.
5. Medical review: Make sure you request and document medical reviews of any request for accommodation as part of the overall interactive accommodation process.
Additional Partner Resources
A Global Perspective
As any traveler knows, the world is full of uncertainty and dangerous places, where the challenges of simply trying to run a profitable business far from home are complicated by even greater risks, such as political violence, civil unrest, credit risk, corruption, expropriation of private assets by the government, and more.
Anyone doubting this need only take a look at current events. Some 70 percent of the world’s nations currently have serious corruption problems throughout their governmental and civil service framework. Nearly 40 percent of all nations are experiencing some form of significant civil unrest. Signs of economic distress are everywhere, from falling oil prices to Eurozone debt crises to economic slowdown in China.
Despite such geopolitical risks, the world still needs its businesses to continue running amid dangers that range from warfare and terrorism to punishing economic conditions caused by international sanctions, to simple graft and hostility toward foreigners.
For global and multinational companies, keeping an eye on their political risk profile is as important as handling worker safety, environmental impact, products liability, or any other insurable risk. Thankfully, political risk exposures are insurable as well, and Starr Companies is there to provide its clients with robust political risk insurance coverage, a suite of unique support services that truly is second to none, and the ability to educate clients on how to manage their political risk.
Political risk hazards generally fall into one of the following categories:
Breach of Contract and Non-Honoring of Financial Obligations
These related hazards involve the failure of a local actor to uphold their contractual or financial obligations to a foreign investor, and the inability or unwillingness of local authorities to intercede on the foreign investor’s behalf. This is perhaps the most common form of political risk hazard, as it is a major problem in any environment where there is substantial economic instability and/or corruption.
Confiscation of Property
Also known as “expropriation,” “ownership risk” and “nationalization,” this is when a government seizes property or assets without compensating the owners for them. An overt example of expropriation would be a revolutionary government seizing an office building or a factory belonging to a foreign-owned corporation. An example of creeping expropriation would be a series of successive events by a government to gradually deprive an investor of their property rights.
This is when the local laws change in such a way as to constrict foreign investors’ economic activity in some way. It could range from creeping expropriation to changing taxation or labor laws that might simply make it far less profitable or far less efficient for a foreign entity to operate in a local jurisdiction.
Inconvertability of Currency
Also known as “transfer risk,” this is when a government takes action to prevent the conversion of local currency to another form of currency, making it difficult or impossible for foreign investors to transfer their profits elsewhere. This tends to happen in countries undergoing some kind of political crisis, like when Zaire—now the Democratic Republic of Congo—declared a new national currency in 1980.
Property or income losses stemming from violence committed for political purposes, including, but not limited to declared and undeclared warfare, hostile actions taken by foreign or international forces, civil war, revolution, insurrection and civil strife (politically motivated terrorism or sabotage).
Kidnap and Ransom
Political violence might also manifest itself as a kidnap, ransom and extortion hazard, but that is typically covered by a separate, specialized policy.
To protect against these risks, insurers can provide comprehensive and custom-tailored political risk solutions, which at a client’s request can be broadened to cover investment contract repudiation, currency inconvertibility and political violence. Such policies typically last for periods of 5 to 10 years. Protected assets for this coverage include fixed assets (e.g., a factory, farm, warehouse or office), mobile assets (e.g., harvested natural resources, raw or manufactured inventory or mobile equipment), leased assets (e.g., aircraft, watercraft or construction vehicles) and investment interests in assets abroad (e.g., money dedicated to funding a foreign project, held in a host country bank and subject to expropriation).
Kidnap & ransom coverage protects company personnel and family by providing financial reimbursement for such an event. Depending on the insurer, some K&R programs also provide independent expert consultancy before and after a potential act of kidnapping, ransom or extortion.
Great insurance coverage isn’t enough to adequately protect against political risk, however. Businesses need extra support to stay on top of their exposures, and to know what the latest geopolitical developments are.
Starr Companies, for example, does this through Global Risk Intelligence, a specialized team of political risk experts with long-standing backgrounds in national intelligence and international affairs. GRI delivers to Starr clients a unique risk advisory service that spans the gamut of commercial property & casualty exposures. GRI also produces two assets that are extremely helpful. The first is the Executive Intelligence Brief, a world-class monthly analysis of ongoing geopolitical developments (especially in emerging markets) available exclusively to a carefully selected readership of top executives. The second is the Global Risk Matrix, a quarterly ranking of the overall political security risk of every country on the planet.
The world’s geopolitical landscape is changing at a remarkable pace, with new risks and uncertainties arising in even the unlikeliest of places. And yet, as business becomes ever more globalized, insurers can provide their clients with tailored coverage to absorb the losses that stem from political turmoil. By finding the right insurer, with the financial strength to cover their risks as well as the analytical acumen to help turn risk into opportunity, businesses can create partners in prosperity anywhere in the world.
This article was produced by the R&I Brand Studio, a unit of the advertising department of Risk & Insurance, in collaboration with Starr Companies. The editorial staff of Risk & Insurance had no role in its preparation.