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The news, when it came whistling across the business wires in February, was ear- and eye-catching. A jury in Napa County, Calif., had gone to stomping on a third-party administrator's grapes.

The leavings amounted to a $4.66 million judgment against Philadelphia-based ESIS Inc., a TPA formerly owned by Cigna and owned since 2000 by ACE USA Insurance Co.

The public insurance pool alleges that ESIS was failing to carry out due diligence to determine whether claims were compensable or not, wasn't objecting to questionable medical treatments and wasn't notifying the pool's excess liability carrier when claims exceeded $125,000, or 50 percent of insured retention.

After a 2004 audit that exposed problems with the management of its workers' compensation claims, the Marin Schools Insurance Authority transferred the management of its claims to Granite Bay, Calif.-based Gregory Bragg & Associates Inc.

"We focused on a group of claims that were open at the time that the account was transferred to the replacement TPA," says Daniel Sovocool, the attorney who pleaded the case for the authority. "So our people looked at most of the universe of claims and focused on about 58 claims that we felt were ones where they had really dropped the ball."

The communications office for ACE, which oversees public relations for ESIS, wouldn't discuss the case, citing a company policy that prohibits commentary on legal issues. Since the audit identifying problems was conducted, ESIS has come under new management and is now headed by former Kemper National Services executive Dave Patterson.

We should also add that since the $4.66 million February judgment, the award has been reduced by some $1.7 million. But more to the point of our line of inquiry is this: Do the implications of this case speak volumes for the industry, despite ACE's reticence to talk about it? Is this a bell-weather judgment, or is it an isolated case of a TPA-client relationship that foundered, festered and needed to be aired out in a courtroom?

In our dialogue with experts, one thing becomes clear: The relationship between an insurance pool--or any other client--with its TPA is an intimate one that is based on trust.

Just think of the nature of the relationship. In workers' compensation alone, clients are asking TPAs to scrutinize and process sometimes hundreds of claims per year. It's essentially a fiduciary responsibility that is being handed over to a bureaucracy, according to one insurance recovery attorney.

And because of the intimate and trusting nature of that relationship, negligence or outright fraud, whether alleged or substantive, can do a lot of damage to a client.

"TPAs for whatever client bear a fair amount of responsibility to ensure that they do a good job in claims administration," says Sovocool.

Representatives of TPAs, too, said that handling claims for someone else is a critical business that demands highly professional execution.

"It's a tough business, there is no margin for error," says Christopher Markley, a spokesman for Inservco Insurance Services Inc., a TPA subsidiary of Harrisburg, Pa.-based Penn National Insurance Co.

Markley says the impression of executives with Inservco is that clients, perhaps driven by the increasingly tight economy, are bringing much more scrutiny to bear on the TPAs that manage their workers' compensation or benefits programs.

"The expectations are higher and higher, and I think TPAs need to emphasize more and more the need for there to be focus on one thing. And that is the flawless execution of the fundamentals of the business," Markley says.

Thelan Reid's Sovocool said that quality of service, whether real or illusory, is what TPAs sell themselves on.

"In other words, the process is what they sell. 'The process is the product' is a term that we heard in the trial, and that is very true, that is what TPA's sell," he says.

Ken Martino, the president of the Plantation, Fla.-based TPA Broadspire, a subsidiary of the Atlanta, Ga.-based Crawford & Co., says he believes the ESIS case is somewhat of a rarity. He says, these days anyway, companies and public-sector pools put third-party administrators through an exhaustive vetting process when choosing one.

"I think it's a fairly healthy relationship industrywide. You know just by the mere fact that it is all contracted on an individual basis. So they have gone out, they have done their due diligence, they have gone through their RFP," Martino says. "There is a lot of time and attention given to that selection process by which they have gone that particular route."

Martino says, in addition to the account managers that ride herd on the contracts managed by Broadspire, he has in-the-field and in-house teams that are auditing contracts and reporting to him on their maintenance. That's not to mention the audits that clients conduct of their Broadspire-managed accounts.

"If I had to tell you right now, I would tell you that we're being audited by somebody somewhere," Martino says.

So what went wrong in the ESIS case? The initial legal complaint alleges that the company mishandled more than 100 claims. The filing says that even though the relationship goes back decades, it wasn't until a 2004 audit that the Marin Schools Insurance Authority figured out something was up.

Sovocool, naturally, sticks by his client and says it's not the fault of the Marin Schools Insurance Authority that it suffered unnecessary losses or, to put it more bluntly, was taken advantage of.

"I don't think that there was any criticism in this directed to Marin Schools," says Sovocool. "They really did rely on their TPA to do the job, and that is what they paid them to do."

Another attorney who tries cases on behalf of clients that feel let down by their TPAs takes issue with the notion that the ESIS-Marin Schools case is an isolated one. She says the industry needed a wakeup call, and that there are many more cases out there than companies want to let on.

"Filling out the right forms, communicating the information the insurance company needs and getting the insurance to the plan. It is stunning to me how often they don't do that," says Rhonda Orin, a managing general partner of the Washington, D.C., office of Anderson Kill & Olick PC.

She says what the ESIS case and others illustrate is that companies that use TPAs need to do a much better job of auditing how their contracts are being administered. The reason is simple: As the ESIS case illustrates, the damages that a pool or company can suffer by allowing its relationship with its TPA to lie fallow are substantial.

And she says, if the TPA isn't doing its job and isn't discovered, it has no motivation to improve its performance.

"If a plan assumes that it knows what its TPA is doing and it doesn't monitor what its TPA is doing, it never finds out and it is of no consequence to the TPA. If they don't do it and if they are not caught doing it, that is a very chronic problem," she says.

Orin says the ESIS case is not the first of its kind and won't be the last. She says the publicity surrounding the case can be a good thing for the industry.

"Anything that alerts the public to the need to monitor their TPAs and the fact that there may be a lot of lost gold in their TPAs is a good thing," Orin says.

DAN REYNOLDS is senior editor of Risk & Insurance®. He can be reached at dreynolds@lrp.com.

June 1, 2008

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