The Curse of the Black Adder
Disclaimer: The events depicted in this scenario are fictitious. Any similarity to any corporation or person, living or dead, is merely coincidental.
One Fine Fall Day
Aaron Scott watched with pride as his German shorthaired pointer Sadie bulled her way through the switchgrass. Sadie was six, an age when most hunting dogs started to show signs of aging. But Sadie was as heavy in the chest and shoulders as some males, and just as tough.
Then suddenly Sadie was on point, her stub of a tail twitching frenetically. Seconds later, the male bird exploded out of the brush. Aaron swung his grandfather’s over and under Remington up and dropped the bird cleanly. Aaron smiled. It didn’t get any better than this.
Then his phone rang. He had to get it. As the CFO for Pinecrest Food Markets, which had 44 stores in four states, it was part of his job to take calls, all calls.
“This is Aaron,” he said.
“Aaron, it’s Christine.” Christine was Aaron’s older sister and the CEO of the company. Aaron knew that tone in her voice. The news wasn’t good.
“We just got a letter from Spendex that they’ve been hit by malware. It looks like we may have lost credit card numbers for about 600,000 customers.”
Aaron paused and again looked at the scenery and savored the diminishing scent of spent gunpowder. He wished he could turn back the clock to one minute ago, but all that was gone.
“You there?” Christine said.
“I’m here,” Aaron said.
“Can you please get those dogs in the truck and get back to the office? We got work to do.”
Christine preferred jumping horses to bird-hunting. On a fox hunt, she could ride with anyone in the state.
Aaron loved his sister, but he also bore a scar over his right eyebrow where she’d clocked him with a rock when they were preteens.
“I’m comin’. Be there in 30,” Aaron said.
Pinecrest had been founded by Aaron’s grandfather William in an 800-square-foot shop in Johnstown, Pa. It had grown to where it had stores in eastern Ohio, its native western Pennsylvania, West Virginia and the Maryland panhandle.
Aaron and Christine ran it now. The phrase “three generations — shirt sleeves to shirt sleeves,” was how old-timers described how quickly an inherited family business could fall apart. Aaron and Christine had vowed they would prove that old saying wrong.
Back at the office, Aaron read the letter from the credit card transaction processing vendor Spendex. Spendex was reporting that as many as 26 of its regional retail customers lost credit card numbers to The Black Adder, a malware that strips names, credit card numbers and expiration dates from the magnetic stripes of credit cards.
“Now what?” said Christine.
“Well, we’ve got to tell every affected customer what happened and we need to do it soon,” Aaron said.
“How much is that going to cost?” Christine said.
“Quite a bit, but we’ve got insurance for it,” Aaron said as calmly as he could as he looked down at his iPhone and started scrolling through his contacts.
Aaron was playing possum with his cool tone. He was the family peacekeeper and he knew that his role at times like these was to keep a lid on the much more volatile Christine.
Christine exhaled, and Aaron kept his eyes on his iPhone.
Part of the Pinecrest brand came from where it was based and who founded it.
Based as it was in a state that was home to almost a million military veterans, Pinecrest aligned itself with traditional values like patriotism, community, faith and family.
There was a picture of a local veteran who had given his life in armed conflict in every Pinecrest store.
So when it came to the data breach notification, Christine Scott — in what she felt was full alignment with the brand — didn’t shrink from responsibility.
In addition to letters and emails sent to Pinecrest’s 600,000 affected customers, Christine called local news stations to broadcast news of the breach and her promises to make good. She didn’t bother to ask Aaron whether he thought that was a good idea.
“Every one of our customers will be reimbursed for their time and trouble, including a year’s worth of multi-bureau credit monitoring services,” Christine said while the TV cameras recorded her.
“Well that’s what the policy says, doesn’t it?” Christine said when Aaron told her later that she probably shouldn’t have said that on television.
The very next day, a phone call from Pinecrest’s insurance broker was the second bad call Aaron got that month.
“Multi-bureau? No. The policy will cover services from a single credit monitoring bureau,” the broker, Robert Franz, told Aaron.
As Aaron spoke with Robert, he was multitasking and monitoring his emails. He saw an email marked “urgent” from Spendex. It was about the data breach.
“Hey Robert, can I call you back in a few minutes? I’ve got something hopping here,” Aaron said.
“Sure,“ Robert said, but in a tone that implied, “What could be more important than this?”
As it turned out, the email from Spendex was plenty important.
The notice from Spendex explained that although it was obligated to inform all of its customers that there had been a breach, in reality, only 14 of its 26 retail customers had been impacted. The clincher? Pinecrest wasn’t one of them.
Aaron pushed back from his desk and ran his hands through his hair.
“What the … ?” he said as loudly as he would say anything.
“What is it?” said Christine, popping her head into his office. She knew from the volume of Aaron’s voice that it was something big.
“We didn’t lose any data. We didn’t lose any data at all,” Aaron said.
“Great,” Christine said.
“No, not great,” Aaron said. “We just told about a million people that we did.”
“Now what do we do?” Christine asked.
Aaron felt that Christine had burned him before by going on television without seeking his counsel. That experience caused him to dig in his heels with Christine over what to do next.
“Slow down, just slow down,” Aaron said when the siblings met to go over strategy.
“I don’t know that we need to come out with an announcement just yet.”
Aaron’s reaction to his sister’s outspokenness had caused him to miscalculate. A full week went by until Pinecrest announced on its website and with another email blast that its customers had, after all, not been impacted by the Black Adder strike.
The company’s pause in making that announcement was as toxic as a rattlesnake bite.
The local media reacted negatively to the company’s week-long silence. News that the company sat on the knowledge that customers hadn’t lost data made the front pages of the Johnstown Tribune-Democrat and the Wheeling News-Register.
For the first time in its history, Pinecrest was dealing with the full brunt of a hit to its reputation.
The traditional print media was one thing, and no small thing in the markets Pinecrest served. But online commentary, ungoverned by journalistic ethics, pulled no punches. Commentators ridiculed the company for banking on the military sacrifices of previous generations, when it “didn’t have the guts,” in one poster’s vernacular, to tell people the truth.
The company’s broker, Robert Franz, phoned Aaron with even more bad news.
“You’re not covered for any of your breach notification expenses, or for any credit monitoring services,” Robert told Aaron.
“Please tell me why,” Aaron said, keeping his voice low because he was just not in the mood for any spontaneous crisis communications with his older sister.
“Under your policy, you’re only covered for notification and credit monitoring if there was an actual breach,” Robert said.
“No breach, no coverage,” he said.
“So we’re out about a million dollars,” Aaron said flatly. In the regional grocery business, where margins could sometimes be measured in the low single digits, a million dollars was a very big hit.
“I’m afraid so,” Robert said.
Sales at Pinecrest Food Markets were down around 10 percent in all four states that it operated in.
“Might as well shop at Supermart,”a grizzled Korean War veteran told Channel 11 in Charles Town, West Virginia.
With the company down a million out of pocket and with revenue hamstrung, Christine Scott and the rest of the Pinecrest team had some very difficult and expensive decisions to make.
Should they sue Spendex for its shoddy forensics? And what coverage did they have for the costs of that?
Rumors began to circulate in several state capitals that class action lawsuits were being prepared on behalf of the tens of thousands of Pinecrest customers who felt they were caused needless expense and worry because of the bad information Pinecrest put out to begin with.
Grandstanding attorneys general were probably not far behind. Pinecrest was possibly facing legal action on several fronts and it was unclear whether it had the coverage to pay for its defense.
With the world seemingly against them, Christine and Aaron took a day in late November and went to their grandfather’s hunting cabin in Somerset County.
The grouse were out there, but the two of them just sat staring at the fire in the cabin’s stone fireplace, with Aaron’s two bird dogs stretched out in front of the fireplace.
Sadie looked up hopefully as Aaron got up to throw another log on the fire.
“No huntin’ today, Sadie girl. Daddy is not in the mood,” Aaron said as Christine nursed a bottle of local craft-distilled rye.
“May I have some of that, please?” Aaron asked.
“Get your own bottle,” said Christine.
A regional grocery chain gets into hot water after it loses customer financial data. Making matters worse is that the company does not have a good grasp on the language in its cyber coverage policy. The company also suffers reputational damage when it notifies customers based on bad information.
1. Know your partners: Pinecrest sees its problems go from bad to worse because the company it uses to process credit card transactions has shoddy forensics and reports data breaches for customers that in the end had no data breach.
2. Know your coverage: Pinecrest suffers needless losses because key executives don’t understand its insurance policy when it comes to services available under the coverage for data breach notification and credit monitoring.
3. Be as transparent as possible: When it comes to notifying customers of substantial issues that could impact their expenditures, getting out quickly with the best information is extremely important. Pinecrest actually has good news to report midway through this story, but sits on it due to internal friction. The good of the team must clearly win out here.
4. Create realistic expectations: Coverage existed for Pinecrest officials to put together a reasonable response when customer data was lost. But a key executive broadcast inflated statements about what Pinecrest would be able to do, creating equally inflated expectations.
5. Hold vendors accountable: Given the volatile expansion of cyber risk, it makes good sense to require vendors contractually to indemnify you if they lose your crucial customer data.
The issues covered in this scenario center around crisis management and insurance pitfalls associated with loss from a cyber breach. This follow-up webinar focused on specific loss trends and cyber exposures, as well as presented steps to take to strengthen your crisis risk management program.
When a Claim Runs Off the Tracks
Mike is a 54-year-old construction worker. One day, he strains himself picking up a piece of lumber and goes home with shoulder pain. He reports his injury and five weeks later is taking Vicodin, an opioid, and Naproxen, an anti-inflammatory, and given an occupational therapy regimen.
That was the scene set for a crowded roomful of attendees at “Risk Scenarios Live! Navigating the Challenging Claim” session, presented at the 2014 National Workers’ Compensation and Disability Management Conference & Expo in Las Vegas.
Mike begins taking more Vicodin per day than he’s prescribed, and performing duties at work that do not allow his injury to heal.
Eventually, he sees an orthopedic surgeon. She suggests Mike may have a rotator cuff tear, which would require surgery and an extensive recovery period that would keep Mike out of work for six months, at least. She orders an MRI to determine if there is a tear.
Even at this early stage of treatment, there are several red flags on Mike’s case, said experts on the panel that included Dr. Kurt Hegmann, associate professor at the Rocky Mountain Center for Occupational & Environmental Health; Dr. Robert Goldberg, chief medical officer at Healthesystems; and Tracey Davanport, director-national managed care, Argonaut Insurance Co.
Using an anti-inflammatory medication alone, without an opioid, often yields better outcomes and avoids the risk of addiction that comes with opioids, said Hegmann.
In Mike’s case, Vicodin was not medically necessary. His condition was not improving, and he was commuting to and from work and performing his job under the influence of an opioid, said Goldberg.
What should have been done to get this claim back on track? Every party involved – worker, employer, claims organization and prescribing physician – should have been communicating directly. That would have helped catch early abuse of painkillers and ensured that the physician is adhering to evidence-based guidelines.
Assignment of a nurse case manager may have also been necessary.
MRIs should be administered with caution, experts said. Such tests often turn up problems unrelated to the original injury, opening up a can of worms in terms of appropriate treatment and compensability.
“You have to treat the entire patient, not just the injury that brought him in,” Goldberg said, such as taking pre-existing conditions into account. Mike’s age, for example, significantly increased his risk for a slow recovery.
The MRI scan revealed a full-thickness tear of the rotator cuff. After surgery, Mike was prescribed Oxycontin to manage post-op pain. He then sat at home, gaining weight and drinking while taking his pain medication and neglecting to perform the at-home exercises his orthopedic surgeon advised.
When he went in for a check-up, the doctor decided to switch him back to Vicodin, although Mike still had a refill left on his Oxycontin. He envisioned doubling up the medications to achieve a new high.
At this point in the case, someone needed to step in to track Mike’s refills and limit his dosage.
“The patient can’t be the one to control the prescription pad,” Goldberg said.
Employers should also try to have workers return to modified-duty positions as soon as possible, which helps to maintain social connections and motivates the employee to get back to their pre-injury capacity.
“The patient needs to be engaged and motivated to get better,” Hegmann said. “If they choose not to do the work, then there’s nothing else a doctor can do for them.”
Mike was not motivated. He did not adhere to the restrictions placed on him in a light-duty position; he failed to dedicate himself to physical therapy and stay active; and he abused the opioids prescribed to him.
A year after his injury, he was 20 pounds heavier, had not progressed in strengthening his shoulder, and his employer’s workers’ comp claims organization was looking at a six-figure settlement for permanent disability.
3 + 3: Theory of Risk
Anthony Valsamakis doesn’t just practice risk management, he wrote a book about it. And he doesn’t just consult with quants, he is one.
“Risk management has been in my blood for so long that I have to stop myself, otherwise I could go into a two-hour monologue,” said Valsamakis, whose career in the discipline goes back almost 35 years, to his first job with the Standard General Insurance Company.
In 1990, the London-based chairman of the Eikos Group received a doctorate in Business Economics. In 1992, “The Theory & Principles of Risk Management” was published, with Valsamakis the principal author, and is now in its 4th edition.
Valsamakis worked first with a carrier, then as a commodities broker, before taking up an academic post. The company he started in 1999, the Eikos Group, has a risk consulting arm, with clients in most industrial sectors, including the food, mining, forestry, industrial paper and packaging and banking industries. The group also includes a transportation risk brokerage and a Bermuda-based carrier.
“I think the idea of having a secure data base that everyone can access and can update at any moment is by far the best innovation that I can see happening in the information game.”
– Anthony Valsamakis, Chairman, Risk Financing Strategy, Eikos Group
For as long as he can remember, Valsamakis sought ways to get better information on the risks he underwrites, brokers or consults on.
“Over many years we’ve tried hard to increase the quality and timeliness of the information that enables us to do just that,” Valsamakis said.
Finally, it looks like Valsamakis has found a risk management information systems platform that enables him to do just that.
For the past year and a half, Valsamakis has been using a system developed by Riskonnect.
“What’s useful for me is that the platform basically resides within the client’s systems,” he said.
The information he needs to prioritize, depends on which client he is working with.
“By definition, depending on where I am working and what I am doing, risk management priorities are very different,” Valsamakis said.
The Riskonnect platform provides the necessary flexibility.
A mine, for example, could be in a location in Africa or South America with a high degree of political risk. A key risk for a furniture maker might be around trade secrets, the possibility that a disgruntled employee would leak a pricing catalogue to competitors. For a packaging manufacturer, their material supply chain is of the utmost importance, and so on.
For each client, Valsamakis can use Riskonnect platform and work with the client to compile the information that is most relevant to that client and its industry and enter that into a secure system.
“All of these are template facts that you can easily put into the Riskonnect system,” Valsamakis said.
The Riskonnect platform is housed within the client’s information technology system, and it is transparent enough, to give Valsamakis and his client access to the same sets of data.
“I think the idea of having a secure data base that everyone can access and can update at any moment is by far the best innovation that I can see happening in the information game,” he said.
Whose System Is It?
Valsamakis has been around long enough to know a few things about data and risk transfer. He’s seen a number of risk information management systems put out by brokers, for example, that he thinks are set up more for the broker’s business model than for the sharing of information.
Generally speaking, information about an insured’s risks come from the broker and the insured. The Riskonnect system works, according to Valsamakis, because it is designed to be adapted to the client, not the broker.
“I have seen efforts by brokers, for example, over the years to produce a type of risk information platform that becomes theirs,” Valsamakis said.
“It’s been a perennial problem in the industry, where depending on which broker you end up with, you’ll end up with system A, B or C,” he said.
The Underwriter Needs to Know
Using Riskonnect, Valsamakis encourages clients to be as transparent as possible, in order to give the most complete information to underwriters.
“For me the question is, ‘What is the volatility around the asset and can there be an impact on the balance sheet of our clients?’” he said.
“We need to describe this exposure in various contexts so that the underwriters know what they are covering,” he said.
It’s basic human psychology. If an underwriter doesn’t feel they are getting enough information about a particular risk, they will take a negative view of that risk.
The more accurate the information Valsamakis has about a client’s exposures, the better the pricing he gets from underwriters.
“If you were an underwriter putting your capital and risk and I gave you little information, you would actually be less inclined to look at the risk in favorable terms. There will be a natural inclination to downgrade it,” he said.
Where Valsamakis sees enormous value is in the Riskonnect system ability to tag which can be revisited at a later stage.
“It’s amazing how clients forget, in the passage of time, that there are profiles that have changed for better or worse.”
A Long-Term Investment
The Eikos Group invested significantly in the Riskonnect product and are taking it to a number of clients. The transparency of the system and the advantage it gives the Eikos Group and its clients with underwriters is in itself a business advantage over the competition.
“We made a decision as a small company, relatively speaking, to invest a lot of money in Riskonnect and be very proactive about it,” Valsamakis said.
“When I talk to executives I say we invested in it because it’s going to save our clients money. Better information will lead to a lower cost of risk,” he said.
“If I’m talking to someone at a high level, that’s fairly easily understood.”
This article was produced by the R&I Brand Studio, a unit of the advertising department of Risk & Insurance, in collaboration with Riskonnect. The editorial staff of Risk & Insurance had no role in its preparation.