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 Wednesday’s “Risk Scenarios Live! Navigating the Challenging Claim” session.
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.
Construction’s New World
Get off a plane at Logan Airport and cross the harbor toward Boston and you will see construction cranes, a lot of them.
Grab an Amtrak train from Philadelphia into New York and pulling into Penn Station, you will see more construction cranes, many more of them. The same scene repeats in Denver, Los Angeles, San Francisco and Chicago.
All that steel and cable in the skyline signifies a construction industry that is growing again, after having the rug pulled out from under it in the Great Recession of 2008-2010.
The cranes these days look the same as cranes looked in 2008, but the risk management and insurance environment in construction is anything but the same now.
A variety of factors are now in play that have drastically changed construction risk underwriting, according to Doug Cauti, a senior vice president and chief underwriting officer with Boston-based Liberty Mutual’s construction practice.
Doug Cauti characterizes the current construction market.
Talent and Margins
For one thing, according to Cauti, the available talent pool in construction is nowhere near what it was pre-recession.
“When the economy went into its downturn, a lot of talent left the business and hasn’t returned,” Cauti said.
Cauti said recent conversations with large contractors in Ohio and Pennsylvania confirmed once again that contractors are facing a workforce that is either aging or very inexperienced. That leads to safety management and project quality concerns at just the moment in time that construction is rebounding.
Doug identifies one of the top risk management issues facing construction firms today.
Workers compensation risks in construction, already a problematic area, are seeing an impact from that dynamic.
Contractors are also facing much more competition. In the past, contractors might have bid on 10 jobs to get one, now they have to bid on 50 or 60 jobs to get one. That’s putting pressure on margins.
“There are a lot of contractors out there competing for business,” Cauti said.
“Margins are going up but not at the same rate as the industry’s recovery,” he added.
Financing and Risk Transfer
Another factor impacting the way construction risk is being underwritten is the size of projects and the way they are being financed. Construction’s recovery from the recession might be slow and steady, but the size of projects requiring risk management and insurance has increased substantially.
In 2010, there were 85 projects under contract nationally that were worth $1 billion or more, according to Cauti. One year later, the percentage of projects of that value or higher had grown by 30 percent, and the trend continues.
A lot of those projects are design-build, a relatively new approach to construction that Liberty Mutual has grown comfortable underwriting over the years. But design-build is still an additional complication, blurring the traditional lines of responsibility.
“We did it when the growth in contractor-controlled insurance programs happened, we did it with the evolution in design-build and we’re laying the groundwork to be a thought leader in public-private partnerships and integrated project delivery.”
– Doug Cauti, Chief Underwriting Officer, Liberty Mutual National Insurance Specialty Construction
Given the funding demands of these much larger and more valuable projects — many of them badly needed public sector infrastructure improvements — public-private partnerships, otherwise known as P3s, are now coming into vogue as a financing option.
But deciding how risk should be allocated, underwritten and transferred in this new arrangement between contractors, the state, and private partners is a relatively new and untested science.
As a thought leader in the underwriting of the design-build approach – and the more traditional design-bid-build – Cauti said construction experts within Liberty Mutual are growing their knowledge to stay in step.
“We did it when the growth in contractor-controlled insurance programs happened, we did it with the evolution in design-build and we’re laying the groundwork to be a thought leader in public-private partnerships and integrated project delivery,” he said.
That means attending relevant industry conferences like the annual IRMI Construction Risk Conference where Liberty Mutual has maintained a significant presence, and engaging in dialogues with contractors and government officials, and maintaining clear and active lines of communications with brokers.
Doug discusses emerging approaches to construction.
Legal and Regulatory
Another change that is creating challenges for construction risk underwriting, according to Cauti, stems from what’s happening in United States courtrooms.
Across the country, how a court interprets coverage can vary widely, especially in the area of construction defect.
“In the past, many jurisdictions viewed construction defect simply as shoddy workmanship and they had to go back and redo it,” Cauti said.
But now, on a state by state basis, courts are ruling that a construction defect is an accident under certain circumstances that may be covered by a contractor’s general liability policy.
In 2014 alone, according to Cauti, Supreme Courts in West Virginia, Connecticut and North Dakota ruled that construction defects can sometimes be considered accidents.
Cauti said doing business with a carrier that pursues contract clarity whenever possible – and that possesses an experienced claims team that can navigate the wide variety of state interpretations – is absolutely essential to the buyer.
Having claim teams not only dedicated to construction but also to construction defect, adds a lot of value to a carrier’s offering.
Doug outlines another top risk management issue facing construction firms in today’s booming market.
Now, as never before, contractors are relying on experienced construction insurance teams to help them address these complexities.
Insurers need to have the engineering expertise to analyze a project, to make sure the right contracting team is in place and to insure that risk exposures are being properly assessed. Another key in a construction insurance team, according to Cauti, is the claims department.
A Strategic Approach
The legal and financing changes that are taking place in the construction market, from a risk transfer standpoint, aren’t going to get ironed out overnight.
Cauti said it could be 10 years until the construction and insurance industries fully understand the complications of public-private partnerships and integrated project delivery, these approaches gain traction, and the state-by-state legal decisions that are causing so much uncertainty can be digested.
In the meantime, an engaged, collaborative approach between carriers, brokers, contractors, and their financing partners will be necessary.
Doug discusses how his area can provide value to project owners and contractors.
For more information on how Liberty Mutual Insurance can help assess your construction risk exposure, contact your broker or Doug Cauti at email@example.com.
This article was produced by the R&I Brand Studio, a unit of the advertising department of Risk & Insurance, in collaboration with Liberty Mutual Insurance. The editorial staff of Risk & Insurance had no role in its preparation.