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magining a world operated mostly by computers is not hard. Cell phones have voice controlled assistants. Vehicles come with GPS technology guiding your routes. Robots are increasingly present in hospital operating rooms. And driverless cars will likely be the mainstream in within 20 years. Now IBM’s supercomputer Watson is taking its place in the insurance industry. This month, IBM Corp., the health insurer WellPoint Inc. and Memorial Sloan-Kettering Cancer Center announced that two Watson-based apArtificial intelligence plications will be offered commercially to wizards like the Watson doctors and health insurers. Both Watson applications — one to supercomputer could be help assess treatments for lung cancer and one to help manage health insurance an adjuster’s best friend. decisions and claims — will utilize artificial intelligence (AI) to increase efficiency and reduce errors. The applications will enable doctors or insurance company employees to quickly compare a patient’s medical records to what Watson has learned and make recommendations in decreasing order of confidence. In the cancer program, Watson will consider what treatment is most likely to succeed. In the insurance program, it will consider what treatment should be authorized for payment. Watson — named for IBM founder Thomas Watson — has been trained in medicine through pilot programs at Indianapolis-based WellPoint and at SloanKettering in New York. Manoj Saxena, an IBM general manager, told the Associated Press that the supercomputer has ingested 1,500 lung cancer cases from Sloan-Kettering records, plus 2 million pages of text from journals, textbooks and treatment guidelines. It also learned “like a medical student” by being corrected when it was questioned by doctors and came up with wrong answers, Saxena said. WellPoint itself is already using the insurance application in Indiana, Kentucky, Ohio and Wisconsin. It will be selling both applications — at prices still to be negotiated — and will compensate IBM under a contract between the two companies, an IBM spokeswoman said. WellPoint said using Watson should not increase insurance premiums thanks to savings from waste and errors. An IBM insurance industry representative told Claims Journal in 2011 there are several potential assignments in insurance for Watson. Watson might help large insurance companies that are selling multiple products in multiple states or even countries deal with myriad regulations. Rather than being a threat to the insurance industry and adjusters, an AI wizard like Watson could become their Andrea Wells best — and smartest — ally, the IBM executive said. Editor-in-Chief email@example.com Fears that AI’s like Watson will replace the human touch and employees are understandable, but appear to be unfounded. “Watson is not making the decisions” on treatment or authorization, Saxena said. “It is essentially reducing the effort for doctors and nurses by going through thousands of pages of information for each case.” 4 Claims Journal | Winter 2013
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C0NTENTS CLAIMS REVIEW
Wildfire Risk High in 2013 8 Auto Insurance Claims Satisfaction Increases 8 Most Ridiculous Lawsuits of 2012 8 Fraud Focus: Investigation Unit Squashes Fraud 10 Study: Workplace Class Action Litigation 11 14
SPECIAL REPORT Liability for Marketing Communications 12 Water Losses & Failed Plumbing Components 14
Technology, Engineering & Forensic Firms Guide 17 Crash Course in Crash Forensics 20 The Next Liability Explosion: Risks to Watch 24 IDEA EXCHANGE
Burkeâ€™s Law: Attorney-Client Privilege 28 New Aerial Imaging Tools for Assessments 30 Essentials: Independent Judgment is a Must 32 Final Offer: Hartwig on the Storms of 2012 34
On The Cover Liability Explosion 6 Claims Journal | Winter 2013
CLAIMS DEPARTMENTS 4 Opening Note 7 Web Exchange 9 Dollars & Sense 19 People 23 Business Moves 31 Snapshot
web exchange FALL 2012 | VOL. 1, NO. 4
Video Highlights Privacy & Security Coverage and Trends http://www.insurancejournal.tv/videos/8466/ Richard Betterley, president of Betterley Risk Consultants, says cyber liability policies have evolved quite a bit in the 10 or so years they have been around, and carriers are doing a good job of providing the coverage. In this interview, Betterley discusses what some of the current trends are in the cyber liability market.
Podcast Highlights Sinkhole Investigation and Damage Evaluation http://www.insurancejournal.tv/videos/8461/ Dan Barton, geotechnical division manager at Rimkus Consulting Group, describes tests used to evaluate sinkhole claims, and explains why they occur, the damage they cause and repair options for buildings damaged by a sinkhole. Markel Motorcycle Examiner Races to Win http://www.insurancejournal.tv/videos/8555/ In an interview with Claims Journal, Mark Hoedel, a claims examiner who handles motorcycle property damage claims for Wis.based Markel American Insurance Co., describes his passion for restoring and racing motorcycles, how he parlayed his skills into a career and how his experience has helped him handle claims.
would create financial incentives that could reduce accidents and fatalities. Gun owners, for example, might see lower insurance rates if they agreed to take firearms training courses and properly stored their weapons. The idea is already meeting with resistance for gun rights advocates, who say it amounts to more regulation aimed at law-abiding gun owners. Craig Baenziger, who works at a gun and ammunition seller in North Attleboro, Mass., called Northeast Trading Co., said requiring liability insurance for guns makes little sense because it targets people who buy the weapons legally instead of going after criminals who illegally possess them. “Insurance on your gun isn’t really going to decrease crime or accidents. Nobody shoots their friend on purpose. It’s not going to do anything,’’ Baenziger said. “It’s just a way to increase revenue for the state.’’ Under the bill proposed in Massachusetts, there would be specific penalties for anyone found in possession of a gun without insurance. The fines would range from $500 to $5,000 or up to a year in jail. (Steve LeBlanc and Jay Lindsay/AP) The Associated Press story generated several comments from readers. Read a few of the comments below: Jester says: What a stupid idea. It has nothing to do with prevention. Catastrophic injuries or death can’t be compensated by money. And compensation is an “after the fact” issue unrelated to gun control. Al says: The point is not effectiveness, it’s disarmament. So anything that makes exercising one’s 2nd Amendment rights more difficult is going to be advocated. Of course, all criminals will purchase insurance for their guns…
ClaimsJournal.com Web Poll
Does the silo mentaility hinder communications within your company?
No, all departments regularly and effectively communicate.
In a Reader’s View Advocates Push Idea of Requiring Gun Insurance Some lawmakers are hoping the insurance market might offer incentives to curb gun-related violence. Legislation recently filed in Massachusetts would require gun owners to purchase liability insurance. The insurance policies would give those injured by a weapon a legal recourse, backers of the bill say, but they also
Yes, there is a little effective communication among departments.
Yes, but we’re working on improving communication.
Unsure: 7% (21 votes) Total Votes: 316 votes Winter 2013 | Claims Journal 7
CLAIMS REVIEW | NEWS & TRENDS
Wildfire Risk High in 2013 Due to Warm Weather, Drought
ith a mild winter, relatively warmer weather in general, and drought conditions expected to continue in 2013, wildfire risk is on the minds of many. Wildfire losses have been on the rise during the past couple of years in several states, with Colorado, Texas and Wyoming being particularly hard hit, according to Julie Rochman, the Insurance Institute for Business & Home Safety’s (IBHS) president and CEO. “2013 is shaping up to be another very dangerous year because of a combination of weather-related factors,” Rochman said. Communities vulnerable to wildfire must act now, she said. According to “State of the Climate,” released by the U.S. National Oceanic and Atmospheric Administration
(NOAA), 2012 was the warmest year on record in the contiguous United States. The average temperature in 2012 was a full degree higher (55.3 degrees Fahrenheit) than the previous record set in 1998. In addition, warm temperatures were coupled with severe drought. Last year was the driest year in the contiguous United States since 1988, according to NOAA. In Nebraska and Wyoming, it was the driest year on record. For 2013, 10 states are already experiencing “exceptional drought” conditions while snow levels throughout the country are nearing record lows, according to the National Drought Mitigation Center. The National Interagency Fire Center
Auto Insurance Claims Satisfaction Increases as Claimants Are Paid Faster
uto insurance customers continue to be pleased not only with their claims settlements but also with how quickly their claims are being settled. Also, insurance claims adjusters are doing a better job of speeding up the claims process than repair shops, new research suggests. Claimant satisfaction increased by six points in the fourth quarter of 2012 to 861 on a 1,000-point scale from the fourth quarter of 2011, according to the latest J.D. Power and Associates 2013 U.S. Auto Claims Satisfaction Study, Wave 1. The rise was primarily due to an 11-point increase in settlement satisfaction. As repairable and total loss claims 8 Claims Journal | Winter 2013
are being paid faster, overall claimant satisfaction rises, the study says. The study finds that the average time to pay claimants has decreased to 13.9 days in the fourth quarter of 2012, down from 16.4 days in the same period of 2011. While the average time to pay claimants for a repairable claim (11.8 days) has decreased by 1.3 days from the fourth quarter of 2011, the largest decrease is in the time it takes to pay total-loss claims, down by an average of 5.1 days to 18.5 days. “Regardless of the claim type, the faster the claimant is paid and can move forward with a repair or to replace their vehicle, the more likely they are to be satisfied,” said Jeremy Bowler, senior director of the insurance practice at J.D. Power and Associates. J.D. Power said the report is based on responses from more than 3,000 auto insurance customers. The study excludes claimants whose vehicle incurred only glass/windshield damage or was stolen, or who only filed roadside assistance claims. CJ
reports that more than 67,000 wildfires burned more than 9.2 million acres throughout the country in 2012. This was the third largest number of acres burned in the U.S. during the 13-year period of record. Warm temps and drought conditions will both contribute to an increased risk for wildfire this year. CJ
Most Ridiculous Lawsuits of 2012
he U.S. Chamber Institute for Legal Reform’s (ILR) survey of the most ridiculous lawsuits of 2012: 1. Intoxicated Florida driver pleads guilty to manslaughter, then sues victim he killed. 2. Michigan woman files $5 million suit for the leftover gas in her repossessed car. 3. 13-year-old Little Leaguer sued by spectator who got hit with baseball. 4. Maximum security inmate who went to jail with five teeth sues prison. 5. Anheuser Busch sued for longneck bottle used as weapon in bar fight. 6. National Football League fan sues Dallas Cowboys over hot bench. 7. California restaurateur sued for disabilities act violations in parking lot he doesn’t own. 8. Colorado man wins $7 million blaming illness on inhaling microwave popcorn fumes. 9. $1.7 billion suit claims City of Santa Monica wireless parking meters causing health problems. 10. Bay Area parents sue school after their son was kicked out of honors class for cheating. CJ
Dollars & sense
The number of fatalities that occurred out of the 51 million skier/ snowboarder days reported for the 2011-12 season. Thirty-nine of the fatalities were skiers and 12 of the fatalities were snowboarders. In 2010, more than 6 million individuals participated in the winter sports of snowmobiling, snowboarding and ice skating. These sports accounted for more than 91,000 emergency roomtreated injuries, according to the National Safety Council. During the past 10 years, about 41.5 people have died skiing and snowboarding per year on average, reports the National Ski Areas Association.
The percentage of all residential building fire responses by fire departments caused by cooking from 2008 to 2010, according to a new report from the U.S. Fire Administration. Cooking remains the leading cause of all residential building fires and injuries. The report estimates 164,500 cooking fires in residential buildings occurred in the United States each year and resulted in an annual average of 110 deaths, 3,525 injuries and $309 million in property loss.
$1.1 Billion The amount of property loss each year resulting from highway vehicle fires. Between 2008 and 2010, there were roughly 194,000 highway vehicle
fires each year in the United States, says a new report examining the characteristics of highway vehicle fires. Accounting for 14 percent of fire department responses, the fires resulted in approximately 300 deaths, 1,250 injuries and $1.1 billion in property loss, according to the report, “Highway Vehicle Fires (2008-2010),” developed by USFA’s National Fire Data Center and based on data from the National Fire Incident Reporting System. Unintentional action (32 percent) was the leading cause of fires, and 86 percent of all fires occurred in passenger vehicles.
The minimum number of surgical mistakes that occur each year. Johns Hopkins patient safety researchers estimate that a surgeon in the United States leaves a foreign object, such as a sponge or a towel, inside a patient’s body after an operation 39 times a week, performs the wrong procedure on a patient 20 times a week and operates on the wrong body site 20 times a week. Researchers estimate that 80,000 of these so-called “never events” occurred in American hospitals between 1990 and 2010. The researchers estimate that 4,044 surgical never events occur in the United States each year.
Workers’ Comp Injuries When it comes to high-severity workers’ compensation injuries, traffic accidents lead the way. Driver-related factors that are linked to traffic accidents include speeding, distraction,
and impairment. There are differences between accidents for large trucks and for passenger vehicles, as well as impacts due to recessions. According to an NCCI report, risk varies by type of vehicle. While the frequency of truck fatalities is now very similar to the frequency of passenger vehicle fatalities, the frequency of nonfatal injuries is higher for passenger vehicles. Motor vehicle accidents are more likely to result in multiple claims, and severity is higher for motor vehicle claims from multiple-claim events.
$800 Million The amount that the Federal Emergency Management Agency approved in disaster assistance for Superstorm Sandy survivors in New Jersey. More than $300 million in housing assistance was approved for more than 52,000 people. More than $42 million has been approved to help replace damaged property and to pay for costs not covered by insurance and other aid programs.
The amount in criminal penalties that a U.S. judge accepted as an agreement for BP to plead guilty for its role in the 2010 Deepwater Horizon offshore oil spill disaster. The company faces civil penalties of up to $21 billion and separate state claims due to be heard at a trial starting in New Orleans on Feb. 25. Winter 2013 | Claims Journal 9
CLAIMS REVIEW | fraud focus
CSI-Type Investigations Unit Works to Squash Fraud What trends are you seeing? Bales: Insurance fraud has become more sophisticated with the use of technology. The perpetrators are now armed with high-tech imaging machines that can produce, among other things, medical records, duplicate checks, false identifications and business licenses. The accident scenarios remain the same, but the sophistication of the charade continues to improve.
ercury Insurance’s Special Investigations Unit (SIU), founded in 1978, is the company’s first line of defense against fraudulent insurance claims, which cost the average U.S. family $400-$700 per year in increased premiums. The culprits behind these scams aren’t runof-the-mill criminals. Dan Bales According to Mercury’s SIU National Director Dan Bales, the unit — which consists of more than 50 seasoned investigators in 13 states — regularly squares off against foreign mobsters, organized crime rings, white-collar con artists, opportunistic doctors and lawyers and even the occasional celebrity. In this interview, Bales, based in Southern California, gives insights into Mercury’s SIU while addressing industry trends and what consumers can do to help fight fraud. What types of fraud does Mercury investigate? Dan Bales: Our SIU in California began as an auto theft investigative team, but we have also become experts in bodily injury and medical fraud. Our investigators receive extensive training in all types of fraud — arson, medical, auto
10 Claims Journal | Winter 2013
theft, property, homeowners, premium, identity theft, forensic data mining and mapping investigations. ... Our SIU is routinely called upon by state and local law enforcement agencies to help train them in these areas.
How have advances in technology aided your team’s investigations? Bales: Without giving away any industry secrets, I can tell you the emergence of surveillance devices has had an extremely positive impact on our fraud investigations. On any given day, the average person is caught on camera or video 12-16 times. This allows our SIU to pull footage or photos from ATMs, intersection cams, private businesses and even homes to catch criminals.
What differentiates Mercury’s SIU from other companies? Bales: Mercury will expend any amount of resources to combat fraudulent or exaggerated claims, which helps lower rates for our customers. Having the company’s full support allows our unit to be very tough on fraudsters. . Can you estimate how many claims you’ve investigated in your career? Bales: I joined Mercury’s Special Investigation Unit in 1986. Since then, I’ve been involved in 30,000 to 40,000 claims investigations.
What has changed over the years and what has stayed the same? Bales: The schemes are relatively similar today, but the methods have grown in sophistication. In the old days, a simple sprain or strain was the typical injury claim. Now criminals use phony outpatient surgery centers to create files for nonexistent patients or even perform unnecessary surgeries to facilitate payouts. In the past, professionals, like doctors and attorneys, were behind these scams. Today, organized crime groups orchestrate the schemes and use doctors and lawyers as hired guns.
What is the oldest trick in the book? Bales: Early insurance schemes were simply claimants dropping jars of jam on the market floor so they could slip and file an injury claim. The preferred method has evolved into staged auto accidents, which involve intentional damage and/or adding claimants who weren’t involved in the incident. It’s also very common for people to claim pre-existing damage on their vehicles.
What can be done to help prevent, detect and flag fraudulent claims? Bales: We have a saying: if you’re not looking for fraud you won’t find it. Common schemes like staged auto accidents, adding damage to vehicles after a loss and switching drivers on accident reports are all things the public can watch for. Additionally, always be sure to document people, places and things involved in an accident. CJ
CLAIMS REVIEW | NEWS & TRENDS
2012 Landmark Year for Workplace Class Action Litigation: Study
hen it comes to complex employment-related legal disputes, 2012 will be considered a landmark year, according to a new report on employment class action litigation. Many of the key rulings of 2012 in class action cases hinged on the U.S. Supreme Court’s 2011 rulings in three milestone cases — Wal-Mart Stores, Inc. v. Dukes, AT&T Mobility LLC v. Concepcion, and Smith v. Bayer— according to the 9th annual edition of the “Workplace Class Action Litigation Report,” published by Seyfarth Shaw LLP. The Seyfarth report identifies six emerging workplace class action trends for employers to heed in 2013: 1. The Supreme Court’s opinions in WalMart and Concepcion had a profound influence in shaping the course of class action litigation rulings in 2012, beginning a new wave of creative case law theories that will continue to evolve and impact employers in the defense of their cases in 2013. 2. The U.S. Equal Employment Opportunity Commission (EEOC) garnering a four-fold increase in recoveries against employers for its systemic discrimination investigations. Government enforcement activity is expected to accelerate even more in 2013. 3. Wal-Mart significantly influenced settlement strategies for workplace class actions in 2012, as employers settled fewer employment discrimination class actions and at a fraction of the levels experienced from 2006 to 2011 (a total of $48.65 million for the top 10 settlements in 2012 compared to $346.4 million in 2010 prior to the Wal-Mart ruling in 2011). Against this backdrop, the plaintiffs’ class action bar is “re-booting” its approach to class litigation and this trend may reverse itself in 2013. CJ 4. The sluggishness of the U.S. economy during 2012 fueled more class action and collective class action litigation. This trend is expected to continue in 2013. 5. Wage and hour litigation continued to outpace all other types of workplace class actions in 2012, led by 7,672 Fair Labor Standards Act (FLSA) lawsuits filed this
past year, an increase of 893 cases from the then record levels in 2011. These figures are expected to grow again in 2013. 6. The plaintiffs’ class action bar has moved quickly to respond to Wal-Mart and craft new approaches to class-wide theo-
ries of certification, liability, and damages related to the Rule 23 developments, creating a new set of challenges for employers. The report is available at: www. seyfarth.com/publications/Ninth-AnnualWorkplace-Class-Action. CJ
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Winter 2013 | Claims Journal 11
SPECIAL REPORT | PRODUCTS
Liability for Marketing Communications By Kenneth Ross
anufacturers of products and providers of services can be held liable for injury, damage or economic loss suffered by a customer and third party based on all aspects of its products and services. This includes the product or service itself, all written materials that accompany the product and all oral and written statements made before and after sale. These claims can even, in some cases, be brought by the entire class of people who purchased the product. The so-called “no-injury class action” is usually based on some representation by the manufacturer before sale and the dashed expectations of customers as to things such as performance, safety, quality or durability. Even without provable damage, settlements have exceeded hundreds of millions of dollars. One case involved a design defect in computer chips in Toshiba laptops, and exceeded $2 billion, even though no one ever suffered a problem. In product liability claims and litigation, plaintiffs can combine claims of breach of contract, breach of warranty, misrepresentation, negligence, defects in design, defects in manufacture and defects in warnings and instructions. They will use the product and any statements printed or uttered by the manufacturer to support their claims. They can allege all of these theories at the beginning of the case, try to discover a basis to support each of these claims during the discovery process, and then, at the end of the case, drop the theories that are not supported. Since they may not know what theories are viable, they may try to attack everything the manufacturer did. A major element of proof for many of these theories is that the purchaser or injured party relied on the statement, misstatement or lack of a statement. Despite that requirement, even if the plaintiff didn’t rely on the statement, statements can be put into evidence for other purposes to support another claim, or to portray the manufacturer as careless or incompetent. Some statements make it more difficult for the manufacturer to defend itself, such as when the injured party did something unsafe that seemed to be authorized by the manufacturer or at least not prohibited. Product Representations Advertising and promotional literature serves as the most significant source of product representations. It has been said that much of product liability reflects the inability of American engineering to match the claims made for products by advertisers. Describing some examples of past litigation will be helpful in illustrating how expansive the theories can be and how easy it is to bring such a suit.
12 Claims Journal | Winter 2013
Brochures: The seminal case in product liability involved marketing brochures. The case of Greenman v. Yuba Power Products, Inc., 377 P.2d 897 (Cal. 1962), dealt with a Shopsmith power tool. While the California Supreme Court mainly used this case to, for the first time, adopt the theory of strict liability, it also discussed marketing issues. It said that the jury could have reasonably concluded that statements in the manufacturer’s brochure were untrue, that these statements constituted express warranties and that plaintiff’s injuries were caused by their breach. The marketing literature used phrases such as “ensures perfect alignment of components” and “every component has positive locks” and “provides rigid support.” Drugs: One of the original drug product liability cases (Toole v. Richardson-Merrell, 1967) resulted in liability because the drug was advertised as “virtually non-toxic,” “safe,” and free of “significant side effects.” In addition, the marketing of prescription drugs directly to consumers, which is a fairly recent phenomenon, has been the subject of a great deal of litigation. The typical allegation is the failure to adequately warn the user while the defense is the “learned intermediary doctrine,” which is under attack because of this direct There are marketing. The way in which the product is advertised and marketed and the disclaimmany product ers and safety precautions that are provided liability cases to consumers is the basis of these cases. Baby Oil: A case from 1990 involved where Johnson & Johnson baby oil. The injury marketing is occurred when a baby swallowed the baby oil and it got into his lungs. The mother was involved. not alarmed because she knew that baby oil was safe. Unfortunately, it was not safe in the lungs and a severe injury resulted. The plaintiff’s human factors expert said that the product label, which used the term “pure and gentle,”
perproof,” “shatterproof,” “harmless,” and “indestructible.” Many problems in this area are caused by unclear, unsupported and incorrect statements caused by unclear or incorrect thinking. If there is a promise that a product will perform in a certain way, then be sure it can do it. There really is no defense if a product is used as advertised and it doesn’t work the way it should work. This may result in a disgruntled purchaser and no claim. But it could just as easily result in a warranty claim, a personal injury case or a class action based on some misrepresentation. Certain language, referred to as “puffing” is legally acceptable. Puffing is not viewed as an expression of a fact but instead as an opinion about a product’s performance or attributes. As a result, “puffery” does not constitute an express warranty. So phrases like “never lets you down” or “strong” or “finest product of its kind available today” or “premium quality” have all been deemed acceptable puffing or opinion and not a factual assertion that can be the subject of a lawsuit.
perpetuated a belief that the product was very safe and benign in all foreseeable situations. Vehicles: A case from 1991 involved the Jeep CJ-7, which was advertised driving up Pikes Peak at a high rate of speed around tight turns on the mountain. These turns were called “J turns” because the marks in the mountain road looked like a “J.” The plaintiffs saw the ads and thought the roll bar would protect them if the vehicle turned over. It didn’t and one person was severely injured. The case proceeded on the theory of misrepresentation using the Jeep ads as evidence that such driving was foreseeable and intended. This despite the fact that the plaintiffs drove the Jeep off the top of a road flying almost 50 feet through the air and landing upside down. The court called the advertising an example of “intentional incitement of unlawful conduct.” Terms and Puffery Other examples from litigation include use of the terms “bulletproof,” “absolutely safe,” “stops assailants instantly,” “tam-
This, of course, does not mean that a customer may not sue over some puffing that resulted in injury or damage. Courts have identified different factors to consider when distinguishing puffing from facts. They are buyer sophistication, trade usage, whether the goods are prototype, the presence of hedging and the level of specificity, with specificity being the most important. While most product liability cases are based on the traditional theories of liability — strict liability, negligence, and breach of warranty — there are many cases where some marketing theory is brought. It is easy to allege, albeit many times hard for the plaintiff to prove. Therefore, while these cases must be taken seriously — especially the so-called no-injury class actions — many of them are defensible due to a lack of causation. CJ Ross is a former partner and now Of Counsel to the Minneapolis office of Bowman and Brooke LLP, a national product liability defense firm. For over 30 years, Ross has provided legal and practical advice in the areas of regulatory compliance, product safety and liability prevention.
City of Hope’s NatioNal iNsuraNCe iNdustry CouNCil iNvites you to joiN us at
Hoops for Hope Monday, April 8, 2013 Check web site for local event times
This special event gives you an opportunity to network with your colleagues while watching the 2013 NCAA National Championship Basketball Game. All proceeds benefit City of Hope’s mission to save more lives. Find a Hoops for Hope event in one of these cities: Los Angeles, San Francisco, Phoenix, Des Moines and Chicago. To register or for more information go to cityofhope.org/hoops or call 800-272-2310, ext. 26370
Greg Case President and Chief Executive Officer of Aon 2013 National Insurance Industry Council Spirit of Life‰ Honoree
DEV-20316 NIIC SOL COH16386.indd 1 Feb Claims Journal Ad FINAL.indd 1
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SPECIAL REPORT | HOME
What to Know About Water Losses Associated with Failed Metal Plumbing Components By David B. Riggs
ll plumbers worth their salt have heard that paste flux, used in soldering, causes pinhole leaks in copper pipe. While plumbers may have heard this, not all believe it is a major issue. As a result, the care associated with the use of flux can sometimes be less than what the situation requires.
Flux is used to facilitate a bond between the solder and the copper when soldering (“sweating”) a joint. Anyone who has ever watched a plumber sweat copper pipes would have seen them use flux and possibly noticed that flux residue covered the plumber’s hands, gloves, tools and toolbox. The manufacturers of paste flux provide warnings on the containers of their product that indicate the flux is corrosive and should be washed off after soldering to prevent corrosion. Paste flux manufacturers go on to state that flux is not for use with aluminum, stainless steel or magnesium. The issue presented in the industry occurs when flux and stainless steel clamps used to connect cross-linked polyethylene (PEX) tubing come in contact. PEX is commonly known as a plastic alternative to copper pipes in domestic water applications. This type of plumbing system has gained significant popularity during the last 10 to 15 years among homebuilders and plumbers because of the potential savings. These stainless steel clamps are intended to secure the PEX tubing on the barbed fittings located at each end of the tubing. The fittings are typically made of brass or plastic and are used to join multiple sections of the tubing or to transition to another material type or fixture. The clamp, when properly installed, provides a uniform compression and a 360-degree sealing surface by incorporating a tongue-and-groove design at the clamp’s overlap. A problem occurs if the clamp fractures transversely across its band. Such a failure releases the clamp’s compressive force and allows water to leak between the barb fitting and PEX tubing interface.
14 Claims Journal | Winter 2013
The typical failure of the stainless steel clamp is due to a process called stress corrosion cracking (SCC). In most cases, the corrosion is driven by exposure to some form of chlorine. Engineers and other experts have debated whether the presence of The assembled connection of the PEX adapter fitting. chlorine on the fitting is from the residual chlorine found in most municipal water supplies. However, the concentration levels of chlorine on the failed fittings are generally found to be much higher than are expected in municipal water supplies and suggest the failure did not result simply from exposure to water. Alternatively, traces of another corrosion-producing substance are also often discovered, which indicates the presence of flux. Failures generally occur on the hot water supply piping and the failed clamp is often connected to a copper adapter fitting. More specifically, this adapter fitting is the point where copper pipes transition to PEX. Therefore, one side of the fitting has a soldered joint, and the other side uses the stainless steel clamp. The increased temperature of the water accelerates the rate of corrosion. So, in review, the failure occurs The failed stainless steel immediately adjacent to a soldered PEX clamp. fitting that uses flux, flux is corrosive to stainless steel and elements consistent with flux are found on the failed clamp. Who is responsible for the failure? The plumber should have a certain awareness of the flux’s corrosive nature, but the manufacturer of the stainless steel clamp should be aware that the clamp will be used in close proximity to a soldered joint. Implications of this problem can be quite severe in situations where multiple clamps become contaminated due to handling and/or storage on a plumber’s truck. These connections are hidden in walls, floors and ceilings throughout a PEX plumbing system. Take, for instance, a small two-bathroom house. It could easily have more than 25 of these fittings in-
stalled. Large houses could have more than 100 fittings, depending on the number of plumbing fixtures and turns in the piping. Stress corrosion cracking is not an isolated problem with stainless steel PEX clamps. In the plumbing industry, it is also the mode of failure for numerous stainless steel braided supply lines and most brittle brass failures. A commonality in most cases is that a driving corrosive is present. For the PEX clamps, the corrosive is the flux, and, for the stainless steel braided supply lines, the corrosive is chlorides found in household cleaners. In either situation, the manufacturer implement It’s important to can design changes document the to make the more losses and secure product robust to the evidence in order effects of SCC. Take, for to build strong instance, the design changes subrogation Fluidmaster cases. in and BrassCraft Manufacturing supply lines. The stainless steel braid on new Fluidmaster supply lines can fail completely by corrosion; however, it will still not cause a catastrophic water loss. BrassCraft has altered the materials in the design to remove stainless steel completely from the supply line. Now, the thing to be looking for is how the industry will react to the failures of the PEX clamps. Often, the first reaction is to simply create a warning to increase the awareness of the problem. If the problem continues, then alternative designs will be developed, assuming it makes financial sense. In the meantime, it’s important to docu-
ment the losses and secure evidence in order to build strong subrogation cases. Keys to building a strong case are to document, photographically or otherwise, the details specific to the failure mode and analyze the failure of the clamps in a laboratory. Failure mode details include: • Was it on a hot water supply? • Was it used in close proximity to a copper fitting? • Who installed it?
• How long has it been installed? This documentation will provide investigators, whether at the scene or in a laboratory, the tools necessary to identify the party responsible for the failure. CJ Riggs is a senior forensic engineer and the general manager of Donan’s Component Testing Laboratory, which investigates subrogation potential for a national client base. Riggs specializes in appliances, plumbing components and HVAC systems.
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IDEA EXCHANGE | GUIDE TO TECHNOLOGY, ENGINEERING & FORENSICS FIRMS
GUIDE TO TECHNOLOGY, ENGINEERING & FORENSICS FIRMS C
laims Journal is pleased to publish the 2013 Guide to Technology, Engineering, and Forensics Firms. This exclusive directory resource has been designed to help claims professionals find partners and services to enhance their ability to respond to disasters and better assist their clients. We look forward to expanding and enhancing this directory in the future and welcome your feedback on how we might improve it. Please send comments or suggestions to firstname.lastname@example.org.
American Structurepoint, Inc. 7260 Shadeland Station Indianapolis, IN 46256 www.structurepoint.com/investigative email@example.com (855) 822-1966 Since 1966, clients have trusted American Structurepoint as their single-source contact for notice of loss through incident resolution. We’ll handle your property or liability claim investigation 24/7. Our licensed engineers and architects specialize in investigative and forensic services for insurance companies, claims adjusters, property managers, building owners, real estate professionals, attorneys, lenders, and more.
Amset Technical Consulting 1864 S. Elmhurst Road Mount Prospect, IL 60056 www.amsetUSA.com firstname.lastname@example.org (847) 229-1155 Amset provides technical consulting to insurance professionals and attorneys in the investigation, analysis, and resolution of insurance claims involving electronics, equipment, and electro-mechanical machinery. Since 1996 Amset has earned an excellent reputation in the field of property and casualty claims for electrical & mechanical failure analysis, fire/explosion origin & cause investigations, vehicle fire investigations, cost analysis, electronics restoration, data recovery, laboratory examinations, and evidence storage.
Donan Engineering Co., Inc. 11321 Plantside Drive Louisville, KY 40299 www.donan.com email@example.com (800) 482-5611 Donan Engineering is a multi-disciplined forensic consulting firm with professional engineers, fire investigators, and a component testing laboratory.
EFI Global, Inc. 8811 FM 1960 Bypass Rd West, Suite 400 Humble, TX 77338 www.efiglobal.com firstname.lastname@example.org (281) 358-4441 EFI Global is a full-service engineering, fire investigation, and environmental services firm serving commercial, insurance, government, public and private entities. We provide a multidisciplinary team of scientists, engineers and fire investigators to aid clients in resolving technical problems. With 28 service centers and a global response team of more than 350 technical professionals, there is always an office or professional that can respond quickly to a project site. We are committed to providing clients with solid solutions to complex issues.
Forensic Analysis & Engineering Corp. 2503 58th Street Suite D Hampton, Virginia 23661 www.forensic-analysis.com email@example.com (757) 265-9333 Forensic Analysis & Engineering Corporation’s team of professional engineers, experienced scientists & specialized experts provide forensic investigative services to a diversified client base worldwide since 1966. From cases involving engineering, fire/explosion, accident reconstruction, storm/catastrophe, and maritime losses, we provide defendable, court-approved analysis as to why an event occurred. Our rapid response team is ready 24/7 to help manage your case quickly & accurately. Let FAEC work closely with you, every step of the way, to “ESTABLISH WHY” the issue occurred.
Haag Engineering 4949 W. Royal Ln. Irving, TX 75063 www.haagengineering.com firstname.lastname@example.org (214) 614-6500 Haag is a globally diverse consulting firm encompassing forensic engineering, construction consulting, geotechnical consulting, 3D laser scanning/BIM modeling and research/testing. Haag engineers have a wide range of expertise in all disciplines - civil, structural, architectural, mechanical, electrical, and metallurgical. We also offer outstanding educational programs, tools and publications. Haag is celebrating 88 years of serving not only the insurance industry, but manufacturers, attorneys, government entities, municipalities and corporations with our professional expertise. Winter 2013 | Claims Journal 17
HSA Engineers & Scientists 4019 East Fowler Avenue Tampa, Florida 33617-2008 www.hsa-env.com email@example.com (813) 971-3882 HSA Engineers & Scientists is a full-service forensic consulting firm with over 20 years of experience serving the insurance industry as well as legal community and business entities. HSA offers a diverse technical staff of more than 300 people operating throughout the United States. Our professionals cover a wide range of services including: building sciences, structural forensics, fire investigation, subsidence investigations, construction management, environmental investigations, and catastrophe response. We are prepared to respond quickly with quality reporting, and timely results.
Rimkus Consulting Group, Inc. 8 Greenway Plaza, Suite 500 Houston, TX 77046 www.rimkus.com firstname.lastname@example.org (713) 621-3550 Rimkus Consulting Group, Inc. serves clients with more than 300 professional engineers, scientists, financial experts, fire investigators and technical specialists located in offices all over the U.S. plus London. Their knowledge, experience and expertise are the reasons why Rimkus is among the largest and most highly regarded forensic consulting firms in the world. Dedicated to fast, informative response and unparalleled quality of final product, our experts provide reports and courtroom testimony aimed at clear understanding by a non-technical audience.
Hughes Associates, Inc.
3610 Commerce Drive, Suite 817 Baltimore, MD 21227
154 Hughes Lane Saint Charles, MO 63301
www.haifire.com Forensics@haifire.com (410) 737-8677 x217
www.semke.com email@example.com (636) 896-9995
Hughes Associates, Inc. has 30+ years of experience delivering fire related forensic services as part of a full service fire science and engineering firm with offices across the US and internationally. Hughes experts are technical leaders, consisting of Professional Engineers, scientists, and investigators with proven experience to respond to fires, explosions, or fire protection system failures. We provide a broad range of capabilities in one firm, high level expertise from scene investigation to trial testimony, testing and research, modeling, and code consulting.
Semke Forensic offers forensic engineering, computer forensic, and technical consulting services to legal, insurance, and corporate clients throughout the United States and abroad. We have built a solid reputation within the industry by consistently applying our skill, knowledge, and experience when evaluating our clientsâ€™ cases and claims. Our professionally licensed engineers and consultants have the qualifications you need. When you need scientifically sound answers to your most difficult questions, rely on our expertise.
Nelson Architectural Engineers, Inc. 2740 Dallas Parkway, Suite 220 Plano, TX 75093 www.nae-us.com firstname.lastname@example.org (877) 850-8765 Nelson Architectural Engineers, Inc., serving nationwide from strategically located offices in Texas, Florida, Georgia, Maryland, Maine, Colorado, California and Hawaii, is a progressive multidiscipline firm specializing in forensics and consulting. We are investigators who assess damage from perils such as hurricanes, explosions, fires, structural failures, and design and construction defects -- typically within an insurance or legal setting. NAE excels in Forensic Engineering (Civil, Structural, Mechanical, Electrical), Forensic Architecture, LEEDÂŽ Consulting, HVAC, Roofing, and Cost Estimating.
18 Claims Journal | Winter 2013
U.S. Forensic 3300 West Esplanade Ave, Suite 601 Metairie, Louisiana 70002 www.usforensic.com email@example.com (888) 873-6752 U.S. Forensic, L.L.C. is a Southeastern U.S. forensic engineering firm offering expert evaluation, opinions, reporting and courtroom testimony. We currently maintain 14 offices with technical expertise including mechanical engineering, civil engineering, structural engineering, fire cause and origin, electrical engineering, vehicle accident reconstruction and indoor air quality investigations. Office locations include New Orleans, LA, Lafayette, LA, Hattiesburg, MS, Picayune, MS, Memphis, TN, Destin FL, Jacksonville, FL, Orlando, FL, West Palm Beach, FL, Miami, FL, Columbia SC, Charlotte, NC, Austin, TX and Dallas, TX.
PEOPLE Claims Journal Magazine is pleased to announce the following members of its newly established editorial board: Steven Plitt, Ken Levine, Renee Callantine, Gary Hinson, Kenneth Tolson and Melissa E. Raymer. Phoenix-based attorney Steve Plitt is a nationally recognized expert in insurance law, has authored numerous insurance treatises and articles, including contributions to Insurance Journal and Claims Journal. He has a national expert witness practice. Ken Levine is a founding partner of Pennsylvania-based Nelson, Levine, de Luca & Hamilton, a national law firm that focuses exclusively on insurance. Levine personally assists clients with large loss property subrogation matters. He has been an active member of the National Association of Subrogation Professionals (NASP) since its inception, and concluded his second year as president in 2012. San Francisco-based Renee Callantine is a partner at the law firm of Meckler Bulger Tilson Marick & Pearson. A frequent writer and lecturer on insurance-related topics, her practice primarily involves representing insurers in coverage disputes, including litigation over alleged bad faith claims handling and contribution actions between insurers. She has extensive experience in property and casualty claims, ranging from personal lines homeowners and automobile policies to complex commercial lines policies. As a CPA, she is often asked to assist with claims and litigation involving complex business interruption losses or other complicated accounting issues. Based in Manchester, N.H., Gary Hinson is vice president of claims at RiverStone Claims Management LLC. RiverStone is the runoff specialist for Fairfax Financial Holdings Limited. Previously, Hinson held claim officer positions in AIG, Tokio Marine, and ACE organizations. Kenneth Tolson is vice president and chief information officer at Crawford & Co. He is responsible for setting technology strategy for Crawford’s U.S. Property & Casualty division. Before becoming CIO in 2011, Tolson spent six years as vice president and manager of the East Region of U.S. Property & Casualty. Melissa E. Raymer is the commercial liability claims manager for Minnesota-based Western National Insurance Group. Raymer grew up working in her parents Farmers Insurance Group agency in Eau Claire, Wis. She began her career in claims with Farmers Insurance Group as a multi-line field rep-
resentative after college. She’s also held claims positions at Liberty Mutual and National Car Rental. Raymer was president of the Twin Cities Claims Association in 2010 and completed her MBA in Risk Management program at Walden University. Nevada-based Employers, a nationwide small business insurance specialist, has named Dwight L. Robertson, M.D. medical director. In this role, Dr. Robertson will provide strategic physician oversight for the clinical direction of medical services for Employers, as well as medical expertise with respect to the company’s clinical policies, procedures and programs. He will work closely with the claims leadership team in the management and development of the company’s workers’ compensation provider networks. Dr. Robertson has significant experience working for insurance carriers, having previously worked at Zenith National Insurance Co., The Travelers Insurance Co. as well as AIG. EagleEye Analytics, a predictive analytics provider for the property/casualty industry, named Doug McCracken senior vice president of sales and marketing. McCracken has more than 20 years of experience in sales, marketing, pricing and management, and has held executive positions at both GMAC Insurance and Infinity P&C. Most recently, he was a vice president at GMAC Insurance, where during a nine-year period he held sales and marketing leadership positions for both the direct and agency channels. Prior to GMAC Insurance, McCracken spent six years at Infinity P&C in a product management leadership role. At EagleEye, McCracken’s role is a key executive position, designed to expand the company’s services and relationships with insurance carriers. Specialist insurer Markel International has appointed Hannah Purves as its new claims director. Based in London, Purves will lead the company’s international claims team. Purves joins Markel after spending six years with specialist insurer Beazley, where she worked as part of the UK E&O claims team and then as head of the company’s PCG claims department for political risk, contingency, terrorism and product recall. Before joining Beazley, Purves worked as an insurance/reinsurance lawyer for Mayer Brown Solicitors. CJ
Winter Winter 2013 2013||Claims ClaimsJournal Journal 19 19
SPECIAL REPORT | FORENSICS
Crash Course Today’s crash forensics field is a high-tech industry with near-perfect accuracy capabilities. So why aren’t adjusters and insurers tapping into it more often?
By Lori Widmer
In most accidents
Michael Merolli investigates, he’s able to tell you whether it was a 90-pound gymnast or a 220-pound basketball player driving the car. That’s because Merolli, SIU accident reconstructionist for MAPFRE USA in Boston, is a crash research and reconstruction expert who understands where to look and what technology is in place to help dissect accidents. Crash forensics, accident reconstruction, and the research behind the what and how of an accident uses science, technology, and intuitive thinking to get to the bottom of the causes. Using detailed measuring techniques and tools, in-auto computer modules, and state-of-the-art equipment, reconstructionists can show with near-perfect accuracy what happened seconds before, during and after most accidents. They can tell who was driving, who was sitting where, and what speed the car was traveling at, and what factors contributed to the accident. It’s a field that has become increasingly more important. According to the latest statistics available via the National Highway Traffic Safety Administration (NHTSA), there were more than 5.4 million motor vehicle accidents that occurred in 2010. Of those accidents, nearly 33,000 fatalities occurred as well as more than 2.2 million injuries sustained. Yet crash forensics methods do not play a front-and-center role in today’s claim settlement process.
20 Claims Journal | Winter 2013
Crash forensics has not taken on a mainstream role in the claim settlement process.
History It’s not because the practice isn’t already vetted. Traffic accident reconstruction has been part of the insurance landscape since 1985, when formalized national guidelines and training standards were put into place by the NHTSA. Since, accident reconstruction and forensics processes have become technologydriven and achieved a surprising level of accuracy. In 1994, General Motors became the first company to install airbag modules that deploy airbags in its automobiles. By 1998, Ford had followed suit. The data stored in these modules served as some of the forensic industry’s most essential data. Then came the CDR technology used today. Ten years ago, a company called Vetronix created the first crash data retrieval (CDR) tool. Flash forward to 2006 when Vetronix Aftermarket merged with Bosch Automotive Aftermarket. Since that time, Bosch has been the sole manufacturer of the CDR tool. It took five more years for the CDR technology to gain wide acceptance, which came first through use in law enforcement cases. In fact, CDR and accident forensics in general have come slowly into the insurance settlement industry. Effective Sept. 1, 2012, NHTSA has implemented a rule that has a presidential order pending. That rule would require CDR technology in all U.S. vehicles. Outside of Mainstream Yet crash forensics has yet to break into a more mainstream role in the claim settlement process. Why? Partly because it’s just not economical, says W. R. “Rusty” Haight. Haight, director of The Collision Safety Institute in San Diego, believes that the dollar value, while there, may not always be justified, depending on the claim. Also, Haight thinks it’s a tougher sell from a customer service standpoint. “It’s a battle of competing interests,” he says. “If I have 30 days to settle a claim and it’s going to take 60 days to get a result back from a lab, I’m not going to have
enough time to do it.” Flawed thinking, in Haight’s estimation. “In any kind of analysis, am I dealing with a claim with only partial information?” He says that a number of claim settlement decisions are based on witness accounts at the scene of an accident. Witnesses, he says, are notoriously wrong and should not be the basis upon which a claim should be settled. Instead, he suggests adjusters begin utilizing airbag module information, data he says is still open to analysis, but it has a lot of good information to be gleaned. Forensics in Action To date, accident reconstruction and forensics processes have evolved into a combination of data extraction, measurement, and analysis practices that can pinpoint nearly everything, from the cause of an accident to the DNA of the driver. That includes determining who was behind the wheel when the accident occurred. As Merolli suggests, he can extract the DNA from imprints on an airbag, as well as the approximate weight of each person in each seat, to determine who was sitting where when the airbag deployed. The airbag modules themselves, he says, store a wealth of information that can more accurately reveal the details of a crash, including the rate of speed five seconds prior to and after the accident. Stan Oglesby says he employs data from those airbag modules to get insight into speed prior to the crash, engine speed, throttle position (open or closed?), brake position, if seat belts were being used and if the passenger airbag was enabled. That’s enough, he says, to glean enough data to reconstruct an accurate assessment of what happened. Oglesby, managing partner of Midwest Accident Reconstruction Services, Concordia, Mo., says time is critical. The ideal situation, he says, is to be on the scene shortly after a crash — within a day or two of the accident. That aids in evidence collection and helps
preserve more of the evidence before it is lost. Even with metal scratches and damages, time is critical. “Bare metal rusts quickly: within a day or two,” he says. Oglesby was busy on a freight crossing accident when we first got in touch. His company handles 120 to 130 reconstructions per year, and as a reconstructionist with 23 years’ experience, he knows the importance of using all available data. That day, he was studying sight distances, vegetation, and other factors that could be lost in just a day’s time. “The goal is to get to the scene before things change,” he says, especially during seasonal changes, where the view today wasn’t the same view as yesterday. While Oglesby uses the CDR and airbag module information, there are some limitations to the technology. That’s when an investigator’s experience and ability to reason comes into play, he says. His example is driving down a highway, losing control, hitting a median and sliding sideways. “I may still be doing 80 miles an hour, but the tires aren’t spinning anymore because we’re sliding sideways, so the module could be recording zero or something like you’re going from 60 to 20 miles per hour in a second. That’s not possible through braking.” An intersection crash investigation Oglesby remembers proved the accuracy of human science in the investigative process. Because some states require that forensics investigators get permission from vehicle owners to download module information, he and his team, lacking that permission, took measurements and calculated speeds based on momentum. A few months later, permission to download the electronic data was granted. The result — the speed his team had calculated based on physical evidence was within one mph of what the module had recorded. Oglesby says forensics can tell what happened, but not why. For example, if the accident involved a pedestrian dressed in dark clothing walking along a highway at night, Oglesby says he continued on page 22
Winter 2013 | Claims Journal 21
SPECIAL REPORT | FORENSICS continued from page 21
can’t determine conclusively if it was a lack of forethought or an attempt at suicide. Value Increasing “Can you download the black box?” It’s a call Merolli gets often these days. It’s not coming from law enforcement as much, but from consumers involved in accidents wanting to prove the fault is not theirs. While the information collected is vital to the accurate settlement of claims, human analysis is just as vital. Merolli says the facts don’t always tell the complete story. He uses the example of a public official who was involved in a high-speed accident. The data recorder showed he could have been traveling more than 100 mph. But Merolli knew better. “We’re fairly certain that speed was over-reported by 20 to 30 miles an hour due to wheel slip.” Why did the data suggest otherwise? Because data, he says, can’t be intuitive like investigators can. “Based on the
fact that the car rolled over and the wheels were in the air, we can ‘It’s not as simple as reading a time the speed and we do know the report. You have to read it and vehicle high speed was occurring while the wheels were slipping.” understand it in the context of “It’s not as simple as reading a the claim.’ report,” Merolli says. “You have to read it and understand it in the internal communication processes. “If context of the claim.” The process, he says, is highly accurate. He says when you’re working on the property side and I’m on the bodily injury side, we’re not two vehicles both contain crash data going to talk. Get the BI (bodily injury) the results can be spot on. “I’d say the and PD (property damage) guys comaccuracy is arriving on 100 percent,” he municating more clearly on what we’re says. looking at as an overall claim.” Haight thinks when that data needs Adjusters must be intuitive, he says. to be used is a call made not just by While there may not always be a need insurer processes, but by adjuster intufor forensics data and processes, there’s ition. When to call? “When my claim has characteristics that would justify it,” says a time and place for it in the adjuster’s arsenal. Haight. “If I have a claim for a hit-while Haight says, “If I’m working for ABC parked claim, I’m probably not going to Insurance and we’re about to hit policy call, unless this guy has had a couple of limits or there’s a question about some these claims.” specific issue within the claim itself, it Another flag, he says, would be a might be worthwhile to look at all the lot of property damage or bodily injury information before I make any kind of exposure or a combination. Yet Haight recommendation or decision.” CJ wonders if adjusters are limited due to
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22 Claims Journal | Winter 2013
1/28/13 9:54 AM
EagleView, Pictometry EagleView Technologies, a provider of automated 3D measurement technologies and analysis and Pictometry International, a geo-referenced aerial image capture and visual-centric data analytics company, jointly announced a merger agreement. The merger creates one global company offering comprehensive capabilities in aerial imagery collections, geospatial analytics and 3D measurement technologies to both government and commercial customers. The company will operate with offices in Bothell, Wash. and Rochester, N.Y., while also maintaining satellite offices in other locations. Chris Barrow, EagleView’s chief executive officer, will lead the management team of the combined company as its president and CEO, while Pictometry’s CEO, Rick Hurwitz, will exit the business having worked closely with both companies in support of this transaction. The two companies have combined pro forma revenues of more than $100 million for calendar year 2012 and have experienced significant historical growth. Under the terms of the merger agreement, EagleView and Pictometry merged in a stock-for-stock merger-of-
equals transaction pursuant to which both EagleView and Pictometry became wholly owned subsidiaries of a new entity. Braemar Adjusting Braemar Adjusting has opened a dedicated loss adjusting operation in Dubai. Effective April 1, 2013, Chris Eades, regional director for the Middle East, and senior adjuster Sam Foster, will start working from the Dubai World Trade Centre Building offices of sister company Braemar Salvage Association, before moving into their own Braemar Adjusting offices later in the year. Caliber Collision Centers Caliber Collision Centers acquired Hi-Tech Collision and Glass Centers. Hi-Tech Collision and Glass Centers has 10 locations in the Los Angeles and Orange County markets. CARSTAR CARSTAR Auto Body Repair Experts, a national multi-shop operator network, opened three new locations. Owned by Mark Riney, Autobody Denton CARSTAR is located at 820 E. McKinney Street in Denton, Texas. The shop, open since 1977, offers collision repair, vehicle restoration and custom-
ization, glass repair and storm and hail damage repair. Expansion in Wisconsin led to the opening of a satellite facility for Utzig CARSTAR Collision Service in Milton, Wis. Owned by Al Utzig, the shop, located at 635 Greenman Street, will serve as a satellite facility to handle repairs for vehicle owners in that community. The opening of Complete Collision CARSTAR, located at 34627 16th Avenue South in Federal Way, adds another location in Washington. It is the third location for owner Jeff Middleton, who also own Exhibition Automotive CARSTAR in Kent and Ballard Collision CARSTAR in Seattle. AmTrust New York-based AmTrust Financial Services announced that it has entered into an agreement, pending regulatory approval, to acquire Sequoia Insurance Co. and its subsidiaries, Sequoia Indemnity Co. and Personal Express Insurance Co., for approximately $60 million. Sequoia offers a variety of low hazard, property/casualty insurance products including workers’ compensation and commercial package insurance to small businesses in key western states. In 2012, Sequoia wrote gross written premium of approximately $140 million. CJ Winter 2013 | Claims Journal 23
SPECIAL REPORT | LIABILITY
By Denise Johnson
awsuits filed today are a good indicator of tomorrow’s liability claims.
Though there is a time lag, property/casualty liability trends are heavily influenced by local and national tort trends, according to Jerry Theodorou, a Conning analyst. “It’s not like a hurricane or a fire where the damage is done and you have an estimate of the loss immediately. It takes longer and it’s also more obscure,” Theodorou said. Findings in Conning’s 2012 liability trends study, “Liability and Tort Trends: Trouble Around the Corner?” leads to his conclusion that a casualty catastrophe is imminent. “The potential for an emerging risk which is exposurebased rather than a factor of tort trends is also there,” he said. In his view, the casualty cat claim will relate to something latent in the air, water or food supply. “Just like asbestos was latent, it was developing in people’s bodies and people’s lungs, and it took years before the manifestation came out,” Theodorou said. The Conning report outlines the four characteristics a future casualty cat source is likely to have: (1) broad use of the product or process, (2) a signature injury or damage, (3) 24 Claims Journal | Winter 2013
applicability of tort law to ensuing damages, and (4) a definable universe of potentially liable defendants. “Whereas the current effort to identify the next asbestos centers heavily around nanotechnology and hydrofracking, our analysis of the conceivable universe of risks finds that more likely suspects may be found somewhere in the food production and processing chain, or elsewhere in the broad swath of activities that may adversely affect the environment,” the Conning report concludes. Liability insurers face increasing frequency of severity, lower investment yields, a shifting tort climate and the possibility of emerging risk. Across the globe, commercial liability is moving to front stage. “The growth of the services sector, which is more exposed to liability risks than the manufacturing sector, is one reason for the increasing importance of liability protection,” said Thomas Holzheu, co-author of Swiss Re’s recent sigma report on global commercial lines. “The pendulum is starting to shift from a very business friendly environment to a little bit more muscle from the plaintiff’s side,” says Theodorou. “You’ve got some things working against the industry,” Food-related or environmental — those are Conning’s
‘It’s not like a hurricane or a fire where the damage is done and you have an estimate of the loss immediately. It takes longer and it’s also more obscure.’
best estimate of where the next liability explosion may occur. Other studies and surveys conducted in the past year that look at tort trends warn about other lines where claims could explode. Here is where the industry might find the next liability claims crisis:
Food Safety One of the most heavily litigated insurance issues relates to outbreaks of widespread foodborne illnesses and the determination of occurrence where multiple people in multiple states are affected by a contaminant that seems to stem from a single source. The Centers for Disease Control (CDC) estimates that around one in six (or 48 million people) gets sick, 128,000 are hospitalized and 3,000 die of foodborne diseases annually in the United States. Litigating foodborne illness cases can be challenging because the product in question often “is disseminated over a number of states to multiple claimants who are not going to be amenable to one court’s jurisdiction,” said Jean Golden, a partner in the law firm of Cassiday Schade LLP in Chicago, who specializes in these cases. “The problem that you’re confronted with as an insurer
in that situation is that you get a ruling or potentially have access to a ruling in one jurisdiction that won’t necessarily preclude a claimant in another jurisdiction from seeking relief against you in another state or federal court.”
Intellectual Property A 2011 American Intellectual Property Law Association survey found that for cases valued at less than $1 million, litigation costs through trial could total almost $916,000. “When you get to a case where the amount in controversy is between $1 million and $25 million, the price tag goes up,” said Robert Fletcher, president of Intellectual Property Insurance Services Corp. “It’s going to cost about $2.8 million to litigate those cases because people fight harder.” The rise in costs and cases is reflective of the fact that every business has some form of intellectual property. “[I]f you define intellectual property as ideas, innovations or reputation, a message or know-how, you’ll find that almost all companies have continued on page 26 Winter 2013 | Claims Journal 25
SPECIAL REPORT | LIABILITY continued from page 25
those assets,” said Fletcher. One interesting aspect of intellectual property is that no intent is necessary for a claim to be alleged against a business. “If you make it, sell it, import it, you’re on the hook,” said Garrett Koehn, president Northwest U.S., Crump Insurance Services, Inc.
Professional Liability Healthcare According to a 2012 report from the Physician Insurers Association of America that analyzed claims between 1985 and 2011, the specialty linked with the highest amount of indemnity paid to date is OB/GYN surgery, accounting for more than $3.6 billion. Paid claims for physicians in this specialty were linked with an average indemnity of $293,087. By comparison, neurosurgery and neurology had the highest average indemnities at $327,557 and $331,886 respectively, while dentists had the lowest, $44,701. Dentists continue to have the highest payment ratio of 47 percent. Paul A. Greve, Jr., senior vice president and senior consultant with Willis Healthcare Practice, confirmed in his physician liability trends report the most troubled specialties are radiology, obstetrics/gynecology, neurosurgery and emergency medicine. One factor influencing professional liability costs is state legislation, according to the annual industry study, “Aon/ ASHRM Hospital and Physician Professional Liability Benchmark.” Massachusetts and New Hampshire enacted medical malpractice laws in 2012 designed to speed up and fairly compensate injured patients. “These states are at the forefront in changing the environment for healthcare providers,” said Erik Johnson, Aon’s Actuarial and Analytics Health Care Practice leader and author of the analysis. According to the Nurses Service Organization’s “Nurse Practitioner 2012 Liability Update,” the average malpractice indemnity payment has increased 19 percent over a five-year period, rising
26 Claims Journal | Winter 2013
from $186,282 to $221,852. The average cost to defend a lawsuit rose to $63,792. “When you compare our past claim reports, it becomes evident that the cost of nurse practitioner professional liability claims has been steadily rising,” said NSO President Michael Loughran. Not everyone sees medical malpractice claims rising in the future; some see mitigating trends. “Decreases in frequency of claims among healthcare practitioners, the stabilization of claim severity trends, shifts in the medical profession, the impact of risk management training and advancements in patient safety are all contributors to a positive outlook for the medical liability insurance sector, according to panelists at the Casualty Actuarial Society (CAS) 2012 Seminar on Reinsurance last summer.
Professional Liability Law Firms The legal professions also continue to see a rising number of professional liability claims. The insurer survey, “Lawyers’ Professional Liability Claims Trends: 2011” by McLean, Va.-based broker Ames & Gough, found three practice areas had the largest number of claims: real estate, corporate and securities and trusts and estates. Conflict of interest was the largest cause of malpractice claims. A recent study by CNA’s Lawyers Professional Liability Program, “Investigating the Hidden Risks of Business Transactions Practice,” found that business transactions presented the greatest professional liability risk for attorneys. More than one-third of business transactions claims involved the improper preparation, filing and/or transmittal of documents. Failure to provide appropriate legal advice was found to be the second leading cause of claims. The study also found the cost to defend a business transaction claim is more than twice as much as claims arising from other practice areas.
Cyber Attacks According to the 2012 “Cost of Cyber Crime” study by the Ponemon Institute in conjunction with Munich Re, cyber attacks get costly fast. A typical case can take almost two months to resolve and cost an estimated $591,780 to the affected organization, according to the study. The cost is 42 percent higher than it was a year earlier. Information theft represents the highest cost, followed by business interruption. The problem, Munich Re explains, stems from the fact that “most traditional property and liability policies provide no cover for cyber risks” although there still may be a duty to defend until such time as coverage is determined. Myriad cyber risk possibilities exist, according to Munich Re, including: virus infections, Internet fraud, industrial espionage, misuse of personal data (identity theft), copyright infringements or denial-of-service attacks that block targeted sites by overloading them with communication requests.
Environmental Michele Schroeder, Zurich Environmental assistant vice president and author of the white paper, “Environmental Claims Experience: What’s Old, What’s New, What’s Coming,” says first party cleanup and third party liability claims are on the decline as office of attorney general lawsuits become the new trend in claims. Allegations, such as contamination to natural resources and water supplies, don’t allege a particular injury to any one person but to the public at large, according to the report. The report identifies toxic tort suits like those involving nanotechnology and genetically modified organisms as additional areas where future claims are expected.
Environmental – Hydraulic Fracturing Much is still unknown about the envi-
one-in-four (23 percent) of the public companies we surveyed already have been sued,” said Evan Rosenberg, senior vice president and global specialty lines manager for Chubb. Rosenberg said activities such as mergers and acquisitions and enforcement of anti-bribery laws are further increasing directors’ and officers’ exposure to future suits by shareholders, regulators, customers, vendors and competitors. Merger and acquisition related claims activity was reported to have increased more than 14 percent last year alone, noted Rosenberg. “While M&A-related lawsuits may be covered by the company’s directors and officers liability policy, documented protocols may help improve the company’s defense in court or result in a lower settlement amount,” said Rosenberg.
‘The pendulum is starting to shift from a very business friendly environment to a little bit more muscle from the plaintiff’s side.’ ronmental impact of hydraulic fracturing, also known as fracking. Last year, Ohiobased Nationwide Mutual Insurance Co. became the first major insurance company to announce that it would no longer offer coverage for damage related to fracking. The Environmental Protection Agency (EPA) is currently collecting information on fracking chemicals from nine companies and 24,925 wells to determine the potential impact on drinking water. The agency doesn’t expect to issue a final report until sometime next year. According to Brian S. Martin, a partner in the Insurance Litigation and Coverage Practice of the law firm of Thompson Coe Cousins & Irons, though there is little evidence suggesting groundwater contamination due to fracking, there have been a number of lawsuits filed alleging pollution. In a recent article published in Insurance Journal, Martin points out some unique issues that will arise with fracking lawsuits. First, while there may be no coverage for the damage alleged, there still may be a duty to defend. This is of obvious concern for insurers that pay the cost of defending such claims. Second, there will likely be complex coverage issues that will arise from such claims. Third, though most property policies don’t cover contamination of land and water, according to Martin, claims alleging damage due to groundwater contamination may still arise.
Directors & Officers A recent Chubb Public Co. Risk Survey found that more than 80 percent of executives don’t believe they and their directors will be sued within the next 12 months, despite statistics that say otherwise. “This general lack of concern is disconcerting especially in light of the fact that the directors and officers of nearly
portunity Commission. A 2012 PLUS panel noted that the EEOC is currently pursuing the following case types: disability discrimination and leave policies; hiring practices; arrest and conviction records; pay and promotions; gender discrimination; migrant workers; and lesbian, gay and transgender rights under Title VII.
Employment Practices Liability Employment practices liability insurance claims continue their upward trend. According to a market survey by Betterley Risk Consultants, there are two problem areas: mass claims and wage and hour claims. The report indicated that insureds are experiencing more unexpected covered claims with increasing defense costs. In addition, more cases are being pursued by the Equal Employment Op-
Social Media As the popularity of social media sites grows, so does the liability risk. In a survey of PLUS conference attendees conducted by global specialty insurer Torus last year, 58 percent expected requests for media liability policies to increase in 2013. “An increasing number of respondents to this survey recognize the need for broader coverage — specifically media liability coverage — due to the potential risks small businesses face when introducing this medium into their business model,” said Christopher Cooper, assistant vice president for media products. Nearly one-third indicate data leakage is their primary concern. An additional 27 percent of respondents believe the biggest risk is lack of control over potentially damaging content disseminated by employees, while 19 percent believe it to be increased personal injury exposure (e.g., defamation, libel, slander). CJ
Specialization, Location Key to Positive Results
onning’s 2012 liability trends study, “Liability and Tort Trends: Trouble Around the Corner?” found that many insurers with the poorest liability results tended to be those that were the most widely diversified. Excess and surplus (E&S) insurers were the best performers followed by multiline insurers with a strong E&S focus. Specialization and geography play a key role in liability insurer results, according to Conning analyst, Jerry Theodorou. E&S and regional carriers know their producers, audit them frequently and understand their local regions. Loss ratio varies state to state and is highly correlated with business friendliness or plaintiff-friendliness of the states, he said. “States do matter, and the smaller regionals that have better market knowledge, that are closer to their producers, closer to their insurers tend to do better than the larger companies that don’t have those geographical loyalties and tend to have national,” said Theodorou. — Stephanie Jones contributed to this article. CJ Winter 2013 | Claims Journal 27
IDEA EXCHANGE | Burke’s law
Courts Continue to Struggle with Attorney-Client Privilege and Work-Product Doctrine By Burke Coleman
he previous year saw a number of important cases interpreting and developing the application of the attorneyclient privilege and the work-product doctrine in the context of insurance claims. Insurers and insureds consistently assert and challenge these protections in coverage disputes, and the two protections have received varying treatment from different courts. A few recent cases demonstrate the difficulty and complexity of applying the attorney-client privilege and the work-product doctrine to insurance cases. Vicor v. Vigilant In Vicor Corp. v. Vigilant Ins. Co., 674 F.3d 1 (1st Cir. 2012), the First Circuit Court of Appeals issued an important decision regarding the common-interest exception to the attorney-client privilege. The attorney-client privilege operates to protect confidential communications between an attorney and client regarding legal advice. This privilege becomes much more complicated in the context of the insurer-insured relationship. In Vicor, an insurer retained defense counsel for its insured but after a coverage dispute arose, the insured attempted to shield its communications with its defense counsel from the insurer. The insurer did not dispute that the communications were privileged, but instead argued that the insurer and insured shared a common interest and therefore the privilege could not be asserted against the insurer. The commoninterest doctrine states that where an attorney acts for two different parties who share a common interest, the parties’ communications with the attorney are privileged as to third parties but not one another. Applying Massachusetts law, the court agreed with the insurer and held that an attorney retained by an insurer to represent the insured is an attorney for both the insurer and the insured, and therefore the privilege could not protect the communications. The court further denied the insured’s argument that the fact that the insurer tendered the defense pursuant to a reservation of rights defeated any claim of common interest. Instead, the court found that the insurer paying for the defense and contributing to the initial settlement created a common interest such that the insured could not assert the privilege against the insurer. The case highlights the complexity of applying the attorney-client privilege within the context of an insurance claim, and is important as it expands the common-interest exception to cases where the parties not only have conflicting interests but are disputing coverage against one another.
28 Claims Journal | Winter 2013
Melworm v. Encompass Another significant case came down in New York, where the court in Melworm v. Encompass Indem. Co., 951 N.Y.S.2d 829 (N.Y. Sup. Ct. 2012), continued a trend in the state of contracting the applicability of the attorney-client privilege in the context of insurance claims. Although the attorney-client privilege and the work-product doctrine are two distinct protections with different elements, New York courts have routinely analyzed the two jointly in insurance cases. Whereas the attorney-client privilege protects communications regarding legal advice between an attorney and client, the work-product doctrine protects materials “prepared in anticipation of litigation.” In Melworm, an insurer asserted the attorney-client privilege to protect certain attorney communications relating to the claim process. But the court, relying on a string of previous cases, denied application of the privilege, holding that “the payment or rejection of claims is part of the regular business of an insurance company” and reports that aid the insurer in that process are “made in the regular course of business.” While such language is typically used to counter the workproduct doctrine by showing that the material was prepared in the ordinary course of business and not in anticipation of litigation, the court here used it to pierce the attorney-client privilege. Presumably, the court’s reliance on this analysis was to show that the attorney was acting not as an attorney but as an investigator and that the communication was not legal advice but rather ordinary business advice falling outside of the privilege.
The opinion lacks clarity and appears to ignore the distinction between the privilege and the work-product doctrine. By combining the analyses, New York law has resulted in a blanket rule that leaves little room for the attorney-client privilege or the attorney work-product doctrine to protect attorney communications in claims files. Barton Malow v. Lloyd’s In a case bearing similar facts, a federal district court in Michigan came to the opposite conclusion after employing a similar though slightly more stable analysis. Though flirting briefly with the combined analysis used by the New York court in Melworm, the court in Barton Malow v. Certain Underwriters at Lloyd’s of London, 2012 U.S. Dist. LEXIS 143014 (E.D. Mich. 2012), approached the attorney-client privilege and Communication work-product doctrine protected by the independently. attorney-client The court deprivilege must be termined that the attorney’s decided on a case-by-case basis. communication, although created and transmitted during the claim investigation, communicated legal advice as it showed “counsel’s legal opinion regarding the scope of potential liability” and therefore was protected by the attorney-client privilege. The court found no need to address the applicability of the work-product doctrine because the attorney-client privilege shielded the document. Although the decision offered limited guidance, it at least recognized the difference between the attorney-client privilege and the work-product doctrine, and was a positive decision for insurers. Whether a communication is protected by the attorney-client privilege is primarily a question of fact which must be decided on a case-by-case basis. While New York
courts continue to assail the applicability of any privilege to an attorney’s work in the insurance claims process, other courts continue to struggle to articulate and apply a clear and consistent standard. Courts continue to address the complicated and difficult task of balancing the unique relationships that exist between insurers, policyholders and counsel, and the privileges and protections of the legal
process. Insurers, insureds and their attorneys must take care to understand the laws of their state and to protect their communications. CJ Coleman is the legal counsel and compliance manager for Demotech Inc., Insurance Journal’s research partner. This article is not intended as legal advice, and is not a substitute for legal analysis and any advice on a particular issue. Email: bcoleman@demotech.
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Winter 2013 | Claims Journal 29
IDEA EXCHANGE | TECHNOLOGY
New Aerial Imaging Tools Offer Cost Effective Assessments
new defense-grade, multi-spectral aerial imagery camera is being used to measure land-use changes, impacts of storms on cities, crops and forests, and damage to infrastructure such as pavement and airport runways. One other huge development this technology provides is the capability to use imagery to measure crop damages and yields. Multi-spectral imagery is a value-added insurance tool that is extremely useful for precise measurement and monetization of crop failure as well as management of crop risks from drought, floods, winds and hail. For example, during the summer of 2012, USDA reports of moderate to severe drought-affected crops covered 62 percent of the Corn Belt. The camera technology was used for measuring crop damages to corn in accordance with the USDA crop failure handbook. Damage was assessed using 4-band multi-spectral imagery, which By Steven Apfelbaum captured images on the ground, to measure plant height and the number of vigorous green versus brown leaves which would indicate a healthy or
government agencies to measure the scope of the devastation quickly and efficiently. The technology is also being used to measure and map failing septic tanks, which is useful for compliance monitoring. It can ultimately help in improving downstream water quality in lakes, streams and potable water supplies. Mapping storm water runoff from urban areas and distribution of suspended solids, nutrients and contaminants has been linked through maps of invasive aquatic plants, such as European water mille foil, which is becoming increasingly abundant in urban lakes. Erosion sources in uplands and sediment depositions have also been mapped. In higher clarity waterways, this imaging
Mapping invasive plant species is possible with great precision using this aerial imaging technology and the analytical procedures used by AES. Maps help farmers, foresters and private land owners and managers reduce the risk these species present to the health of their land.
Corn Belt crop damages were evaluated in test flights to understand the usefulness of the imagery for assessing damage risk and costs. dying crop. Using this data, landscape-scale maps were created to show zones of crop failure and damage. Damages from extreme weather events have also been mapped with the camera, and can be used to measure and project recovery costs such as after the Joplin, Mo., or Henryville, Ind., tornadoes. This includes documentation of damaged or lost homes, forest tree damages and crop damages. Spot hail damage measurements can be flown quickly after a storm to document crop losses and impacted acreages. With the help of geographic information systems, property boundaries can be draped over the imagery to document risks and projected losses by individual farm. In the event of a natural disaster, this technology allows insurance companies and 30 Claims Journal | Winter 2013
tool can map bottom conditions down to several meters depth. This is now a way to map underwater sediment deposits more accurately and less expensively than has been possible by probing and coring from boats. What is often most useful and promising is the just-in-time capability of the new camera and airplane. For ecological projects, images need to be shot during narrow windows of time such as right after a storm event to map runoff conditions, or when an invasive plant is in bloom for mapping its distribution. The selection of plane and camera allow flying low and slow, and can operate under lower light conditions, including flying beneath cloud cover, which usually shuts down other aerial photography technologies carried in faster planes and satellites that fly high. CJ Apfelbaum is the founder and principal ecologist at Applied Ecological Services Inc., an environmental consulting firm. He is co-author of the â€œRestoring Ecological Health to Your Landâ€? series, which provides step-by-step instructions for laypeople interested in restoration ecology. Website: www.appliedeco.com.
CLAIMS REVIEW | Snapshot
Before and After: Seaside Heights, N.J.
n Oct. 30, 2012, New York and New Jersey experienced the unimaginable when Superstorm Sandy tore through the East coast. Pictured here are before and after aerial images taken by Pictometry. The company deployed aircraft to capture high-resolution oblique imagery of the devastated areas within days of the storm, and collected more than 160,000 data-rich, Sandy-specific images that allowed for before and after comparisons of property damage directly from desktops, tablets and other mobile computing devices. This enabled key forensic information — such as determining if the damage was caused by surge waters versus the storm’s winds — to be analyzed and documented on a large scale. In cases of widespread disasters, claims management professionals and adjustors can utilize aerial imagery to help visualize a storm’s impact, determine policyholders affected and plan response operations. This specialized imagery is also used to produce remote measurements — such as roof measurement reports — to aid in faster claims processing. CJ
Winter 2013 | Claims Journal 31
IDEA EXCHANGE | Essentials
When Using Colossus Independent Judgment Is a Must
lacing the value on bodily injury claims is inherently speculative. To remove some of the guess work from ascertaining a proper value for general damages, some insurance companies utilize a comprehensive software program called Colossus. The Colossus software attempts to recreate, electronically, the “round-tabling” that often occurs with specific claims. One court has described the “round-tabling” process as a process in which the insurer’s most skilled and experienced casualty claims professionals come together to evaluate hypothetical injury claims by examining settlements in similar claims, jury verdicts, and the like. See In re Farmers Ins. Exchange Claims By Steven Plitt Representatives’ Overtime Pay Litigation, 336 F.Supp.2d 1077, 1102 (D. Or. 2004). When an insurer decides to use the claim valuing software, it is customized according to the insurer’s settlement philosophies and claims practice history. This process may involve bringing together a super round-table to come up with predicted values for hypothetical case scenarios, which are then incorporated into the software matrix. When this is done, the Colossus software allows for electronic “roundtabling” at each adjuster’s desk for each submitted claim without having to wait for a claim committee meeting. In that fashion, use of the Colossus software helps insurers to
32 Claims Journal | Winter 2013
evaluate claims consistently and to smooth out variations in claim payouts. Because some settlement amount ranges of value recommended by Colossus may be different than what a specific adjuster would offer on a specific claim, there has been a plethora of litigation over the utilization of the software where plaintiffs assert bad faith claims against the insurance company based on their use of it. Although Colossus is a useful estimating tool, it is incapable of considering external factors such as re-injuries to preexisting conditions or complications arising as a result of preexisting conditions; the reputation and caliber of counsel; possible aggravated liability; and a multitude of other external factors. Some courts have noted that Colossus does not and cannot replace the claims professional’s judgment and experience. Claim Values and Bad Faith Two cases demonstrate judicial focus on the adjuster’s independence in deciding claim values in the context of bad faith litigation. In Kosierowski v. Allstate Ins. Co., 51 F.Supp.2d 583 (E.D. Pa. 1999), Allstate used Colossus on the claim presentation. The first evaluation produced a value range of $11,624 to $13,824 although the adjuster in the case independently evaluated the case as being worth $50,000 to $60,000. On that same
day, Allstate offered $50,000. Two days later a Colossus evaluation was run with the addition of different variables which produced a settlement range of $50,760 to $61,060. Shortly thereafter Allstate gave the adjuster $100,000 in settlement authority but he did not utilize that authority and instead made an offer of $80,000. The claimant insured accepted the $80,000 offer but would not release his bad faith claim. The insured argued that Allstate committed bad faith because it calculated the value of claims based upon irrelevant variables used in Colossus. The court found that even assuming all of plaintiff’s arguments about the impropriety of the Colossus can program, the adjuster did be a useful tool not rely on but the adjuster the program exclusively in must feel free to making his use independent own initial settlement ofjudgment. fer of $50,000, which was well above the first value range. The adjuster consistently used his own judgment in determining the value of the case. Therefore, the use of Colossus was not relevant to the bad faith claim. In a second case, Milhone v. Allstate Ins. Co, 289 F.Supp.2d 1089 (D. Ariz. 2003), the adjuster also used Colossus to set a value range in the plaintiff’s case. The adjuster’s initial offer was less than the range Colossus recommended, but the adjuster then made an offer within the range and made a final offer above the range. Plaintiff asserted that the adjuster had to apply the Colossus value mandatorily and that the Colossus formula did not take into account how an injury might specifically affect a particular individual. Just like the court did in Kosierowski, the court in Milhone, stated that assuming the plaintiff’s allegations were true, plaintiff nevertheless failed to show how the program — by not taking into account some items — would constitute bad faith as a whole. The facts demonstrated that Colossus was not mandatorily used by the adjuster “in this case.” The court concluded that adjusters could overcome any alleged bad faith in utilizing the system where a
manual adjustment to the range was offered. Demonstrate Independence Both the Kosierowski and Milhone cases underscore the importance of the adjuster’s ability to deviate outside the range recommended by the Colossus software. However, adjusters, attempting to avoid bad faith allegations face a quandary: most claims will inevitably fall within the range of Colossus values, and therefore, the selection of a different value within that range will not help against a claim for bad faith use of Colossus. The insurer finds itself trying to explain away a large class of cases where the adjuster legitimately agrees with the recommended amount or value range. Thus, an actual deviation from Colossus ought not to be the touchstone of good faith. The analysis should require the plaintiff to present evidence of bad faith beyond the lack of deviation from Colossus recommendations. For those insurers that utilize a Colossus system, several things can be done by the adjuster to demonstrate independence through the claim file notations. First, it is helpful for the adjuster to state in the claim notes that utilization of Colossus is only a tool and does not need to be mandatorily followed. Second, the adjuster can demonstrate his or her independent thought analysis for valuing the case by placing sufficient claim notes in the file demonstrating the mental thought processes by which the adjuster came to the ultimate conclusion of claim value. This would include the issue of whether there are or are not preexisting conditions and their affect upon the injury being claimed. Those particular aspects of the medical records that are relevant to the value analysis should be set forth in the claim notes with sufficient detail so that an independent reading of the claim note would demonstrate what the claim adjuster believed was relevant in assigning case claim values. Third, if missing information is relevant but unavailable then the missing information should be documented so that an under value of the claim can be explained by specific missing information. Fourth, if the claim representative selects a specific dollar value from within
the Colossus value range then the adjuster should explain why the lower or higher number in the range was selected. Finally, if independent medical examinations are performed, the claims adjuster should identify into the claim file those aspects of the independent medical exam that the adjuster found particularly relevant in assessing claim value. Disagreements among the doctors regarding diagnosis, prognosis, restrictions and limitations should be noted. Although Colossus can be a useful tool in the overall claim process, the adjuster must feel free to use independent judgment in evaluating any particular claim. Irrespective of whether Colossus is being used, best practices in the claim environment is to document the file. An insurer’s utilization of Colossus requires the adjuster to be more vigilant in documenting the claim file so as to demonstrate independent judgment and assessment of a particular claim and how it interrelates with the range of values assigned. When properly done, the claim representative will minimize the risk that the utilization of Colossus, by itself, will become a distraction and source for bad faith allegations against the company. CJ Plitt is a nationally recognized expert in insurance law. He has authored numerous insurance treatises and articles. He has a national expert witness practice. Email: SP@kunzlegal.com
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Winter 2013 | Claims Journal 33
IDEA EXCHANGE | FINAL OFFER
Insurers Ride Out Powerful Storms of 2012 But Can They Settle the Weather in 2013?
nsured losses in the United States in 2012 totaled $58 billion — far above the 2000-2011 average loss of $27 billion (in 2012 dollars), according to Munich Re. Those losses were caused by tornadoes, tropical systems, derechos, hail, wildfires, winter storms and other major natural disasters. Many records were tied or broken during the 2012 season. Tropical Storm Beryl became the strongest off-season Atlantic tropical cyclone to ever strike the United States, the formation of Tropical Storm Debby on June 23 made it the earliest formation of a season’s fourth named storm on record and Sandy was the largest known Atlantic hurricane by diameter. Making landfall near Atlantic City, N.J., on Oct. 29, Sandy caused the highest insured By Robert Hartwig loss in 2012, estimated at $25 billion. Sandy ranks behind 2005’s Katrina ($47.6 billion) and 1992’s Andrew ($25 billion) [in 2011 dollars]. Sandy also had an estimated claim count of 1.3 million compared with Hurricane Katrina, which produced 1.7 million claims. Most industry experts agree the losses were smaller, in part, because much of Sandy’s damage was due to storm surge and subsequent flooding, not covered by standard homeowners or most small business owners’ commercial insurance policies. More Severe Weather Patterns Events such as Sandy are signs that the world is entering a period of more frequent and severe weather patterns. Ten of the 12 most costly hurricanes to ever strike the U.S. occurred between 2004 and 2012. Experts suggest disaster losses along the coast are likely to escalate in coming years, in part because of huge increases in development. One catastrophe modeling firm predicts that catastrophe losses will double every decade due to growing residential and commercial density and more expensive buildings. Data from the Census Bureau, collected by USA Today, shows that in 2006, 34.9 million people were seriously threatened by Atlantic hurricanes, compared with 10.2 million in 1950. Despite these storms and forecasts, insured losses through Sept. 30, 2012, were down an incredible 51 percent to $16.2 billion from $32.8 billion the previous year (excluding crop losses). Losses from tornados and winter storms were well below those experienced in 2011. Compare that to catastrophe losses in 2010, which totaled $14.1 billion, $3.6 billion more than in 2009, when catastrophes totaled $10.5 billion. There were 33 catastrophes in 2010, up from 27 in 2009. U.S. catastrophe losses, mostly from tornadoes, caused an unprecedented $27 billion for the first half of 2011. The insurance industry also went into 2011 better capital-
34 Claims Journal | Winter 2013
ized than at any other time in history and Events such as Sandy financially was well are signs that the world prepared to handle 2012 losses. The property/cais entering a period sualty insurance indusof more frequent and try turned in a relatively strong underwriting severe weather patterns. performance during the first nine months of 2012 and overall return on average surplus (profitability) compared with the first nine months of 2011. Although profitability surged amid much lower catastrophe losses during 2012’s first nine months, overall investment gains were down, in large part to historically low yields on fixed income securities. Premium growth, while still modest, accelerated to its fastest pace in the post-crisis era. Fundamentally, the P/C insurance industry remains financially strong with capital adequacy ratios remaining high relative to long-term historical averages. It appears likely the industry’s recent momentum will carry into 2013, which may prove vital as big snow events may return this winter. Winter storms were the third most costly type of natural disaster in the U.S. in 2011, with $2 billion in insured losses in 2011, according to a report by Munich Re. As for hurricanes, on Dec. 5, 2012, Tropical Storm Risk issued an extended-range forecast indicating an above-average hurricane season for 2013. If Andrea — the first named storm of the 2013 hurricane season — hits the Houston/Galveston area as predicted, the industry will be prepared. CJ Hartwig is president of the Insurance Information Institute.
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