Risk Scenario

A Friend’s Betrayal

An expensed dinner and drinks with an old and trusted friend winds up being more than Jimmy Davis ever bargained for.
By: | August 13, 2013 • 8 min read
Risk Scenarios are created by Risk & Insurance editors along with leading industry partners. The hypothetical, yet realistic stories, showcase emerging risks that can result in significant losses if not properly addressed.

Disclaimer: The events depicted in this scenario are fictitious. Any similarity to any corporation or person, living or dead, is merely coincidental.

Part One

When Jimmy Davis sat down to dinner with his old buddy Sal Blair that night, he could never have guessed how much damage a simple conversation could do to him.

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One of the things that Jimmy liked about Sal was that Sal liked to eat as much as he did.

So it was with a wink and a nod, and safely out of view of their wives, that Jimmy and Sal both ordered the special at the River Run Inn that night. Three cod filets, a dozen shrimp, calamari and a mess of smelts, all of it deep fried to a golden brown. Tartar sauce and steak fries on the side, thank you very much.

“And a side of penne with marinara,” Sal said to the waitress.

“Same for me,” Jimmy added.

The two old friends and former football teammates clinked wine glasses and chuckled. The laughs came easy with Sal. That was the way it was with a guy you had known since grade school.

“Hell of a meeting tonight,” Jimmy said.

“Yeah, some negotiations are tougher than others I guess,” Sal said.

Jimmy, a retired Monroe County fire captain, and Sal, a retired Monroe County police detective, both served as trustees on the county’s police and fire pension fund.

They’d been to the fund’s quarterly meeting that night in Sharpsburg where the topic had been reduced fund returns due to bond investments that just weren’t what they used to be.

“I think the members get it, not much we can do,” Jimmy said, about the current financial climate.

***

When the bill came, Sal got to it first.

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“Hey, let me get that,” said Jimmy. “You paid for the Mellencamp concert after last quarter’s meeting!”

“Nah, I got it,” Sal said. “Besides, I expensed the mileage for the concert to the fund.”

“Really?” said Jimmy, somewhat taken aback.

“Yeah, I don’t do it all the time,” Sal said as he used his index finger to pick up the crumbs of graham cracker crust that had served as the underpinning to his departed slice of Mayer lemon cheesecake.

“But ever since gas walked over the $3.00 per gallon mark, I’ve been doing it a couple times a year. I think it’s fine if we’re coming from a fund meeting.”

“It’s not a lot mind you,” Sal said as Jimmy gave him a challenging look.

“Alright,” Jimmy said softly as Sal bent his head to sign the credit card receipt.

As Sal folded his copy of the receipt and put it in his wallet, Jimmy noticed, as he always did, how Sal’s right pinkie finger splayed away from the rest of his fingers, bent at the second knuckle.

In the AAA championship game against Montclair back in 1974, Sal had jammed that hand into the face mask of a Montclair lineman, trying to open up a hole for Jimmy, who was playing fullback that night.

Sal had always played on the edge of dirty. That night back in 1974 it had cost him a broken finger.

But Jimmy had picked up 22 yards on that play. He would never forget that.

He and Sal had been buddies for a long time. But as they left the restaurant that night, Jimmy walked behind Sal, pondering his friend’s pension fund expense account habits.

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Part Two

Three weeks later, Jimmy got a manila envelope in the mail, the contents of which turned his stomach to ice.

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It was a report from the auditing firm Gamble, Gamble, Rutter and Beam. The annual audit detailed numerous expense infractions on the part of Monroe County Police and Firemen’s Pension Fund trustees.

Four trustees and the fund’s executive director were mentioned by name in the report. Sal was one of them.

***

At dinner with his family that night, Jimmy’s mind was elsewhere.

“Jimmy! Jimmy! Did you hear one blessed word that I just said?” his wife Marla asked him.

“Um, you were talking about who was going to drive Jenny back from soccer practice tomorrow,” Jimmy said, nodding hopefully at his 13-year-old daughter.

“No dad! That wasn’t it at all!” Jenny and her brother Andy broke out in laughter. But Marla didn’t.

Things went from bad to worse very quickly. Sal, three other trustees and the executive director all resigned their positions at the request of a majority of the pension fund board.

Then Jimmy got another manila envelope in the mail. It didn’t take him long to figure out what it was. This time he went numb all over. Jimmy had been named as a defendant in a lawsuit brought against the pension fund trustees by the pension fund members.

Sal had violated the “exclusive purpose rule” that fund monies must be used exclusively for the purpose of representing fund participants and beneficiaries. The suit alleged that Jimmy knew about the misuse of funds and did nothing about it.

That night at the River View Inn, the conversation between the two former teammates isn’t so lighthearted.

Sal had his face in his hands, that always broken pinkie prominent.

“I … I screwed up, Jimmy. I got nervous, I didn’t know what I was saying,” said Sal.

“You didn’t know what you were saying? What do you mean? You didn’t know you were giving them my name? You had to say ‘Jimmy Davis’?” Jimmy almost hissed the words.

That was the end of the conversation. Jimmy strode out to the parking lot and called Steve Mars, the Monroe County solicitor.

“Steve, it’s Jimmy Davis.”

“Hey Jimmy, sorry about Sal,” Steve said.

“Sorry about me!” Jimmy said. “Did you see I got named in a lawsuit by the union members?”

“I … no … I hadn’t seen that,” Steve said. “I’d heard rumors about it, but that’s all.”

“I’m a retired county firefighter, I’m a volunteer on that board. The county defends me in court, right?”

There is a brutally long pause on the other end.

“No, Jimmy, no, the county doesn’t defend you.”

Steve sighed. Everybody knew and loved Jimmy Davis. This wasn’t easy.

“Some counties indemnify their volunteer board members but unfortunately Monroe County does not.”

“Indemnify, what does that mean?” Jimmy asked.

“Insurance, Jimmy. You’re not covered by a county insurance policy that could pay for your defense.”

“I run into burning buildings for 27 years and the county doesn’t cover me?” Jimmy said.

“Not for something like this, Jimmy. I’m sorry.”

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Part Three

Lawsuits and audits concerning public funds and trustees are open records. With copies of the lawsuit and the audit in hand, the newspaper editors in Monroe County tee off on Jimmy and the rest of the pension board members.

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Protesting their innocence, Jimmy and another pension board member who was named in the lawsuit were forced to resign from the board.

It got worse. The Monroe County District Attorney’s office filed felony charges against Sal, three other ex-board members and the former executive director of the fund. The value of what they were alleged to have taken from the fund exceeded $300 each, which qualified as a felony by state law.

“Are you considering any more charges in this case?” a reporter asked the D.A. at a press conference.

“We are,” said the D.A.

“The possibility remains that additional members of the trustee board could be named accessories to felony, based on their possible knowledge of these criminal acts.”

The D.A. drew himself up to his full height, as he always did when the television camera lights were on.

“Let me be perfectly clear. My office considers the breach of public trust in this case to be substantial and we intend to prosecute this case to the fullest extent of the law.”

The D.A. knew which side of his political bread was buttered and by whom. There were plenty of fire and police union members within earshot.

“We view our police and firefighters as heroes, everyday heroes to the people of this county. We will not rest until this violation of their trust has been met with justice,” the D.A. said, to thunderous applause from those police and firefighters attending the conference.

***

Dinners in the Jimmy Davis household had become very somber affairs indeed.

“Children, your father has something he needs to tell you,” Marla said as Jimmy poked at a slice of meatloaf he had no desire or energy to consume.

There was a long pause.

“What is it Dad?” Jenny said in that open, curious way of hers, the sight of which brought Jimmy to the verge of tears.

“Kids,” Jimmy said. “Andy … Jenny.” His voice almost cracked.

“We can’t go to Fair Harbor this year. Mom and I had to cancel our rental cottage.”

“Why??!!” Jenny and Andy cry in unison.

Jimmy couldn’t tell them it was because the preliminary estimates for his legal defense ran into the tens of thousands of dollars.

With a possible felony conviction and an adverse decision in the pension members’ lawsuit in the offing, Jimmy’s own pension could be at risk.

Jimmy was a brave man on the football field and in firefighter’s gear. But what he was facing now had him afraid like never before.

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Summary

Jimmy Davis, a retired firefighter, becomes privy to the seemingly trivial ethical shortcomings of Sal Blair, an old friend and a fellow trustee on the county’s fire and police pension fund board. Little does Jimmy know how much legal trouble his knowledge of Sal’s shortcomings will create for him. After Sal’s theft of pension board funds becomes public, Jimmy is sucked into the dilemma due to his prior knowledge of his friend’s theft. Jimmy is forced to step down from the pension board and faces possible criminal prosecution and staggering legal bills.

1. Know when to say when: Friendships are important, but protection of yourself and your family is more important should you become knowledgeable that someone you know with fiduciary responsibilities is breaking the law.

2. Know your exposures: If you assume a position of fiduciary responsibility, even as a volunteer, you should educate yourself on your exposures as an elected officer and what measures you should take to mitigate them.

3. Coverage is out there: There are insurance products to protect board members in the public and private sector from stakeholder lawsuits and it is worth your while to familiarize yourself with them.

4. Lawyers cost money: Lawyers’ fees and the issue of duty to defend are often major sticking points in whether a board member has adequate coverage or not. If you are in a position where you could be sued by stakeholders or shareholders, adequate coverage for your legal defense should be a key concern.

5. Know the law: You can’t know if you or an associate are breaking the law unless you know the law. If you gain knowledge of questionable behavior, consult an attorney in that field of practice as the first step in analyzing your exposure.

Dan Reynolds is editor-in-chief of Risk & Insurance. He can be reached at [email protected]

More from Risk & Insurance

More from Risk & Insurance

Lead Story

Improving the Claims Experience

Insureds and carriers agree that more communication can address common claims complaints.
By: | January 10, 2018 • 7 min read

Carriers today often argue that buying their insurance product is about much more than financial indemnity and peace of mind.

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Many insurers include a variety of risk management services and resources in their packages to position themselves as true risk partners who help clients build resiliency and prevent losses in the first place.

That’s all well and good. No company wants to experience a loss, after all. But even with the added value of all those services, the core purpose of insurance is to reimburse loss, and policyholders pay premiums because they expect delivery on that promise.

At the end of the day, nothing else matters if your insurer can’t or won’t pay your claim, and the quality of the claims experience is ultimately the barometer by which insureds will judge their insurer.

Why, then, is the process not smoother? Insureds want more transparency and faster claims payment, but claims examiners are often overburdened and disconnected from the original policy. Where does the disconnect come from, and how can it be bridged?

Both sides of the insurer-insured equation may be responsible.

Susan Hiteshew, senior manager of global insurance and risk management, Under Armor Inc.

“One of the difficult things in our industry is that oftentimes insureds don’t call their insurer until they have a claim,” said Susan Hiteshew, senior manager of global insurance and risk management for Under Armour Inc.

“It’s important to leverage all of the other value that insurers offer through mid-term touchpoints and open communication. This can help build the insurer-insured partnership so that when a claim materializes, the relationships are already established and the claim can be resolved quickly and fairly.”

“My experience has been that claims executives are often in the background until there is an issue that needs addressing with the policyholder,” said Dan Holden, manager of corporate risk and insurance for Daimler Trucks North America.

“This is unfortunate because the claims department essentially writes the checks and they should certainly be involved in the day to day operations of the policyholders in designing polices that mitigate claims.

“By being in the shadows they often miss the opportunity to strengthen the relationship with policyholders.”

Communication Breakdown

Communication barriers may stem from internal separation between claims and underwriting teams. Prior to signing a contract and throughout a policy cycle, underwriters are often in contact with insureds to keep tabs on any changes in their risk profile and to help connect clients with risk engineering resources. Claims professionals are often left out of the loop, as if they have no proactive role to play in the insured-insurer relationship.

“Claims operates on their side of the house, ready to jump in, assist and manage when the loss occurs, and underwriting operates in their silo assessing the risk story,” Hiteshew said.
“Claims and underwriting need to be in lock-step to collectively provide maximum value to insureds, whether or not losses occur.”

Both insureds and claims professionals agree that most disputes could be solved faster or avoided completely if claims decision-makers interacted with policyholders early and often — not just when a loss occurs.

“Claims and underwriting need to be in lock-step to collectively provide maximum value to insureds, whether or not losses occur.” – Susan Hiteshew, senior manager of global insurance and risk management for Under Armour Inc.

“Communication is critically important and in my opinion, should take place prior to binding business and well before a claim comes in the door,” said David Crowe, senior vice president, claims, Berkshire Hathaway Specialty Insurance.

“In my experience, the vast majority of disputes boil down to lack of communication and most disputes ultimately are resolved when the claim decision-maker gets involved directly.”

Talent and Resource Shortage

Another contributing factor to fractured communication could be claims adjuster workload and turnover. Claims adjusting is stressful work to begin with.

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Adjusters normally deal with a high volume of cases, and each case can be emotionally draining. The customer on the other side is, after all, dealing with a loss and struggling to return to business as usual. At some TPAs, adjuster turnover can exceed 25 percent.

“This is a difficult time for claims organizations to find talent who want to be in this business long-term, and claims organizations need to invest in their employees if they’re going to have any success in retaining them,” said Patrick Walsh, executive vice president of York Risk Services Group.

The claims field — like the insurance industry as a whole — is also strained by a talent crunch. There may not be enough qualified candidates to take the place of examiners looking to retire in the next ten years.

“One of the biggest challenges facing the claims industry is a growing shortage of talent,” said Scott Rogers, president, National Accounts, Sedgwick. “This shortage is due to a combination of the number of claims professionals expected to retire in the coming years and an underdeveloped pipeline of talent in our marketplace.

“The lack of investment in ensuring a positive work environment, training, and technology for claims professionals is finally catching up to the industry.”

The pool of adjusters gets stretched even thinner in the aftermath of catastrophes — especially when a string of catastrophes occurs, as they did in the U.S in the third quarter of 2017.

“From an industry perspective, Harvey, Irma and Maria reminded us of the limitations on resources available when multiple catastrophes occur in close succession,” said Crowe.

“From independent and/or CAT adjusters to building consultants, restoration companies and contractors, resources became thin once Irma made landfall.”

Is Tech the Solution?

This is where Insurtech may help things. Automation of some processes could free up time for claims professionals, resulting in faster deployment of adjusters where they’re needed most and, ultimately, speedier claims payment.

“There is some really exciting work being done with artificial intelligence and blockchain technologies that could yield a meaningful ROI to both insureds and insurers,” Hiteshew said.

“The claim set-up process and coverage validation on some claims could be automated, which could allow adjusters to focus their work on more complex losses, expedite claim resolution and payment as well.”

Dan Holden, manager, Corporate Risk & Insurance, Daimler Trucks North America

Predictive modeling and analytics can also help claims examiners prioritize tasks and maximize productivity by flagging high-risk claims.

“We use our data to identify claims with the possibility of exceeding a specified high dollar amount in total incurred costs,” Rogers said. “If the model predicts that a claim will become a large loss, the claim is redirected to our complex claims unit. This allows us to focus appropriate resources that impact key areas like return to work.”

“York has implemented a number of models that are focused on helping the claims professional take action when it’s really required and that will have a positive impact on the claim experience,” Walsh said.

“We’ve implemented centers of excellence where our experts provide additional support and direction so claim professionals aren’t getting deluged with a bunch of predictive model alerts that they don’t understand.”

“Technology can certainly expedite the claims process, but that could also lead to even more cases being heaped on examiners.” — Dan Holden, manager, Corporate Risk & Insurance, Daimler Trucks North America

Many technology platforms focused on claims management include client portals meant to improve the customer experience by facilitating claim submission and communication with examiners.

“With convenient, easy-to-use applications, claimants can send important documents and photos to their claims professionals, thereby accelerating the claims process. They can designate their communication preferences, whether it’s email, text message, etc.,” Sedgwick’s Rogers said. “Additionally, rules can be established that direct workflow and send real time notifications when triggered by specific claim events.”

However, many in the industry don’t expect technology to revolutionize claims management any time soon, and are quick to point out its downsides. Those include even less personal interaction and deteriorating customer service.

While they acknowledge that Insurtech has the potential to simplify and speed up the claims workflow, they emphasize that insurance is a “people business” and the key to improving the claims process lies in better, more proactive communication and strengthening of the insurer-insured relationship.

Additionally, automation is often a double-edged sword in terms of making work easier for the claims examiner.

“Technology can certainly expedite the claims process, but that could also lead to even more cases being heaped on examiners,” Holden said.

“So while the intent is to make things more streamlined for claims staff, the byproduct is that management assumes that examiners can now handle more files. If management carries that assumption too far, you risk diminishing returns and examiner burnout.”

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By further taking real people out of the equation and reducing personal interaction, Holden says technology also contributes to deteriorating customer service.

“When I started more than 30 years ago as a claims examiner, I asked a few of the seasoned examiners what they felt had changed since they began their own careers 30 year earlier. Their answer was unanimous: a decline in customer service,” Holden said.

“It fell to the wayside to be replaced by faster, more impersonal methodologies.”

Insurtech may improve customer satisfaction for simpler claims, allowing policyholders to upload images with the click of a button, automating claim valuation and fast-tracking payment. But for complex claims, where the value of an insurance policy really comes into play, tech may do more harm than good.

“Technology is an important tool and allows for more timely payment and processing of claims, but it is not THE answer,” BHSI’s Crowe said. “Behind all of the technology is people.” &

Katie Dwyer is an associate editor at Risk & Insurance®. She can be reached at [email protected]