Risk Scenario

Blind Faith

An auto manufacturer thinks their tech supplier escaped typhoon damage. Closer inspection reveals quite the opposite.
By: | September 15, 2014 • 9 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: Cocky Sons of Guns

With a steady, fluid motion, Ray Fines stretched his six-foot-two-inch frame to its limit and smacked the tennis ball toward his opponent Robert Gailey on Gailey’s ad-court side.


Fines served with a lot of top-spin, so the shorter Gailey had to hop a little on his return, but he reached out and backhanded the ball masterfully down Fine’s forehand side for a winner.

Someone whistled appreciatively from the grassy court-side banks of the hard-surface courts at San Diego’s Corona del Playa Country Club: Neither Fines nor Gailey looked over.

For one, they were both well-paid executives with the highly successful niche luxury automobile manufacturer Charing Motors, based in San Diego. The company’s 2014 revenue was $850 million.

It was fair to say success had gotten to their heads a little bit and they tended to be socially unapproachable.

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They were also two of the club’s top players and were used to people watching them play.

“Game and set,” Gailey said as Fines trotted over to pick up the ball.

“One more?” Fines asked, looking over to Gailey and hoping for a chance at revenge.

“Nah, we need to get set up for the barbeque tonight,” Gailey said. “I’d better get back to the house or I’m going to be the one getting grilled.”

After showering, Gailey and Fines stopped in the clubhouse for some sparkling water and freshly squeezed orange juice, fortified with raw vegan supplements. They were quietly hydrating when Gailey, flipping through the news feeds on his mobile phone, stopped.

“Hmmm,” he murmured.

“What?” said Fines, Charing Motors’ risk manager.

“Looks like there’s a sizable tropical storm heading for mainland China. Could turn into a typhoon,” said Gailey, the company’s procurement director.

“We don’t have any suppliers there,” Fines said.

“No, we don’t,” Gailey agreed.

“But some poor son of a gun does. Looks like it’s headed right at the Pearl River Delta. Lots and lots of tech suppliers there,” he said.

“First we miss Tohoku, now we luck out on this. We must be doing something right,” Fines said.

Charing Motors, back in its infancy, had escaped the supply chain damage that many auto manufacturers suffered when an earthquake and tsunami devastated Japan and its economy in 2011.

“Evidently so,” Gailey said, looking up from his mobile phone and flashing a suntanned, winning smile at Fines.

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Part Two: A Stunning Revelation

Three weeks later, Gailey and Fines were in a conference room, hunched over a speaker phone.


“Good morning,” Gailey said as the other caller beeped on.

“Good afternoon,” said the caller in Taipei, acknowledging the 15-hour time difference between Taipei and San Diego.

After some brief and awkward preliminaries, Gailey got to the point.

“We’re concerned about these delivery delays we’re seeing, Dr. Wu,” Gailey said. “We’re looking at a three-week backlog as things stand, and I’m not confident the delays won’t get even longer,” Gailey said.

There is a long pause.

“Are you with me, Dr. Wu?” Gailey said.

“Yes. I’m with you,” said Dr. Wu.

Dr. Wu, who earned his Ph.D. at Carnegie Mellon University in Pittsburgh, is the chief executive officer of Paramount Technologies, which assembles the collision avoidance and cruise control components for Charing Motors.

“We … it’s hard to explain but we are conducting an investigation into our suppliers. We have some suppliers in the Pearl River Delta in China and we are uncertain as to their status,” Dr. Wu said.

Fines punched the mute button.

“Pearl River? I didn’t think we had any exposure there,” Fines said.

Gailey unmuted the phone.

“Pearl River, you say? That area was heavily damaged by Typhoon Lei, was it not?”

“Yes sir, substantial damage. We have multiple suppliers there we fear have been heavily damaged,” Dr. Wu said.

“Well how long until you? …” Fines began but was cut off by Dr. Wu’s response.

“We cannot offer a timeline on when our investigation will be finished,” Dr. Wu said.

Robert Gailey and Ray Fines just look at each other. In the space of one conversation, their confidence level in the short- to mid-term success of their company plummeted.

Part Three: The Flood in Bao ‘an

Wearing rubber boots, Vince Yee sloshed across his factory floor at the semi-conductor manufacturer Yee Industries in Bao ‘an, causing a pair of two-foot-long grass carp that typhoon flood waters stranded in his shop to swim for cover.


Yee grimaced at the sight of the river fish in his once-pristine manufacturing facility. He climbed up on a flight of concrete steps. Gaining that perch gave him enough elevation to sit down and light a cigarette.

Yee exhaled cigarette smoke and looked out over the water-covered factory floor. Here and there, employees moved about in vain attempts to hoist expensive machinery up on blocks in an effort to lessen the water damage.

It’s Yee that supplies the semi-conductors to Dr. Wu’s Paramount Technologies, without which Wu will not be able to assemble the collision-avoidance technology for Charing Motors’ luxury sedans.

Yee takes another long drag on his cigarette and his cell phone vibrates as he sees a water snake working its way under a water-soaked piece of equipment that cost him $750,000.

“Hello?” Yee says in a dour tone of voice.

“Yes, this is Vince Yee. Yes, Dr. Wu.”

Yee looks out over the factory floor as Dr. Wu talks. From his expression, Yee would rather throw his phone in the flood water then listen to what Dr. Wu is asking him.

“No. No. I have no flood insurance,” Yee said.

“You can’t even get flood insurance down here. I’m 30 centimeters above sea level, Dr. Wu. You know that.”

Yee grimaces in frustration and anger as Dr. Wu asks him another question.

“Your guess is as good as mine, Dr. Wu. It will be a bloody miracle if I ever get back into business at this rate. But I’ll let you know. Good bye.”

Yee turns off the cell, runs his free hand over his face and hair in frustration and then flips his cigarette butt into the flood waters.

Part Four: Searching in Vain

Lee Ackles, Charing Motors CFO, leans back in his office chair and looks away from Robert Gailey and Ray Fines toward the San Diego Harbor.

“I’m just trying to get my head around this and I don’t think I can,” Ackles says to Gailey and Fines, when he brings his gaze back from the water.

“From what you’re telling me, our collision-avoidance system supplier really doesn’t know at this point where it can get the semi-conductors it needs to finish our product,” Ackles said.

“That’s correct,” Gailey said bravely.

“We’ve determined that a lot of their suppliers are single-source. Many of them were in the Pearl River Delta which was so heavily damaged by the typhoon in May.”

“Five months ago,” Ackles said, looking at Gailey and Fines like they had no brains.

“Correct.” It was Fines that managed to speak this time.

“And what have you found out in the past five months?” Ackles asked.

“There’s a lot of variation in product specs, even the names of the products in some of these Asian countries,” Gailey said.

“The semiconductors we’re looking for are really hard to find in Taiwan, Thailand or even mainland China right now,” Gailey said.

“We hope to have this thing nailed down in another month but as it stands, we can’t complete production on the CM-5 or the CM-7 until we do,” Gailey said.

“The CM-5 and the CM-7,” Ackles said. At this point he clicked his mouse and looked at some data on his screen.

“We’re looking at a real punch in the gut unless we can get it done much sooner guys,” Ackles said.

“Paramount Technologies, that’s the company in Taipei?” Ackles asked. He clicked and looked at his computer screen again.

“Wow, $4 million in billings to us last year. Get on a plane, go see Dr. Wu and company and get us a quicker answer. Both of you. Go tomorrow.”

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Part Five: A Visit to the Delta

Robert Gailey and Ray Fines are passengers in a 1969 Piper Cherokee 6/260 that is winging its way along the Pearl River toward the Bao ‘an location of Yee Industries. The Piper is equipped with twin pontoons and makes a perfect river landing.

Jackie Chen, the Piper Cherokee pilot, turns and smiles toothily at Gailey and Fines from behind yellow-tinted sunglasses after his plane drifts up to the dock outside of Yee Industries and is secured by a Yee Industries employee.

“Just like I said, gentleman, smooth as silk,” Chen said, mimicking the smooth descent and landing of the plane with his hand.

Gailey and Fines both try forced smiles but just clamber out instead.

Walking up the path to the Yee Industries factory, Fines scanned the property and saw little sign of activity.

“Doesn’t look like they are even close to operational,” Fines said.

“Who knows,” Gailey said as they reached the factory door.

Entering the factory through an open side door, Gailey and Fines encounter a factory floor that is now dry, but shows no indication of being able to achieve full production anytime soon.

In one corner, six employees are sitting around a table hand-fashioning some semiconductor parts.

“Can I help you gentlemen?” said Vince Yee, as he approached the Americans.

“We’re looking for Vince Yee,” Gailey said.

“I’m Vince Yee,” said the factory owner.

“I’m Robert Gailey and this is Ray Fines. We’re with Charing Motors out of San Diego in the U.S.”

Yee stared at Gailey and Fines blankly.

“You’ve heard of Charing Motors?” Fines said.

“No. Never heard of it,” Yee said.

Gailey and Fines pause as this latest piece of information resonates.

“We make cars,” Gailey said.

“You want to buy this factory? You could make cars here in China,” Yee said.

“That’s not what we had in mind,” Fines said.

The conversation with Yee yielded one piece of productive information. After looking at the specs of the semiconductors Charing Motors needs to assemble its collision-avoidance system, Yee gave Fines and Gailey the name of a Pearl River manufacturer still at full production.

This manufacturer, though, is upstream in Panyu.

“Can you take us to Panyu?’” Gailey asked Jackie Chen as he and Fines get back to the Piper Cherokee.

“Can I take you to Panyu? I was born in Panyu,” Jackie Chen said with a chuckle.

“Just get in and fasten your seatbelts.”

As the Piper Cherokee takes off, Ray Fines and Robert Gailey avoid eye contact, neither of them knowing how soon they’ll be able to get the part they need to keep crucial manufacturing processes going.

It will be a full year until Charing Motors can resume full production. The privately held company recorded a 40-percent revenue drop for fiscal year 2015.

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Risk & Insurance® partnered with FM Global to produce this scenario. Below are FM Global’s recommendations on how to prevent the losses presented in the scenario. This perspective is not an editorial opinion of Risk & Insurance®.

1. Demand more from first and second-tier suppliers: It’s not enough to trust that your first and second-tier suppliers have an adequate knowledge of their suppliers’ property-CAT exposures and resilience. Insureds, working through their brokers and carriers, should create contractual certainty with their suppliers that their supply chain will be resilient in the event of a natural catastrophe or some other supply chain interruption.

2. Identify at-risk locations: Locations such as the Pearl River Delta of China is a prime spot for property losses, business interruption and supply chain problems due to the extremely high concentration of technology, automotive and telecommunications parts suppliers in natural hazard-exposed locations. As vulnerable as it is, however, the Pearl River Delta is just one example of a super-exposed location that could result in substantial business interruption should a windstorm, earthquake, flood or some other event transpire.

3. Involve the claims executives: In mapping out business interruption, property and supply chain risk and risk transfer options, make sure to involve the claims executives from your carrier in the discussion. Involving only the broker and the carrier at renewal time could result in an incomplete understanding of your company’s claims recovery chances in the event there is a loss.

4. Pinpoint single-source suppliers: One of the most vulnerable parts of your supply chain is that occupied by single-source suppliers. The use of single-source suppliers in some cases might be unavoidable, but identifying those parts of your supply chain that are single source and addressing them with specific risk management strategies is a good idea.

5. Everyone gets hit: Never assume that just because you haven’t suffered a substantial property, business interruption or supply chain loss that you won’t. An increasing complexity of global supply chains and economic forces that dictate business establishment in natural hazard-exposed areas almost guarantees, that sooner or later, your company will face a peril of one kind or another.

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

More from Risk & Insurance

More from Risk & Insurance

Employment Practices


Sexual harassment is a growing concern for corporate America. Risk managers can pave the way to top-down culture change.
By: | March 5, 2018 • 12 min read

The #MeToo and #TimesUp movements opened up Pandora’s Box, launching countless public scandals and accusations. The stories that continue to emerge paint an unflattering picture of corporate America and the culture of sexual harassment that has permeated it for decades.


“The clock has run out on sexual assault, harassment and inequality in the workplace. It’s time to do something about it,” reads the official tagline of Time’s Up, one of the most vocal groups demanding change.

The GoFundMe campaign that supports the Time’s Up Legal Defense Fund raised more than $16.7 million in less than a month, making it the most successful GoFundMe initiative on record.

Funds will be used to help victims of sexual harassment and assault bring legal action against harassers, as well as provide public relations consultation to manage any media attention such suits might attract.

The problem was never really a secret.

In surveys conducted since 1980 by the U.S. Merit Systems Protection Board, 40 percent of women and 15 percent of men consistently reported being sexually harassed at work.

In a sweeping meta-analysis of 25 years’ worth of research data, published in “Personnel Psychology,” an average of 25 percent of women reported experiencing sexual harassment at work. When respondents were given clear definitions of harassing behavior, that figure shot up to 60 percent.

The current climate is just now pushing awareness to the forefront. It was reported last November that law firms in the nation’s capital are seeing a spike in inquiries about sexual harassment cases.

Laura Coppola, regional head of commercial management liability in North America, Allianz Global Corporate & Specialty

In addition, the Equal Employment Opportunity Commission (EEOC) website is seeing visits to its harassment web page double.

There’s no question the costs to businesses can be staggering. Twenty-First Century Fox reportedly incurred $50 million in costs tied to the settlement of sexual harassment and discrimination allegations in its Fox News division, as well as a $90 million settlement of shareholder claims arising from sexual harassment scandals.

In June, the company disclosed in a regulatory filing that it had $224 million in costs during the fiscal year related to “management and employee transitions and restructuring” at business units, including the group that houses Fox News.

If time is indeed up, it won’t just impact Hollywood, Silicon Valley or Capitol Hill. It will impact every workplace, in every industry.

“It affects everybody,” said Marie-France Gelot, senior vice president and insurance & claims counsel for Lockton’s Northeast Claims Advisory Group.

“I think anybody in corporate America — at some point — has seen it or been aware of it or been around it.”

“This particular phenomenon is certainly at a much wider scope than we’ve seen in the last decade or so,” said Laura Coppola, regional head of commercial management liability in North America, Allianz Global Corporate & Specialty.

“This is going to touch many industries, many segments, and many people.”

Employers are beginning to wonder if their workplace could be next.

“I think if you’d been asking [insureds] a year ago, ‘Are you interested in hearing about sexual harassment prevention?’ I think the answer would have been, ‘No, we’re good, we’ve got it,’ ” said Bob Graham, vice president, HUB International Limited.

“But I think now everyone’s saying ‘Sure, yes, we’d like to hear something.’ ”

Leading the Conversation

As American workplaces come under increasing scrutiny, the time is ripe for a large-scale pivot in the way employers manage risks related to sexual harassment.

The co-chairs of the EEOC’s select task force on the study of harassment in the workplace expressed it aptly in 2016:

“With legal liability long ago established, with reputational harm from harassment well known, with an entire cottage industry of workplace compliance and training adopted and encouraged for 30 years, why does so much harassment persist and take place in so many of our workplaces? And, most important of all, what can be done to prevent it? After 30 years — is there something we’ve been missing?”

Experts in the management liability field unanimously told Risk & Insurance® these issues should be elevated to the board level and the C-suite.

“Just as cyber liability shifted rapidly from an IT discussion to a board level discussion, so too will the harassment and discrimination discussion go beyond HR and be elevated to the highest levels,” said Coppola. It will become a corporate-wide, enterprise-wide conversation.

“It’s going to take some time to get to that board level, but it’s going to have to happen,” said Paul King, national practice leader, management and professional services, USI Insurance Services.

“Risk management and HR cannot go down parallel paths, not understanding one another. Not anymore. There’s too much at stake.” — Paul King, national practice leader, management and professional services, USI Insurance Services

Risk managers, said Kelly Thoerig, U.S. employment practices liability coverage leader, Marsh, are well suited to lead this conversation, which means actively partnering with human resources, the legal department, the general counsel’s office and outside counsel.


“Just like the quarterback depends on the offensive line, on receivers, on the running backs, it’s not a one-man show,” said King. “This can’t be the risk manager operating in a vacuum; they have to be liaising with multiple parts of the organization.”

Added King, “Risk management and HR cannot go down parallel paths, not understanding one another. Not anymore. There’s too much at stake.”

Connecting with outside counsel can also be of great benefit to risk managers, said Coppola.

“[They can] provide a very independent objective view of what they see in the overall market and how their knowledge of the individual client’s best practices can be improved and enhanced to ensure that they are protecting employees and the organization.”

Brokers and carriers also may be able to offer insights and services. Unfortunately, that piece is often lost because risk management and HR are siloed.

“The [knowledge of the] services that come with the insurance policy end up with the policy — in a drawer in the risk manager’s office,” said Tom Hams, employment practice liability insurance leader, Aon.

“HR doesn’t know that they exist. Even if they’re just online blogs or something like that, they could be more meaningful to the HR department than they are to risk management.

“So it’s important to make sure that companies are aware they’ve got those tools and — more importantly — to share them internally.”

Expediting Cultural Change

The X factor that underpins every aspect of these efforts is culture, experts agreed.

“It’s not so much ‘does the company have best-in-class policies and procedures in place;’ I think many of them do. I think that a significant change needed is doing a full overhaul of corporate culture, and that’s no small feat,” said Gelot.

Paul King, national practice leader, management and professional services, USI Insurance Services

True culture change can only come from the top level. But that isn’t likely to happen unless everyone at the top understands what the scope of the exposure could be if it’s not addressed appropriately on the front end. And for that, money talks, said Thoerig, who will be presenting on the topic at RIMS 2018 in San Antonio.

“Nothing is more instructive than real tangible claims examples and settlement amounts. Arm yourself with … recent, relevant claims examples specific to the industry and the jurisdictions the company operates in.”

In addition, said King, HR and legal should be regularly feeding claims information to risk managers to share at quarterly meetings of the board and give specific updates around these issues.

Armed with that level of intelligence, top brass can set the goals that will drive all anti-harassment efforts, said experts, putting an emphasis on identifying and correcting behavior that could potentially expose a company to liability.

Better Training and Reporting 

The best anti-harassment programs are multilayered, said Hams, with each facet carefully tailored to suit the employee population, the industry and the organization’s goals. A clearly defined policy is essential, stating that harassment will not be tolerated and neither will retaliation against those who report it.

The policy should be clear that employees are expected to report harassment or unacceptable behavior. Hams said he’s seen companies go so far as to state employees who don’t speak up are in violation of the policy.

“At least it should give them pause to stop and think about what they might have seen before they click the button or sign the document,” he said.

Companies should consider how uncomfortable employees may be about speaking up. An open-door policy is a start.

But there should also be multiple reporting points throughout the organization, said Hams, and an anonymous hotline for those reluctant to bring the matter up with anyone in their chain of command, and a multilingual hotline as well.

An effective training plan will have multiple moving parts and should touch every level of the organization from the executive suite to managers and supervisors to the rank and file. Comprehensive training is especially critical for the managers and supervisors who might receive or investigate complaints.

Many large employers already have training programs that can be considered best-in-class. Small to midsized employers, however, may still be using the cookie-cutter compliance-centric training that has dominated the field for decades.

The goal of this training is to hit all the bases related to Title VII of the Civil Rights Act, ticking off a list of acts or speech that would be considered illegal and affirming the company will not tolerate illegal behavior.

Overwhelmingly though, this type of training misses the mark. Studies have shown that this one-size-fits-all training is ineffective, especially when it’s a rote check-the-box exercise. Employees get the message their employer doesn’t take the subject too seriously.

Worse, it can even aggravate tensions, creating more discriminatory behavior from men who avoid working with women just to eliminate the chance of being accused of anything.

One study even found that men were more likely to place blame on the victim of sexual abuse after they’d received that type of anti-harassment training.

Even at best, compliance-centric training will still fail, because it only addresses behaviors that violate the law. But there is a broad array of behavior that — while not quite illegal — shouldn’t be tolerated.

When this kind of activity is allowed to flourish unchecked, the environment becomes increasingly toxic for those on the receiving end. It also tells employees that the company will tolerate harassment as long as it’s not overly egregious. In that case, it’s just a matter of time before the company is faced with a serious claim.

“Nothing is more instructive than real tangible claims examples and settlement amounts. Arm yourself with … recent, relevant claims examples specific to the industry and the jurisdictions the company operates in.” — Kelly Thoerig, U.S. employment practices liability coverage leader, Marsh

In its 2016 report, the EEOC’s harassment task force recommended changing tactics, exploring alternative training models such as respect-based civility training — what some call professionalism training.


The theory is “if you train them to act in a professional manner, these things tend not to happen at all,” said Hams.

The EEOC also suggested bystander intervention training, which is designed to empower employees to intervene when they witness harassing behavior.

Experts agreed whatever training programs or modules a company chooses, it’s important the training material reflect the workforce and be continuous and regularly refreshed.

A certification scheme also should be put in place to ensure the training is hitting the mark. While the law does not yet require companies to prove the effectiveness of their programs, some suggest it’s only a matter of time before the courts catch up to the problem.

What’s more, said Coppola, it’s simply the right thing to do for companies that want to confirm they’ve created a culture where all employees can expect to be treated professionally.

Zero Tolerance

Gelot and others believe a zero-tolerance policy should be a key component of an effective anti-harassment program.

“There are many companies that have Harvey Weinsteins and Matt Lauers and Kevin Spaceys working in their midst and those people are tolerated. Employees know about them — it’s not a secret.”

Bob Graham, vice president, HUB International Limited

Particularly when the harasser is a high-level executive, companies may wrestle with the decision to look the other way or lose a key rainmaker. In a zero-tolerance environment — one that starts at the top — the decision would be clear.

“What we saw with Matt Lauer and Charlie Rose — they were terminated immediately as the accusations came out. That’s zero tolerance. That’s sending a message to all of the employees within the company that this is completely unacceptable, we won’t tolerate it, and [it] clearly sends a message to the public at large.”

Employers should promote a workplace culture where all forms of harassment and discrimination are unacceptable and reportable, said Gelot. That’s the only way to take the fear and the stigma out of reporting.

That said, the EEOC offers a word of caution on zero-tolerance policies applied militantly without regard for common sense. Employers should hash out the specifics of which acts merit immediate termination versus a warning.

Overzealous application of the zero-tolerance doctrine can backfire if an employee fears her coworker’s children will go hungry if she reports his lewd or sexist jokes.

Creating a Dialogue

As with managing any other exposure that touches everyone, robust sharing of ideas and best practices has the power to improve the risk profile of entire industry sectors.

Facebook raised eyebrows in December, making public its sexual harassment policy in full.

“I hope in sharing it we will start a discussion, both to help smaller companies thinking about this for the first time, and to improve our own practices by learning from other companies,” wrote Lori Goler, Facebook’s global VP of people, about the company’s bold move.


That level of disclosure is making some risk professionals uncomfortable. But others acknowledge the wisdom of it.

“Any time you can share best practices that’s probably a great idea, because no one has all the answers … or at least not all the right answers,” said Graham.

“There’s a reason they did that, and I think it’s for all the right, positive reasons. They want to drive the momentum that is going to reduce or even eliminate what we have seen in corporate America over the last 50-plus years. They want to lead by example, they want to be the model and rightly so,” added Coppola.

“I think we are at a perfect time in our economic environment that allows the evolution of equality in our workplace.”

Part of that should involve making the workplace more egalitarian, said Gelot, and figuring out “how to make female employees not feel ostracized by a ‘boys’ club’ atmosphere, and actively championing the ascension of women into senior rolls.”

“We can’t focus on the past,” said Coppola. “But we can work very hard collectively as a community, and within the insurance industry specifically, to move forward.” &

Michelle Kerr is associate editor of Risk & Insurance. She can be reached at [email protected]