Risk Scenario

The Great Wall of Pain

A lack of transparency during a foreign acquisition abruptly halts a mining company's celebrations.
By: | December 19, 2012 • 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

When the directors of Range Claimer, a Utah-based mining company, sealed the purchase of the China-based Great Wall Metals Corp., the stage was set for a celebration.


The vice chairman was flushed with the success of it all. It had been his initiative, in concert with the CEO, to start diversifying Range Claimer into other channels than its traditional strengths in U.S.-produced coal and iron ore.

Buying the strong rare earth metals business of China-based Great Wall Metals Corp. meant getting into the lucrative sourcing chain for the global telecommunications and computer industries.

Device manufacturing facilities in China and elsewhere in Asia needed the neodymium and the europium that China had.

Pulling off the deal had required a bold stroke of diplomacy. The vice chairman of Range Claimer and the CEO traveled to Beijing to lobby government officials that were anxious to keep a supply of competitively priced coal from the western states and Appalachia flowing to China.

A long-term commitment at the right price for the coal and iron ore — plus Range Claimer’s reputation for efficiency — sealed the deal.

Despite its strong hold on some metals markets, the stark truth for knowledgeable Chinese officials was that the management of the Great Wall Metals Corp. needed improvement.

You keep the West Virginia coal coming to us, the Chinese had said, and we’ll put Great Wall Metals Corp. on your plate at a decent price, say about $85 million. All you have to do is run it well.

The Board Secretary of Range Claimer had several cases of premium South Willamette Valley sparkling wine iced for as soon as the ink was dry.  And the ink was drying.


That was where things stood in May. In October, Typhoon Chieko kicked up her heels in the South China Sea. Her name in Japanese meant “wise child” but she was in fact a wild child.


Scenario Partner

Chieko became a Category 3 within days of her birth and set a course straight for Shandong, a province on the Northeast coast of China and the primary metals processing location of the Great Wall Metals Corp.

Chieko didn’t care how much the board of Range Claimer had just paid for Great Wall Metals Corp. or when they had bought it.

She was a Category 4 when she came to shore and she acted like it.

Winds that topped 100 miles per hour ripped off sections of the Great Wall factory roof. Water came from above and below as the storm surge inundated the factory floor. When the wind stopped howling and the waters receded, 60 percent of Great Wall’s manufacturing capacity had been damaged or destroyed.

Part Two

In their efforts to make sense of the Great Wall Metals Corp’s insurance coverage and file a timely claim, the Range Claimer risk management department knew right away they had a problem.

When the acquisition was being put together, the risk management department had requested and been sent copies of property, business interruption, environmental and general liability policies in English translations that showed what looked like adequate limits.


But talking to their risk management counterparts in Jinan in the efforts to document the claim and get it paid proved to be problematic.

The language gap in dealing with what was now the risk management department of their own subsidiary made things difficult. Different claims management systems between the two companies, and a weak process for version control made things even more difficult.

The in-country broker was impossible. He couldn’t be reached by phone and his e-mailed responses were maddeningly vague.

It was understandable that the locals in Jinan would need some time to get back to their posts. But now it was three days past the day when Chieko struck and there was not one shred of usable information in the Range Claimer claim file.

Sarah Tomlinson, the risk coordinator for Range Claimer, found herself going through the seemingly useless exercise of staring at interior photographs of the Great Wall Metals Corp processing plant to try to get some indication of what had been lost.  Based on what little information she had, she had next to no ideas on how to minimize the loss and prevent further damage.

Her New York-based broker, who had begun some preliminary work as Sarah and he geared up to cover the Chinese plant at their December renewal, was doing the best he could to help. But both of them knew they were spinning their wheels.

Without some transparency into the effective policies in play in China, and someone on the ground who could give her some indication of the specificity of the loss, Sarah knew she was in trouble.

She had no way of determining whether the water and wind damage caused by Chieko were actual named perils in the policy. Without better information on the ground, she also didn’t know whether she should attempt to repair or replace the damaged manufacturing machinery.


She had called the carrier as soon as Chieko hit. She was being as honest as she could be. She felt the loss was big but she couldn’t say how big. The carrier had placed a call to her suggesting that an independent adjustor get on the case as soon as possible.

Sarah was gearing up to return that call when her phone rang. She looked at the extension.

It was Harry Chase, the CFO. He never got involved in insurance matters.  He usually acted like all that was beneath him. But it wasn’t beneath him now.

“Hey Harry,” Sarah said into the phone, trying to make her voice sound upbeat.

“Hey Sarah. Any news on this typhoon claim? We were looking at $8 million in revenue this quarter from that acquisition and I’d like to see something before Christmas.”

“I wish I could tell you ‘yes’ Harry but I have nothing I can count on,” Sarah said.

There was an uncomfortable pause.

“Why not?”

“Well, I still haven’t established communication with the Chinese broker and we don’t have any claims figures we can rely on.”

“We need to make this better, Sarah.”

Harry’s voice wasn’t threatening, but Sarah felt the dread any way.

Sarah exhaled.

“I guess the only thing left for me to do is to go to China,” Sarah said.

“Then do it,” Harry said.

“We have got to have some answers from these people.”

Sarah was on a plane to Jinan Yaoqinang International Airport the following day. The Great Wall Metals Corp. people in Jinan said they’d have a translator waiting for her.

“This is going to be great,” she said to herself, ironically, as she boarded the plane.

Part Three

If getting e-mails from the Beijing-based Chinese insurance broker was maddeningly vague, meeting him in person was worse.


He showed Sarah copies of the Shandong Province plant’s policies that looked entirely different from those that Sarah had seen pre-merger. In just one example, the copies Sarah had seen pre-merger calculated business interruption coverage as a measurement of sales. This version calculated business interruption as a measurement of production.

The first version also included language on contingent time element coverage for customers and suppliers. The second one was silent on that issue.

Through the translator, Sarah asked the Chinese broker about the discrepancies.

The broker replied abruptly in Chinese.

“This is the one that matters now,” the translator told Sarah.

“But it’s not the same, this is not the same language,” Sarah told the broker, losing her cool a bit and talking to him directly in English even though, rationally, she knew he understood very little English.

The translator looked at Sarah stoically and said something to the broker in Chinese. The broker replied quickly and abruptly in Chinese.

“He’ll handle everything, you have no worries,” the translator said to Sarah.

“But I do have worries, I have lots of worries,” Sarah said to the translator.

The translator spoke to the broker again. He just shrugged.

“Mr. Liu is very busy. Lots of damage from the storm. He’ll call us later,” the translator said.

Sarah just sat there. She felt like she was sinking into a swamp as Mr. Liu rose, bowed and departed with another brief remark to the translator.

The translator looked at Sarah compassionately. The translator wasn’t malevolent; she just wasn’t the most competent person on earth and was a little detached from her work.

“You like noodles?” the translator said to Sarah.

“We can get some lunch.”

Sarah was hungry and she felt defeated. The thought of the aroma of warm chicken broth wafting up from a bowl of rice noodles felt like it could be comforting.


Sarah worked through the night, going over the two copies of policies that she had. All she had was what was on paper pre-merger and what was now in front of her.

The property deductible was $500,000 on the first policy. On the second policy, it was $2 million. The business interruption coverage limit was $15 million on the first policy. On the second policy,  it was $10 million. There was a $6.5 million gap there if the first policy couldn’t be legally enforced.

In addition, it looked like the renewal of the second property policy hadn’t been properly authenticated and confirmed with the carrier.

She couldn’t even imagine what the legal bills would look like to try to make some recoveries on this claim. Not to mention the cost of conducting a complete review of the company’s policies.

Range Claimer had deep pockets. Selling iron ore and coal from 2002 through 2007 had been a very good place to be. The company had its reserves, despite the downturn of 2008 and beyond, and was now going to have to use them.

What had looked like a short-term, top-line improvement move with long-term diversification advantages for Range Claimer was now looking like a cost center for at least the next two or three years.

Range Claimer was almost better off eating the costs of rebuilding the storm-damaged plant than it was waiting for resolution and adding the legal bills to what was already a very costly situation.

Insurance was made for situations like this. But tragically, for the doings of Typhoon Chieko, Range Claimer might never know if it was ever in place.

Adding to the tragedy was that Range Claimer now had a history of a severe loss in China in its very first year of operations there. What was viewed as a feather in the caps of the vice chairman and the CEO now looked more like an albatross.


A lack of meaningful transparency into the content of the insurance policies of a foreign acquisition translates into serious losses when a typhoon strikes a Chinese manufacturing plant.

1. Don’t take short-cuts with policy and risk management data documentation during M&A activity: Just because the CEO or the chairman is hot to complete an acquisition is no time for risk management to take a back seat, especially with a foreign acquisition. Documenting that the acquisition target’s policies are what they say they are can make the difference between ample coverage and devastating exposure. The same goes for the acquisition target’s loss and values data.

2. What are you waiting for? The time for the Range Claimer claims manager to get on the plane was as soon as she knew there had been a loss on the property of a newly acquired company. Our claims manager’s decision to wait and see how foreign brokers and risk management staff  were going to perform was a mistake. You want something done right? You do it when you know there is a problem and you don’t wait.

3. Sprechen Sie Deutsch? After there is a big loss in a foreign country is not when you want to discover that your risk management network has communication problems. Making sure that U.S.-based executives have the contacts in country that can clearly understand and communicate what they need to know is crucial. Figuring out what insurance policies say when everyone is a native English speaker is hard enough!

4. Manage your relationships: Having multiple brokers with overlapping responsibilities can mean that no one is accountable when it comes to recovering on a claim. Having a firm grip on which broker owns the relationship with which carrier around which coverage can make resolving a complex property loss in a foreign country much easier and more likely to result in a good settlement. Just as important in an international scenario is having good risk management contacts with local brokers and carriers.

5. Know your accountants: Being able to track the values, not only of damaged and destroyed equipment, but of sales and other revenue losses is crucial to the timely, accurate, report of a claim that has a good chance of being paid. Having a good working familiarity with your company’s accounting system and solid relationships in that department is key here.

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

High Net Worth

High Net Worth Clients Live in CAT Zones. Here’s What Their Resiliency Plan Should Include

Having a resiliency plan and practicing it can make all the difference in a disaster.
By: | September 14, 2018 • 7 min read

Packed with state-of-the-art electronics, priceless collections and high-end furnishings, and situated in scenic, often remote locations, the dwellings of high net worth individuals and families pose particular challenges when it comes to disaster resiliency. But help is on the way.


Armed with loss data, innovative new programs, technological advances, and a growing army of niche service-providers aimed at addressing an astonishingly diverse set of risks, insurers are increasingly determined to not just insure against their high net worth clients’ losses, but to prevent them.

Insurers have long been proactive in risk mitigation, but increasingly, after the recent surge in wildfire and storm losses, insureds are now, too.

“Before, insurance was considered the only step in risk management. Now, our client families realize it is one of the many imperative steps in an effective risk management strategy,” said Laura Sherman, founding partner at Baldwin Krystyn Sherman Partners.

And especially in the high net worth space, preventing that loss is vastly preferable to a payout, for insurers and insureds alike.

“If insurers can preserve even one house that’s 10 or 20 or 40 million dollars … whatever they have spent in a year is money well spent. Plus they’ve saved this important asset for the client,” said Bruce Gendelman, chairman and founder Bruce Gendelman Insurance Services.

High Net Worth Vulnerabilities

Laura Sherman, founding partner, Baldwin Krystyn Sherman Partners

As the number and size of luxury homes built in vulnerable areas has increased, so has the frequency and magnitude of extreme weather events, including hurricanes, harsh cold and winter storms, and wildfires.

“There is a growing desire to inhabit this riskier terrain,” said Jason Metzger, SVP Risk Management, PURE group of insurance companies. “In the western states alone, a little over a million homes are highly vulnerable to wildfires because of their proximity to forests that are fuller of fuel than they have been in years past.”

Such homes are often filled with expensive artwork and collections, from fine wine to rare books to couture to automobiles, each presenting unique challenges. The homes themselves present other vulnerabilities.

“Larger, more sophisticated homes are bristling with more technology than ever,” said Stephen Poux, SVP and head of Risk Management Services and Loss Prevention for AIG’s Private Client Group.

“A lightning strike can trash every electronic in the home.”

Niche Service Providers

A variety of niche service providers are stepping forward to help.

Secure facilities provide hurricane-proof, wildfire-proof off-site storage for artwork, antiques, and all manner of collectibles for seasonal or rotating storage, as well as ahead of impending disasters.

Other companies help manage such collections — a substantial challenge anytime, but especially during a crisis.

“Knowing where it is, is a huge part of mitigating the risk,” said Eric Kahan, founder of Collector Systems, a cloud-based collection management company that allows collectors to monitor their collections during loans to museums, transit between homes, or evacuation to secure storage.

“Before, insurance was considered the only step in risk management. Now, our client families realize it is one of the many imperative steps in an effective risk management strategy.” — Laura Sherman, founding partner, Baldwin Krystyn Sherman Partners

Insurers also employ specialists in-house. AIG employs four art curators who advise clients on how to protect and preserve their art collections.

Perhaps the best known and most striking example of this kind of direct insurer involvement are the fire teams insurers retain or employ to monitor fires and even spray retardant or water on threatened properties.

High-Level Service for High Net Worth

All high net worth carriers have programs that leverage expertise, loss data, and relationships with vendors to help clients avoid and recover from losses, employing the highest levels of customer service to accomplish this as unobtrusively as possible.

“What allows you to do your job best is when you develop that relationship with a client, where it’s the same people that are interacting with them on every front for their risk management,” said Steve Bitterman, chief risk services officer for Vault Insurance.

Site visits are an essential first step, allowing insurers to assess risks, make recommendations to reduce them, and establish plans in the event of a disaster.

“When you’re in a catastrophic situation, it’s high stress, time is of the essence, and people forget things,” said Sherman. “Having a written plan in place is paramount to success.”


Another important component is knowing who will execute that plan in homes that are often unoccupied.

Domestic staff may lack the knowledge or authority to protect the homeowner’s assets, and during a disaster may be distracted dealing with threats to their own homes and families. Adequate planning includes ensuring that whoever is responsible has the training and authority to execute the plan.

Evaluating New Technology

Insurers use technologies like GPS and satellite imagery to determine which homes are directly threatened by storms or wildfires. They also assess and vet technologies that can be implemented by homeowners, from impact glass to alarm and monitoring systems, to more obscure but potentially more important options.

AIG’s Poux recommends two types of vents that mitigate important, and unexpected risks.

“There’s a fantastic technology called Smart Vent, which allows water to flow in and out of the foundation,” Poux said. “… The weight of water outside a foundation can push a foundation wall in. If you equalize that water inside and out at the same level, you negate that.”

Another wildfire risk — embers getting sucked into the attic — is, according to Poux, “typically the greatest cause of the destruction of homes.” But, he said, “Special ember-resisting venting, like Brandguard Vents, can remove that exposure altogether.”

Building Smart

Many disaster resiliency technologies can be applied at any time, but often the cost is fractional if implemented during initial construction. AIG’s Smart Build is a free program for new or remodeled homes that evolved out of AIG’s construction insurance programs.

Previously available only to homes valued at $5 million and up, Smart Build recently expanded to include homes of $1 million and up. Roughly 100 homes are enrolled, with an average value of $13 million.

“In the high net worth space, sometimes it takes longer potentially to recover, simply because there are limited contractors available to do specialty work.” — Curt Goetsch, head of underwriting, Private Client Group, Ironshore

“We know what goes wrong in high net worth homes,” said Poux, citing AIG’s decades of loss data.

“We’re incenting our client and by proxy their builder, their architects and their broker, to give us a seat at the design table. … That enables us to help tweak the architectural plans in ways that are very easy to do with a pencil, as opposed to after a home is built.”

Poux cites a remote ranch property in Texas.

Curt Goetsch, head of underwriting, Private Client Group, Ironshore

“The client was rebuilding a home but also installing new roads and grading and driveways. … The property was very far from the fire department and there wasn’t any available water on the property.”

Poux’s team was able to recommend underground water storage tanks, something that would have been prohibitively expensive after construction.

“But if the ground is open and you’ve got heavy equipment, it’s a relatively minor additional expense.”

Homes that graduate from the Smart Build program may be eligible for preferred pricing due to their added resilience, Poux said.

Recovery from Loss

A major component of disaster resiliency is still recovery from loss, and preparation is key to the prompt service expected by homeowners paying six- or seven-figure premiums.

Before Irma, PURE sent contact information for pre-assigned claim adjusters to insureds in the storm’s direct path.

“In the high net worth space, sometimes it takes longer potentially to recover, simply because there are limited contractors available to do specialty work,” said Curt Goetsch, head of underwriting for Ironshore’s Private Client Group.


“If you’ve got custom construction or imported materials in your house, you’re not going to go down the street and just find somebody that can do that kind of work, or has those materials in stock.”

In the wake of disaster, even basic services can be scarce.

“Our claims and risk management departments have to work together in advance of the storm,” said Bitterman, “to have contractors and restoration companies and tarp and board services that are going to respond to our company’s clients, that will commit resources to us.”

And while local agents’ connections can be invaluable, Goetsch sees insurers taking more of that responsibility from the agent, to at least get the claim started.

“When there is a disaster, the agency’s staff may have to deal with personal losses,” Goetsch said. &

Jon McGoran is a novelist and magazine editor based outside of Philadelphia. He can be reached at [email protected]