The Law

Legal Spotlight

A look at the latest decisions impacting the industry.
By: | December 14, 2016 • 4 min read

Social Engineering Claim Fails

In March 2013, an employee in Apache Corp.’s Scotland office received a telephone call informing the company of a changed bank account for Petrofac, a vendor. The Apache employee replied that a formal request on Petrofac letterhead was required.

A week later, Apache’s accounts payable department received an email from petrofacltd.com (the true website was petrofac.com) with an attached letter related to the change of bank account. The email said the letter had been sent by mail as well.

The Apache employee called the phone number on the letter to confirm the request and subsequently, about $7 million was sent to the new bank account in payment of invoices. Within the month, Apache learned that it had been duped, and was able to retrieve “a substantial portion of the funds.” It did lose about $2.4 million, according to court documents.

Businessman Sitting In Front Of Computer Holding Calculator

It filed a claim with Great American Insurance Co. under the “computer fraud” provision of its crime-protection insurance policy, which had a $1 million deductible. The insurer denied the claim, stating the “loss did not result directly from the use of a computer nor did the use of a computer cause the transfer of funds.”

A Texas court ruled on behalf of Apache, after it had filed suit. The U.S. 5th Circuit Court of Appeals reversed that decision on Oct. 18.

“The email was part of the scheme; but, the email was merely incidental to the occurrence of the authorized transfer of money,” the court ruled, noting that “few — if any — fraudulent schemes would not involve some form of computer-facilitated communication.”

Scorecard: The insurance company did not have to cover the $2.4 million loss.

Takeaway: The decision will limit coverage for crime policy claims related to social-engineering scams.

‘Faulty Workmanship’ Dooms Claim

In December 2011, Kim’s Asia Construction removed the existing roof at Powerline Imports Inc. and installed a new one. Powerline said the new roof “leaks worse than before it was replaced,” according to court documents.

Additional repairs did not resolve the problem and eventually, Kim’s Asia Construction stopped responding to Powerline’s phone calls. Powerline engaged a new contractor to remove and dispose of the new roof, and filed suit against Kim’s in the Superior Court of Bergen County, N.J.

Kim’s sought defense and indemnification from State Farm Fire and Casualty Co., under its business liability insurance policy. The insurance company initially granted a defense but filed a lawsuit in the U.S. District Court for the Eastern District of Pennsylvania seeking a judgment that it owed neither defense nor indemnification.

That judgment was granted to State Farm on Oct. 5.

The court ruled that “faulty workmanship” is not considered an occurrence that would trigger a bodily injury or property damage claim.

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“Under Pennsylvania law, such claims are not covered under the definition of ‘accident’ required to establish an ‘occurrence’ under the policy,” the court ruled.

Scorecard: The insurer does not have to defend the construction company in the lawsuit filed against it for “negligent construction” of a new roof.

Takeaway: The policy defined an occurrence as “an accident,” and the lawsuit did not allege “anything ‘unexpected,’ ‘unintentional,’ or ‘fortuitous’ about the damage to the roof.

Insurer Need Not Cover Thefts

John Clemmons was an estate lawyer who stole $1.3 million from his clients and gambled it away, according to reports. He was disbarred and sentenced to 18 years in prison.

The new administrator of two of the estates filed suit against Clemmons for misappropriating the funds and failing to account for the assets. It also claimed Clemmons failed to obtain adequate surety bonds as required by state law.
Hanover Insurance Co., which had issued a legal professional liability policy to Clemmons, sought a court declaration that it had no obligation to defend or indemnify Clemmons.

Businessman Being Arrested

The U.S. District Court in Nashville, Tenn., agreed with the insurer on Sept. 30.
The policy, the court ruled, excluded any claims caused by the “insured committing any intentional, dishonest, criminal, malicious or fraudulent act or omission.”

In addition, it said that the negligent failure to purchase surety bonds in the state’s mandated amounts were “outside the scope of coverage” of the policy, and that the claim was filed about a year after the claims-made policy lapsed.

The court also ruled that failure to obtain proper surety bonds “was not a ‘substantial factor in producing the damage or injury’ to the estates,” citing the attorney’s theft as the “substantial cause of the loss.”

Scorecard: The insurer does not have to defend or indemnify the incarcerated attorney for breach of fiduciary duty and misappropriation of funds.

Takeaway: The claims are outside the scope of coverage because the attorney “could have reasonably foreseen” the misappropriation claims against him and that Hanover would not have provided coverage for his thefts.

Anne Freedman is managing editor of Risk & Insurance. She can be reached at [email protected]

More from Risk & Insurance

More from Risk & Insurance

4 Companies That Rocked It by Treating Injured Workers as Equals; Not Adversaries

The 2018 Teddy Award winners built their programs around people, not claims, and offer proof that a worker-centric approach is a smarter way to operate.
By: | October 30, 2018 • 3 min read

Across the workers’ compensation industry, the concept of a worker advocacy model has been around for a while, but has only seen notable adoption in recent years.

Even among those not adopting a formal advocacy approach, mindsets are shifting. Formerly claims-centric programs are becoming worker-centric and it’s a win all around: better outcomes; greater productivity; safer, healthier employees and a stronger bottom line.

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That’s what you’ll see in this month’s issue of Risk & Insurance® when you read the profiles of the four recipients of the 2018 Theodore Roosevelt Workers’ Compensation and Disability Management Award, sponsored by PMA Companies. These four programs put workers front and center in everything they do.

“We were focused on building up a program with an eye on our partner experience. Cost was at the bottom of the list. Doing a better job by our partners was at the top,” said Steve Legg, director of risk management for Starbucks.

Starbucks put claims reporting in the hands of its partners, an exemplary act of trust. The coffee company also put itself in workers’ shoes to identify and remove points of friction.

That led to a call center run by Starbucks’ TPA and a dedicated telephonic case management team so that partners can speak to a live person without the frustration of ‘phone tag’ and unanswered questions.

“We were focused on building up a program with an eye on our partner experience. Cost was at the bottom of the list. Doing a better job by our partners was at the top.” — Steve Legg, director of risk management, Starbucks

Starbucks also implemented direct deposit for lost-time pay, eliminating stressful wait times for injured partners, and allowing them to focus on healing.

For Starbucks, as for all of the 2018 Teddy Award winners, the approach is netting measurable results. With higher partner satisfaction, it has seen a 50 percent decrease in litigation.

Teddy winner Main Line Health (MLH) adopted worker advocacy in a way that goes far beyond claims.

Employees who identify and report safety hazards can take credit for their actions by sending out a formal “Employee Safety Message” to nearly 11,000 mailboxes across the organization.

“The recognition is pretty cool,” said Steve Besack, system director, claims management and workers’ compensation for the health system.

MLH also takes a non-adversarial approach to workers with repeat injuries, seeing them as a resource for identifying areas of improvement.

“When you look at ‘repeat offenders’ in an unconventional way, they’re a great asset to the program, not a liability,” said Mike Miller, manager, workers’ compensation and employee safety for MLH.

Teddy winner Monmouth County, N.J. utilizes high-tech motion capture technology to reduce the chance of placing new hires in jobs that are likely to hurt them.

Monmouth County also adopted numerous wellness initiatives that help workers manage their weight and improve their wellbeing overall.

“You should see the looks on their faces when their cholesterol is down, they’ve lost weight and their blood sugar is better. We’ve had people lose 30 and 40 pounds,” said William McGuane, the county’s manager of benefits and workers’ compensation.

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Do these sound like minor program elements? The math says otherwise: Claims severity has plunged from $5.5 million in 2009 to $1.3 million in 2017.

At the University of Pennsylvania, putting workers first means getting out from behind the desk and finding out what each one of them is tasked with, day in, day out — and looking for ways to make each of those tasks safer.

Regular observations across the sprawling campus have resulted in a phenomenal number of process and equipment changes that seem simple on their own, but in combination have created a substantially safer, healthier campus and improved employee morale.

UPenn’s workers’ comp costs, in the seven-digit figures in 2009, have been virtually cut in half.

Risk & Insurance® is proud to honor the work of these four organizations. We hope their stories inspire other organizations to be true partners with the employees they depend on. &

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