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