$41.7 Million Liability Judgement Mediation for Disputed Sandy Claims More on Fund Transfer Fraud

This is current events month. While the topics aren’t closely related, they’ve all been in the news or on my desk in the past month.

$41.7 Million Liability Judgment for Injury to One Person

The headline read: “Conn. Student Disabled On School Trip Wins $41.7 Million.”1 My first reaction: “Must have been an awful injury.” Second: “There are probably some lessons here for insurance people.” Both were correct.

Cara Mann, a 9th grader at The Hotchkiss School, a prestigious private school in Lakeville, CT, was bitten by a tick while a school trip in China. She developed encephalitis and is now brain-damaged and unable to speak. We can’t weigh the facts—that was the jury’s job and will ultimately be reviewed on appeal—but we can look at the risk management and insurance aspects.

The first line of defense is loss control. Alerting parents and students to potential hazards and recommending protective measures is a winning strategy for everyone. If this was, in fact, an area known to be infested with disease-carrying insects as the plaintiff’s attorney alleges, warnings and precautions were called for. The School’s attorney’s response that “…tickborne encephalitis is such a rare disease that it (the School) could not have foreseen a risk and could not be expected to warn Munn or require her to use protection against it”2 is weak.

Pro-active preparation is always the best way to treat and ameliorate risk. Many organizations require that the participants and/or their parents sign waivers. These are of limited legal effectiveness; courts are often unwilling to enforce them. Their main value is alerting participants to the risks and potentially discouraging them from suing when something does happen. As to insurance coverage, this case points up the need for world-wide coverage and high liability limits. ISO CGL coverage provides world-wide coverage IF the insured’s responsibility to pay damages is determined in a suit on the merits in the US or other covered territory.

In a case such as this—the trial took place in Bridgeport, CT—the typical CGL policy would provide defense and indemnity, up to the policy limit. Two caveats: (1) Not every CGL policy provides this much world-wide coverage. Some are limited to accidents that occur in the US, in others designated location endorsements can restrict coverage even for policies that appear to afford world-wide coverage. (2) In almost all CGL policies, if the “suit on the merits” takes place in a foreign court a subsequent suit in the US to enforce that judgment is not covered.

Awards in the US are more generous and US tort law is more favorable to plaintiffs, so most accidents involving a company that doesn’t have a permanent presence in the foreign country will be brought in US courts. Nevertheless, an insured with an obvious foreign exposure, such as a sponsored trip to a foreign country, should consider foreign coverage. These policies are readily available, reasonably priced, and can cover foreign property and auto liability as well as general liability.3 Often the insured’s umbrella/excess liability policy can cover over the foreign policy.

Even more important: reexamine how high to set umbrella/excess liability limits. The award against Hotchkiss School may be reduced on appeal or even reversed, but it shows what’s possible and that’s what insureds should be prepared for. Tell your clients about the problem. I encourage clients to consider at least $50 million umbrella/excess limits.

Breaking News: $130 Million Judgment as I was getting ready to submit this column, I saw a report of a $130M medical malpractice award against Saint Charles Hospital in Port Jefferson, NY.4 Sadly, this was another case involving a severely disabled child. Awards for medical malpractice tend to be higher than other types of cases, but the common element in both these cases is injury to a child. A child with devastating injuries tugs at the jury’s heartstrings and the defendant’s purse strings. Every organization has an exposure to claims by injured children— insureds need high excess liability limits. Go-Figure Department: The April 6, 2013 issue of the Insurance Advocate carried a story noting that St. Charles Hospital received the 2013 Risk Management and Safety Best Practices award from Physician’s Reciprocal Insurers.5

Mediation of Disputed Sandy Claims in New York and New Jersey

Mediation of disputed Sandy claims has been mandated by both New York and New Jersey.6 This can be an effective way to resolve difficult claims. Chances are you and your clients have never been involved in mediation, so some general information may be helpful:

• Mediation is non-binding. The mediator does not impose a decision.

• Mediation is an informal dispute settlement process run by a trained third party mediator. It’s intended to bring the parties together to clear up misunderstandings, find out concerns, and reach a resolution.

• During the mediation, each side presents its view of the issue and the mediator attempts to work out a settlement. The mediator may meet separately with each side at some point.

• At the end of the process, the mediator can present his or her findings and propose a potential solution.7 “Mediation” and “arbitration” are often used interchangeably, however they are different.

Most importantly, an arbitrator does make a decision, which can be either binding or non-binding. Arbitration is more like an informal court proceeding and can involve witnesses, experts, etc.)8 If the parties can’t resolve the dispute by mediation, they retain whatever rights they had prior to the mediation. In an insurance setting that includes the right to demand appraisal and the right to sue. Sandy mediation expenses in New York and New Jersey will be will be paid by the insurance company. Mediation can be conducted face to face, by video conference, or telephone conference, depending upon what is agreed between the insurer and the insured. I think a face-to-face meeting is the best.

If mediation is requested: an insurer must participate in good faith, send a representative with claims settlement authority, and be prepared with a reasonable explanation if it does not alter its original decision concerning the claim.

The mediation program also does not apply to National Flood Insurance Program claims. This is a major shortcoming for Sandy disputes as many will involve NFIP claims. Unfortunately, New York State cannot control Federal NFIP adjustments.

The mediation program also does not apply to disputes that have been submitted to appraisal or to claims where civil actions have been filed against the insurer. Insurers are required to notify insureds of their right to a free appraisal when they deny a claim in whole or in part, when the insured notifies the insurer that he or she disputes the settlement offer, or if the insurer has not made an offer to settle with 45 days after its receipt of a proper proof of loss and requested supporting documents. You’ll be getting calls from insureds when they receive these notices. Here are some points you’ll want to discuss with them:

• Prepare, Prepare, Prepare. It’s important for the insured to be prepared with a cogent statement of its position.

• Most insureds will need assistance in preparing their presentation. Brokers, public adjusters, and insurance attorneys can be helpful.

• The insured can have someone accompany him or her, but there is no requirement that the insured be represented by an attorney or anyone else.

Florida and Louisiana have had mediation programs for all property claims for several years. I emailed two Florida public adjusters asking about their experience with the program. One responded that he found it a successful procedure. Most of those he participated in were “fairly and professionally conducted.” The other had a more mixed experience: “we do resolve some claims but it is usually not for a number I am happy with.” Both felt that it was worth trying as in Florida, like New York and New Jersey, the insurance companies pick up the tab.9

More on Electronic Funds Transfer Coverage Insurance and Loss Control

A client, the head of a real estate management firm, questioned why we recommended increasing the firm’s funds transfer fraud coverage limit. “After all,” he said, “we maintain separate accounts for each of the buildings and the maximum balance in any one account is much less than our current limit.”

I responded by pointing out the counter- intuitive definition of occurrence in crime insurance. It typically reads: …”Occurrence” means:

(1) An individual act or event;

(2) The combined total (emphasis added) of all separate acts or events whether or not related; or

(3) A series of acts or events whether or not related (emphasis added); committed by a person acting alone or in collusion with other persons…

Thus, depending on the exact nature of the claim, an insurance company might argue that 20 thefts of $50,000 each on the same or different dates from the same or different bank accounts by one or more persons are not 20 losses of $50,000 each, but one loss of $1,000,000. Our client instructed his broker to increase the limit. I also suggested that he talk to his bank about loss prevention. When he did, his bank recommended a program known as Positive Pay. Positive Pay is an automated fraud detection tool offered by the Cash Management Department of most banks. The company transmits a daily list of issued checks. When checks are presented for payment, the bank compares them electronically against the submitted list. If a check is presented that does not have a match, the bank sends a fax or an image of the item to the client and the client instructs the bank to pay or return the check.10

There was an excellent article on cyber theft from the Journal of Accountancy. It’s dated October, 2010. Given the rate of change in the cyber-world, it may be somewhat out-of-date. Nevertheless, it is a good description of the problem. The authors list insurance as one of the measures needed to cope with fund transfer fraud and recommend an amount of insurance equal to the maximum exposure.

Sending clients the article is a good way to open up the discussion fund transfer fraud and crime insurance in general. You can find it at: http://www.journalofaccountancy.com/Issues/2010/Oct/20092174.htm

1 http://online.wsj.com/article/APd00d6c37c8e94d9dbbdb0202c90d409d.html

2 Ibid

3 In addition to the “suit on the merits in the covered territory” restriction, ISO and most other insurer auto liability policies are limited to coverage for private passenger cars leased, rented, hired, or borrowed without a driver. That can be a problem. For example, if school or other organization runs a trip there will most likely be some travel using buses or other vehicle that come with a driver. Just what the school’s responsibility would be in the event of an accident is for the courts decide. I’d like to let an insurance company bear the risk of an adverse decision.

4 “New York Family Awarded $130M in Medical Malpractice Lawsuit” Insurance Journal 4/19/03 http://www.insurancejournal.com/news/east/2013/04/19/289166.htm

5 “PRI Names St. Charles Hospital Winner of Risk Management and Patient Safety ‘Best Practices,’” Insurance Advocate, April 6, 2013 page 28

6 These comments are based on the New York regulations.

7 http:// biztaxlaw.about.com/od/glossarym/g/mediation.htm

8 http://biztaxlaw.about.com/od/glossarya/g/arbitration.htm.

9 Based on emails from Charles R. “Dick” Tutwiler, Tutwiler & Associates and Greg Roover, Claim Concepts, Inc

10 The description of Positive Pay is from http://www.positivepay.net/