“The more time risk managers spend carefully considering business interruption worksheet pre-loss,” Dempsey noted, “perhaps, the less time they'll spend in heartache and stress post-loss.”

Risk managers must go beyond just completing worksheets and thinking that their jobs are done, however. They must decide what the exercise implies for insurance limits, coinsurance percentages, retention levels, loss control, and self-funding mechanisms.

“Business interruption worksheets typically are designed to help the insurance underwriters set a proper premium,” said Costner. They are not necessarily designed to help determine genuine business interruption values. This is one reason business interruption worksheets can be frustrating, he added.

The concept of maximum foreseeable loss has substantial meaning for risk managers, according to Dempsey. An analytical tool, it presumes a worst-case scenario, such as when a blaze spreads, sprinklers fail, or fire-suppression personnel are unavailable. One blind spot, for example, is that most business interruption worksheets do not identify bottlenecks in manufacturing processes. In the case of clothing, which may be manufactured as a result of sequential steps undertaken at five different locations, if one of those locations goes down, the entire clothing process halts.

Costner described a situation involving a Phillips Electronic manufacturing center in Albuquerque, N.M., that made Ericsson cell phone components. Fire damaged “clean rooms” in which workers fabricated cell phone chips. Essentially, this interruption to the manufacturing process knocked Erickson out of the cell phone business, Costner observed.

Contingent business interruption is crucial, but often not captured by business interruption worksheets, he added. “Ninety percent of all the people who visit Las Vegas are there either because they fly in to the local airport or drive in via Interstate 15,” he said, by way of example. Dollars are dollars, and it does not matter whether the hotel in Las Vegas has a physical loss or whether there is damage to the airport or interstate; an interruption at either will cause severe financial loss.

Few policyholders buy ordinary payroll coverage, simply because, in cases of severe loss, most management teams will not keep employees on the payroll for long. Costner recalled the example of a Massachusetts mill that had burned down, whose owner “charitably” announced that he would continue payroll for a month. What the owner did not disclose, according to Costner, was the fact that the mill had two months of ordinary payroll coverage on tap.

Insurance underwriters have their own concerns regarding business interruption values, Dempsey noted. Risk managers must know these and brace for questions. Underwriters will be preoccupied with location exposures and values. For example, are locations with high maximum foreseeable losses properly identified? Are there earthquake or windstorm exposures? Are there any significant interdependencies that the underwriter should recognize? Has the insured disclosed any significant contingent business interruption exposures? Are adequate loss control measures in place to reduce loss exposures? On the latter point, Dempsey noted, risk managers can get better pricing deals on coverage if they can demonstrate strong loss control programs.

Similarly, risk managers have their own business interruption value concerns. These relate to whether the business units understand the purpose and importance of accurate business interruption value reporting. Also, are reported values calculated consistently among business units and locations? Risk managers should weigh mundane factors, such as whether the right amount of data is reported, and whether the collection process is rational and efficient.

In other areas, risk managers and underwriters share certain concerns with regard to business interruption values. They both want to know whether reported values are based on reality and are computed in ways consistent with industry standards. Are reported values suitable for calculating probable maximum losses and maximum foreseeable losses, and for allocating insurance capacity? Are reported values a reasonable basis for calculating premiums and determining location limits and deductibles?

Completing a business interruption worksheet is an opportunity to review contingency and business continuity plans. What factors affect the maximum foreseeable loss scenario? Can the risk manager quantify these factors? Can risk managers line up alternate locations for producing excess capacity? Can they use temporary facilities, obtain replacement inventories, or make emergency purchases from third parties or competitors that can compress the time of the business interruption?

Labor-Saving Devices

Also presenting a session at the conference was Ann Schnure, claim director for Federated Department Stores; Paul Przysiecki, risk management analyst for ADP TotalSource; and Robert Steggert, vice president of casualty claims for Marriott International.

Schnure outlined the changes that technological advances have brought to claim handling, and how they may be integrated into the process to achieve greater efficiency and efficacy. The current claim environment is being led by companies willing to invest in information technology infrastructures, she said. Although, traditionally, claim handling is labor intensive and suffers from scarce resources, a balance of technology and human expertise can result in reduced claim costs.

Because Schnure works for a retailer, her employer has customized techniques to help manage, and even prevent, claims. For example, due to electronic data interchange, a claim person can send gift cards to potential claimants, when appropriate. This is done automatically, without human intervention. It increases speed, responsiveness, and reduces legal expenses. It also builds goodwill and helps avoid aggrieved individuals' becoming claimants or plaintiffs.

Przysiecki discussed systemic claim oversight, focusing on employment through professional employer organizations. PEOs provide dual employment relationships, whereby clients control day-to-day activities, but the PEO becomes an employer of record for employee administration purposes.

A seasoned group of claim professionals oversees the third party claim administrator, evaluating it for specific performance standards. This may include online claim reviews and litigation oversight. Effective practices identified by Przysiecki include routine review and documentation on claims for medical bills, working on litigation status with adjusters, coordination of return-to-work efforts, and coordination of all legal aspects of workers' compensation claims.

He also emphasized that good litigation oversight involves finding out the rationale behind claim litigation. In other words, “Why did an employee retain counsel?” It also should be determined whether plaintiff law firms are targeting employees associated with particular companies or particular clients. Technology can provide quick access between the client and defense firms for information exchange.

Steggert noted that the Marriott Corp. is self insured nationally for workers' compensation and general liability. The company, which handles about 25,000 claims per year, is striving toward a paperless process. One objective is to align technology to meet claim goals, including increased efficiency of claim processes, reduced medical and indemnity costs, improved quality of care for injuries, and integrating vendors electronically into the claim process.

Marriott has had mixed success with medical cost management firms, he said. The company has come full circle and often pays medical providers above scale for services, finding that those higher costs can be offset by better medical outcomes and earlier return-to-work dates.

Call centers help Marriott receive prompt notice of all losses. Steggert would like to have 24-hour loss reporting systems in place, but noted that it is difficult, given the corporation's thousands of locations and the fact that many of them are operating 24 hours a day. Nevertheless, having a centralized claim hub for receiving accident and loss reports is a key component for effective claim management.

Questions from the audience revealed concerns about privacy of employees' medical information. Steggert observed that HIPAA regulations do not apply to the realm of workers' compensation. Nevertheless, employees handling claims at Marriott must sign annual agreements pledging not to divulge sensitive and private medical information. If a Marriott claim person were to handle a job-related injury sustained by someone who is HIV-positive, and later carelessly disclosed that fact, the employee could be terminated for cause. Steggert believes that privacy concerns are manageable.

Kevin Quinley, CPCU, is senior vice president for Medmarc Insurance Group in Chantilly, Va. He can be reached at [email protected].