Tag Archives: liability claims

Thought Leader in Action: At Walmart

How do you manage risk when your company is the biggest employer in the U.S. other than the federal government? Very carefully — and very well, if you’re K. Max Koonce II, the senior director of risk management at Walmart, until recently, when he took a senior position at Sedgwick. You do that partly by taking advantage of an extraordinary amount of data to identify potential problems, to use outcomes analysis to greatly shrink the number of litigation firms you use, to be highly selective about doctors used for workers’ comp and even to set up a full-sized, in-house third party administrator.

But let’s begin at the beginning:

Koonce was born in Mississippi, but his family moved to Bentonville, AR, where he has lived most of his life with his wife and family. He attended Harding University, a private liberal arts university located in Searcy, AR, where he graduated with a BBA in economics. Thinking that economics was not as challenging a career as what he aspired to, Koonce attended the University of Arkansas William Bowen School of Law to obtain his J.D.

He was immediately hired by Walmart upon his graduation in the ’90s and was given the responsibility to set up Walmart’s internal legal defense system for the roughly 30,000 Walmart employees at the time. He and his in-house team of legal aides handled all of Walmart’s workers’ comp and ultimately much of its liability claims. The program worked so well that the governor of Arkansas appointed Koonce as an administrative law judge for the state workers’ comp commission in 1997, with Walmart’s blessing. With Koonce’s departure, Walmart eliminated the internal legal program and transferred its litigation to outside legal firms.

koonce
K. Max Koonce II

By January 2000, Koonce was appointed by the governor to the Arkansas Court of Appeals. With a vacancy in the State’s Supreme Court, Koonce ran for State Supreme Court in a partisan election. During the campaign, he shared fond memories of attending all kinds of civic events, fundraisers and county fairs around the state. When he failed to get elected, Walmart brought him back to head its risk management program that same year. The program grew dramatically with his return.

Apart from the U.S. government, Walmart is the largest employer in North America. Nearly 20 million people shop at Walmart every day, and 90% of the U.S. population lives within 15 minutes of a Walmart. If Walmart were a country, it would be the 26th-largest economy in the world. Walmart manages 11,500 retail units in 28 countries; generates $482 billion in annual sales; and has 2.2 million employees (1.4 million associates in the U.S.). Koonce exclaimed that there was no other retail company to benchmark to, so his risk management department had to make up its own risk benchmarks. Interestingly, with a tightly managed work culture and such huge numbers to work with, Walmart’s risk management statistical and actuarial claim calculations have proven to be consistently accurate for many years.

Walmart’s risk management department has grown over the years to more than 40 risk management support personnel. Walmart divides its risk portfolio by working with two competing insurance brokers. Koonce said he had an incredibly talented and dedicated team of risk management professionals working at headquarters in Bentonville. “The analytics and metrics achieved by my experts,” he said, “were as good as any in the insurance industry.” He said that no relevant risk factors in Walmart’s operation went unnoticed.

Walmart’s workers’ comp program is designed to include specific doctors and medical facilities to ensure consistent care of any injured workers. Walmart manages detailed feedback from all of its employees to continue to fine tune its workers’ comp program. Koonce stated that risk management has always been a part of the Walmart culture, going back to its founding by Sam Walton in 1962; Walton wanted to help individuals and communities save money while ensuring that the company’s operations adhere to ethical decision making, good communication and responsiveness to employees and stakeholder.

Using an “outcomes-based” approach to litigation management, Walmart’s team relies on claims data analysis and metrics to choose, evaluate and consolidate the number of workers’ comp attorney firms. Max notes: “This approach forms tighter relations with a smaller number of lawyers to create a ‘one team’ approach to litigation.” In California alone, for example, the mega-retailer reduced the number of legal defense firms from more than 20 to three. The outcomes-based litigation strategy relies on a multivariate analysis using Walmart’s own claims data. Metrics are used to benchmark attorney performance and align specific lawyers with cases depending on claim facts and knowledge about an attorney’s unique skills and experience. At Walmart, claims examiners generally choose specific defense attorneys to maintain a continuing team relationship.

Besides retail store risks, Walmart also manages the largest private trucking firm in the U.S. and delivers more prescriptions than any other retailer. Asked if he had experienced any highly unusual claims during his tenure at Walmart, Koonce said that Walmart is all about awareness, control and consistency and that claims were nearly always within an expected parameter (i.e. slip-and-fall claims) and not horrific, as some employers experience. Each store location, including Sam’s Clubs, have conscientious safety response teams that sweep the stores periodically during their shifts and respond immediately to any safety hazards like floor spills.

A unique feature of Walmart is its subsidiary, a third party claims administrator (TPA) called Claims Management Inc. (CMI), at which Koonce served as president. Located in nearby Rogers, AR, CMI administers the casualty claims, including workers’ compensation, for all Walmart stores. Although most companies with national operations use insurer claims administrators (for non-self-insured operations), or multiple regional TPAs, Walmart’s CMI operation is a sizable TPA of its own with 600 employees. As Koonce explains, “CMI provides the claims oversight the company feels is desirable to maintain good control, communication and consistency.”

Unlike most national companies, Walmart has been able to maintain a highly efficient and focused risk management program through a tight-knit organization consisting of mostly local or regional employees who live and work in Benton County, AR (pop. 242, 321). Most of Walmart’s managers have been employees who have worked their way up the corporate ladder. Sam Walton once said: “We’re all working together; that’s the secret.”

Koonce left Walmart in September to serve as senior VP of client services for Sedgwick Claims Management Services. He was succeeded by Janice Van Allen, director of risk management at Walmart, who started as a store department manager in 1992. Koonce said he’s doing what he loves most at Sedgwick — helping risk managers achieve success with their internal programs.

Owner Controlled Insurance Program Liability Claims Challenges, Part 5

This is the fifth article in an 11-part series on Owner Controlled Insurance Programs. Preceding and subsequent articles in this series can be found here: Part 1, Part 2, Part 3, Part 4, Part 6, Part 7, Part 8, Part 9, Part 10, and Part 11.

Owner Controlled Insurance Programs From The Perspective Of Liability Claims (continued)

Covered Damage
The first issue that the carrier and the policyholders must address is whether the loss resulted in “covered damage.” However, with an Owner Controlled Insurance Program, the analysis with regard to the particular insured is critical. There are numerous exclusions in the commercial general liability coverage form that apply differently, depending on whether the named insured enrolled contractor is an owner, general contractor, or subcontractor. The following exclusions illustrate why the policy may provide coverage or not, depending on which insured is seeking coverage:

Expected or Intended Injury Exclusion

This insurance does not apply to:

a) Expected or Intended Injury

“Bodily injury” or “property damage” expected or intended from the standpoint of the insured …

Use of the phrase “the insured” refers to the insured seeking coverage. This phrase is contrasted to an exclusion that applies to an injury which is expected or intended from the standpoint of “an” or “any” insured, which would preclude coverage entirely under the policy if an insured or any insured intended the act. (See, e.g., National Union Fire Insurance Company vs. Lynette C. (1991) 228 Cal.App.3d 1073 — a wife who negligently failed to prevent molestation by her husband was covered; Fire Insurance Exchange vs. Altieri (1991) 235 Cal.App.3d 1352 — parents sued in connection with their son’s arson of a school building.) The phrase “the insured” also is contrasted to exclusions that apply to “you,” which is the named insured. In the context of an Owner Controlled Insurance Program, where virtually every contractor is an insured, particular attention has to be paid to whether the claims of “supervision,” “vicarious liability,” or other non-direct liability could create coverage where the exclusions apply to “the insured.”

For example, in a claim that a contractor’s employee intentionally damaged another contractor’s work, the employee would be an insured, but the exclusion would bar coverage. His employer, assuming it was enrolled, would likely be a named insured; the exclusion would not apply to the employer, or any other enrolled contractor on the project.

Contractual Liability Exclusion
A second example is the contractual liability exclusion, which provides:

This insurance does not apply to: …

b) Contractual Liability

“Bodily injury” or “property damage” for which the insured is obligated to pay damages by reason of the assumption of liability in a contract or agreement. This exclusion does not apply to liability for damages: …

(2) Assumed in a contract or agreement that is an “insured contract” …

The typical construction project contains indemnity flowing uphill in favor of the owner and general contractor. The liability of the owner or general contractor is generally passed down to the lowest level subcontractor.

Under contractual liability coverage, the Owner Controlled Insurance Program assumes every enrolled contractor’s indemnity obligations upward to the general contractor and owner. Contractual liability coverage allows owners/sponsors to settle claims with third parties and seek recovery from responsible subcontractors under the indemnity agreement. Thus, the insurance company must be mindful that any enrolled contractor may be both an insured as well as a claimant against the downhill subcontractors for any uncovered damages.

Damage to Project Work
The next series of exclusions are those dealing with damage to the work which is the subject of the Owner Controlled Insurance Program:

This insurance does not apply to: …

j. Damage to Property

“Property Damage”

1) Property you own, rent or occupy; …

4) Personal property in the care, custody or control of the insured;

5) That particular part of real property on which you or any contractors or subcontractors working directly or indirectly on your behalf or performing operations, if the “property damage” arises out of those operations; or

6) That particular part of any property that must be restored, repaired or replaced because “your work” was incorrectly performed on it.

Paragraph 6 of this exclusion does not apply to “property damage” included in the “Products-Completed Operations Hazard.”

k. Damage to Your Product

“Property Damage” to “your product” arising out of it or any part of it.

l. Damage to Your Work

“Property Damage” to “your work” arising out of it or any part of it, and included in the “Products-Completed Operations Hazard.”

This exclusion does not apply if the damaged work or the work out of which the damage arises was performed on your behalf by a subcontractor.1

With regard to property damage claims arising out of “operations” (as distinct from “completed operations”), Exclusion “j.” is critical. In light of the “separation of insureds” condition, Exclusion j(1) would exclude coverage to the program sponsor for damages occurring to the construction project itself. (Assuming the sponsor is the owner.)

Exclusions j(5) and j(6) preclude coverage for damage to the construction project, but not entirely. Viewing the construction project from the standpoint of a general contractor, the entire project is “real property” on which the named insured (defined alternatively as “you”) or its subcontractors are performing operations. As to the owner or general contractor, virtually any damage would be excluded if it is within the basic scope of the construction project and the project is not completed.

However, each enrolled contractor must be viewed separately. If there is an allegation of damage caused by a subcontractor to work other than its own, this exclusion would not bar coverage. An example would be a residential developer with an Owner Controlled Insurance Program covering its projects that experiences a fire at a home under construction caused by the negligence of the roofer. As to the owner/developer, exclusion j. precludes coverage entirely. As to the roofer, exclusion j. only precludes coverage for damage to the roofer’s own work, but not resulting property damage caused by the roofer, i.e., the burned down home.

This scenario constitutes the primary overlap with builders risk coverage. The owner/ general contractor may pursue a subcontractor for negligence arising out of performance of work under its contract, and the subcontractor’s liability will be covered by the Owner Controlled Insurance Program. This gap presents an exposure to the liability Owner Controlled Insurance Program insurer for the builders risk deductible (since the amount is not covered by builders risk insurance).

This scenario also illustrates that for owners or insurance companies, the proper analysis is to review any “operations” loss — those that occur while the project is under construction — first from the perspective of the responsible contractor (from the bottom up) rather than from the perspective of the owner (from the top down).

1 The terms “you” and “your” refer to the named insured, not to anyone qualifying as an insured.

Owner Controlled Insurance Program Liability Claims Challenges, Part 1

Owner Controlled Insurance Programs (OCIPs) present unique challenges in settling claims. Critical aspects of the underwriting process directly affect how coverage will apply to covered contractors and subcontractors. This series examines critical policy provisions that will impact the claims process and offers strategies for smoothing the claim resolution process. A variety of challenging Owner Controlled Insurance Program scenarios will be used to guide brokers, claim professionals, and underwriters in the settlement of claims.

This is the first article in an 11-part series on Owner Controlled Insurance Programs. Subsequent articles in this series can be found here: Part 2, Part 3, Part 4, Part 5, Part 6, Part 7, Part 8, Part 9, Part 10, and Part 11.

Owner Controlled Insurance Programs, or OCIPs, are the logical consequence of insurance underwriters and project owners trying to control costs and speed the resolution of construction-related insurance claims (including builders risk, workers compensation, and liability claims). Indeed, it would be difficult to find an experienced claim manager who has not slapped his head (or someone else’s) in exasperation over the amount of time and money that it takes to resolve a construction bodily injury or construction defect claim.

For owners, there is a built-in incentive to find a better way to more efficiently manage the claims that inevitably occur on a large construction project. The amount of money spent on insurance premiums is a significant portion of the cost of construction. Moreover, the amount of money spent, not to mention the time commitment, is substantial because of the number of people and interests to protect.

From an insurance company’s perspective, an Owner Controlled Insurance Program premium is significant. Further, the ability to receive the premium for all parties on the job site while simultaneously eliminating the allocated expense makes Owner Controlled Insurance Programs an attractive underwriting risk.

An Owner Controlled Insurance Program, or wrap-up policy, may include all or part of the insurance needed on a project, including builders risk, workers compensation, and liability insurance. Experienced professionals in each line of insurance each have their own unique perspective on the process and the effect of insuring all parties on the project. Here, we concentrate on liability claims and policies.

As viewed from the perspective of the people who are attempting to resolve liability claims under an Owner Controlled Insurance Program, the industry is maturing. Underwriters, owners, contractors, construction managers, and brokers are becoming more sophisticated with regard to underwriting and claims presentation. Specifically, in our practice we have noted the following trends in the handling of such claims “in the trenches”:

  1. Owners, as the sponsor of the program, assert control over claims under the insurance program, which can create tension with the insurance company and the contractors on the project.
  2. Brokers are increasingly sophisticated and acting as coverage advisors for the insureds to maximize recovery under the Owner Controlled Insurance Program policies.
  3. There are often differences between the insurance policy issued by the company and the coverage as represented to enrolled subcontractors.
  4. There is an increasing tendency for owners, brokers, and contractors to treat the Owner Controlled Insurance Program as a single program, a concept that is sometimes at odds with the concept of liability insurance.
  5. Inconsistencies between liability policy language, Owner Controlled Insurance Program manuals provided to contractors, and the actual subcontracts blur the definition of what is the governing Owner Controlled Insurance Program contract. 
  6. Lack of complete enrollment by all subcontractors on the project or phase complicates the claims process and impacts the cost of the program.
  7. The timing of the inception of a “rolling wrap” can create hybrid liability claims that are partial wrap and partial non-wrap for purposes of a construction defect claim.
  8. Lack of sophistication by subcontractors and their counsel creates tension in the claims process.

The insured contractors must bear in mind what an Owner Controlled Insurance Program is and what it is not. An Owner Controlled Insurance Program is an insurance policy, intended to provide all of the contractors on a job site with necessary coverage. From the perspective of the claims department, the Owner Controlled Insurance Program is not a new kind of insurance. Therefore, this series concentrates on applying existing rules in the context of an all-encompassing policy.