Category Archives: Business Risk

Aviation Safety

As investigators begin the task of determining what caused the crash of a turboprop regional aircraft in a Buffalo, New York suburb late yesterday, it seems that weather conditions, rather than birds may have played a role. The plane, a Continental Connection flight operated by Colgan Air, was en route from Newark, New Jersey to Buffalo with 49 people on board when it crashed into a house in the Buffalo suburb of Clarence Center. According to latest reports, the total death toll from the crash is thought to be 50, including one person on the ground. The incident comes  just a  month after the emergency landing of a US Airways Airbus A-320 into New York City’s Hudson River in which 155 people escaped. Despite these two aviation accidents, it’s important to note the strong safety record of the U.S. commercial aviation industry. The number of commercial aviation accidents on scheduled flights with 10 or more seats, stood at less than one per 100,000 flight hours at year-end 2007, according to National Transportation Safety Board (NTSB) data. There were no fatalities on large scheduled commercial airlines in 2007, compared with 50 in 2006. Check out further I.I.I. facts on aviation.  

 

Food Safety Concerns

Peanut Case Shows Holes in Safety Net is the apt heading of a February  8  article in  the New York Times by Michael Moss. By now you’ll be aware of the fact that more than 1,000 peanut butter products have been recalled (from as far afield as Canada and Europe) after a salmonella outbreak sickened at least 575 people in 43 states, killing eight. A peanut-processing plant in Georgia that produces just 1 percent of all U.S. peanut products is the apparent source of the tainted peanut butter. The owner of the plant, the Peanut Corporation of America, is under criminal investigation and the event has been described as the largest food contamination case in U.S. history. Note: in 2007 the Government Accountability Office (GAO) added the federal oversight of food safety to its high-risk list (because 15 agencies collectively administer at least 30 food-related laws). This fragmented federal oversight of food safety has caused inconsistent oversight, ineffective coordination and inefficient use of resources, according to GAO. For more on this debate check out the  Room for Debate blog. Whatever the size or nature of a business, this latest food-borne outbreak of salmonella highlights the importance of product safety. Check out I.I.I.’s small business owners’ guide to insurance for more on managing product liability risks.  

Cat Bond Market Resilient

What a difference a year can make†¦The catastrophe bond market, described as mainstream rather than alternative after a record-setting year in 2007, saw a sharp fall in issuance both in terms of risk capital and number of transactions in 2008. Guy Carpenter’s latest review of the market reveals that cat bond issuance volume fell 62 percent to $2.7 billion in 2008, from just under $7 billion in 2007 as a soft reinsurance market and the global financial crisis took their toll. Just 13 transactions were completed during the year, compared to 27 in 2007. At year-end 2008, total cat bond risk capital outstanding was $11.8 billion, a 14.5 percent decline from $13.8 billion in 2007. But a slow issuance year in 2008 masks a story of resilience and risk management flexibility, according to Guy Carpenter. For example, in terms of issuance volume it found that 2008 was the market’s third most active year since catastrophe bonds were introduced in 1997. Check out further I.I.I. information on alternative risk-financing options.  

 

Employee Lawsuits Du Jour

Mounting job cuts amid the economic downturn are resulting in an increase in employee lawsuits, according to various news reports.  A  posting yesterday in the New York Times DealBook blog citing a January 31  article in the newspaper by Jonathan Glater speaks to this growing trend. It suggests that laid off employees may have more legal arguments to draw on than in previous recessions due to a raft of employment protection laws passed in better times. However it does acknowledge that employment cases are not easy to win. Meanwhile, an article in the  Washington Post today notes that the number of allegations of job discrimination filed with the U.S. Equal Employment Opportunity Commission (EEOC) increased by 15 percent in 2008, compared with 2007. A cautionary note to companies looking to lay off employees comes in a January 22 article at CFO.com. It advises that companies that put together a detailed business plan before announcing layoffs may be able to avoid a trip to court. Desperate times can lead to desperate measures and that brings us to these words of wisdom from Lisa Rickard, president U.S. Chamber Institute for Legal Reform: “America cannot sue its way out of this recession. More lawsuits won’t create more jobs, help consumers or rebuild America’s infrastructure.† Check out I.I.I. facts & stats on litigiousness.  

Insurance Fraud Hall of Shame

The Coalition Against Insurance Fraud has just released its annual Insurance Fraud Hall of Shame, highlighting America’s most brazen, vicious or plain klutzy insurance crooks. Among the  top swindlers elected to the No-Class of 2008 are: a serial home arsonist; an elected judge who made phony auto-injury claims; two elderly women who killed homeless men for life insurance money; and dentists who did worthless root canals on children. According to the Coalition, insurance fraud is an $80 billion-a-year crime, yet its research shows that more Americans tolerate insurance fraud than they did 10 years ago. Too many individuals also view fraud as a harmless prank or an obscure white-collar crime, the Coalition says. Check out related I.I.I. information on insurance fraud.

A Risk Management Failure?

The financial crisis resulted from a system-wide failure to embrace appropriate enterprise risk management (ERM) behaviors, rather than a failure of risk management as a business discipline. The assertion comes in an executive report from the Risk and Insurance Management Society (RIMS). RIMS notes that when we look for a cause of the current financial crisis, it is critical to remember that organizations failed to do a number of things:Â  

  • truly adopt an enterprise risk management culture.  

  • embrace and demonstrate appropriate enterprise risk management behaviors, or attributes  

  • develop and reward internal risk management competencies, and  

  • use enterprise risk management to inform management decision-making in both taking and avoiding risks.  

RIMS believes that the 2008 financial crisis is a call to action for enterprise risk management to demonstrate its value, but that to be effective it must fundamentally change the way organizations think about risk. “When enterprise risk management becomes part of the DNA of a company’s culture, the warning signs of a market gone astray cannot go unseen so easily. When every employee is part of a larger risk management process, companies can be much more resilient in the face of risks,† it notes. What do you think?  

Securities Class Action Filings Up

Securities class action filings in 2008 were at their highest level since 2004, dominated by a wave of litigation against financial services firms. According to an annual report by Stanford Law School and Cornerstone Research, a total of 210 federal securities class actions were filed in 2008, a 19 percent increase over the 176 class actions filed in 2007. Close to half of the 2008 litigation activity, or 103 class actions, involved firms in the financial services sector. The maximum dollar loss (MDL) attributable to all 2008 claims is $856 billion, a 27 percent increase over comparable 2007 data. Financial services firms represented 46 percent of MDL in 2008. A new Litigation Heat Map illustrates the intensity of litigation activity within each industry over time and shows that nearly one third of all large financial firms were named defendant in a securities class action filed in 2008. The financial firms named as defendants in 2008 represented more than half of the sector’s total market capitalization. However, the study predicted that litigation activity against the financial sector may decline next year because the supply of new defendants might be drying up.  

Surge in Securities Class Action Filings

Securities class action litigation surged to a six-year high in 2008 amid the ongoing credit crisis and turmoil in the financial sector. According to a just released report by NERA Economic Consulting as of 14 December 2008, 255 cases were filed of which 43 percent, or 110, were related to the credit crisis. While filings have steadily increased from 2006 through 2008, NERA reports that median settlement values have remained relatively stable. The 2008 median settlement resolved for $7.5 million, below the 2007 median of $9.4 million, but above the 2006 median settlement of $7 million. While it is too early to tell what impact the surge in credit crisis filings may have on future settlement values, the authors note that two outcomes are possible: either average and median settlement sizes will grow in the future as credit crisis cases begin to be resolved, or the financial distress faced by defendant companies could pull median settlement values down. More analysis of the NERA findings can be found at The D&O Diary, a blog focused on D&O liability issues.

Judicial Hellholes for the New Year

In the waning days of 2008, best/worst of the year reports are plentiful and one not to be missed is the American Tort Reform Association’s (ATRA) Judicial Hellholes 2008/2009 report that names and shames some of the nation’s most unfair civil court jurisdictions. This year’s list includes perennial hellholes West Virginia, South Florida and Cook County, Illinois; relative newcomers Clark County, Nevada, and Atlantic County, New Jersey; as well as Los Angeles County, California, and Alabama’s Macon and Montgomery counties – both returning to the spotlight after respective absences.  A new section in this year’s report is the aptly titled “Rogues’ Gallery†Ã‚  which ATRA says is designed to remind policymakers, particularly those in Congress that “just like professional athletes who use performance-enhancing drugs and corporate accountants who take ill-advised shortcuts, there are influential plaintiffs’ lawyers who unscrupulously and sometimes illegally work to corrupt the nation’s civil justice system and they, too, warrant aggressive oversight.† Definitely worth checking out, as is an I.I.I. update on the liability system.  

Tort Costs Up

After a temporary hiatus, tort costs in the United States are rising again. The 2008 Update on U.S. Tort Costs by Towers Perrin finds that U.S. tort costs rose by 2.1 percent or $5.1 billion in 2007, fueled by the first increase in auto accident frequency since 1999. It follows a 5.6 percent decline in tort costs in 2006. Further, due to the current financial crisis and a bunch of other factors such as the potential for increased activity in the area of employment practices liability, Towers Perrin predicts that tort costs will increase by 4 percent in 2008 and an additional 5 percent in both 2009 and 2010. The 2.1 percent increase in tort costs in 2007 compares with an overall gross domestic product (GDP) growth rate of 4.8 percent. Since 1950 growth in tort costs has exceeded growth in GDP by an average of two percentage points. The upshot is that the U.S. tort system cost $252 billion in 2007, which translates to $835 per person  Ã¢â‚¬“ $9 per person more than in 2006. Everywhere we look the call is for more litigation. Check out further I.I.I. info on the liability system.