Category Archives: Business Risk

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.  

Women Businessowners and Liability Risks

Despite current economic conditions, nearly three in five (58 percent) women business owners predict their organizations’ revenues will grow in 2009 and nearly one-half (44 percent) do not expect difficulty in obtaining access to credit, according to a survey conducted by Chubb and the Women Presidents’ Organization (WPO). However, the same activities that will help grow their businesses may also increase their companies’ exposure to liability risk. Small to medium-size firms with more limited resources may be particularly vulnerable to the costs associated with a liability lawsuit, Chubb said. It highlighted product liability, errors and omissions (E&O) and employment practices liability (EPL) as areas to watch. For example, economic conditions can have a negative impact on employment-related claims and lawsuits. Even though the majority of survey respondents (89 percent) indicated they are not concerned about EPL risk increasing in 2009, Chubb noted that when companies lay off employees or reduce employee benefits there is generally a resulting spike in EPL lawsuits as well as incidents of workplace violence.  Greater exposure to liability risks is probably a factor for all businesses right now. Check out the I.I.I. small businessowners’ guide to insurance and I.I.I. facts & stats on litigiousness for more information.

ID Theft Rules Deadline Extended

The Federal Trade Commission (FTC) has given financial institutions and creditors an extra six months, until May 1, 2009, to comply with the so-called “red flags rule† which requires them to develop and implement written identity theft prevention programs. Apparently some industries and entities within the FTC’s jurisdiction had expressed confusion and uncertainty about their coverage under the rule. Just to be clear, the FTC said the extension does not affect compliance with the original November 1, 2008 deadline for institutions subject to oversight of other federal agencies. Those of you who read our posting a year ago will already be aware that under the red flags rule, financial institutions and creditors with covered accounts must  implement prevention programs to identify, detect, and respond to patterns, practices, or specific activities that could indicate ID theft. As we’ve said before, financial institutions are prime targets of ID theft, so new rules requiring them to take preventive measures could increase their potential liability. Check out further I.I.I. facts and stats on ID theft.

Regulatory Risk Tops Threat List

Risk managers questioned for a new Economist Intelligence Unit survey point to regulatory risk as the most significant threat to their business, ahead of country risk, market and credit risk, IT and people risks, or terrorism and natural disasters. The report’s publication is timely given the widespread calls for increased global regulatory oversight in response to the financial crisis. While respondents to the survey  support the concept of regulation, they voiced strong concerns about the quantity and complexity of their compliance obligations, as well as the lack of regulatory harmonization between different jurisdictions. The findings form part of From Burden to Benefit: Making the Most of Regulatory Risk Management, a new Economist Intelligence Unit survey and report sponsored by ACE, KPMG, SAP and Towers Perrin. According to the results, audit and reporting regulations cause the biggest headaches, but other areas are also causing concern for many companies. In particular, respondents point to workforce and environmental legislation as areas that consume large amounts of resources and management time. Research for the report is based on an online survey of 320 global executives with responsibility for risk.

Litigation Uptick Looms

U.S. companies are preparing for a rise in litigation amid the economic downturn, according to the Fifth Annual Litigation Trends Survey from international law firm Fulbright & Jaworski. Despite two straight years of reporting declines in the numbers of new lawsuits and regulatory proceedings, this year’s survey reveals an important shift as to how U.S. corporate law departments view the litigation climate. Some 34 percent of in-house counsel at U.S. firms now expect to see an increase in the number of legal disputes faced by their company in the year ahead, while 25 percent expect an  uptick in the number of regulatory proceedings on the horizon. Fulbright reports that billion-dollar firms were especially wary, with 43 percent anticipating more litigation versus 34 percent last year. Financial firms feel the most at risk, with 50 percent expecting more disputes, followed by education (43 percent predicting uptick), health care firms (40 percent), retailers (39 percent) and insurers (36 percent). We note that insurers were the number one target for new litigation in the past year – two-thirds of insurers faced at least six new lawsuits, including 29 percent facing more than 50 new actions. Check out I.I.I. information on the liability system.