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- The National Institutes of Health estimate that two-thirds of adult Americans are overweight. The direct cost of obesity exceeds $64 billion per year. Indirect costs are nearly as high. Obesity complicates the effects of traumatic injuries in many subtle ways and can contribute to those injuries. Think of the effects on your workers compensation costs. Could a health improvement program for employees be an investment rather than a cost?
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| What should your workers compensation modifier be? |
A workers compensation insurance modifier is an expression of how your company's loss experience compares to others with the same employment classification. A modifier of 1.00 is the statistical norm. Below 1.00 (e.g. .80) is better, above 1.00 (1.20) is worse. The modifier plays an important role in your overall insurance cost.
Even in states with so-called "open rating" (rates set by insurers not by a state rating agency), workers compensation modifiers help determine your company's insurance cost. In open-rating states, insurers are free to set rates and apply discounts to customers (usually subject to the insurance regulator's determination that price-cutting will not harm the insurer's financial solvency). However, the modifier is still a factor in determining the ultimate premium, and a poor modifier will offset other possible discounts.
Insureds sometime overlook several other important issues concerning modifiers. First, the very existence of a high modifier may cause insurers to shun your company when you are seeking coverage. Second, depending on your industry, potential customers and contractors may have requirements that would tend to keep your firm from doing business with them if the modifier is high. This is especially true in construction. Finally, a high modifier can increase your insurance costs for an extended period as the rating process considers multiple years' loss experience. Higher insurance costs make your firm less competitive.
There are many reasons for implementing safety and cost containment programs. When considering the cost of such programs, also consider the economic side benefits.
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| Watch your vendors' insurer ratings |
One way or another, insurance insolvencies can affect an organization. Of course, your company should be with sound insurers, but what happens if your suppliers', vendors' and service providers' insurers fail? If your firm is relying on others' insurance, such as through contracts or leases with indemnity provisions, you could be in for a surprise when the time to collect arrives.
Many contracts that include indemnity and insurance provisions specify standards for insurers. Usually the requirements specify a minimum rating such as through A. M. Best, Moody's or Standard & Poor's. In addition, the specifications may require that an insurer is "admitted" in the state of the contract. An "admitted" insurer is subject to regulation by that state and required to participate in a guaranty fund. If the insurer fails, insureds (and additional insureds) have a chance of some recovery from the fund as well as from any remaining assets of the insurer.
If the party providing indemnity and insurance does not monitor its insurer and if that insurer's rating slips below the minimum, the party technically may be in breach of contract. Such a breach may give your company cause of action against the vendor if the vendor's insurer fails and a claim that otherwise would be covered is not paid. Properly drafted indemnity wording also provides this protection.
However, the whole purpose of requiring insurance is that it is a certain source of funds for a loss. Trying to collect from a vendor or contractor for an indemnified loss is always problematic.
The best procedure to avoid having to sue your vendor or petition a guaranty fund probably is to monitor your vendor/contractor's insurance yourself. When evidence of insurance (usually a certificate of insurance) comes in from the vendor, make note of the insurer. Keep a log of insurers of vendors, suppliers and your own. Periodically check their ratings. (www.ambest.com, www.standardandpoors.com, or www.moodys.com.)
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Trade journals report a growing interest in "cyber" insurance as companies begin to understand the risks better. Cyber insurance is a catchall term for policies that protect against losses arising out of the use of information systems and technology. Such losses can range from the cost of recovery from system failures to business interruption from cyber crime.
In a 2002 survey of larger corporations and government agencies by the Computer Security Institute and the FBI, 90% of the respondents reported security breaches within the previous 12 months. Eighty percent identified financial losses due to the breaches.
Despite the obvious risk, and despite the reports of increased interest, few organizations actually buy cyber insurance. A 2003 survey by Ernst & Young, LLP revealed that only 7% of the participants purchased the coverage.
The principal reasons for not buying the coverage are two, according to various reports. One is the lack of comprehensive understanding of the risk principally because it is so new. The same phenomenon occurred in the development of directors and officers liability, pollution liability, employment practices liability and other coverages that protect against risks created by technological and social evolution. The second major reason companies forego coverage is a belief that non-insurance risk control techniques (e.g. firewalls, anti-virus software) are adequate.
Realization is growing that no matter how secure one's systems, a potential for cyber loss exists and the consequences often are unacceptable. Company owners and managers know that disruption of the business often is more costly than destruction of its property or claims based on liability. Further, with all the focus on corporate governance responsibility and privacy (California has a new law requiring notification of customers if their identity or private information may have been compromised) the issue is being kicked up to the board level.
Are you confident that your company's security measures alone are adequate protection against all forms of cyber loss or cyber crime? Have you considered cyber insurance?
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| Traffic accidents and occupations |
Doctors and lawyers are among the three occupations most often involved in traffic accidents, according to Quality Planning Corp., a consulting firm. The leading occupation is student.
From a database of over 1 million drivers, the study analyzed both accidents and speeding violations per 1,000 drivers per year. Students had the most of each category.
Most people (and many insurers) likely would consider doctors and lawyers to be good risks because of their high education levels and the fact that median ages are relatively high for these professions. One explanation is that while it is established that lack of experience and youth are contributing factors to high risk, for mature drivers the critical factor is lack of attention. Overworked doctors and lawyers juggling multiple patients or cases might not concentrate on their driving as they should. Interestingly, architects also are in the top five occupations most likely to have an accident.
Homemakers, politicians, pilots, firefighters and farmers were the least likely to be involved in traffic accidents. Homemakers also made the bottom five (least likely to be involved) in the speeding category.
The implication for businesses is that high-powered professionals in your employment should receive no special treatment with regard to safe driver training or any other requirement for employees who drive vehicles on the job. Professional service firms should be especially careful to emphasize safe driving practices.
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| Court finds private company directors liable under public company standards |
Some owners and directors of privately held companies feel that they have little need for directors and officers insurance. This belief arises out of the assumption that claims against corporate directors usually come from shareholders.
Insurance advisors point out that shareholder suits are not the only type of claim against directors. Employees, competitors and regulators may also bring actions. Nevertheless, argue some, shareholder suits are the most common type of suits against corporate boards and the strict legal standards applicable to directors of publicly held companies do not apply to private firm directors.
A new case may have changed all that, at least in some jurisdictions. In Pereira v Cogan, 294 BR 449 (SDNY), a judge has applied standards usually applicable to publicly held companies to a private concern. Even more ominous, the judge held liable those directors that did not personally profit from the actions that gave rise to the suit. The decision could cost the directors as much as $44 million.
Creditors of Trace International Holdings, Inc., sued Marshall S. Cogan, who was CEO and chairman of Trace. The court found that Cogan made insider loans, awarded himself excess compensation and paid salaries to family members who did no actual work. These actions contributed to the bankruptcy of Trace.
The directors and officers of Trace were all employees or appointees of Cogan. They were found liable because they passively accepted these actions by failing to stay abreast of and failing to challenge Cogan's expenditures. The directors failed to approve or even review loans made to Cogan or the other payments. The court found that the actions or inactions of the directors were a breach of their fiduciary duties of care and loyalty - normally a standard applied to publicly held companies.
Obtaining directors and officers insurance for publicly held companies has become more difficult because of recent corporate scandals and accounting irregularities. Insurers are adding exclusions and more vigorously enforcing and interpreting existing policy limitations. This case presents a conundrum for directors of privately held firms. It emphasizes more then ever the need for directors and officers insurance while possibly contributing to greater scrutiny by underwriters.
Ironically, Trace had $50 million in directors and officers liability insurance. However, a major part of the coverage was placed with an insurer that is now insolvent.
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| The importance of proper third-party claim filing |
When you submit a claim to your insurer for damaged property, such as from a fire, you expect a prompt response and settlement. What about when someone else causes the damage, for example when a contractor's vehicle strikes some of your property on a worksite? You may report the loss to your own property insurer and let them subrogate (pursue your claim) against the negligent party.
If you cannot involve your own insurer (such as when the particular property is not insured) you need to go directly after the liable party. When asking another party for recovery of damages, you should be careful. The manner in which you present your claim may determine how promptly or if your claim is settled.
First, you would present your claim to the person or company responsible for the damage. A well-run business would promptly submit the claim to its insurer. For various reasons, this may not happen.
If the claim gets to the insurer, you could face another set of problems. Some insurers are less responsive to third-party claimants than to their own insureds. If the insurer does respond, one approach may be to state that the insurer finds no negligence on the part of their insured. At this point, you have incurred a significant amount of frustration and delay and are back at the start.
Perhaps the best way to avoid this scenario is to follow a careful procedure for submitting such third-party claims. Here is a simple process:
- Put it in writing. Your demand to the liable party should be in the form of a letter. The letter should clearly state the circumstances of the incident, should document the amount of your damages and should provide a timeline for a response.
- Follow up. Within a reasonable time, follow up to make sure that the responsible party has received and submitted the claim to their insurer. Find out who the insurer is and if possible, the name and phone number of the adjuster handling the claim.
- Document. Keep a record of your conversations and correspondence with the negligent party and their insurer.
- Be prepared to carry the matter further. If the adjuster has not thoroughly investigated and prepared sound reasons for denial, you may wish to contact the insurance commissioner of your state. If the investigation seems thorough, the only recourse may be to turn the case over to a lawyer. There are attorneys who specialize in third-party recovery. If the amount of loss is within the jurisdiction of small claims court, you may be able to pursue solution on your own.
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When insurance markets get tough, creative strategies for corporate risk management appear. Some are truly creative and beneficial. Others are just a little too creative.
A concept that has surfaced from time to time over the years is "finite risk insurance." Many years ago, a similar approach was called "chronological stabilization." The idea is to "smooth" expected losses over a period. Finite risk can be very useful but can also be misused.
For example, suppose a company anticipates a single $1 million loss every ten years but does not know the year in which the loss will occur. It could fund the loss by contributing $100,000 each year for 10 years into a fund. Since the loss could occur in the first year, the company needs a way to pay that loss before it is fully funded. In a finite risk program, an insurer steps in and agrees to pay the loss if it occurs before the company fully accumulates the funds. The insured company agrees to pay the remaining years contributions to the insurer. If no loss occurs, the company gets its funding back absent a risk premium of (for example) 10%.
Sounds good so far. The "creativity" comes in when the finite risk arrangement becomes a vehicle for a tax break or for smoothing earnings. Some companies have tried to deduct the annual contributions as premiums. Since no actual risk transfer takes place, this deduction is not allowable. If the company submits the claim in the year of the loss and does not take the $1 million charge against earnings that year, it has overstated earnings. In the other years, if the company expenses the "premium" it has understated earnings.
This is not entirely hypothetical. The Securities and Exchange Commission recently fined a major insurer $10 million for providing a "creative" risk-financing product to a customer. The SEC found that the intent was to smooth earnings, not to provide insurance.
When markets harden, you need to be especially vigilant for "creative" concepts that offer an easy answer to an apparent insuring dilemma. Such is the time for working closely with your accounting, legal and insurance advisors to ensure that anything that sounds really good, is really what it appears to be.
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