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If your organization frequently transfers risk in contracts, you may wish to pay additional attention to the security of the contractor's insurer. These are difficult times for many insurers. More than a few long-time carriers have been placed on watch lists or downgraded by rating agencies. A.M. Best is the oldest rating agency specializing in insurers. Other rating agencies include Standard & Poors and Moody's. Your insurance representative can help in interpreting the ratings and in looking beyond them at other factors to consider. Ratings are available on line.
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| Information control - E-mail |
Information is one of the most important elements in today's business world. Every organization needs a "document retention system." A document retention program is basically a systematic plan to dispose of records as soon as legal requirements or other needs are no longer applicable.
But what about e-mail? Cyber correspondence can live on long after its creator intended and in places the originator never realized. For example, e-mail may still exist on internet service provider or mail service servers even after deletion by sender and recipient. Copies are easily forwarded and could be kept on Internet bulletin boards, corporate servers, or hard drives of addressees.
One answer for sensitive communications is an "e-mail shredder." This software allows users to encrypt a message and to specify a time period after which the message turns to nothing but garbled text. Only a person who has the "key" can read the message and after the designated time period, not even that recipient can read it. With some of the software, the sender has the option to prevent cutting and pasting, copying or printing of the e-mail and any attachments.
Although this is a relatively new software field, several producers of e-mail shredder type products are already offering "shredder" and other e-mail security software for a variety of needs and applications. If your organization has a need for secure communications, you may wish to consider an e-mail security application. You should note, however, that some products are relatively new and in some ways yet untested. If your organization has an IT specialist or consultant, you may wish to discuss the product with them before using it.
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| Management liability insurance for private companies |
Management liability insurance includes several types of policies designed to protect against liability arising out of management's decisions and business practices. The most common kinds of management liability insurance include
- Fiduciary liability (for trustees of employee benefit plans)
- Employment practices liability
- Professional liability for certain organizations such as hospitals, and their management
- Directors and officers liability
Directors and officers liability insurance (D&O), the coverage most obviously intended for management liability, was intended primarily to protect against shareholder suits. Today, however, most D&O policies contain considerably more than that one coverage. D&O is great for publicly traded companies. Privately held companies do not have the shareholder derivative action exposure of public companies, however. They could be paying too much insurance premium to insure a risk that isn't there.
A relatively new kind of insurance product addresses the coverage needs of directors and officers of privately held companies. The coverage is sometimes called "private company management liability insurance" although different insurers give their policies different names.
Most policies offering this type of coverage include a combination of basic management liability coverages including D&O, employment practices, fiduciary and third party discrimination. These are combined in a single policy. Depending on the insurer and the needs of the company, some policies can add coverage for crime, kidnap & ransom, errors and omissions for the business or profession, intellectual property liability, "cyber" insurance and other "business risks."
There are many different ways to structure this bundle of coverage. One is the ability to pick and choose among the coverages most important to your business. Another option is combining policy maximum amounts or maintaining separate maximums by type of coverage. Combining maximums into a single limit is one way of reducing premiums. However, one key coverage may lose protection if a different coverage involves many claims within the policy period.
Many private companies should consider some form of private company management liability coverage. This is especially true for those who do not buy D&O insurance because they believe there is no threat of shareholder suits. Half the suits against publicly traded companies are not from shareholders. They are from employees, clients, customers, and competitors. Privately held companies have these same risks.
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| Beware of fraudulent certificates of insurance |
In the current economy some companies apparently are trying to save money by cutting back on insurance. Some are skimping on limits or switching to lower-rated insurers that are willing to offer lower premiums. Others "go bare" (without coverage). As a result, certain businesses sometime find it difficult to satisfy their customer's insurance requirements. A few resort to fraud.
According to one state insurance department investigator, as many as one-third of the certificates of insurance provided as evidence of coverage to meet customer insurance requirements are phonies in certain industries. Construction and trucking are businesses in which this has become a particular problem. A woman in Minnesota was charged with insurance fraud and forgery for forging a certificate for workers compensation insurance for her husband's construction firm.
If you rely on your vendors and contractors to provide insurance coverage, make sure you check certificates carefully. Some telltale signs to watch out for:
- Obvious marks indicating modification, such as "white out"
- Faded certificate photocopies
- False insurer names (many sound alike - make sure the company is legitimate)
- Expiration dates that have passed
- A party other than your organization listed as "certificate holder"
- A party other than your contractor or vendor listed as "insured"
You can also call the insurance broker or agent listed in the upper left hand corner of the form to verify its authenticity. Use the phone book to look up the agent, however. A devious fraud perpetrator may give a false telephone number and have an accomplice answer the phone.
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Some insureds may be concerned that reporting every occurrence to an insurer will result in cancellation or higher premiums. In most cases, however, notice of occurrence letters are simply filed without action unless it is clear that significant damage or injury has occurred. Adjusters are too busy to investigate every single notice. One strategy is to devise a protocol with the insurer so that incident reports are not coded into the insured's experience.
There is a danger in not reporting, however. If the insurer can demonstrate that its defense was prejudiced by lack of opportunity to investigate and settle a claim, the insurer may be able to deny coverage. This ability depends on circumstances, jurisdiction and type of policy. A look at the policy wording reveals some clues.
- General liability policies say something like: "You must see to it that we are notified as soon as practicable of an 'occurrence' or an offense which may result in a claim." In some jurisdictions an insurer must prove "prejudice" in order to deny coverage for late reporting. Other jurisdictions hold the view that unexplained delays in reporting justify denial of the claim outright. Besides risking no coverage, late reporting increases claim costs. One study by St. Paul Insurance Company showed a 78% cost increase for late reported bodily injury claims.
- Property policies may say that the insured must "Give us prompt notice of the loss or damage." Obviously, it is in the insured's best interest to report property losses quickly. You want to get your money or property replaced as soon as possible. If you delay, valuable proof of loss could disappear, jeopardizing the amount of recovery. Some equipment breakdown (boiler & machinery) policies recognize the report date as the date of occurrence. This practice could seriously affect recovery of business interruption losses.
- Auto policies state "In the event of 'loss', you must give us or our authorized representative prompt notice of the 'loss'." The word "prompt" is not defined. Like general liability policies the issue of "prejudice" varies by jurisdiction. Delayed reporting increases costs and greatly increases the likelihood of the plaintiff consulting an injury lawyer.
- Professional liability and directors and officers liability policies may contain a requirement such as: "The Insured shall as a condition precedent to the obligations of the Company under this Policy, give written notice to the Company as soon as practicable …." Generally, courts will strictly interpret the reporting provisions in a claims-made policy and deny coverage to insureds reporting late. See Matador Petroleum Corp. v. St. Paul Surplus Lines Insurance Co., 174 F2 63 (5th Circ., 1999).
- Workers compensation policies such as the National Council on Compensation Insurance (NCCI) form state that the insured's duties are to "Tell us at once if injury occurs that may be covered by this policy." Delayed claim reporting means increased cost. In one study by insurer Liberty Mutual, workers compensation claims reported in the first three days following an injury cost an average of 23% less than claims reported from 15 to 21 days after the event. In addition to the claim cost increase, many states impose fines for late compensation claim reporting.
Obviously all insurers want notice of loss sooner, rather than later. Prompt reporting is in the best interest of all parties. Late reporting can be costly, especially to the insured.
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Changes in your business activities, in your inventory or assets, or in any of the hundreds of little things that are a part of daily organizational life can affect your insurance coverage program. Here are some of the things you need to keep track of and notify your insurance representative when changes occur:
- Ownership
- Name changes
- Business plan changes
- Mergers, acquisitions, divestitures
- Dissolution or disposition of subsidiaries
- Partnership changes
- Location changes, including vacancy or unoccupancy and operations in new states or countries
- Major payroll changes - new employees, layoffs, etc.
- Fleet changes including new vehicles, location changes and new drivers
- Addition or deletion of watercraft or aircraft
- Benefit plan changes, in structure or assets
- Physical security changes such as alarm systems, fire suppression systems, guards
- Transit changes such as method of shipping, large shipments
- Products - new, discontinued, significantly modified
- Customer or client changes (major accounts)
- Major changes in sales volume
- New buildings, additions or remodeling
- Significant inventory increases or decreases
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| Policy anniversary timing |
You may already know that there are several reasons why you may want most, if not all, of your insurance policies to have the same policy period ("anniversary" date).
- It can make it easier to administer if you only have to go through renewal once a year
- You may gain some negotiation advantage if you have a larger package of coverages to offer to insurers
- You reduce the danger that overlapping periods could produce coverage gaps such as might occur between primary and excess policies
Besides the advantages of a common anniversary date, the date itself is a matter of some importance. Many insureds purchase coverage to coincide with tax years or fiscal years. These most often commence on January 1 or July 1. The greater the number of insureds requesting quotes on the same day, the harder it is for insurers and agents to devote as much attention to each request.
Another practical issue is that the insurers' own policies usually renew on one of those two dates. The insurers purchase "reinsurance" to share the risk of loss with other insurers. For some insurers, reinsurance is the most crucial part of the program. The insurer may reinsure more of the coverage than it keeps. A lot of attention goes into reinsurance negotiations. The need for attending to reinsurance renewals takes away from the amount of consideration the insurer can give your application.
Avoiding January or July 1 renewals has long been used by savvy insurance buyers as a way to avoid getting "lost in the rush." As the business world has become more complex and more organizations have staggered fiscal years, underwriters now say that the first date of any calendar quarter has become a frenzied time for renewals.
To make sure your insurance renewals get the attention they deserve and to gain some strategic benefits, consider timing your insurance program to the best advantage. A single anniversary date that is in an "off" month (not the first month of any calendar quarter) may help your program in a variety of ways. Consult your insurance representative about whether this approach could benefit you.
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