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Warren Buffett, the Oracle of Omaha, is widely regarded as one of the most successful and influential investors in the world. His company, Berkshire Hathaway, is closely watched by the business world both for the purchases it makes and the way it operates. But a recent disclosure by Buffett in his widely read annual letter to shareholders contains a bit of information about the way Berkshire Hathaway operates that almost no company should emulate: the company does not buy directors and officers insurance for its directors. Its decision to “go bare” is somewhat surprising for a company known for its investments in traditional companies. But if there is any company that can do it, it's Berkshire Hathaway. The company is larger and more heavily capitalized than many of the insurers that would sell it a policy. Buffett told shareholders that the company wants directors who are more accountable if they make a mistake. “If they mess up with your money, they will lose their money as well,” Buffett wrote. Most companies can't afford to essentially self-insure themselves in this way. Directors and officers, or D&O, liability insurance protects directors from damages or the costs of defending a lawsuit in the event they are sued over errors, omissions, misstatements, misleading statements or breaches of duty. It does not, however, protect against intentionally wrongful acts. Some policies also will cover the actions of employees and the company itself. Some closely held private companies assume they do not need D&O insurance because they have few shareholders and are unlikely to be sued in a securities action. However, it is important to remember that D&O insurance can also come in handy if company officers are sued by customers, vendors, creditors or any number of others. Buffett's announcement came just after Towers Watson released a survey on the D&O market showing that many companies increased the limits of their coverage in 2010. Specifically, 21 percent of companies surveyed said they had increased their limits in response to a perceived threat of increased regulatory action. “Clearly, companies are reacting to the fact that D&O liability exposures facing directors and officers are arguably at an all-time high,” said Larry Racioppo of the executive liability group in Towers Watson's Brokerage business. The amount any company might need has everything to do with how much risk there is of your business and its directors being sued as well as your market capitalizatiion. It is also important to remember that separate employment practices liability insurance will be needed to protect the business in the event it or its director’s and officer’s are sued by your workers. If you have questions about D&O coverage, talk to your insurance representative.
There is a movement in Congress to finally fix the financially unsound National Flood Insurance Program. But the plan – as it is now written – would shore up the program, at least partially, on the backs of those who own commercial property. The federal government's flood insurance program has been in a state of limbo for what seems like forever. The program has been slated to expire several times and has been saved several times by temporary extensions. The latest extension is set to expire in September, but there is a new plan getting attention in Congress that would extend the program for five years and begin to deal with the structural deficits that plague the program. The program is more than $18 million in debt, mostly as a result of hurricane damage from 2004 and 2005. Right now, the federal government essentially provides a subsidy to policyholders by charging rates that are sometimes far below what would be necessary to cover payouts. The proposal, which has been put forward by House Republicans, would raise rates by as much as 20 percent a year on commercial property until they reached rates that could reasonably cover expenses. It's not all bad for commercial property owners, however. The proposal also contains business interruption coverage for up to $20,000. The proposal has been embraced by anti-tax groups and the Independent Insurance Agents and Brokers of America. In many flood-prone places in America, the National Flood Insurance Program is the only way to get flood insurance. Standard commercial property insurance does not cover flood damage, so it is important to make sure your business has separate coverage to protect in case of flooding. Check with your insurance representative if you have any questions.
Figuring out who is an independent contractor and who is an employee is often difficult for employers, and getting it wrong can be expensive. This is especially true in the trucking and courier industries, where there have been many questions – and just as much litigation – over the issue. Last year the Internal Revenue Service and dozens of states began a crackdown on employers who misclassified their employees as independent contractors. But he National Conference of Insurance Legislators (NCOIL) recently adopted a model law that, if enacted widely, could make the line between employee and contractor clearer. The reasons for hiring an independent contractor instead of a full-time employee are myriad. A company can save a lot of money because, generally, they do not have to pay for things like workers compensation and unemployment insurance, often do not provide contractors with the same benefits that are provided for full-time employees and can avoid paying some taxes. NCOIL's model act is based on a Minnesota law and would apply a six-factor test to determine whether or not a worker is an independent contractor. The six factors include ownership of equipment, operating responsibilities and costs, how the worker is compensated, how much control the worker has over the work performed, and a certification statement. “We’ve heard that confusion over independent contractor and employee status is a problem in these unique industries and hope the model will eliminate uncertainty that causes major headaches for all” said NCOIL President George Keiser, a North Dakota state representative. “The model will help states ensure that businesses and state workers’ compensation systems aren’t unexpectedly burdened and that employees receive the benefits they deserve.”
The federal government will begin to play a much larger role in providing earthquake insurance if a proposal by California's two Democratic senators is approved. Senators Dianne Feinstein and Barbara Boxer have proposed creating a program that they hope would lower the cost of earthquake insurance. The Earthquake Insurance Affordability Act would set up a system where non-profit insurance programs – like the California Earthquake Authority – could access federal loan guarantees. The hope is that such a system would make it easier to capitalize for earthquakes. The senators also say that the insurance system would not cost the federal government anything and that any additional costs would be borne by the non-profit insurance providers. There is even hope that by lowering the cost of earthquake coverage, more people will buy coverage and the federal government will spend less in emergency aid in the event of an earthquake as a result. California's insurance commissioner, Dave Jones, said he supports the legislation. Currently, only 12 percent of Californians carry earthquake insurance. “Recent events have shown how significant the impact of an earthquake can be and how critical it is for people to be ready to confront the challenges that arise from such a disaster” Jones said. “And one of the most important ways people can do this is though earthquake insurance.”
Red-light cameras are no fun – especially if you get a ticket from one of them. However, they appear to be saving lives. Analysis by the Insurance Institute for Highway Safety shows that 159 lives were saved by red-light cameras in 14 large cities in the United States between 2004 and 2008. The institute also said that if all major cities had used the cameras during that time, a total of 815 deaths would have been prevented. The institute calculated the number of lives saved by comparing the number of deaths in cities before and after they installed red-light cameras. First, researchers found 14 cities that did not have the cameras between 1992 and 1996 but did have the cameras between 2004 and 2008. They compared the number of fatal accidents during those time periods and found a 35 percent decrease. They then compared that decrease to the percentage decrease in cities that didn't have the cameras in both study periods. Cities without the cameras had a 14 percent decrease. Using this data, researchers concluded that if all 99 cities had installed the cameras, 815 lives would have been saved. One of the most interesting conclusions of the study is that the cameras did not just reduce crashes at intersections. Researchers found that cities with red-light cameras also had a reduction in the number of crashes away from intersections – perhaps because drivers are being more cautious in general when driving in areas with the cameras. “Examining a large group of cities over several years allowed us to take a close look at the most serious crashes, the ones that claim people's lives,” said Anne McCartt, the institute's senior vice president for research and a co-author of the study. “Our analysis shows that red-light cameras are making intersections safer.”
The tsunami that swept ashore in Japan following a massive earthquake there has left cities devastated and thousands dead. And while the vast majority of the damage is confined to Japan, the United States was not totally spared. An estimated $50 million in damage was done to property in the Western United States. A tsunami is the sort of risk that most businesses don't think about. And for good reason: they are rare events that affect only coastal areas. But the earthquake and tsunami in Japan – along with the massive tsunami that rocked the Indian Ocean in 2004 – provide reminders that these are the sort of natural disasters that have the potential to devastate coastal areas. Tsunamis have hit the United States before. In fact, one of the tallest tsunamis ever recorded hit Alaska in 1964 and tsunamis come ashore somewhat regularly in Hawaii and along the Pacific coast. Insurance policies exclude coverage for water damage from tsunamis and the earthquakes that usually cause them. Any businesses owner who wants protection from an event like this would need to purchase separate earthquake and flood coverage. Ask your insurance insurance provider if you have any questions about your coverage needs.
The number of questionable claims referred to the National Insurance Crime Bureau rose again in 2010, another indication that insurance fraud remains high despite the slowly recovering economy. The number of referrals from insurance companies to the bureau jumped 8.7 percent over 2009. That increase comes on top of a 24 percent increase between 2008 and 2009. The bureau's analysis identified auto glass fraud and inflated towing and storage bills as the top two category increases in 2010 with increases of 450 percent and 116 percent, respectively, over their 2009 numbers.
Far-off disasters rarely have a major effect on U.S. businesses, but the earthquake in Japan might be different. Marsh Risk Consulting is warning that companies whose supply chain stretches into Asia might suffer disruptions lasting several months. “A multinational company whose supply chain could be impacted by the catastrophe should start now by assuming that its business is severely disrupted for an extended period and develop an effective mitigation strategy,” said Gary Lynch, head of supply chain risk management at Marsh. The first step in managing the risk created by long supply chains is to know your supply chain and to have contingency plans in place in case there is a disruption. This can mean considering alternative methods of transport, alternative suppliers, and diversification of suppliers so that your company isn't dependent on one source of goods. Sole sourcing is a critical vulnerability. The appropriate insurance is contingent business income (CBI.) Ask your insurance representative if you have any questions about your coverage needs.
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