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Business Protection Bulletin

Jul 01
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Fine Arts: protect everything from prototypes to Picassos

By Business Protection Bulletin
Sandy brought destruction to the northeast in uncountable and, before the storm, unimaginable ways.

Especially hard hit in value were collectors of fine arts and antiques. Even businesses lost precious antiquities and paintings. Many of these businesses thought fine art floaters were for attaching to homeowners only. Not so. The estimate of uncovered loss in Sandy equaled the covered losses, about half of a billion dollars.

Whether you display Civil War memorabilia, Louis XIII chairs or a stamp collection as points of interest and conversation starters, these dear assets need special consideration for their greater than intrinsic value.

Honus Wagner’s hat is not just a baseball cap. Straight property policies view it that way. The fine arts form is required.

Inventory your fine arts: paintings, collections, memorabilia, statues, silver, gold, crystal, sculpture, anything with an art value. Either find receipts for purchase or obtain current appraisals.

Even the historical pieces or company museum should be valued. Do you have an original prototype of a famous invention? How about the original of your companies first stock certificate? Any well known awards or trophies?

Think one-of-a kind, think unique value, think collectible. Now think how you replace this value.

Fine arts coverage is about uniqueness. Some policies agree to an amount of loss up front. Although you will never find that second Mona Lisa, the value can be estimated and paid to you on loss.

If you use the lobby as a museum, certainly you will want to purchase substitute pieces in the event of a loss. Main Street property policies view intrinsic value in either replacement or actual cash value.

That Louis XIII chair is fully depreciated under actual cash value and its replacement cost might be a few hundred dollars.

Other property categories limit loss to a few hundred or thousand dollars.

Learn from the crowd in New York City who never believed that loss could occur. Take time to inventory and value your treasures.

 

Jul 01
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Additional Insured Endorsement: read carefully

By Business Protection Bulletin
Additional Insured (AI) endorsements either grant liability coverage to a contract partner for a specific project or they cover vicarious liability claims arising out of the AI’s workmanship or products. Neither. Or both, depends how it’s written.

AI might be the most widely misunderstood endorsement in general liability. First, the court interpretations are recent by insurance standards. Second, the courts in different states interpret the wording differently. Third, since the comprehensive policy changed into the commercial policy form, the change in wording is being interpreted as meaningful. Fourth, by the time a liability claim gets to court, the policy wording may have been interpreted several times.

ISO current wording:

Who Is an Insured (Section II) is amended to include as an insured the person or organization shown in the Schedule, but only with respect to liability arising out of your ongoing operations performed for that insured.

Some of the controversy comes from word choice in the endorsement:

1. Arising out of operations for that insured (holder of the AI)
2. Ongoing operations’ yours on behalf of the AI
3. work yours on behalf of the AI (old form)
4. Various manuscript endorsements

Liability arising out of does not limit claims to negligence based acts or omissions. A very broad interpretation by the courts implies any connection between your operations and a loss gains coverage for the AI.

Work implies completed operations coverage while ongoing operations imply process only. The courts no longer make this distinction and interpret work as working, not completed work. The terms are synonymous on ISO forms, manuscript forms may be different.

The ISO form is being interpreted broadly as any process connection between your operations and damages may allow coverage under the AI.

Since the process usually involves your expertise combined with the general contractor, both parties may be held liable for the same act, even though clear negligence is only attached to one party.

Keep this broad interpretation in mind when considering AI status. Read your endorsement carefully, you may be accepting more risk than intended.

 

Jul 01
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The Pollution Exclusion and Misapplied Chemicals

By Business Protection Bulletin
An interesting claim case occurred at a day care center. An employee misapplied ammonia when cleaning a toilet seat causing rashes on several children.

The company reserved their rights on the claim based on the environmental exclusion in the general liability policy.

A reservation of rights essentially lets the insured know that the company will investigate the claim, but feels the company may not be responsible for payments due to an exclusion or coverage issue.

Although the reservation of rights is a stretch in this case, the action indicates the insurance industry desire to limit environmental coverage by exclusion and activism.

The ammonia was not released by accident, it was simply misapplied to the surface being cleaned. Other chemicals would have been a much better choice.

Suppose the ammonia application was followed by a second employee applying bleach to the same area. The chemical reaction can be very toxic. Would this action create an excluded event?

Under the coverage, the exclusion defines an event as sudden and accidental. The combination of the chemicals certainly is sudden and accidental even when both people purposely applied the chemical. The insurance carrier might apply the exclusion to this event successfully.

Certainly if both bottles spilled in a store room, the exclusion would apply.

The important consideration for business owners is that the insurance industry is frightened of environmental claims and is doing what it can to exclude them from liability policies. As astute risk managers, business managers must rethink strategies to eliminate environmental risk and transfer what’s left.

Train employees on chemical and cleaning supply usage. Restrict usage to knowledgeable employees. Store chemicals appropriately to avoid leaks and spills. Do not store incompatible chemicals in the same area. Check the MSDS for pertinent information.

Look into environmental liability coverage as a separate line of coverage. Even the most benign chemicals can become problematic in the long-run. Why is the insurance industry afraid of environmental claims? Think asbestos. Think about underground storage tanks.

 

Jun 01
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The Latest in Cyber Liability

By Business Protection Bulletin
What happens when an ethical tautology collides with a business imperative? Cyber liability.
Business must keep confidential information regarding clients, customers, and casual prospects secure from unauthorized use and publication.
Business must also engage in web-related activities, even something as benign as email, in the twenty-first century. A website or an email opens a portal to your business. Unguarded, this portal becomes a virtual interstate.
Communications companies, large retailers, and financial companies have paid tens of millions of dollar fines for breaches in security.
Medium and small companies share this risk if they have an internet footprint.
Cyber and Privacy Insurance coverage is complex. The most comprehensive stand-alone forms cost a minimum of ten thousand dollars in premium, which prices the coverage out of the small to medium size business budget.
Risk management offers some solutions to the problem. Engage an expert webmaster and risk manager to implement:
– Hold harmless agreements, shifting the responsibility to users
– Insurance requirements of third party vendors involved with your site
– Screen your interface users carefully
Currently, risk avoidance, although immediately pricey, is your best long-term solution to reducing your risks. Let the hackers move on to a less guarded site, or a more lucrative target.
The insurance aspect of protection requires expertise because forms and coverage differ dramatically among the carriers. Your professional risk manager can determine:
– Which policy contains the fewest or least costly exclusions to your normal operations
– Any exceptions to those exclusions which may provide coverage
– The adequacy of Cyber coverage contained in package policies
– How much coverage (policy limits) is enough
– Does your company have an exposure to bodily injury or property damage due to cyber liability? Machine software tampering causing malfunction, for example.
Cyber liability insurance is still in its infancy. Privacy, particularly for personal financial and health data, must be maintained. The web opens a door to that private data. Business needs vigilance and creative thinking to shut down this paradox.

 

Jun 01
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Business Interruption: what’s the correct form to use

By Business Protection Bulletin
Time element insurances provide the income which would be derived from assets which are no longer available for production due to an insured loss.
Two main forms of business interruption insurance are:
1. Loss of Income
2. Extra Expense
The difference between the two is the financial approach. Is the impact of loss derived from lower income or greater expense to achieve current income?
If the loss can be mitigated by spending marginally more overhead money, extra expense insurance will be cost effective. If any loss of vital assets means months of recovery with no commercial activity possible, loss of income is the correct approach.
The deep and long-lasting nature of the current recession offers opportunities to revisit business interruption insurance strategies.
Two scenarios are now commonplace:
1. The economic situation has created decreased demand, and thereby sales, so the business is over-insured and burdened with too much premium.
2. The economic condition has eliminated competition, and thereby increased sales, which leaves your firm under-insured and ill prepared for a loss.
Given the last decade, predicting your company’s financial future is a difficult task. Some thought provoking questions to ask your team:
1. Are we introducing new products into or withdrawing old ones from the market which will significantly impact expenses or incomes?
2. Have competitors entered or left your market in significant numbers?
3. Is your traditional product or service list doing well in the economy?
4. Is your supply chain adversely affected by the economy? This question is particularly relevant to contingent business interruption if a sole provider were to burn down.
5. Is your company making money now?
6. Would you significantly change operations if a major insured loss were to occur?
Review your time sensitive coverage today. The market demands attention to this detail. Using the above guideline will help you choose wisely between extra expense and loss of income.

 

Jun 01
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Today’s Flood Insurance

By Business Protection Bulletin
Flood insurance confuses even the most seasoned insurance professionals. Flood is a most damaging, yet predictable peril.
Floods occur faster and more powerfully now since so much area is paved with impervious surface and graded to drain quickly and efficiently. Local streams swell immediately.
The hundred-year floodplain is generally a decade or two behind this development curve. Even with storm retention facilities built into new larger projects, the release is measured as a ten-year storm. So, every intense storm becomes more than naturally intense. The flood peril will only get worse.
The Standard Flood Insurance Policy General Property Form (commercial properties and residential with greater than four family units) offers two coverage limits:
1. Building property – $500,000
2. Personal property – $500,000
Valuation of damage is based on actual cash value; that is, replacement cost less depreciation.
According to the Federal Emergency Management Agency (FEMA), flood means an overflow of inland waters, tidal waters, unusual or rapid accumulation of runoff, mudflow, or collapse of shorelines or banks due to erosive forces of floods or waves.
According to FEMA, mudflow means a liquid river of flowing mud on the surfaces of normally dry land. It does not include landslides, slope failure or saturated soil movements.
Flood insurance only covers this narrowly defined peril.
Deductibles apply to buildings and personal property separately, and contents coverage is never included in building coverage. The two may be on the same policy, but they stand alone as losses, valuation including deductible, and limits.
Building coverage includes permanent machinery, like HVAC systems, pumps, built-in cabinets, water heaters, awnings and canopies, and permanently attached antennas. Business interruption and loss of income are not covered.
Personal property does not include currency or precious metals, coin or stamp collections or stock certificates, vehicles, or ensuing mold or mildew without insured mitigation of potential loss.
Increased Cost of Compliance (ICC) coverage helps defray the cost of relocating or restructuring the dwelling to bring the dwelling to current community building standards in a flood zone. It is an add-on coverage.
ICC is limited to $30,000 and the building claim amount is limited to $500,000 with both coverage limits included.
Ask your insurance professional about flood insurance. It may reduce your losses substantially.

 

Jun 01
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What Your Balance Sheet Is Trying to Tell You

By Business Protection Bulletin
Listen to your balance sheet; it knows risk management.
Cash breathes life into a company like blood delivers oxygen to vital organs. Do not run low on cash. The top line in any balance sheet determines the relative health of the company, cash.
Do you have a minimum of four months operating cash on hand? If not, you’re becoming anemic. One month’s cash or less, you’re slipping into a coma.
An extremely healthy operation has cash reserves for depreciation, a plan and funding to replace vital parts.
What are those parts? Real property, like buildings, may be readily replaceable in the current market. Office operations present no serious replacement problems, setting a manufacturing line does.
If you require a specialty building, for example the roof supports an unusual amount of machinery or weight, finding a temporary replacement might prove difficult.
What is the game plan in the event of a catastrophic loss? Do you have target replacement facilities in mind? Are you expanding to a second location to spread risk, or expanding the current facility for convenience or economies of scale?
Or, are you better off funding the potential temporary loss through business interruption insurance? Take a hard look at the function of your real property and find the best solution before a loss becomes a disaster.
The balance sheet will list equipment and machinery. What is the lead time to replace the most critical assets? Do alternatives exist such as outsourcing manufacturing?
Treat your equipment and machinery like a cash flow. Can you maintain that cash flow by changing from asset based to leases? How much time will elapse to regain full operational status? How will you finance this gap?
Look on the liability side of the balance sheet. If the real property is leveraged, is a balloon payment part of the financial structure or is it a fully amortized loan? Can interest rates change over the long run?
The current rates are historically low. If you have a large loan to negotiate several years from now, you might consider an investment in interest futures to smooth the transition and avoid potential loss.
Read and study the balance sheet. You’ll ground yourself in the fundamentals and vital needs of your company.

 

May 04
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Audit Your Management Decisions to Avoid D&O Claims

By Business Protection Bulletin
Directors and Officers Liability insurance protects the company from claims pertaining to management decisions and their effect on company policy, financial reporting and, of course, performance. More and more, Boards of Directors and C-suite officers are targeted for literal or figurative payback when problems arise.
What is the best risk management for these types of losses? Other than finding the skill to predict the future or purchasing adequate limits of D&O insurance, auditing decisions for compliance and efficacy is the best.
Just as a Certified Public Accounting audit uncovers potential problem areas and relieves some of the burden and responsibility from the Board, operations and procedures audits point to compliance and process issues.
Your options include internal and external audits.
External audits have the advantage of bringing in people unfamiliar with your company, with no pre-existing thoughts, to rethink procedures and compliance. Typically, businesses grow and do not change management styles or procedures until problems arise. Sometimes a total re-engineering is required; sometimes a few tweaks do the job. A fresh perspective helps.
Internal audits have the advantage of cost, but familiarity can blind people to the issues at hand. The process investigation should begin with raw materials and end with shipping. Why? That is the pertinent question.
Why this supplier? Are others available either to supply or back-up the first supplier? This situation is a potential D&O claim: no contingency suppliers lined up. Why not? Tradition most likely.
Corporate memory and tradition are valuable, but modernization is too.
One more audit method is worth mentioning. Ask the first person in the process line how they would improve the system. Go to the next and so on. Many employees have good ideas but are hesitant to rock the boat. Find those employees and mine those thoughts. You might be surprised.
Engaging the employees has an additional benefit: happy, engaged employees who feel some sense of ownership are less likely to sue for employment practices claims, a rising cause of D&O losses.

 

May 04
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Look Through Receivables to Find Potential Liability Claims

By Business Protection Bulletin
There’s an old adage in risk management: anything pending is a potential liability.
Just like football coaches forgive hitting mistakes over inaction, top-notch business risk managers design processes which complete tasks; and when awaiting customer input, they mandate a date certain response time with follow-up. They do not want inaction to lead to uncertainty.
One form of the pending dilemma disguises itself as accounts receivable. Business owners cringe at the mention of this toxic reality – not everyone pays on time.
Use receivables as a valuable risk management tool. One of two basic truths drive accounts receivable:
1. The company made a poor credit choice and extended terms on which the customer could not
pay.
2. The customer, in hindsight, does not value the product or service as much as they expected.
Okay, before you argue that some customers are just dishonest (credit criminals) or the economy went south for the decade, see observation 1 above.
Legitimate liability issues dwell in the second house. Investigate the reason for non-pay.
Was the customer over-promised results? The area a coat of paint will cover is puffery and not a liability issue. The promise that paint is lead-free when it is not is a liability issue. If all you do is steam over not getting paid, this issue will not be rectified in a time-prudent manner.
Was your product or service defective in some way? In construction, perhaps the concrete mix was specified to be rated high strength and early tests show it is not going to meet the standard. The contractor may only find out ten days after the pour. If they move the business to a different concrete pre-mix company, you may never find out without proper investigation.
Not only is proper after-sale follow-up good salesmanship, it provides a pathway to lowering past-due receivables and detecting quality issues.
If your company is not a high priority on your customers payables list, there is a disconnect between perceived value and observed value. This situation germinates pending liability claims.

 

May 04
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Five Steps to Better Risk Management

By Business Protection Bulletin
Risk management improves with keen observations. Try these five techniques over the next few months:
Financial Statements
When reviewing your financial statements for your risk management audit, take a hard look at receivables aging. How are collections compared to last period and industry standards? Increased issues with receivables are a good indicator of future risk management problems.
Customers pay their priority vendors first. Are you slipping on their list? Is this a credit or production problem? Investigate thoroughly when slippage in receivables occurs.
Include Middle Management
Do not rely on communications rolling up hill. Interview middle managers and get thoughts on hazards, perils and general safety and risk management. Sometimes good ideas do not get passed along for a variety of reasons.
Safety Committee
If your company does not have a safety committee, organize one. The CEO should be a member, but not the head or chair. All levels of employees and sectors of the company should be represented.
Interview a few committee members about what the nature of discussions are with non-member employees. Is the information received well? Are changes implemented on a timely basis? Is the feedback from non-members of the nature of wondering why something is not being done or fixed?
Disaster Plan – Contingency planning
If you don’t have a plan, create one. Within this exercise, rethink the operation and how you would rebuild it. There is always room for improvement and your contingency plan might be a solid blueprint.
Some examples:

1. Does it make sense to move closer to your suppliers?
2. Does it make sense to move closer to end product users?
3. What is the next generation of equipment?
4. What feature should the next generation of equipment possess?
Ask the people involved with the process, they will have good ideas.
Listen
Listening is almost a lost skill. Interviewers and investigators have two ears and one mouth use them in that ratio. As a risk manager, improve your service by listening to everyone taking time to speak with you.
They do not get heard often and will pay you dividends for hearing.

 

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