Business Protection Bulletin

Risk management is a process by which business risks are identified, analyzed, engineered, reduced, eliminated or transferred. Often, insurance is the final transfer of risk.

Certain risks point to insurance solutions, for example large liability limits for products or automobile exposures.

Other risks immediately point to engineering or operational risk management. Think of insurance as replacing a monetary loss. If a building burns to the ground, money replaces the loss as building funds or asset value. Now, think of losses that money cannot replace. Money will not buy a second Mona Lisa.

Failure to recover data from damaged computers, loss of cryogenically stored materials, losing the irreplaceable, these risks require management.

The cloud changes the data recovery problems of the past, but it exposes data to misuse and mischief. Simply keep a second portable record separate from the original. This duplication technique can be used for inventory management too; split mission critical stock storage into two locations.

Use redundant monitoring systems on refrigeration or other climate controlled areas. Implement a self-contained back-up energy supply such as a generator. If money cannot replace the materials stored, take avoidance and reduction loss control measures.

Do you have a product which requires a high level of expertise to operate properly?

Once the product leaves your care, poor operator training can lead to injuries or property losses. Distinguishing between defective equipment and operator error can be difficult, or it may become secondary to the financial depths of the stakeholders’ pockets.

If your product requires operational expertise, reconsider selling it as a service whereby your own personnel complete the task. You may save your company exposure to liability claims.

Risk management techniques work well with non-monetary issues or when components are irreplaceable at any price. Think through your operations and identify risks which cannot be solved with money. Risk manage those.

More former employee status jobs are becoming independent contractor assignments. Companies have various reasons for this transition, liability is the main reason. Whether liability for the employer’s share of social security or completed operations, employers decrease risks through changing employee status to independent contractor.

Liability, however, flows upstream. If the contractor has insufficient funds or insurance, the liability transfers to the engaging company.

The engaging company must require certificates of insurance (proof of insurance) from the independent contractor. Workers’ compensation, automobile liability and general liability are often required.

Some companies charge a percentage of the contract if insurance is not in place. This policy is flawed.

1. Injuries incurred under workers’ compensation affect your experience modification for three
years. You will pay for your contractors claim for three years.
2. General liability and automobile coverage use experience rating as well.
3. Your capacity to obtain insurance may be limited with the use of under- or un-insured.

What can you do to cure some of these issues?

Ask for a certificate of insurance for umbrella liability. Umbrella broadens underlying coverage, assures primary limits which are adequate, and acts as primary insurance for unusual claims.

Require contractor principles to be insured by workers’ compensation – have them opt in.

Verify all information with a phone call to the agent’s office or insurance company. This technique may sound a bit untrusting, but the financial health and ability to obtain insurance of your company demands thorough verification.

Independent contractors by definition are independent. You cannot control their employees or them. Demand verifiable certificates of insurance or do not allow the contractor to work for you.

Do not accept the transfer of risks from your subcontractors or independents to you. The long-term costs to your company can be devastating.

In the modern, younger, more relaxed era of office life, company pets are becoming more popular. And why not? Hotels have dog concierges and rent a pet.

Homeowners’ policies have used canine exclusions for years, particularly after the dog’s first bite victim claims bodily injuries.

General liability policies follow suit.

What are the concerns with company pets?

1. Too enthusiastic welcoming.
2. Employee and visitor health concerns – allergies for example.
3. Trip hazards.
4. Hygiene.

Company pets, like the homebound varieties, enjoy a good enthusiastic welcoming for friends and new visitors alike. The average medical claim for people injured by these excited demonstrations is $30,000. The animal does not want to harm anyone, but accidents do occur.

Employees and visitors can have allergic reactions to different pets. Animal phobias are relatively common. Animals can carry human pathogens and transmit through various vectors. Agreed, pets are a calming and fun addition to the company family, but employee health trumps that need.

Smaller pets contribute to trips and falls, the most common workers compensation cause of loss. Visitors or customers may be more apt to trip over a small pet since they may not be aware of the risk.

Of course, your pet may go to the bathroom inside or bring in ticks, fleas or other bugs. Hair can become a hygiene issue, or even a curse to your electronic equipment.

Company pets do increase risks to health and injury as well as property. Risk management is the first step. Different pets offer different risk profiles. Large, friendly, shedding dogs obviously carry risks. Highly territorial animals can be dangerous. Avoidance may be the best path – simply do not have a company pet.

Liability insurance for your company pet should be discussed in advance with your agent or company representative to assure proper controls, risk management and coverage.

Why should every start-up company consider environmental liability coverage?

The harmless products and processes of the past have emerged as dangerous long-term pathogens of the present many times – lead-based paint, asbestos, even cigarettes.

Start-ups begin with a new idea, product or service which cannot, by the nature of business, be thoroughly time-tested. As an entrepreneur, you must decide, with sparse data, to go forward.

Unfortunately, injured parties have the advantage of hindsight and long-term studies.

The period of uncertainty after new launches creates a long-term liability for environmental liability as well as products liability. Think about:

1. What are the byproducts?
2. What is our waste stream?
3. Can our components be recycled?
4. What will be the result of employee exposures?
5. Are there any known potential issues.

Review the history of products liability. Caveat emptor morphed into warning labels which soon became punch lines. “Do not use your lawn mower as a hedge trimmer” or “Do not dive into two feet of water” seem like unnecessary warnings, but the legal cases were lost and money changed hands.

Environmental liability is likely to evolve along this same pathway.

The late seventies brought government interventions like EPA and an environmental Cabinet Post. Since then, public consciousness has risen dramatically and sensitivity towards environmental issues has grown.

Unfortunately for business owners, even the most green-minded, environmental impacts are still not well defined and responsibility not settled.

Unable to reduce or modify the environmental risk, the best solution is transferring the risk by insuring it.

No matter how benign you believe your company’s product, process or service to be, you cannot adequately predict the environmental issues twenty years in the future. Certainly asbestos, a natural mineral, was considered safe by its promoters.

Look into environmental liability insurance for your start-up, or your mature company.

Do you communicate company benefits to your employees? Life, health, 401K, dental, paid vacations, days off or holidays? You should communicate, in writing, these benefits to your employees at least annually so they understand the cost of these benefits.

Many companies already explain costs and benefits to employees.

How about these benefits?

1. Company share of Social Security and Medicare.
2. Unemployment insurance.
3. Workers’ compensation and employee safety costs.
4. Company automobile insurance
5. Company general liability insurance

the first two points concern government insurance programs. Include these benefits because employees tend to be dismissive of the company expense involved.

Workers’ compensation insurance covers on the job injuries and illnesses for employees. It is a benefit. Simply multiply the individuals’ payroll by the rate. Explain why this is a benefit and how much it costs. Most employees do not give workers’ compensation a second thought, but largely because they are never told.

Company automobile insurance is a benefit for drivers or employees who ride in company transportation. Drivers benefit from the company assuming liability for all accidents and covering the individual driver. This protection is often overlooked as an employee benefit.

Consider common carriers. You pay for a driver and their insurance. You can avoid the risk of trucking accident by not using employees. You can avoid the risk of trucking by requiring your employee to provide insurance. When you choose to provide the insurance, you pay for your employee’s liability as well. That’s a benefit.

General liability insurance has similar impacts on employee liabilities as does the company automobile liability policy. The company assumes responsibility for employee errors in maintaining premises or manufacturing products.

Absent company risk management programs, employees might be held responsible for their liabilities. The independent contracting driver and the employee both face risks of road travel, but the employee has the benefit of company supplied insurance.

Communicate these benefits every year for two reasons:

1. Inform the employee of the costs of these benefits.
2. Remind the employee of these risks, and their responsibility to operate safely.

7655 Key Man Insurance

Small and medium-sized businesses often have employees that are “stars.” Sometimes the star is the CEO or president, other times there is a salesperson who consistently outsells every other sales team member by a two to one margin. A software company has a star coder whose ideas led to your product being a number one editor’s choice. The point is that most companies have an employee or two that helps their business thrive. What happens to your business in the short-term if a star employee, referred to by the insurance industry as a “key” employee dies?

Death is an issue that most people do not like discussing; so, many small and medium-sized businesses do not have detailed succession plans, and key person life insurance remains an unresolved issue. It is a discussion that helps your company survive hard times that follow the death of a key person.

What is Key Person Life Insurance?

Keyman life insurance protects a business from economic loss relating to the death of a key employee. The company buys the insurance, owns the policy, and is the beneficiary of the policy in the event of the sudden death of the insured. Payment from the insurance company to the business is a lump sum, and there are no restrictions on how the company uses the money. Most companies use the money to stabilize the business until they find the key person’s replacement.

Types of Keyman Life Insurance

Businesses gravitate to two kinds of policies for key employee life insurance.

Term Life Insurance: startups favor this type of policy. As startups always try to conserve cash, term life insurance is cheaper than any other kind of personal life insurance.
Policies that build cash value: Whole life or universal life insurance builds cash value that increases the cash value of the policy and is an asset on the company’s book. The company can get access to the excess cash value of the policy at any time for any purpose as the money from the cash buildup belongs to them.
Life insurance premiums vary between companies and smart companies comparison shop for the best insurance program.

The discussion is uncomfortable, but, if you do not have key man insurance, act now.

You have an idea that is unique. Perhaps it is a new process, or you invented a machine that works in a new way, maybe you wrote a book, computer code or a song. All of the above are examples of what intellectual property is.

IP Infringement and IP Insurance

When someone steals your intellectual property, it is infringement; there are several kinds of intellectual property infringements. They are:

* Patent infringement
* Copyright infringement
* Trademark infringement
* Service mark infringement

If you are a victim of any kind of infringement or accused of infringing someone’s intellectual property you face staggering legal bills. To protect your company and yourself from huge legal bills you must do two things.

1. Register your invention with the United States Patent Office (USPTO). Most people seek the help of a patent attorney, as navigating the USPTO is difficult. Through the patent office, you also record work that has protection by obtaining a copyright, trademark, or service mark.

2. Purchase intellectual property (IP) insurance. There are two kinds of IP insurance. One is defensive IP insurance that protects if you are the accused in IP infringement. The other is the offensive IP insurance which helps pay your legal fees if you own intellectual property that someone stole (infringed) from you.

Many small and medium-sized businesses count their intellectual property as their most valuable asset. If you value your IP, you need an Intellectual Property insurance policy that is both offensive and defensive.

Defensive IP Insurance

According to a study by Price, Waterhouse, Cooper more than 5,000 patent infringement lawsuits happened in 2012. Of them, three plaintiffs received judgments against defendants in excess of $1 billion. The number of lawsuits and the amount of the awards continues on an upward trajectory.

When you have defensive intellectual property insurance, the insurance company pays for your defense. If you lose, they help pay. The study concludes that IP lawsuits will continue to proliferate.

Offensive IP Insurance

If someone infringes your Intellectual Property, your recourse is a lawsuit. Legal fees for the plaintiff in an IP lawsuit are also considerable. An offensive IP insurance policy helps pay the legal costs of recovering compensation from whoever infringed your Intellectual Property.

Does your business have a website, a presence on social media (Facebook, Twitter, Instagram etc.) or anywhere else on the Internet where consumers can express their point of view you post responses? If you do, you need a Special Insurance Policy to cover you, your employees, and your company from claims of defamation (slander and libel).

Slander and libel lawsuits have grown familiar, thanks to the Internet and responsible insurance agents advise clients at risk to get the coverage.

What is Defamation?

Defamation is a tort (wrongdoing) that harms the reputation of an individual. Many states have rulings that the defamation is often unintentional and not designed to injure anyone’s reputation. Nevertheless, states also recognize the claims made for negligent or reckless defamation.

Libel means written defamation, and slander is oral or spoken defamation. In a business setting, if a clerk falsely accuses a shopper of shoplifting and is heard by others making the accusation may have committed libel (unless the goods are found on their person). Libel is a written statement that is untrue.

The only absolute defense against defamation is the truth. The exception is if the defamatory statement is about a public figure. Then there is a higher bar for winning a lawsuit. The plaintiff must prove that the statement is a known falsehood to the writer and made with actual malice. This protection was for the benefit of journalists who wrote unflattering but truthful pieces about public figures.

If your business, an employee, or you are defendants in a slander or libel action, it is almost a certainty that there will be costs associated with defending you.

Why do you need Defamation Insurance?

As in the example above, statements made publicly and are untrue can bring a slander lawsuit against your employee, you as the owner, and the business as an employer.

However, the advent of social media makes the risk greater, yet not risky enough to ignore the marketing value of an online presence. There are many of what ifs.

What if a customer makes a libelous comment on your website blog about a competitor? Are you responsible?

What if an employee makes a libelous comment in response to a customer? Is your business responsible?

What if a customer libels another customer on your blog? Are you responsible?

The possibilities are endless but not using Internet marketing techniques is not an option — even if you follow best practices.

At least, you may go to court and need to defend your employee and your business. If the plaintiff wins the case, the damage award can be costly, and some states allow for punitive damages.

Defamation insurance covers the cost of defense and the damages and punitive awards up to your policy limit.

You do need defamation insurance in today’s litigious world.

You own your home, have your own business, and drive a new car. Though you are not rich, you are comfortable. It will be a shame to lose it all if someone sustains injuries by your car or at your home or place of business.

You have insurance you say; you have standard auto liability insurance. The limits are $100,000 for a single person and a total of $300,000 for multiple people. Suppose you are responsible for any accident involving a shuttle taking ten people to the airport. Three hundred thousand dollars allows on average $10,000 per person. That is hardly enough to cover the emergency room fees let alone any surgery, rehabilitation, lost wages and other medical expenses. If there is a fatality, you may consider bankruptcy.

Your business has a small storefront on a busy street. A middle-aged executive comes into your place of business following a rainstorm. Your floor is wet and slippery, and the executive slips and falls. He strikes his head, loses consciousness, and goes into a coma. Your general business liability insurance has the same limit as your auto insurance – $100,000. It may cover part of the hospital bill, but the official says he is permanently disabled and sues you for future wages for $1 million. Since your business is a sole proprietorship, bankruptcy beckons.

Your son invites a friend over for a swim in your pool. He dives into the shallow end strikes his head and suffers traumatic brain injury. Sadly, the damage is permanent — with standard liability limits of $100,000 — well, you know, bankruptcy stares you in the face.

The inexpensive, elegant solution to the problem is umbrella insurance. When a claim exceeds your standard liability insurance limits, your umbrella insurance policy takes over and pays up to your umbrella liability limits. Most people who buy umbrella insurance extend their liability limits to $5 million.

Though you hope never to use it, for a few hundred dollars per year, you can protect your assets, and avoid financial disaster. Umbrella insurance pays when you are responsible for an injury that exceeds your standard liability limits.

Excess liability policies layer over underlying coverage like commercial automobile or general liability. These policies can be written as follow form, self-contained, or specific and aggregate.

Follow form excess policies do not broaden underlying coverage; they simply follow the form used by the primary carrier. These policies create a higher limit of liability than the primary carrier is willing to risk.

Self-contained excess liability forms independently define limits and conditions of coverage. The primary coverage dictates no terms of coverage to this form of excess, so the excess liability policy may be broader or more narrow than the primary.

Specific and aggregate excess policies resemble reinsurance more than excess coverage. These policies usually cover above self-insured retention, very common in workers’ compensation self-insured or captive programs.

The specific excess policy addresses individual claim retention amounts. The excess pays over a prescribed individual loss.

The aggregate excess policy covers over a total claims retention amount, whether it occurs in one claim or one hundred.

The umbrella liability policy broadens underlying coverage to provide first dollar, less retention, coverage above underlying primary policies. For example, umbrella policies broaden general liability and automobile liability to worldwide coverage rather than the territorial restrictions of business automobile policies.

How do these distinctions help protect your business?

Choose the correct form of excess to fit your budget. If standard primary automobile and general liability represent the biggest exposures to loss for your company, a few million in excess liability might be cost effective.

If the sources of loss just cannot be predicted in your business, or if your business is international in scope, umbrella liability will be a better buy.

It’s possible to combine two or more of these policies. Perhaps you want four million of excess and one million of umbrella.

Adequately high liability limits require some planning. Talk to your insurance professional and iron out the details.