Business Protection Bulletin

Sometimes called pay as you owe, pay as you go workers compensation helps smooth the audit process and provides cash flow to the business.

Workers compensation premiums are calculated by multiplying the rate by each one hundred dollars in payroll. Historically, workers compensation premiums were estimated in the beginning of the policy year; and audited for accuracy at the end of the policy year.

As a result of this estimate and audit process, sometimes a business would tie up capital on overpaid premiums to receive a return months later; and sometimes a firm would receive a large audit bill, followed by an increase in the then current year’s workers compensation.

Unless the business is very predictable, these audits were difficult to budget.

Pay as you go contemplates this issue and offers an option to pay premium based on actual payroll. The business, or more often, their payroll service, sums payrolls in each class and applies the rate, or, sends the payroll figures directly to the company for billing.

The business knows its workers compensation cost for that pay period immediately and with a great deal more accuracy. Budgeting is as easy as payroll budgeting since the two are tied together.

An audit will be conducted at the end of the year, but the effects should be much smaller.

Who should use pay as you go?

* Businesses with seasonal income and payroll so expenses tie to income more easily and
budgeting is easier.

* Businesses with large payrolls which benefit from the cash flow of this system.

* Contractor businesses which assign payroll to different jobs to more easily tie payroll
expenses to specific sites.

Your business needs to qualify for this service, so call us to discuss the possibilities to find the best match for your business. We can help your budgeting and cash flow.

Yes. The most obvious addition is worldwide coverage for automobile liability. Typical business automobile policies cover drivers in the United States, its possessions and Canada. The umbrella policy does not have this restriction.

Umbrellas serve to add layers of liability in one million dollar increments. These layers are written in excess of your general liability and automobile policies. If you have watercraft or aviation policies, the umbrella layer covers in excess of those policies too.

Umbrellas broaden the general liability policy too. Some general liability policies do not cover the peril of sexual harassment, for example. Umbrella policies do. When these claims occur, you would be subject to a retention, similar to a deductible.

A deductible is when you pay the first few dollars of a claim, but claims administration and legal fees are not included as subject to a deductible. With a retention, these administrative and legal costs are subject to your first dollar payment.

So, how does this work?

A business has a $500,000 limit on automobile insurance and $2,000,000 on general liability with a one million dollar umbrella. They have an automobile claim that settles for $1,300,000. Their automobile liability pays $500,000 plus claims and legal costs; and the umbrella pays $800,000. The business pays nothing out of pocket.

The same business suffers an excluded general liability claim in a foreign country and the courts order $250,000 damages. The general liability policy does not pay any of the claim because the act is excluded. The business pays their retention of ten thousand dollars. The umbrella pays $240,000 plus court and claims costs.

The umbrella policy, after the retention amount, pays for all legal defense costs worldwide. Anyone traveling outside the borders of the United States and Canada should seriously consider an umbrella policy.

Umbrellas provide important increases to liability limits at home. Call us for details and a quote.

How does experience rating work?

Okay, this discussion will get a bit technical. Price setters in the insurance business, underwriters, assess the risk associated with an account and then calculate a premium. They look at factors such as the types of items covered (the schedule) and past losses.

Schedule credits apply to multiple cars, multiple property locations, or supply-chain management factors. Theoretically, it’s unlikely to lose or total damage items at multiple locations in one incident. For a favorable schedule, less risk equals lower premiums.

Low past losses imply good loss control. So a favorable loss history generates an experience discount. The process is known as experience rating.

Usually, the underwriter has access to research which outlines average losses per type of business. These data also indicate how the losses are generated on average – few severe losses or many small losses.

Underwriters fear the frequency of losses more than the severity of any loss. Frequency demonstrates general carelessness and poor risk management. Severity indicates bad luck. So the underwriter tallies total small losses and discounts major losses. This number indicates expected losses. If these are lower than expected, the underwriter applies a discount.

How can a business earn these discounts?

Solid loss control programs help reduce the frequency of claims. An investment in proper protective gear like hard hats, eyewear and work gloves pays dividends in lower premiums.

Good maintenance of equipment, buildings and tools decrease the odds of property losses occurring.

View your loss control program as an employee benefit funded by reduced insurance premiums. The employee benefit requires a company ethic that every employee should get home safe every day. Personal protection items remind the employee to think safety.

When employees know management treasures safety, work becomes more familial. It usually takes about three years for safety programs to prove cost cutting. Get started today.

Personal automobile liability, homeowners’ liability coverage, watercraft, aviation, and umbrella liability are designed to cover all the risks associated with day-to-day hazards. But, many times, entrepreneurs are not as vigilant with personal risk management as they are with their business’.

So ask yourself: do you want your partner’s 17 year-old son randomly choosing your next partner as the result of a DUI accident?

Once the underlying limits run out, the partnership share, the stock ownership, the thrift plans, become vulnerable to seizure. Yes, your new partner might be a bit angry with your old partner. Of course we advocate safe sober driving, but any claim can exceed the statutory limits of liability and create an unpleasant internal operations problem for your company. Cover the real risks properly.

Enterprise risk management uncovers this sort of hazard. Business continuation planning recommends surveying personal risk management among the owners and partners of any closely held company.

Just as you protect your company assets and income against casualty and property losses, protect your partnership too. Review the personal lines limits of liability partners carry. Require at least several million dollars of umbrella coverage.

Okay, you’re asking why so high.

Do you want your business to thrive for many years? Do you know how long it takes to get through the court system for a major liability case? If the injured party doesn’t settle, the business assets and partnership could be at risk for four years.

And if the case would settle for a million dollars today, claims inflation might make the payout three times that in four years. It is not entirely predictable. But it is predictable that your policy limit will not rise as the result of inflation. You must take action to increase that limit.

Stay ahead of the liability curve and protect your business structure with proper personal risk management risk assessment, planning, and program implementation.

Directors and Officers (D&O) coverage protects company and individual assets from claims regarding the management professionalism of the upper levels of companies.

The leading cause of D&O claims and payouts concerns financial reporting. The books don’t have to be cooked necessarily, as they just need to be inaccurate to provoke a claim.

Relatively new accounting standards require real property values to properly reflect environmental impacts and potential clean-up costs. For example your company purchases a piece of land for $50 knowing it is environmentally impacted with an anticipated clean-up cost of $950. The book value of the property is $50 because that is what you paid, and it is the net value including clean-up. Now let’s assume new regulations require an additional $49 of remediation. You must either write down the value by $49, or if the property is held for sale, you can optionally write down only actual costs reflected in the sales price.

Of course, as with most future conditions, how do we predict what costs will be when we remediate the site?

Unfortunately, directors and officers must make management decisions in real time while arm-chair stakeholder quarterbacks get to review results with the power of hindsight. Will the Chief Financial Officer (CFO) decide a conservative cost structure and reduce the value of the stock? Or, will he choose a more optimistic scenario and not reveal the full extent of the environmental impact thus falsely inflating values?

The answer is: in today’s regulatory and transparent business environment, adequate D&O limits are a requirement of good management. Also, the CFO should consider environmental impairment insurance.

In the spirit of insurance and great risk management, the CFO can swap a premium (known expense) for a future potential claim (unknown loss). Thus transferring the loss on the asset, to an expense. The asset value remains unchanged.

These valuation rules are very complex and you should consult with a CPA about your specific situation.

There exist many ways to calculate the value of your real property. When it comes to an insurance value, several stakeholders have some skin in the game.

The lender wants a value greater than the financed amount even though the insurance company is under no obligation to pay an amount greater than replacement cost. So what happens in a down real estate market when the best business decision might be to buy a low priced replacement building rather than face the relatively high cost of rebuilding the old one?

If a decent replacement is on the market, the business could buy, move and reopen sooner and suffer lower collateral losses, like lost sales.

So here’s the problem. If you claim the loss with the intention of buying a building with the proceeds rather than fixing the old one, the insurance company is only obligated to reimburse the “actual cash value” of the building.

Actual cash value (ACV) is the replacement cost less depreciation. With older buildings and other add-on coverage, the difference can be significant. And ACV valuation may work for you; don’t discard it out of hand.

The add-on coverage defrays costs associated with upgrading due to building codes, replacing obsolete building materials, extra demolition required by the authorities, or upgrading life, fire and access codes.

So under replacement cost valuation, the insurance company pays for your old building to be replaced with the modern, up to code version. Depending on the age difference, these costs can be significant.

With an ACV claim, the insurance company cuts you a check for that amount less what the lender got. The advantage, in down real estate markets, is if you can buy a reasonable, usable replacement location for the cash proceeds and the same loan amount, you end up with a different location and the land from the first location. You may need to demolish the balance of the building though.

Back to the lender: unless you negotiated an agreed value to a total loss, the insurance company does not look at the financed amount as relevant to the claim. Some specialty coverage can be bought to cover that shortfall, but it is not yet standard.

We suggest thinking about the contingencies and planning for them in advance. Is it more important to reopen and save the sales, or is it wiser to build an inventory stored elsewhere? How about your suppliers? Can you replace them quickly in event of a fire at their facility? A good crisis plan is common sense for risk management. Then, your selection of economic valuations of your building will be appropriate.

What do umbrella policies do?

Insurance professionals can’t help themselves. We rely on wonk-ish diatribes to describe umbrella policies because they are technical in nature.

So let’s try to simplify.

Most companies buy insurance because they are required by law. Workers’ compensation and automobile liability allow companies to hire employees and use public highways. If they own property, their lender requires insurance. If the company leases space, the landlord requires premises liability.

But the real reason to buy insurance: trade a known loss (premiums) for unknown losses (claims). Your company can budget for the acceptable level of known loss which protects against normal, everyday losses associated with entrepreneurship.

Now the umbrella policy: you’re buying catastrophic loss coverage for imaginable claims. The multi-passenger near fatal car wreck or the nightmare products liability claim that costs millions in damages.

You’re also buying coverage for unimaginable claims. Claims not covered by your automobile, general or employer’s liability:

• Do you promote your company through social media? Libel and slander losses are covered by personal injury liability, usually excluded in general liability policies, usually covered on umbrellas.
• Do you send employees out of the country? The stated territories for coverage under standard general and automobile insurance is the United States and Canada. For umbrellas, it’s worldwide. Now, some umbrellas specifically expand territory language to include “anywhere” because of commercial space travel.
• Any possible sexual harassment in your organization? Again, usually excluded by general liability, but included under umbrella coverage.

These examples of rare occurrences give a taste of the importance of umbrella liability. Your company can be blindsided by large liability claims that are not anticipated by your typical liability coverage. Broaden the territory, widen the safety net, spend a little more premium, get more peace of mind.

Trade a little more known loss, your umbrella premium, for a lot of protection against the unimaginable loss.

How safe are your company’s drivers behind the wheel – and what can you do to help them make safer decisions on the road?

More and more auto fleet managers are using wireless telematic devices mounted inside company vehicles to answer to monitor the speed, location, and braking information of their employees.

Businesses that have installed these systems have reduced their accident rate 15% to 20% by educating drivers, according to industry experts.

“We’ve always tried to individualize training, but in-vehicle information was hard to capture,” says Beth Lowrey of Mercury Associates, Inc. a fleet management consulting firm based in Fort Smith, AR. “Now, if we see somebody who has had a hard braking event or irregular shifting patterns, we can monitor this behavior in real time through technology and train accordingly.”

To help the cause, more sophisticated telematics systems are using in-vehicle cameras and active alarms that alert drivers immediately when they violate road safety standards “When a driver sees a light flashing, they will know that they have to take action,” explains Nancy Bendickson, senior consultant with Aon Global Risk Consulting (Minneapolis, MN).

Domique Bonte, Vice President and Director of Telematics of London-based ABI Research, believes this instant feedback empowers drivers by removing the sense that the telematics system is only there to monitor them. As Bonte sees it, “This way, a driver can improve himself without his boss or fleet manager having to do so. It’s important to reward drivers for good behavior. It can’t all be about punishing the bad ones.”

To learn how telematics can help keep your drivers safe behind the wheel – and reduce your Commercial Auto premiums – feel free to get in touch with us.

A disgruntled employee can sue your business at any time – and, even if you win, you’ll be out time, money, and energy defending yourself.

The first step in reducing this risk is to ensure that every hire is “clean:” made purely on the basis of job requirements. To help the cause, industrial relationship experts recommend these guidelines:

• Avoid discriminatory language when advertising job opportunities. For instance, an advertisement stating “young” or “recent grad” might discriminate against older job applicants, while “’salesman” implies discrimination based on gender.
• Have a specific job description that gives the essential functions and abilities of the job.
• Use a standardized interview form that asks all applicants the same questions – which must be related to the job.
• Don’t ask applicants questions that might identify their membership in a protected class such as age, religion, or national origin, unless it’s essential to the job (For example, a parochial school can ask about the religion of a potential teacher, but not a maintenance worker).
• Never ask whether an applicant is married, pregnant, has children, or is planning to do so.
• Ask only questions related to the applicant’s ability to perform specific job functions, not such past history as such as drug addiction.
• If an applicant is otherwise fit for s position, don’t refuse to hire him or her based on presumed susceptibility to injury However, you can set bona fide physical criteria required by a job, such as the ability to lift a certain weight.

Although these “ounce of prevention” policies can help curb hiring-related discrimination claims, your business also need a comprehensive Employment Practices Liability Insurance (EPLI) policy.

For more information, just give us a call.

In today’s high-tech world, every business depends on increasingly complex electronic and electric equipment to stay in business. But what happens when these systems break down?

Consider this nightmare scenario: You’re facing a deadline under a major contract when a voltage spike surges through your electrical lines, burning out its computers and telephone networks, and shutting down your operations. In addition to lost productivity, you’ll need to spend time and money repairing or replacing the damaged systems – not to mention the revenue you’ll lose until you can get back up to speed. The total cost could easily run into six figures.

Equipment Breakdown insurance to the rescue! “Think of this policy as Accident, Health, and Disability insurance for your equipment,” says Mark MacGougan, Assistant Vice President of The Hartford Steam Boiler Inspection and Insurance Company. The coverage, also known as Boiler & Equipment Insurance, can pick up the tab for: 1) repairs and replacement of equipment damaged due (some policies will cover green construction and disposal and recycling expenses); 2) expenses of limiting the loss or expediting the restoration process; and 3) income lost when a covered breakdown causes a partial or total business interruption.

Many businesses carry Equipment Breakdown coverage under their Commercial Property insurance. More sophisticated operations might prefer a stand-alone policy. Some insurance companies offer such preventive services as infrared scanning technology or onsite inspections to identify maintenance needs.

The coverage you need depends on the nature and size of your operation, the exposures you face, and the type of equipment you use. As insurance professionals, we’d be happy to tailor an Equipment Breakdown policy to fit your needs, at a price you can afford.