Business Protection Bulletin

Fraud detection can be approached with a five-step strategy. Businesses of all types and sizes can use this five-step strategy to establish control systems to help detect frauds in day-to-day operations. The five steps are:

1. Knowing the exposures.
2. Knowing the symptoms of occurrence.
3. Being alert for behavior indicators and symptoms.
4. Initiating detection processes and building audit programs to look for symptoms.
5. Following through on any detected symptoms.

It’s often step one, knowing the exposures, that stops most people from ever getting starting. After all, if you don’t know what could go wrong, then the rest of the strategy is a moot point. To help you better understand how you can use the five-step strategy to create a hostile environment for fraud, let’s begin by identifying the exposures and going through some of the most dangerous/common frauds affecting businesses of all industry types.

How often are employees offered a kickback by an employee or vendor in exchange for their participation in an embezzlement? Collusion is the involvement of at least two perpetrators in a fraud. This is a risk that intimidates accounting and finance managers, risk professionals, and auditors alike because it involves perpetrators getting around the controls designed to prevent a specific fraud.

It doesn’t take an elaborate, large conspiracy to circumvent controls. Let’s use a driver and accountant for a trucking company as an example. Inventory and warehouse operations and accounting operations are segregated from one another, but the control is circumvented. The driver steals the goods from his truck. Meanwhile, the accountant covers up the inventory shortages with false sales and un-collectible write offs.

This begs the question: How are executives and managers to prevent such a fraud when multiple people can so easily circumvent the control structures? The answer is to commit to seeking the symptoms of fraud. Begin with composing a list of what could go wrong, including potential fraud perpetrators and acts. With certain collusive frauds still in mind, here are some examples:

• A procurement director for a business informs a vendor of what the vendor’s competitors are bidding. The vendor is able to win the business with a lowest bid and gives a kickback to the procurement director.
• A supervisor proposes that a 13 hourly student laborers put false overtime on their timesheets. The supervisor will approve the un-worked overtime in return for them splitting the money they’re paid with him/her. The individuals are able to steal thousands of dollars before anyone detects the fraud.
• A terminal operator, terminal supervisor, and accountant at a pipeline company conspire with two employees from the pipeline’s trucking vendor to steal one million gallons of fuel. Unsuspecting fuel service stations buy the stolen fuel. Meanwhile, the accounting clerk decreased the actual numbers on the fuel variance report and destroyed lading bills.
• Three operation employees at a construction company begin over-billing several multi-million dollar project clients for insurance, rent, and other indirect costs. They’re able to put the extra billing money into their pockets while their company continues to collect on the legitimate charges. The company’s chief financial officer discovers the fraud, but offers his/her silence for a cut of the proceeds. Millions of dollars are over-billed before the fraud is detected.

The Symptoms. Once you know what could go wrong, the goal is to avoid the problem. This can be accomplished by listing the symptoms of the frauds, which is essentially how the frauds would appear in your records and books. Using the examples of what could go wrong from above, the following are just some examples of what could be on the symptom listing:

• A particular bidder is always the lowest bidder, the last bid received, and/or just pennies less than their competitors.
• Absent student employees during the time the overtime hours are supposedly being fulfilled.
• Over budget departmental labor expenses.
• Peculiar or suspect overtime hours, such as 80-hour workweeks by a full-time student.
• Service stations complaining about competitors getting fuel under the market price.
• Missing lading bills.
• A particular area has larger than usual, unexplained, and/or miscellaneous losses.
• Altered and/or inadequate documentation to support indirect charges.
• An unreasonable percentage of indirect charges for a construction project, such as being 25% of more of the total billing.

In summary, notice that control weakness weren’t listed. Control weaknesses aren’t symptoms of fraud. You don’t know that you don’t have lung cancer because you’re a non-smoker, or that you do have lung cancer because you’re a smoker. It’s about the symptoms. The same can be said of fraud in that it doesn’t mean that a fraud isn’t happening just because a control is present, or that it is occurring because a control isn’t present.

How can managing your Workers Compensation claims process protect every employee?

The first step is to file the claim right away. To this end, have claim forms available to all supervisors. Some companies keep forms near the first aid kit alongside the OSHA log. Management must acknowledge the problem to correct it, so keep good records.

Keep any information regarding preferred doctors networks or nearest emergency care facility with the first aid kit. Maps to these facilities help in crisis management.

Because of the privacy laws, keeping records of employee health concerns (hypertension, diabetes, allergies to medicines) at the ready is tricky at best. Without making the records readily accessible by anyone, they need to be available to supervisors in an emergency.

The insurance company has a depth of claims experience that no insured can have. If not treated properly, some injuries worsen over time. The company has a right to investigate and guide treatment and rehabilitation. A delay in reporting that causes the situation to worsen may create coverage problems. Dutifully report all claims immediately.

Allow the insurance company to investigate the claim. Usually, if the claim results in only medical bills and no lost time, the company will not spend time finding causation; but your company management needs to understand the progression of events that leads to any loss.

Uncover the cause. Were safety appliances, equipment, and personal protection in place and used properly? When the employee was drug tested after the claim, was that an issue?

Use any claim as an opportunity to discuss safety at your next scheduled safety meeting. Discuss the following topics as collateral to the claim:

Assure employees the injury is covered by Workers Compensation and the injured will be cared for properly. If the injured is at work, have them report on the level of care. Discuss the results of the investigation regarding the cause of the loss in neutral terms, but no personal information about the employee. This discussion is about future avoidance, not humiliation. Remind employees of the drug testing policy and explain the policy aims to protect everyone.

If the insurance company investigation implies fraud, fake injury, review safety rules or regulations in a more generic form. Perhaps discuss slips, trips, and falls prevention as opposed to that specific incident.

Risk avoidance is your best measure against Workers Compensation injuries. Maintaining a safety culture with training, meetings, and management leadership keeps a workplace safer. Having proper paperwork and first aid readily available reduces the lost production effect of injuries.

The more prepared you are to handle an injury professionally, the more you protect your workforce. Manage ahead of the crisis with proper planning.

When the Commercial General Liability policy was formed, the creators did not intend for pollution events to be covered. The effects of these events are very costly, and special policies are required for businesses facing such risks. These special policies are designed by companies that have expertise in pollution events. Routine events are what the CGL form covers. Falls, construction accidents and property damage are some examples of such routine events. Contractors who have accidents that result in irritants, fumes or other harmful substances being released may still receive some coverage from a CGL policy.

It is important for contractors to understand the extent of pollutant coverage. The CGL form extends coverage for pollutants released only on properties not owned, rented or occupied by the general contractor. However, coverage is not extended for personal property. For example, if a contractor accidentally cracks a gas pipeline at a fuel station, coverage may be extended because the contractor does not own, rent or occupy the station. However, if the same contractor knocked over a large oil drum on his own business property, the effects of the incident would not be covered by the policy.

Contractors also have coverage for any pollutants released on a job site that were not provided by them. Consider the previous example. Since the gasoline at the fuel station was brought by a supplier, it was already in the pipelines when the contractor arrived. However, if that same contractor had brought some chemicals to take to the next job site and spilled them while at the station, he would not be covered. Chemicals and pollutants brought by the contractor may only be covered if they were brought for that specific job. If the chemicals were brought for the fuel station job instead of the following one, the spill may be covered. For example, if a contractor is painting inside of a building and others get sick, he is covered. The policy also covers pollution from completed operations. If pipelines carrying damaging chemicals started leaking several months after being installed, the contractor would be covered.

In most construction contracts, the subcontractor’s CGL policy must include the general contractor and project owner as additional insureds. The policy does not include pollution incidents occurring at places that were not owned, rented or occupied by an insured. However, exceptions are made for premises belonging to any entity named as an additional insured. This means that subcontractors would not have pollution coverage on most job sites without naming the general contractor and property owner as additional insureds.

Keep in mind that the CGL’s pollution coverage is not complete. For example, if a contractor brought a front-end loader to a job site and fluid spilled everywhere, the cleanup would not be covered. In addition to this, the policy does not extend coverage for pollutants released in connection with a contractor’s environmental remediation work. It also does not cover such work performed by hired subcontractors. For contractors and subcontractors who do this type of work, a special Pollution Liability policy is required. It is important for all contractors to discuss their operations with an agent. This will help the agent determine whether current coverage is sufficient. If it is not, an agent will be able to recommend insurance products that close any deficiency gaps. Pollution fines and cleanup expenses are very costly, so it is important to be prepared before an incident happens.

Thanks to the widespread popularity of social network sites like Facebook, MySpace, Twitter, and LinkedIn, it’s easier than ever to find personal information about an individual. There’s little hesitation or forethought as users of these sites post everything from their vacation schedules and photos to the most mundane and taboo details of their personal lives. Such information might be intended for the user’s friends and family, but, in many cases, anyone with access to the Internet can see it if they’re looking.

The information an employer can uncover about an existing or potential employee from a simple Google search is often far more detailed and reflective of real life than a job application, resume, and interview combined. On the good side, an employer might find positive articles written by or about an applicant, marks from professional peers, and volunteerism efforts. However, on the bad side, an employer might find unappealing, profane language; graphic videos or pictures; derogatory comments about an employer; or text that clearly shows an unscrupulous demeanor. Good or bad, many of these finding will directly influence an employer’s decision to hire or pass.

Although a quick Google search of a job applicant can be extremely revealing, many employers still wonder if it’s wise for them to conduct one.

One complication would be an employer discovering information that would bias and complicate their hiring decision. Let’s say an employer does an Internet search on a female applicant, discovers that she has several children, and therefore decides not to hire her because her status as a mother might interfere with her ability to put in extra hours at work. If the applicant was to discover that the search was done by the employer and decide to pursue legal action for discrimination, then the employer could be burdened with proving his hiring decision wasn’t based on the applicant’s status as a mother.

Another complication would be an employer using an applicant’s off-duty, legal activities as a basis for discrimination. Let’s say an employer does a search, finds that a male applicant is involved with a political or social cause they don’t necessarily agree with, and therefore doesn’t hire him. Many states actually have laws prohibiting such employer discrimination, meaning an employer can’t legally deny an applicant a position based on political or social views that aren’t relevant to his/her work duties and only take place during off-duty hours. There must be a legitimate business reason for the hiring decision.

Federal law requires employers to make a disclosure if they use an applicant’s credit history to take adverse actions, and some state laws are similarly requiring employers to disclose any adverse information they find in public records about an applicant. Such disclosures are certainly a costly inconvenience to employers. There’s also a question of just how reliable the information is since the information could be pertaining to a different person with the exact same first name and surname as the applicant. Furthermore, it doesn’t take 30 minutes for a begrudged or vindictive individual to create a web page to discredit another individual by passing off false, misleading, or distorted information as fact.

The above points certainly show a liability risk for employers doing Internet searches. However, there’s also a risk in not thoroughly researching potential employees. Let’s say an employer fails to do an Internet search on an employer that later commits a workplace crime. Had the search been done, the employer would’ve found that the employee had a violent past and criminal inclinations. In such a scenario, the employer could face a lawsuit from the employee’s victims for not conducting a thorough evaluation.

When it comes to hiring, the best approach in making an informed, legal business decision is usually to not use one or the other, but rather combine public Internet information with reference checks, interview processes, applications, aptitude testing, and any other credible source of information. Remember, the Internet can be an invaluable hiring tool, but only if used wisely.

Professional Liability insurance funds losses caused by errors or omissions in the rendering of services. What does this mean? Professionals are human and errors do occur. In medicine and science, the client benefits from the best course of action suggested by an experienced practitioner at the time the service is rendered. The best course of action, though, has some risk of failure. It is wise to cover this potential.

Some examples of typical professional liability claims include: An attorney misses a filing date for a lawsuit and the client loses the right to sue a surgeon removes too little, too much, or the wrong tissue. A hair stylist misuses chemicals and burns the client. A computer consultant provides incompatible software, causing damage.

Some examples of actual, but unusual claims: Although machinery is tagged as under repair, a building inspector is held responsible for a new system because they merely reported the tag-out rather than investigating the nature of the repair required. A real estate agent sold a home that the listing agent reported as located in the wrong school district. The selling agent did not correct the error although they were never asked to verify the information. A stockbroker advises a client to sell some stock and balance their portfolio. The client refuses and loses money. The client sues for mismanagement.

Most professional services contracts offer advice, design, expertise, politics, negotiations, or any skill associated with a particular profession. Beyond laws and regulations, professions self-govern by way of setting minimum performance and ethical standards. When these performance standards are not met, either by an error occurring or an omission of an important service duty, a potential claim results. Expert witness testimony is often a feature of litigation in these claims to determine the definition and scope of the malpractice.

Doctors, lawyers, and certified public accountants (CPAs) spring to mind when discussing Malpractice insurance, Professional Liability, or Errors & Omissions insurance. How about architects, engineers, office designers, barbers, dog groomers, bankers, clergy, web site designers, software producers, or computer consultants? Any profession that provides a service instead of a product has a professional liability exposure. Almost any product includes some element of design. So, what separates a product from a service?

A service is defined by the acts of the professional, not by the finished product or outcome. Concrete contractors are covered by completed operations insurance; construction managers who select and supervise the concrete contractor fall under professional liability. If you provide a professional service, advise clients, act on behalf of a client, or provide an outcome or consequence rather than a specified product or completed operation, you need Professional Liability insurance.

Professional Liability policies define the acts, errors, and omissions covered both in general and specifically. Restrictions or exclusions are enumerated as well. Standard forms exist for many professions; however, different forms are used and it pays to have knowledgeable advice.

Reputation creates value in any professional practice. One major difference between standard business and professional liability is the professional’s right not to settle. The downside to this decision, however, is the policy limit of liability decreases for that claim to the accepted claim offer, including costs and legal fees, a very risky strategy. Claimants and their legal counsel prefer to negotiate with an emotionally distraught practitioner than a dollars and cents experienced adjuster who knows the potential court outcome.

With reputation and time away from the practice already at risk, remove the strain of total financial ruin from the equation and obtain Professional Liability insurance.

Employers must take the proper measures to ensure workplace safety. However, there are accidents even in the safest workplaces. To be prepared for employee accidents, employers must have Workers Compensation coverage. This insurance will provide valuable benefits for the employer and the employee who sustains injuries.

It’s important for employers to understand what is covered by a Workers Compensation policy. Each state has varying statutes regarding Workers Compensation, so it’s important to speak with an agent to learn about individual state statutes. Each state determines what injuries are covered and to what extent. They also determine how much coverage employers should purchase. Businesses that expand to other states must consider the different rules of each state they operate in. Workers Compensation policies cover injuries and accidents that happen while an employee is on the workplace premises or away from the workplace on the course and scope of performing their duties.

Workers who are injured receive the necessary medical treatment. There are several guidelines that outline what treatments and diagnostic tests are considered as necessary. Benefits for income replacement are based on whether the employee’s disability is temporary or permanent. Although some states allow the benefits to be paid for the entire length of the disability, some place limits on the amount of time that benefits can last.

Many employers wonder whether they need Workers Compensation coverage or not. In most cases, unless employees are paid on commission or they’re company partners, employers need to purchase workers compensation coverage. There are some states that exempt employers with only a few workers. However, it’s important to speak with an agent about individual state laws regarding workers compensation insurance.

There are individual state rules regarding where an employer can purchase Workers Compensation insurance. It is not part of a BOP, so it’s necessary to purchase it in addition to this policy. Speak with our agents to learn how to get this valuable coverage.

The premiums paid by employers vary by the nature of their business. For example, employers who hire workers to do dangerous jobs must pay more for Workers Compensation insurance. If the nature of the business is dangerous and is likely to result in a serious injury or disability, it’s important for employers to plan on paying more. Experience ratings can be beneficial for employers who must pay more initially but are able to maintain a low claims volume. Speak with an agent to learn how experience ratings work and how they can help premiums become lower. There are several other important aspects of workers compensation insurance that must be understood. Contact an agent to ensure that ample coverage is in place.

With more jobs becoming available today, there is a major problem presenting itself for employers. Employees who are applying for jobs are lying about important aspects of their lives. In most cases, the truth may be a disqualifying factor. To avoid the hassle of hiring an unfit employee, it’s important to conduct a background check.

According to the ADP’s 2009 Hiring Index, 46% of the 1.7 million applicants reviewed had discrepancies in their resume’s employment, credentials, education or reference checks sections. In addition to this, 37% of applicants had traffic violations or convictions, and 6% had criminal charges within the past seven years. While not all applicants lie about convictions, others may fabricate details that make them look more appealing. This practice, which is commonly called resume padding, is a method used by people who aren’t qualified for a position to attempt to obtain it. It’s important to be able to identify both omissions and lies.

Understanding What Is in a Background Check. Not all background checks are the same. There are hundreds of online services that advertise cheap and fast background checks. However, these companies provide limited information, and often have limited access to databases that are not regularly updated. In order to get the most accurate and recent records it is best to use state resources.

How to Perform a Background Check. Usually, the office of the Highway Patrol is the best place to begin a search. Some jobs require a prospective employee to manage a budget and handle money. If this is the case, it’s a good idea to request a credit check also. It’s important to have the applicant’s SSN, date of birth and any last names or aliases they’ve used in the past 10 years. Be sure to have the applicant’s approval before performing a background check. Social media sites, such as Facebook, can also be beneficial when researching a potential employee. Keep in mind that people may make fictitious profiles and claims on social media sites, so this information shouldn’t replace what is available on a background check. However, sometimes discrepancies between resumes and social profiles are enough to raise a red flag against a potential employee.

Be specific in what information you decide to verify with a background check or credit check, and only perform those checks when there is a direct correlation with job duties. For example, don’t request a credit check for an employee who won’t be controlling a budget or working with cash. However, if an applicant will be caring for disabled individuals, it’s important to verify that they don’t have any past charges of abuse, assault or neglect. Always use common sense to determine which bits of information need to be verified.

Employer Reference Considerations. Verifying employment and inquiring about an applicant’s work ethic with a previous employer is important. However, it’s also important to make the reference call count. Never rely on the phone number provided by the applicant. Either look up the number through an online phone directory or use a reliable source to verify the number. Although it isn’t common, sometimes applicants provide erroneous phone numbers that may not belong to the previous employer they listed. In some cases, employees might provide a friend’s number instead. That friend will often provide a false reference to make the employee look good. Be sure to ask pointed and concise questions to the applicant’s previous employer. The following questions are good examples:

• What are the applicant’s strengths?
• How does the applicant deal with stress and conflict?
• In what ways could the applicant improve?
• How do the applicant’s skills with other team members rank?

The best time to perform a background check is after extending an offer for employment. However, be sure to tell the applicant that their employment with the company is contingent upon them passing a background check. It’s always a good idea to state upfront in the job posting that a background check will be performed for qualified applicants. This is usually effective in discouraging applicants who know they have a checkered past and intend to lie about it. Again, the most important thing to remember is to always obtain an applicant’s written permission before ordering a background or credit check for them.

An employee in a high school’s finance department steals $279,000 to support her gambling habit and cover her mortgage payments. A bank employee in Pennsylvania allegedly embezzles $750,000. The former CEO of a Colorado insurance brokerage pleads guilty to stealing $353,400 from the brokerage’s employee benefits plan. The office manager of a Texas law firm gets four years in prison for forging checks and depositing client payments in her personal bank account.

When people become desperate, they may succumb to temptation and turn to crime. The FBI reported that one in 28.2 employees was caught stealing from an employer in 2007, and that was before the worst of the recent economic downturn. Vendors’ employees and other visitors to an organization’s premises may also have the opportunity to steal computer equipment or network passwords.

Most business property insurance policies cover losses resulting from some types of crime. For example, they will cover the cost of cleaning up graffiti that vandals spray paint on an exterior wall or the value of merchandise burglars steal, plus the cost of repairing the damage they did breaking into the store. However, insurance companies did not design these policies to cover money stolen from a cash register or deposits never made to a bank; in fact, the policies almost never cover employee crime. For this reason, every organization should consider buying crime insurance.

Employee dishonesty insurance, often called fidelity coverage, pays for losses due to employee theft of money, securities, and other property. It covers property the organization owns or leases, property of others in the organization’s custody, and property for which the organization has legal liability. Insurance companies can provide one amount of insurance that applies separately to each loss, regardless of how many employees were involved in the theft and regardless of whether the employer can actually identify the responsible employees. Alternatively, the policy can contain a list (known as a schedule) of either employee names or positions with a separate amount of insurance listed next to each one. The policy can cover permanent, temporary and leased employees for up to 30 days or more after they terminate employment. Some companies will extend coverage to certain non-employees who may have the opportunity to commit theft, such as equipment support technicians, consultants, and vendors.

Many policies include a “prior dishonesty” clause. This immediately cancels coverage for an individual employee if the organization discovers that the employee has committed a dishonest act, including acts other than theft and acts he committed prior to his current employment. Even relatively minor dishonest acts will eliminate coverage for that employee. Some insurance companies will amend the policy to cover certain individuals on a case-by-case basis, so the employer should work with the insurance agent and company to arrange coverage.

Insurance companies offer this coverage either as a separate policy or as part of a package policy. If it comes as part of a package, the employer should carefully review the policy to determine whether the amount of insurance provided is adequate. Package policies often come with certain insurance limits built in, and they may or may not be enough for a given situation. For example, a package policy that automatically provides $100,000 coverage may be fine for the smallest of businesses, but it would have been way too small to cover the losses described at the beginning of this article.

Employees can either make a business successful or drag it down. No organization wants to believe that its workers would steal from it, but unfortunately some of them will. To make sure that they have adequate protection, all employers should work with a professional insurance agent and purchase employee dishonesty coverage. With the right insurance, the organization and its trustworthy employees will survive a large loss caused by the untrustworthy few.

How does safety pay dividends to the business owner?

Time and resources spent on developing a culture of safety repays the business in the long run. Safety cultures rely on reducing the number of workers compensation claims, in return, the odds of a disastrous claim are reduced.

Business owners with Workers Compensation experience modifications above 1.25 need to review their safety policies with professionals. It is possible one year or even one claim causes this situation; but it should not be ignored. Discover and repair the root cause.

A 1.01 to 1.25 modification indicates worse than average experience. State rates can be less than adequate for a short period of time. The actuarial or mathematical calculations just incorrectly reflect the average expected claims. Slightly elevated modifications may be caused by these issues; however, review your losses by department in these cases and see if a problem area exists.

For slightly elevated modifications, review the safety program and types of losses. Seek out a professional risk manager for help if needed. Look for patterns in the losses, and consider changes in safety equipment or procedures to reduce problem issues.

Proactively nurturing a safety culture will pay long-term dividends. Experience modifications will decrease with positive results. How?

Each state calculates Workers Compensation experience modifications independently. Many states do utilize the services of the National Council on Compensation Insurance (NCCI) to gather data and promulgate base rates and experience modifications; but each state regulates its own Workers Compensation system.

Workers Compensation experience rating predicts future behavior by analyzing past performance. It is a consequence of loss control performance, neither a reward for no losses nor a punishment for too many claims.

The generic formula for experience modifications follows some rules:

Just as payrolls are the basis for the standard premium, they form the basis for expected claims. Payroll is multiplied by an average claim factor to produce total expected claims. A discount factor is then applied to predict the potential severity of the claims. The product of this equation is expected losses. Actual medical only (MO) claims combine and report as a number of claims/total amount. Some states designate the MO claims as primary (maximum average) and excess, and then apply a discount rate to one or both of these amounts. Most states set a limit on the value of any one claim, and then discount large claims on a sliding scale. This historical claim experience is divided by expected losses. That quotient is the experience modification.

The insurance industry spends millions of dollars to find ways to predict the future. Loss analysts discovered one important fact: the best predictor of future claims is the frequency with which companies suffer losses in the past.

Frequency reflects the number of claims per employee, usually expressed as claims per payroll unit ($100), claims per year, or claims per time unit. Frequency, however, more importantly, reflects the safety culture of the business.

If the frequency of claims is predictable, how about the severity of an individual loss? No, severity, the magnitude of the loss, is not predictable. With greater frequency, however, come greater odds that a severe claim will occur.

Experience modifications indicate the status of the safety culture within a business. Good management listens to risk management and loss control experts who ultimately reduce Workers Compensation costs.

Insurance funds losses; it transfers risk from your company to the insurance company for a fee – premium. Deductibles are used to reduce the number of claims by having the business pay small amounts and only reporting larger issues. The order in which claims are funded is: Deductible, liability limits, and then company assets — and sometimes personal assets. Your company needs high liability limits to protect company assets.

Claims exceeding $1 million in liability are infrequent, but not rare. Umbrella insurance covers above all other liability insurance in one million dollar layers. High liability limits become affordable this way. Business nightmares, such as the $3 million cup of coffee, the truck catching fire under a railroad bridge, or your vehicle colliding with a school bus, unfortunately do occur. A million or two is not sufficient coverage for most operations.

Asbestos and tobacco companies produced legal products for years before lawsuits started as the result of long-term exposure, and these very successful companies were brought to the brink of extinction. These companies kept tens of millions in umbrella layers. How much is enough?

Commercial Liability insurance covers injuries to other people and damage to their property caused by your company, your employees, or you. The cause of loss might be vehicle, products, premises, operations, liable, slander, poor advice, or even aviation related. The amount of liability and types of insurance depends on your company’s exposure to risks. Most companies face fleet risks, premises-operations risks, and employee injury risks; some add professional liability risks, aviation risks, common carrier and garage liability risks.

Insurance companies recognize these typical risk scenarios and respond by offering Business Automobile, Truckers, Garage, General, Aviation and Professional Liability policies.

Purchasing sufficient liability limits for disastrous claims is costly when purchased one liability risk at a time. In fact, most companies simply could not afford purchasing insurance this way. Insurance companies offer Umbrella coverage to serve this need. The company proscribes underlying, or first dollar coverage limits, over which umbrellas pay claims settling for more, or in excess, of these policies. Since these claims are infrequent, premiums are affordable; and each added million dollar layer decreases in cost.

In addition, most umbrella forms add liability coverage by insuring more risks than the underlying policies. A relatively modest – $1,000 to $10,000 – deductible is required, but then the umbrella limits cover unscheduled liabilities. So, with an Umbrella policy, the order in which claims are paid is: deductible or underlying liability limits, umbrella limits, and then company assets.

How much is enough combined liability limit? How well can you predict the future of litigation? Products, operations, and vehicle claims in excess of $3 million are not rare. The cost effective answer depends on the amount of assets you’re protecting, the cost of the coverage, company profit from which to expense the premium, your risk tolerance, and the availability of Umbrella coverage.

Three more factors are worth considering: Products claims might take years to discover. Claim inflation requires high limits at the time the claim is paid. Large liability claims take time to settle. Claim inflation is rampant. Even though an event occurs today, you may be settling at the going rate three years from now. Million dollar claims were rare 20 years ago; not so much now. Courts have been chipping away at the corporate liability shield for smaller businesses. Personal assets might be at risk. Now consider how far that erosion of corporate protection might progress by the time you get your day in court.

Umbrella liability limits should be high enough that business assets are not at risk. Business survivability is at risk with a too low limit. Your current limits can be assessed and reviewed by your broker and/or attorney for adequacy.