Business Protection Bulletin

Standards for Workers Compensation insurance policies are set by the National Council on Compensation Insurance (NCCI). The NCCI uses more than 700 codes for specific job descriptions to help determine insurance premiums. These codes are applied to information submitted about your business by your insurance agent. Regulations vary from state-to-state, so setting standards is anything but a simple process.

Understandably, the complex nature of the process causes many employers confusion and concern about their Workers Compensation policies. Therefore, understanding the basics of Workers Compensation plans and how your premiums are determined is important.

Your insurer will estimate your first year’s premium based on a projection of your company’s payroll and the type of business you operate. At the close of the first year, the insurance company will do an audit to determine a more accurate premium, based on a year of payroll information and your business classification.

It is important to make any necessary adjustments during the end-of-year audit, since it is often difficult for a new business to predict what its first-year payroll will be. Working closely with our insurance agent will ensure your premium accurately reflects your needs.

Due to the complexity of the process, there are a handful of private companies that work to ensure accurate premium calculations. Independent premium auditors specialize in finding overcharges in Workers Compensations premiums. Such overcharges can occur when payroll is reported to the insurance company incorrectly, showing too many workers in risky jobs, or when a business is misclassified as a higher risk workplace than it actually is.

Even though states mandate Workers Compensation, they don’t actually set the premiums. Instead, they approve the rates that prescribe a certain dollar amount in Workers Compensation premiums for every $100 of payroll. Some states permit discretionary credits, which allow insurance companies to discount premiums, offering tremendous assistance to insurers in a competitive Workers Compensation marketplace.

Although accurate payroll records are essential in determining premiums, payroll is not the only component of remuneration. The NCCI also considers employee commissions, bonuses, overtime, holiday, vacation, sick pay, incentive plans, profit-sharing plans, payments for tool reimbursements, the value of rental housing and lodging provided by an employer, and the value of store certificates or merchandise given to employees.

After the first year, your premium is based on the injury rate at your workplace; so it is likely you will see a change based on your company’s experience with Workers Compensation claims. It becomes obvious that good record keeping, paired with effective communication with your insurance representative, is the key to ensuring your Workers Compensation premiums are in line with your needs.

Help Yourself:

• Discuss all aspects of your business thoroughly with one of our agents. The more honest you are, the more realistic your premium will be. If your payroll or business description changes mid-year, you can always change your Workers Compensation policy to reflect these changes.
• Some states exclude officers, owners, partnership, and sole proprietors from required Workers Compensation coverage. If you wish to cover any of these individuals with your policy, you might have to request such coverage specifically and pay for it additionally.

Outsourcing resources out of the country is rapidly becoming an indispensable business practice for a number of industries trying to increase the speed of their production and reduce their overhead. However, if you have a supplier or several located thousands of miles from your business that shuts down and is incapable of delivering products or services on schedule, the results on your financial situation can be dramatic. To reduce the amount of uncertainty that is common with both domestic and overseas outsourcing, you should think about Contingent Business Interruption, or CBI insurance. This is also known as Dependent Properties insurance or Contingent Business Income, and this kind of coverage pays back your company for lost earnings that come from an interruption in your supply chain. You can either add this coverage to your standard Property policy, or purchase it as a stand-alone coverage.

CBI keeps your business protected from the interruption in functioning and additional expense losses that might come from damage due to an insured danger to property that it doesn’t operate, own, or control, but whose functioning is essential to its maintained operations. CBI does not offer protection against your business being interrupted from damage to operations and plants under your control.

CBI typically will cover any losses of revenue, losses of earnings, and damages that are liquidated. You can arrange policies to address third party strikes, pollution or contamination, political risks, denial of access, epidemics, disease, and terrorism. Depending on the circumstances, it might be possible to find coverage for other dangers.

Typically, there are four unique types of properties that are covered through CBI:

1. Contributing properties are either single or multiple suppliers for resources and materials that the insured party relies on nearly completely to finish its products on schedule.
2. A manufacturing property comes into existence when the insured party relies on either one or a few choice manufacturers for the majority of its merchandise.
3. A recipient property can be defined as either one or a select few companies that buy the majority of the products of the insured party.
4. A leader property is a company that is a close business neighbor of the insured party and which assists in driving customers to the insured party.

CBI policies typically advertise a defined “waiting period” that applies for losses in income suffered by businesses. The waiting period can vary from between eight hours to a full week or more. Since a large number of policy holders will suffer the greatest amount of earning loss and expense within the first several hours and days that follow a supply disaster, you should make as much effort as you can to have the waiting period either eliminated or substantially lowered with your policy. Alternatively, you can strive to obtain a “known dollar deductible” rather than a mandatory waiting period. On one hand, you will still have to deal with the loss of some potential earnings, but on the other hand, any amount of earnings you lose above the deductible will be covered fully by your policy. When you apply for a CBI policy, the underwriter of the insurance will ask for several reports and information about your business, much of which will be information related to the suppliers of your business. These requests may include contingency plans and loss prevention plans from your primary suppliers. The amount you spend on a CBI policy will depend on several factors, including the type of business you have, how much dependency you have on your suppliers, and how much loss control your suppliers practice. Providing full information to your underwriter will help you receive the most precise pricing. For a business to file a claim through its CBI policy, there only needs to be an insured loss that occurs at a particular location with the business of the insurer interrupted in the process.

Volunteers are the lifeblood of hundreds of organizations, from churches to political campaigns to youth sports leagues. These organizations could not accomplish their missions without them. Just like paid employees, however, volunteers can have accidents that injure themselves or others or that damage property. A woman making deliveries for Meals On Wheels can have a car accident. A Little League coach can be injured by a batted baseball. A man helping to build a house for Habitat For Humanity might discard what he thinks is an extinguished cigarette and start a fire that destroys half of the house next door. Because each of these individuals was volunteering for charitable organizations at the times of the accidents, the question arises as to whether the organizations are responsible and whether their insurance will protect them.

Some state Workers Compensation laws cover certain types of volunteers. For example, some states cover volunteer firefighters but not other types of volunteers. Insurance companies have available a policy change that voluntarily covers workers who are not automatically covered by a state Workers Compensation law, but the endorsement is unclear as to whether it covers injuries to volunteers. Its coverage might vary from state to state, so an organization’s leadership should determine how the law applies in its particular state. For organizations in states where coverage for volunteers is unavailable, some specialty insurance companies offer accident policies. Such a policy might pay for the medical expenses of the Little League baseball coach injured by the batted ball.

Commercial General Liability insurance typically covers both the organization and the individual volunteers for bodily injury, property damage, and personal and advertising injury they cause to others. The man who starts a fire while volunteering for Habitat For Humanity will have coverage for the damage done to the other house. The insurance applies only while the volunteers are performing duties related to the organization’s business. Also, the person must meet the policy’s definition of “volunteer worker” as a person who is not an employee, who donates her work, acts at the organization’s direction and within the scope of duties the organization determines, and who receives no compensation from anyone for her work for the organization. The policy provides a small amount of insurance (typically $5,000) for injuries volunteers suffer. A volunteer who sprains her ankle while working at a library’s fund-raising book sale will have coverage for her medical treatment.

An organization’s Auto policy will cover a volunteer if he is using a vehicle he does not own for organization business with the organization’s permission. The vehicle must be one that the policy covers. However, although the policy will cover the organization for accidents the volunteer has while using his own vehicle for organization business, it will not cover the volunteer himself. He would have to seek coverage under his Personal Auto and Umbrella policies, if he has them. For example, the woman making deliveries for Meals On Wheels using her car has coverage under her own insurance, not the organization’s. The organization’s policy would cover her if she were driving a car the organization provided. Also, the Business Auto policy does not provide automatic coverage for injuries to volunteers like the liability policy does. The insurance company can add this coverage, known as “Medical Payments,” to the policy for an additional premium.

Organizations interested in providing additional protection for their volunteers should work with a professional insurance agent (such as ours!) to identify the options and insurance companies willing to provide them. Volunteers are essential to organizations, so it is worthwhile to make certain that appropriate coverage for them is in place.

Just the mention of a Workers Compensation audit engenders fear into the heart of man. If you are scheduled for a Workers Compensation audit, there is no need to dread it or be fearful. A small amount of preparation and common sense can save you a lot of aggravation and money.

Devoting a few hours of your attention now can save you a lot of time in the future. You need to give your full attention to the auditor and remain with him/her throughout the entire process. The process can take a couple of hours to complete. So, make sure that the time and date of the scheduled audit is convenient for you. Call to reschedule the audit if it has been scheduled at an inopportune time.

Begin to collect and organize payroll records, overtime payroll records, classification divisions, and insurance certificates as soon as you learn of the audit. This should give you plenty of time to compose a summary of each, which will help you to better communicate important data during the audit process. Information that is well organized will also expedite the process. If you can reconcile your calculations to payroll records, such as W2s and payroll stubs, the auditor might be more comfortable trusting your data.

You will also want to make any needed adjustment to payrolls; for example, subtracting bonus pay from overtime pay. If applicable, you will need to apply the maximum and minimum payrolls to the calculations. This part might require a little research, since the minimum and maximum will vary based on state; career; and even among sole proprietors, partners, and executive officers.

Before the audit, you should apprise yourself on the different employee job classifications and make sure that each employee is classified correctly. This is a key element to ensure that the audit flows smoothly. The auditor is most likely going to be asking you about the classification and job duties for multiple different employees. So, be prepared and armed with knowledge.

One last important preparation item concerns subcontractors. Payments issued to subcontractors can go against your Workers Compensation in the event that the subcontractor did not have a certificate of Workers Compensation. You can get a copy of the certificate, but make sure that it is current and shows coverage during the time the subcontractor worked for you.

Once the audit arrives, you will be glad that you took a little time collecting, organizing, and summarizing your information. You will also find that the auditor is not a nemesis, especially when you provide honest answers and organized paperwork.

At the conclusion of the audit, ask the auditor for the audit worksheet. Ask one of our brokers or agents to review the accuracy of the final audit. You have a legal right to ask for a corrected audit anytime you think there were any errors. If any overpayment was made during the past three preceding audits, you also have a legal right to recover it.

A large contractor that specializes in excavating, removing, and hauling contaminated soil runs into an insurance problem while bidding on a multi-million dollar three-year project. The contractor has Liability insurance that covers pollution-related incidents for up to $1 million each and up to $10 million per year. However, that is not enough for the project’s owner and general contractor. They plan to build a new school on the site after the soil is cleaned up, and they want the excavation contractor to carry at least $40 million limits in case students fall ill and their families sue. The excavation contractor’s insurance broker gets quotes from four companies for the extra $30 million and reports back that the premiums will be astronomical. The companies are assuming that any claims involving sickness in children will get sympathetic hearings from juries, leading to potentially large judgments and defense costs.

The excavation contractor has more than a decade’s experience in this type of work and has never had liability losses in any one year that exceeded $5 million. Its management is confident in its ability to do this project correctly, and it wants the lucrative contract. However, the high premiums for the excess $30 million coverage will take a major bite out of its profit margin. The solution might lie in something known as the “corridor self-insured retention.”

Corridor self-insured retention is an insurance program where the insured organization carries one layer of insurance (known as the primary layer) and an excess layer, but insures losses that fall between the two with its own funds. To illustrate, our excavation contractor buys the primary insurance that pays for up to $10 million per year in liability losses. It then self-insures (pays on its own) for losses that exceed $10 million per year but that are less than $20 million. Finally, it carries the excess $30 million coverage (the excess layer) that applies when losses exceed $20 million.

Here’s how it would work under three loss scenarios:

• The contractor has a typical year, incurring around $4 million in losses. Since the primary insurance will cover up to $10 million in losses in one year, it will pay all $4 million, less any applicable deductible or self-insured retention specified in the policy.
• The contractor has $17million in losses. This time, the primary insurance pays $10million (again, less self-insured retentions or deductibles). The contractor pays the remaining $7 million out of pocket.
• The contractor has $30 million in losses. The primary insurance pays $10 million, the contractor pays $10million out of pocket, and the excess insurance pays the remaining $10 million.

Under the last two scenarios, the contractor has to pay some very large sums out of its own funds. Why would an organization agree to such an arrangement? First, it might be the only way it can obtain Excess insurance. If the organization is in a highly hazardous line of work, insurance companies might not want to pick up coverage at the point where the $10 million primary insurance is used up (also known as the “attachment point”). Second, if Excess insurance is available, a corridor self-insured retention can make the premiums more affordable. Instead of kicking in when losses exceed $10,000,000, the Excess insurance begins to pay when they exceed $20 million. Because the chances of having to pay are reduced, the insurance company reduces the premium. Finally, it allows the contractor to meet the general contractor’s insurance requirements at a more reasonable cost and relieves it of having to pay for expected losses out of pocket.

A corridor self-insured retention program is complex and should be developed with care. Our professional insurance agents experienced in alternative risk transfer techniques can provide valuable assistance with such an arrangement. Large organizations with strong balance sheets can benefit from a program like this, but they must build it on a thorough analysis and understanding of the risks.

The September 11, 2001 terrorist attacks were a wake-up call to the kinds of dangers that still face America, including American businesses. In the months and years following the attacks, companies nationwide took steps to ratchet up security and emergency preparedness, in the event that they might someday be impacted directly by an attack or other major disaster.

For instance, an often-cited survey conducted by the Hartford Financial Services Group found that security measures instituted or improved on by companies resulted in a drastic drop in the number of unauthorized visitors entering workplaces. However, the same survey concluded that, as time passed, companies relaxed their newfound post-attack security consciousness. Emergency preparedness gaps are particularly apparent in smaller businesses.

A terrorist attack, of course, is not the only type of emergency a company might face. Natural disasters (hurricanes, tornadoes, blizzards), fires, and power outages all can endanger employee security and stymie business operations. The extent to which a company is prepared for such events can mean the difference between being able to continue operations, and shutting down. According to the American Red Cross, as many as 40% of small businesses do not reopen after a major disaster.

According to the Hartford survey, the top workplace safety threat continues to be that posed by unauthorized entries into a business. Employers can take a number of actions to reduce the number of unauthorized entries. For example, they can: check that all entry doors have working locks; reduce the number of entry points, and have all of them set up so that individuals coming in through them must pass by a receptionist or other staffed workstation; implement photo IDs for employees; require that visitors sign in and wear visitor badges; and establish procedures that receptionists can use to inconspicuously signal that they need help (such as a call button).

Companies also must be prepared for emergencies that confine employees inside the building, such as a blizzard, or a situation involving outside release of a chemical or biological agent. Among the items businesses should ensure they have on hand are a supply of bottled water and nonperishable food; flashlights and batteries; a battery-powered radio; a landline phone that can operate without electricity; and first-aid supplies. Detailed lists of suggested “in case of an emergency” items for businesses can be found on the Web site of the American Red Cross (www.redcross.org).

Other steps businesses should take to prepare for disaster situations include:

• Establish emergency evacuation routes and conduct regular emergency evacuation drills.
• Copy or back up important, valuable, or irreplaceable documents, and store these off site.
• Keep an up-to-date list of contact information for employees, customers, suppliers, distributors, and professional service providers (e.g., insurance agent, accountant, lawyer), and store this list off site.
• Establish procedures for handling suspicious mail. * If the nature of the business permits, formulate a plan for continuing operations from an alternate site.
• Make sure that the insurance coverages held by the business are appropriate and adequate, and store a copy of the policies off site.

Depending on a company’s location and the nature of its business, it might be more or less susceptible to certain risks than others. Our insurance brokers are an excellent source for help in evaluating your company’s risk profile and for learning about business safety and emergency preparedness programs. Another source for emergency preparedness ideas and risk assessment is Open for Business: A Disaster Planning Toolkit for the Small Business Owner, by the Institute for Business and Home Safety (IBHS) and the U.S. Small Business Administration. This publication can be accessed at the IBHS Web site, www.disastersafety.org.

As the United States continues to transform from a manufacturing-based economy to one based on information and ideas, protecting those ideas has become increasingly important to businesses. The U.S. Patent Office reported that it received more than 440,000 applications and more than 188,000 trademark registrations in 2006. Both numbers were substantial increases from the previous year. That same year, U.S. district courts saw more than 30 intellectual property lawsuits filed every day. The cost of those lawsuits is steep: The American Intellectual Property Law Association reported in 2009 that the average costs of litigation were $2 million for patents, $700,000 for trademarks, and $600,000 for copyrights. The high and rising frequency and cost of these lawsuits make avoiding and minimizing intellectual property lawsuits a major issue for American business.

As a business owner, how can you steer clear of IP lawsuits? Here are a variety of strategies:

• Research your marketplace. Know what your competitors have done and what they have in the works. Pay close attention to competitors’ press releases, website updates, SEC filings, and advertisements. Be aware of industry practices and literature. Continuously monitor competitors’ activities for potential threats to your own protected intellectual property.
• To protect the business, have employees who contribute to IP sign contracts giving the company ownership of the IP. Restrict employees’ and contractors’ ability to externally share confidential information. Develop procedures for identifying and documenting any concepts that might eventually require legal protection.
• If you have suffered an infringement of your IP rights, investigate alternatives to litigation. For example, you might offer the offending party a licensing agreement or proposing a joint venture. Another possibility is to pursue mediation. Mediation is less costly, potentially offers a faster resolution to the dispute, reduces the impact on management’s time and resources, and allows for finding creative business-driven solutions.

Despite a business owner’s best efforts, however, some IP litigation might be inevitable. A third party might, with or without grounds, accuse the business of violating its IP rights, or the business might find that someone has violated its rights; in either case, the opposing party could refuse to cooperate. When this happens, the important thing is for the business to minimize its out-of-pocket costs. In this case business owners should consider their goals for the litigation. Do they want monetary damages, or do they simply want the other party to cease and desist from the offending act? Seeking an injunction might be less expensive than pursuing a lengthy trial for damages. It is also suggested that litigants remain open at every stage of the litigation to possible settlements. A settlement early in the process will be far less expensive than one that happens later.

Although standard Commercial General Liability insurance policies provide limited protection against claims that a business infringed a copyright or patent, some insurance companies now offer specialized policies that provide broader coverage. Some policies will pay for both a company’s legal liability for IP infringement and its defense; others cover defense costs only. A third type of policy reimburses a company for its legal costs when it must pursue an IP infringement claim against another party. These policies cover defense costs such as injunctions, appeals costs, and declaratory actions. Legal Liability coverage applies to judgments, settlements, lost royalties and income, and interest costs.

IP infringement problems might be a reality of business today. However, with the proper risk management, they need not harm your business.

For the last several years, stories of wrongdoing and bad judgment by corporate managers have filled the headlines. Enron, Worldcom, and Countrywide are just some of the companies that became household names because of mistakes or criminal acts their leaders committed. These stories became big news because they were exceptional; the vast majority of companies do not fail in such a spectacular fashion. However, all corporate managers have the potential to make mistakes, and some mistakes can lead to significant losses for the company, its shareholders, employees and vendors. When this happens, having the appropriate insurance coverage can make all the difference between survival and corporate and personal bankruptcy. Most businesses carry Commercial General Liability insurance (CGL) that covers the business’s legal liability for bodily injury, property damage, and personal and advertising injury suffered by others. However, this insurance probably will not cover claims against corporate officers for their errors in running the company. These claims often involve allegations of monetary losses, such as falling stock prices or loss of capital. Although real, these losses do not meet the CGL policy’s definition of “property damage,” which is physical injury to tangible property, including resulting loss of use, or loss of use of property not physically injured. In these claims, people lose money but their property is intact. Therefore, companies that rely solely on their CGL policies will have no insurance in these cases.

Directors and Officers Liability insurance (D&O) covers a business’s legal liability for “wrongful acts” of its directors and officers acting within their capacity for the business. A typical policy defines “wrongful act” as including errors, misstatements, misleading statements, acts, omissions, neglect, or breaches of duty actually or allegedly committed or attempted by an individual in her capacity as a director or officer of the insured business.

Directors and officers are subject to lawsuits from many sources, including the entity they work for, shareholders, employees, government entities, competitors, vendors, and other third parties such as consumer groups or groups that represent segments of the population. Leaders of all types of organizations are vulnerable, though the source of a legal claim will vary by the type of entity. Most claims against public companies come from shareholders, while employees file most of the claims against non-profit organizations and half the claims against private companies. Customers and competitors are also frequent sources of suits against private companies.

D&O insurance covers many types of claims, including:

• A lawsuit by one shareholder against the majority owners, claiming that the company lost money because the majority gave themselves excessive compensation.
• A key employee leaves one company and joins a competitor as a director. His former employer sues him and the competitor, claiming that he violated his contract and used confidential company information with his new employer.
• Shareholders sue a company and its directors and officers, claiming that they misrepresented the quality of a potential new product when they sought funding for its production.
• A shareholder sues the president of a company for failing to promptly notify shareholders of a major pending transaction and for not pursuing litigation against a partner company that did not live up to its agreement.
• A lender sues a company for allegedly failing to repay a loan
• Members of a private company’s board of directors are sued for allegedly using their positions for personal gain.
• The government sues a company for alleged anti-trust activities.

Even though courts dismissed some of these lawsuits, the legal defense costs were still significant; D&O insurance covers these costs. Because all organizations and their leadership are vulnerable to these types of claims, you should work with our professional insurance agents to identify companies that can provide the coverage you need at a reasonable cost. Businesses face many different risks today; consequently, D&O insurance is a necessity.

Owning a business can be a very exciting and rewarding experience, but it is crucial that you do not overlook the risks that come along with it. Having proper financial protection gives family-owned businesses peace of mind and allows them to focus on what is important — moving the business forward.

Although the government requires most businesses to provide Workers Compensation insurance to cover employees in the event of an accident or injury, there are other forms of insurance that business owners should carry to protect their investments. Property and Liability insurance should also be included in any business plan, providing complete coverage of the business’ physical assets, such as inventory and equipment, as well as Liability coverage in the event of a lawsuit.

Property Insurance. There are different ways property insurance policies are written. The policy can cover the property’s actual value, which is the replacement cost adjusted for depreciation, or it can cover the replacement value alone, without any depreciation adjustments. Policies can also be written to cover hard-to-replace items, such as artwork or other unique items. In general, small business property insurance covers damage and loss from fire, smoke, wind, and hail, and damage from auto accidents, vandalism, and civil unrest. Supplemental insurance can be purchased to cover more specific risks, such as earthquakes, hurricanes, and floods. Depending on the needs of your business, policies can be tailored to cover everything you have worked so hard for.

Before purchasing an insurance policy, be sure to conduct a full inventory of all of the business’ physical assets, in order to determine their value and which items are worth insuring. Some items might not be covered through a basic policy, so make sure your insurance protects everything you value, including such items as supplies and office furniture, in addition to the building.

Liability Insurance. Carrying Liability insurance safeguards business assets from lawsuits, both legitimate and frivolous. When your business is sued, your hard work and livelihood are at stake, but carrying Liability insurance can cover settlement costs, court fees, and the cost of your legal representation. Privately hiring a defense team is incredibly expensive and without insurance, you could stand to lose everything your business has earned. Liability insurance is like a safety net that prevents you from taking a giant loss in the event of a lawsuit.

Basic Liability insurance will not cover business owners from certain claims, such as sexual harassment, employee discrimination, wrongful terminations, or claims against nonperformance of work. This is why it is also important to carry some form of performance insurance as a surety bond. Purchasing Employment Practices Liability insurance, or EPLI, can protect business owners from employee-based claims, such as sexual harassment or wrongful firings.

Business Owner Policies (BOP). In an effort to make things easier for business owners, insurance companies have bundled Liability and Property insurance into a single policy, known as a Business Owners Policy (BOP). Again, you are encouraged to read the fine print, because even BOP coverage might not protect everything you need it to. Additional coverage might be required, and should be purchased in addition to a BOP.

Whatever the size of your business, consulting with one of our professionals can help you decide which policies are best for your situation. Do the responsible thing and protect your future with comprehensive business owners insurance.

There were 325 data breach incidents and 8,320,325 people exposed to data theft from the beginning of 2010 through late June, according to the Identity Theft Resource Center. This amounts to almost two breaches every day involving two of every 100 Americans. When thieves steal personal information, the victims look for someone to blame; the target is usually the person or company who had their data to start with. Businesses that suffer data breaches involving the possible theft of others’ information can expect to receive lawsuits. Legal actions taken so far have not produced sizable awards, but they have produced some guidance from the courts.

Some plaintiffs’ actions have failed because they could not prove that a data breach actually harmed them. A federal appellate court ruled that only one of three plaintiffs in a particular case had a cause of action against a company whose computer servers were stolen. That plaintiff had suffered an identity theft; the court ruled that it was possible that the server theft caused the identity theft. Because the other two plaintiffs could not show that the server theft harmed them, the court said that they had no cause of action. Likewise, a federal court ruling on an Indiana case said that a data breach alone was not what state law defines as a “compensable injury.” In both of these cases, plaintiffs sought recovery for the cost of credit monitoring services, but the courts ruled that these costs were not compensable damages.

Plaintiffs had no more success in a class action suit against supermarket chain Hannaford following a three-month data breach that exposed millions of credit card numbers and led to 2,000 incidents of fraud. Claiming that the chain had violated an implied contract to protect their data, the plaintiffs sought compensation and an injunction ordering Hannaford to disclose the breached data and to pay for credit monitoring services. However, the court ruled that Hannaford had no implied contract with its customers and owed no compensation to those affected customers who did not have fraudulent charges on their accounts. It also ruled that customers whose credit card issuers removed fraudulent charges from their accounts were not entitled to damages. Finally, the court denied the request for the injunction because the plaintiffs had closed the affected accounts.

Banks that reimbursed customers affected by a 2005 data breach involving TJX Corp. had more success in court. The company, which operates popular retail chains, suffered the theft of 45 million customer records from its systems. The banks removed fraudulent charges from their customers credit card accounts, then filed a class action suit against the company. TJX eventually settled for more than $40 million.

Many business owners see these large-scale events as the problems of large corporations, any business that keeps records of confidential customer information, such as credit card numbers, has a serious exposure to this type of loss. Some insurance companies now offer Security Liability insurance to protect businesses against being held liable for harm resulting from a data breach. One company’s policy covers a business’ liability resulting from a failure and inability of its computer security system to prevent a computer attack or to minimize its effects. It covers only losses resulting when a source outside the organization causes a data breach.

Since virtually every organization keeps some customer information on its computer systems, every organization, regardless of size, should at least consider purchasing Security Liability insurance. Our professional insurance agents can suggest coverages appropriate for your specific exposures and identify insurance companies that can provide them at a reasonable cost. Businesses must do everything they can to protect customer data, but if things go wrong, the right insurance will help the business survive.