Biz Insurance Offers Recessionary Cover
The struggling economy and recent legislative changes practically require small businesses to examine insurance coverages they previously ignored, and the failure to do so might leave organizations more exposed than the Green Bay Packers' secondary.
This exposure should not be ignored, especially when businesses need all the working capital they can muster and when insurance coverages, themselves, undergo constant change. Coverages must be periodically renewed to meet the needs of new industries and new risks, or respond to lawsuits and damage awards that compel insurers to clarify language or create new policies altogether.
Fortunately, when business organizations sample the Wisconsin insurance market, they are likely to find healthy companies despite today's fragile economy.
Wisconsin Commissioner of Insurance Sean Dilweg, whose staff monitors the financial health of the state's 2,000 licensed insurers, said premium tax receipts were down about $10 million in 2009, but the companies generally have more than enough assets to pay claims. "Obviously, it's a soft market, and business is down," Dilweg said. "The small construction company that may have had five pick-up trucks insured is no longer working. But overall, insurance companies are stable."
Since the matter of health-care reform was still in a state of flux at the time of this writing, this article will focus on other types of business insurance. These are largely property-casualty coverages that a business owner should be thinking about in the current economic context.
Directors and Officers
The recession, and the greater degree of difficulty in maintaining company performance, has exposed directors and officers to a higher degree of accountability. The coverage is basically administrative-decision insurance to protect the executives against claims by employees, the public, minority owners, and competitors alleging unfair trade practices.
Whereas general liability coverage usually is triggered by a bodily injury or property damage claim, directors and officers liability covers decisions made at the directors and officers' level, usually when that decision negatively impacts the business. "It's more administrative decision insurance than it is bodily injury or property damage insurance," explained Steven Squires, executive vice president of Hausmann-Johnson Insurance.
Claims do not have to involve criminal allegations, but simple mismanagement that led to an unsatisfactory result. According to Squires, people are making claims against directors and officers for being laid off from an unprofitable business, or not receiving as large a profit-sharing contribution because the company was imprudently run.
In some public and private cases, shareholders are suing directors and officers of underperforming firms for poor performance or misrepresentations made during the sale of stock. "That's more on the public side, but even private companies have this exposure where you might have 10 stockholders in a small business," Squires explained. "If two or three people own the majority of stock, but there are minority owners who become disgruntled because they had no say, or their value is worthless or they perceive it to be worthless, they can make a claim against directors and officers of the company for allegedly making the wrong decisions."
One of the misnomers about this type of coverage is that it's only for large, publicly held companies, but the majority of directors and officers lawsuits involve privately held businesses, including family businesses, according to Mike Moore, executive vice president of M3 Insurance. For small-to middle- market businesses that have a board of family members, or that have more than one owner, it's unwise to pass off officers and directors insurance "as something that only a Wall Street company needs," Moore said.
This type of coverage is offered as an annual policy that a company purchases on behalf of its directors and officers and stockholders so that they have certain limits of liability. Premium rates vary by factors like the liability limits requested, size of the company and its financial health, the number of shareholders it has, and the makeup of people the company is trying to insure.
When insurers dig in and examine the coverage, it's often more affordable than consumers realize, but insurers will perform due diligence. "Insurance companies spend a lot of time looking at those entities and asking, 'What's the appropriate amount of coverage for this business?'" Moore said. "If it's a business that's making $1 million and it's asking for $15 million of directors and officers liability, then why?"
Issues having to deal with employee practices — hiring, firing, discrimination, and sexual harassment — have increased business exposure in an era of downsizing. American businesses have shed more than 7 million jobs since the onset of the recession, and some who occupied those jobs have pursued claims for wrongful termination.
Every employer has some level of exposure, and some have more exposure than others. "I'd say more than 50% of the businesses purchase this coverage," Squires said. "In a down economy, you have more exposure for wrongful terminations, and for issues that come up when you're having to layoff or fire people, or whatever the case may be."
Employment practices liability insurance, or EPLI for short, is a special coverage in which premiums are based on factors like the liability limit, the number of people employed by the insured party, and what kind of procedures the business has in place. Coverage is purchased for the whole business, not a certain group of employees.
The coverage basically protects and defends organizations from both legitimate and unfounded claims, both of which have to be defended. According to Squires, the average per-claim defense cost is about $16,000, but that does to take into account a negligent judgment. If there is a judgment against a company, this coverage potentially pays the judgment up to the policy limits.
"What you're really buying 90% of the time is the defense cost," Moore concurred. "We don't see a lot of wrongful termination claims upheld in Wisconsin, but what we do see are tremendous legal costs incurred by companies defending their position."
While the best insurance against such claims are smart employment practices that are aligned with the law and are well communicated, that does not mean organizations, even those with strong human resource departments, are immune. "It may be a bogus claim, but you still have to defend it," Squires said. "That's why the best business in the world has that exposure."
There also is a preventive aspect to this type of coverage because some policies include services such as legal hotlines that smaller employers, particularly those without an attorney on retainer, can call to discuss the legal ramifications or potential pitfalls of a pending decision.
Thanks to legislation that went into effect in 2009, EPLI is now more critical in Wisconsin than ever before, according to Martin Burns, president of The Curtis Agency. The resulting change in the state's Fair Employment Law, which applies to businesses with more than 15 employees, enables complainants in eligible discrimination cases to be awarded additional damages in Wisconsin courts. Under the law's previous incarnation, plaintiffs were only entitled to indemnification for items like attorney fees, back pay, or reinstatement, but now the protected classes identified in the law can seek compensatory and punitive damages. Compensatory damages can include future monetary loss, emotional distress, and items that go beyond indemnification.
Burns, who expects this to result in increased employment practices litigation in Wisconsin, noted that some companies carry between $5,000 and $100,000 of per-employee coverage. However, future coverage will have to factor in punitive damages, defense costs inside or outside of the policy limits, and address whether the limits of existing coverage are dedicated to EPLI or shared with another form of coverage. If it is shared within a coverage form, the insured might have only part or none of the limit available for defense or damages. The rest of the limit, Burns noted, may have been used up by a different claim.
In a recession, when companies take a closer look at their books, crime coverage and its subset, employee theft coverage, is used much more than usual. Rates on crime insurance are usually structured on how many employees a company has, the type of business, and the actual exposure. Is there a lot of cash on the premises? Do people have access to the cash? If so, how many? What procedures and safeguards are in place to protect it and account for it?
The better the procedures, the smaller the insurance premium. "Companies that don't have adequate crime coverage, or limits in that area, need to be looking at that coverage even if they feel they have things under control and good risk-management techniques in place," Moore said. "That's a very affordable coverage. It's a small thing that they can fine tune and make sure they are covered."
The economy also is impacting the practice of bonding, which is used in the construction industry to ensure that a general contractor adheres to the provisions of a contract. In the past, payment and performance bonds were required for most government projects, including federal projects where the contract price exceeds $100,000.
Due to the sluggish economy, however, bonds are increasingly being sought on private construction projects. The cost of bonding is not as worrisome as the stricter underwriting criteria now demanded by those who provide the financing, a development that is hampering small contractors.
Elsewhere, continuing liability insurance provides coverage to manufacturing businesses that down shut operations but still have ongoing liability for products. That widget produced two years before the plant closing might cause an injury two years down the road. In many cases, the plant may have closed but the corporation goes on for tax reasons for two or three more years, yet its assets are exposed to an insurance claim. This coverage is not terribly expensive, with the ultimate cost dependent on how many years coverage rolls forward.
Vacant buildings insurance can protect a new building owner who, due to the economy, hasn't been able to fill the space. However, some agents don't believe the insurance, which covers things like vandalism or water damage from ruptured pipes, is necessary unless building occupancy dips below the 25% threshold.
Gaps in coverage can emerge over time, especially in multi-faceted businesses, and the better insurance companies will proactively engage their clients for annual policy reviews and even reduce premium costs where possible, with the savings then available for extra working capital.
Selecting a company or agency with the right coverage for your business is an age-old issue. Burns indicated that mismatches can occur when an agent places an insured party with a company that is not well suited for such risks because the agent wants to write business for financial reasons or to satisfy production requirements. Burns said mismatches also can be the result of the would-be insured party withholding critical information about the business in order to get a lower-cost policy.
Whatever the case, the cost of insurance is nothing compared to the cost of responding to a claim. 'It's less expensive to have good insurance than to have to pay out of pocket when something goes wrong," Burns noted. "Just consider how expensive it is to hire an attorney."
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