Regulatory risk encompasses a wide range of issues that can create problems for a business, says Chad Follmer, Healthcare Practice Leader at Woodruff-Sawyer & Co. In some cases, regulations are violated maliciously while in other instances, it’s an innocent mistake that gets flagged such as the wrong coding for a health condition.
“Even if you believe you’ve done everything right and been as proactive about regulatory risk as you can be, the odds are pretty good that at some point as a corporate executive, you could face allegations of a regulatory violation,” Follmer says. “In some industries, unfortunately, it’s really not if, it’s when.”
Health care is a particularly tricky realm to navigate. In 2014, the Department of Justice secured $6 billion in settlements and judgments in civil fraud cases with an estimated $3 billion of this sum representing recoveries from health care providers.
“The government’s return on investment is between $8 and $12 for every dollar spent on regulatory enforcement,” Follmer says. “From a political standpoint, people like the idea that their watchdogs are doing their job to recover this money.”
Smart Business spoke with Follmer about how to work with your insurance partners to craft coverage that minimizes your regulatory risk.
What is driving the increased attention on regulatory risk?
Health care qui tam, billing and Stark violations continue to be a focal point, but you also have cyber-related regulatory claims; wage and hour claims; potential violations of the Foreign Corrupt Practices Act; and for publicly owned companies, investigations by the Securities and Exchange Commission (SEC). The risks continue to grow and carriers are adapting their coverage to deal with the new threats.
How prepared are companies to respond to regulatory claims?
You may not be as prepared as you think. A growing number of insurance carriers are carving regulatory risks out of policies and offering clients the opportunity to buy it back via expensive standalone placements. Some carriers don’t see it as that big of an issue, but it’s creating divergence around regulatory risk and the coverage carriers are willing to offer.
Employment practices coverage started out this way as well. It used to be part of either your general liability or your director and officer (D&O) liability insurance. It would protect your business on issues such as discrimination in the workplace. Cyber liability is another area that was historically covered with general liability policies, but has now become an increasingly standard separate coverage.
In some cases, limited coverage can be bought as a policy enhancement on an existing professional liability form.
Review your policy and scour any recent coverage changes that have taken place to make sure you haven’t had any limiting coverages introduced. Talk to your broker or to an expert in regulatory risk about what coverage options might be available to solidify your protection.
In what other ways are insurance carriers changing how they work with clients?
With regulatory risk going up, the insurance industry is taking a more aggressive approach to underwriting risk and giving clients incentive to reduce the odds of a problem occurring. Let’s say you have a $10 million D&O limit. If you have a $100,000 deductible, your carrier might say for a regulatory risk, the deductible is going to change from $100,000 to $1 million.
Now you have more skin in the game to ensure you’re doing everything you can to account for that regulatory risk. Coinsurance is another tactic used by some carriers. You may have a policy for $10 million in coverage, for example, with a provision that you pay 20 percent of every claim all the way up to $10 million.
So if you have a total loss, the carrier will pay out $8 million and you’ll pay $2 million. These are additional reasons why you need to dig deeper into your policy to be clear on what’s covered, what’s not and how much it will cost. Consider bringing in an outside consultant or broker to do an independent evaluation of your policy.
In many cases, the risks your company face today don’t look anything like they used to. Ensure your company is as prepared as it can be. ●
Insights Business Insurance is brought to you by Woodruff-Sawyer & Co.
