The insurance market is always cycling between hard and soft. As it continues to firm, employers will have fewer low-price options.

Expect your broker to communicate with you regarding what’s coming up, with respect to firming prices, says Marc McTeague, president of Best Hoovler McTeague Insurance Services, a member of the SeibertKeck Group. In this type of environment — even if it’s not a typical market turn — employers have to take the initiative.

“Business owners need to proactively work to eliminate risk by putting in place policies and procedures that need to be formally written down and followed,” he says.

Smart Business spoke with McTeague about how employers can react to the hardening market and future premium increases.

What’s the difference between a soft and hard insurance market?

In a soft market, insurance companies are looking to gain market share and grow, as they take on more risk at lower prices. This is good for the insured to a point because there are a lot of options. However, it’s called a cycle for a reason, and that soft market tends to quickly change — and competitive insurance options dry up.  As insurance companies have taken on more underpriced risk, they start to get bad results, which eats away at their surplus and they start to pull back. This turn is usually predicated after a catastrophe such as the 9/11 terrorist attack.

What are the conditions of the current market?

Rather than just one catastrophe, the turn that’s beginning now is more because of a series of weather events such as tornados in Tuscaloosa and Joplin, flooding in Thailand, the earthquake in Japan and Colorado wildfires. These property-driven stresses on the market have hurt insurers and pricing is starting to firm.

In the past, the insurance market turned on a dime from soft to hard — all rates across the board. In this market, you’re seeing some price increases, but not for all insurance types. Property and workers’ compensation premiums have gone up, while liability and vehicle rates have stayed pretty even. This is not a classic market turn yet, but brokers keep hearing the word ‘yet.’ Insurance companies’ base portfolios are not making a whole lot, so they will eventually have to make up the difference with larger premium increases or covering less risk. However, this year — so far — has been a fairly friendly weather catastrophe year, keeping the turn slow.

For the insured that have high loss ratios, insurance companies are hitting those businesses hard with premium increases or non-renewing their policies. In these cases, it could be hard to find replacement insurance. However, the best of the best are still being treated well — the businesses that have low loss ratios.

Have some industries been hit harder because of the unevenness of the market turn?

Yes. If, for example, you’re a property manager who manages apartment buildings or commercial office buildings, you’re probably going to be hit harder. Other industries that rely more on liability and vehicle insurance may not see as much change. Regardless of the industry, make sure your loss control program is up to date and follow any risk management recommendations from your insurance company or broker. You also may need to increase deductibles or further spread your risk.

How can you combat the harder market?

Business owners need to do what’s necessary to become the best of the best. Put policies and procedures in place to mitigate your risk and decrease losses. For example, employers can utilize systems like Fleet Watch, which monitors drivers and vehicle usage by keeping track of factors like driver’s speed to give business owners real fleet data. Employers can drill down, find risks and eliminate them to keep rates down.

Employers should use data provided by their broker to reach the right decisions, such as asking whether raising deductibles or stop loss limits will be economically smart strategy or just make your underwriter feel better.

A good broker will help analyze everything from your current vendor/client contracts to previous losses. You might see risks that you didn’t know about. For instance, there could be a better way to create a contract so you push the risk out to a subcontractor.

Communicate with your broker on a regular basis. Brokers typically have a stewardship meeting well before the renewal to go over each of your policies and formulate a strategy for the renewal. If your renewal includes diminished coverage or added exclusions, then it may simply be a matter of pushback. You and your broker might tell your insurance company that if this is to be done, then something will be needed in return, while being prepared to look elsewhere. A proactive broker will handle these negotiations for you.

What about using self-insurance in this type of market?

You’ve got to analyze the situation thoroughly. There’s always going to be self-retention that makes sense, but it’s important to figure out where. For any self-insured program it’s a matter of rolling the dice, and your company has to have information to put the odds in your favor.

Combatting this market cycle is about consistent loss control and having a strong business model. Too many businesses fly by the seat their pants when it comes to preventing losses. A little dose of long-term thinking combined with a professional insurance broker goes a long way in helping you navigate through the hard and soft market cycles.

Marc McTeague is president of Best Hoovler McTeague Insurance Services, a member of the SeibertKeck Group. Reach him at (614) 246-RISK or mmcteague@bhmins.com.

Insights Business Insurance is brought to you by SeibertKeck Insurance Agency

Published in Columbus

An employee is critically hurt in a taxicab accident while on business in China. He had to be stabilized at the scene, flown to the coast and then to Hong Kong. Two operations and two months later, he is sent back to the U.S. on a private charter plane with two nurses and a doctor. The repatriation trip alone costs $140,000, which he would have had to pay had he not had foreign insurance.

Richard B. Hite, CEO of SeibertKeck Insurance Agency, says domestic U.S. policies only cover incidents occurring in the U.S., Canada, Puerto Rico or any U.S. possession.

“A standard domestic insurance policy doesn’t insure against foreign business exposure in general,” he says. “As long as your company has goods, services or people going overseas, you’re going to need foreign

insurance.”

Smart Business spoke with Hite about how to get the most out of your foreign package coverage.

What are the characteristics of international insurance?

There are a number of scenarios where foreign insurance is necessary. For example, a salesperson at an international conference demonstrating a product causes bodily injury or property damage. Maybe you’re exporting products and have a product failure — a propane tank explodes and kills 20 people. If sued, your domestic policy does not respond to lawsuits outside of the U.S. and Canada.

Under a foreign package policy, there are five types of coverage. They are:

  • General liability — Covers public liability, including product liability.

  • Property coverage — Protection for laptop computers, sales samples, personal property at trade shows, etc.

  • Foreign voluntary workers’ compensation — Provides employees workers’ compensation and covers medical costs and loss of earnings as if the employee was hurt in Ohio or whatever the state of domicile. With 24/7 coverage, it also provides medical assistance services and repatriation expenses to get an employee to the U.S., including immediate family traveling with him or her or allowing family to fly to the foreign location where the employee is being treated.

  • Accidental death and dismemberment (AD&D) coverage.

  • Automobile liability — When an employee rents a car, there is certain compulsory insurance coverage in that country, but this provides excess liability.

Other types of foreign insurance exposure include kidnap and ransom, business interruption, crime and ocean cargo for when you’re responsible for your export shipment of goods in a container until it arrives.

How has foreign insurance changed to better serve small and mid-sized businesses?

With globalization and international trade agreements, even a small company could be distributing products abroad, but many small and mid-sized businesses don’t realize the protection needed. Insurance companies have different coverage levels, but usually a minimum premium with all five basic types of coverage runs an affordable $1,500 to $2,500 per year.

How do you decide which coverage and options or limits to buy?

Analyze the exposure — what employees, goods or services are doing and where they are going. Public liability and foreign workers’ compensation are necessary, but property and automobile depend on the circumstances. Property could be worth it if you have sales samples or laptop computers going abroad, but your employee might not be driving anywhere. Additionally, the AD&D for many mid-sized business is already an international 24/7 policy, so there could be a duplication of coverage. The insurance company takes a census of the number of people, where they are going and for how long, and then creates different rates for different risks.

Many policies exclude countries not aligned with U.S. foreign policy, such as Syria, Iraq, Iran and now, Mexico. To get around it, underwriters want to know the finite trip details. For example, Monterrey, Mexico, is a medium risk, while Mexico City is very hazardous and has become its own cottage industry considering the high incidence of kidnap and ransom occurring there. In general, the insurance company writes a blanket policy for all countries, excluding certain ones, and then underwrites exceptions on a per-trip basis.

What’s the difference between buying international insurance in the U.S. or local insurance in the foreign country?

If you write a policy in the U.S., called a nonadmitted basis, most countries accept it. However, some foreign countries require a domicile insurance company and a broker to write the policy as a form of protectionism. Therefore, big companies — Travelers, Chartis and Chubb — have foreign divisions writing policies, called an admitted basis. You might need a combination of nonadmitted and admitted insurance to ensure the proper coverage.

It’s almost always advantageous to buy U.S. coverage rather than admitted coverage in the country itself. U.S. coverage provides compulsory insurance on a broader basis and uses a U.S. company and adjuster, with the cost not necessarily more expensive.

What steps should employers take if something happens to an employee or property abroad?

The planning should be part of your disaster preparedness program. Insurance companies have emergency response teams globally who speak the local languages. As part of the service, you reach out to these key contact people if there’s a problem. They also know what steps to take to get the best medical care. For example, in Shanghai, China, hospitals won’t operate unless they know they will be

compensated.

Additionally, the insurance company will set up a website to be checked throughout the trip. It gives tips on how to travel, how to dress, what areas to avoid, and a security and weather report. It helps employees blend in and act accordingly, which also prevents them from becoming a target.

Richard B. Hite is the CEO of SeibertKeck Insurance Agency. Reach him at (330) 865-6573 or rhite@seibertkeck.com.

Insights Business Insurance is brought to you by SeibertKeck Insurance Agency

Published in Akron/Canton
Sunday, 30 September 2012 20:00

How to cover your overseas business exposures

An employee is critically hurt in a taxicab accident while on business in China. He had to be stabilized at the scene, flown to the coast and then to Hong Kong. Two operations and two months later, he is sent back to the U.S. on a private charter plane with two nurses and a doctor. The repatriation trip alone costs $140,000, which he would have had to pay had he not had foreign insurance.

Cliff Baseler, vice president at Best Hoovler Insurance Services Inc., a SeibertKeck company, says domestic U.S. policies only cover incidents occurring in the U.S., Canada, Puerto Rico or any U.S. possession.

“A standard domestic insurance policy doesn’t insure against foreign business exposure in general,” he says. “As long as your company has goods, services or people going overseas, you’re going to need foreign insurance.”

Smart Business spoke with Baseler about how to get the most out of your foreign package coverage.

What are the characteristics of international insurance?

There are a number of scenarios where foreign insurance is necessary. For example, a salesperson at an international conference demonstrating a product causes bodily injury or property damage. Maybe you’re exporting products and have a product failure — a propane tank explodes and kills 20 people. If sued, your domestic policy does not respond to lawsuits outside of the U.S. and Canada.

Under a foreign package policy, there are five types of coverage. They are:

  • General liability — Covers public liability, including product liability.

  • Property coverage — Protection for laptop computers, sales samples, personal property at trade shows, etc.

  • Foreign voluntary workers’ compensation — Provides employees workers’ compensation and covers medical costs and loss of earnings as if the employee was hurt in his or her state of domicile. With 24/7 coverage, it also provides medical assistance services and repatriation expenses to get an employee to the U.S., including immediate family traveling with him or her or getting family to the foreign location where the employee is being treated.

  • Accidental death and dismemberment (AD&D) coverage.

  • Automobile liability — When an employee rents a car, there is certain compulsory insurance coverage in that country, but this provides excess liability.

Other types of foreign insurance exposure include kidnap and ransom, business interruption, crime and ocean cargo for when you’re responsible for your export shipment of goods in a container until it arrives.

How has foreign insurance changed to better serve small and mid-sized businesses?

With globalization and international trade agreements, even a small company could be distributing products abroad, but many small and mid-sized businesses don’t realize the protection needed. Insurance companies have different coverage levels, but usually a minimum premium with all five basic types of coverage runs an affordable $1,500 to $2,500 per year.

How do you decide which coverage and options or limits to buy?

Analyze the exposure — what employees, goods or services are doing and where they are going. Public liability and foreign workers’ compensation are necessary, but property and automobile depend on the circumstances. Property could be worth it if you have sales samples or laptop computers going abroad, but your employee might not be driving anywhere. Additionally, the AD&D for many mid-sized business is already an international 24/7 policy, so there could be a duplication of coverage. The insurance company takes a census of the number of people, where they are going and for how long, and then creates different rates for different risks.

Many policies exclude countries not aligned with U.S. foreign policy, such as Syria, Iraq, Iran and now, Mexico. To get around it, underwriters want to know the finite trip details. For example, Monterrey, Mexico, is a medium risk, while Mexico City is very hazardous and has become its own cottage industry considering the high incidence of kidnap and ransom occurring there. In general, the insurance company writes a blanket policy for all countries, excluding certain ones, and then underwrites exceptions on a per-trip basis.

What’s the difference between buying international insurance in the U.S. or local insurance in the foreign country?

If you write a policy in the U.S., called a non-admitted basis, most countries accept it. However, some foreign countries require a domicile insurance company and a broker to write the policy as a form of protectionism. Therefore, big companies — Travelers, Chartis and Chubb — have foreign divisions writing policies, called an admitted basis. You might need a combination of nonadmitted and admitted insurance to ensure the proper coverage.

It’s almost always advantageous to buy U.S. coverage rather than admitted coverage in the country itself. U.S. coverage provides compulsory insurance on a broader basis and uses a U.S. company and adjuster, with the cost not necessarily more expensive.

What steps should employers take if something happens to an employee or property abroad?

The planning should be part of your disaster preparedness program. Insurance companies have emergency response teams globally who speak the local languages. As part of the service, you reach out to these key contact people if there’s a problem. They also know what steps to take to get the best medical care. For example, in Shanghai, China, hospitals won’t operate unless they’re sure they will be paid.

Additionally, the insurance company will set up a website to be checked on the trip. It gives tips on how to travel and dress, where to avoid, and a security and weather report. It helps employees blend in, which also prevents them from becoming a target.

Cliff Baseler is vice president at Best Hoovler Insurance Services Inc., a SeibertKeck company. Reach him at (614) 246-7475 or cbaseler@bhmins.com.

Insights Business Insurance is brought to you by SeibertKeck Insurance Agency

Published in Columbus

Credit insurance, which has been around for many years, is a custom financial tool that protects a business from losses due to insolvency or past due/slow pay from their customers.

This problem of insolvency or past due/slow pay from customers isn’t expected to stop any time soon, either. U.S. corporate default rates are expected to rise this year, as marginal companies that already refinanced debt in the last few years stumble because they didn’t reduce debt and just pushed out payment schedules, according to a USA Today article.

“This insurance product can be a cost-effective device for transferring risk — premiums are tax deductible while reductions in bad debt reserves are not,” says Cliff Baseler, vice president, Best Hoovler Insurance Services, Inc., a SeibertKeck company.

Smart Business spoke with Baseler about why the value of this insurance is consistently being demonstrated during economic financial crisis time and time again.

How does credit insurance coverage work most effectively?

If your company does business in which it extends a line of credit for merchandise orders or other accounts payable, then this insurance protects you against losses because when you extend credit to a business your own financial solvency gets tied in with that account. Coverage can apply to a single debtor or a greater spread of risk by including all of your unquestioned buyers in excess of a certain dollar amount. Annual sales of at least $1 million can make the program more cost effective.

Why should employers look into buying this type of coverage?

Business owners must be more attentive regarding the management of their accounts receivable in the face of this global economic climate. There are more business failures both domestically and internationally. This was borne out by increased worldwide demand for credit insurance across all geographies in the first quarter of 2012, according to the Global Insurance Market Quarterly Briefing. The United States saw a modest increase in demand of less than 10 percent, with the largest demand increase in Asia.

Credit insurance provides catastrophic loss protection that can be used by businesses of all sizes and by all business sectors. There are many benefits as to why a business owner will purchase this coverage. Some include:

  • Increasing credit to your existing customer base and extending credit to new customers.

  • Improving cash flow.

  • Enhancing bank financing by increasing borrowing capacity. Banks will lend more against insured receivables.

  • Reducing bad debt reserves and freeing up cash.

  • Utilizing it as a risk management tool to improve business planning by elimination of unknown risk.

How does credit insurance protect you better than just looking at a customer’s payment history?

Unfortunately, payment history is not a valid predictor of default. Close to 50 percent of all payment defaults rise from stable and long-term customers. One sudden loss could have a devastating impact on you and your business. Consider that your receivables are a concentration of all your cost and profit, and in many cases, you create them based on a customer’s promise to pay. Therefore, there is a tremendous amount of risk facing your business. Credit insurance is a great tool to remove this disastrous risk from a balance sheet.

What do business owners need to know about purchasing this insurance?

The level of indemnity ranges from 80 to 100 percent depending on your credit management experience, accounts receivable portfolio and premium target. Policies are designed to fit a business owner’s need for coverage. Risk retention comes in the form of co-insurance and deductibles and helps in lowering the premium. Co-insurance is a percentage of the loss you retain on each insured account.

There are only a small handful of carriers that specialize in this type of coverage. Each will have their own risk appetite, underwriting philosophy, and method to how they structure and administer their policies.

Underwriters will research, approve and monitor the accounts you want to insure. They also will approve coverage limits on the customers you want to insure. You will want to provide underwriters with a balanced spread of risk that will offer best pricing and terms. It’s important to clarify with the underwriter your maximum terms of sale, lead times for customer orders and note any special circumstances that might require additional coverage.

You can insure the entire accounts receivable portfolio or a select number of accounts. The premium will be based on your loss history, customer credit quality, spread of risk, and deductible and co-insurance levels in the policy. Usually the premium is less than half of one percent of insured sales.

Your customers’ payment history is not a valid evaluator of their failure to pay. Having a carrier watching over your covered accounts and helping evaluate credit limits is a great advantage to a business owner’s risk management plan. Nonpayment and slow pay by your customers will weaken a company. Credit insurance can help protect a company’s biggest asset — your own business credit.

Cliff Baseler is vice president of Best Hoovler Insurance Services, Inc., a SeibertKeck company. Reach him at (330) 867-3140 or cbaseler@bhmins.com.

Insights Business Insurance is brought to you by SeibertKeck Insurance Agency

Published in Columbus

Credit insurance, which has been around for many years, is a custom financial tool that protects a business from losses due to insolvency or past due/slow pay from their customers.

This problem of insolvency or past due/slow pay from customers isn’t expected to stop any time soon, either. U.S. corporate default rates are expected to rise this year, as marginal companies that already refinanced debt in the last few years stumble because they didn’t reduce debt and just pushed out payment schedules, according to a USA Today article.

“This insurance product can be a cost-effective device for transferring risk — premiums are tax deductible while reductions in bad debt reserves are not,” says Shelley C. White, assistant vice president with SeibertKeck.

Smart Business spoke with White about why the value of this insurance is consistently being demonstrated during economic financial crisis time and time again.

How does credit insurance coverage work most effectively?

If your company does business in which it extends a line of credit for merchandise orders or other accounts payable, then this insurance protects you against losses because when you extend credit to a business, your own financial solvency gets tied in with that account. Coverage can apply to a single debtor or a greater spread of risk by including all of your unquestioned buyers in excess of a certain dollar amount. Annual sales of at least $1 million can make the program more cost effective.

Why should employers look into buying this type of coverage?

Business owners must be more attentive regarding the management of their accounts receivable in the face of this global economic climate. There are more business failures both domestically and internationally. This was borne out by increased worldwide demand for credit insurance across all geographies in the first quarter of 2012, according to the Global Insurance Market Quarterly Briefing. The United States saw a modest increase in demand of less than 10 percent, with the largest demand increase in Asia.

Credit insurance provides catastrophic loss protection that can be used by businesses of all sizes and by all business sectors. There are many benefits as to why a business owner will purchase this coverage. Some include:

  • Increasing credit to your existing customer base and extending credit to new customers.

  • Improving cash flow.

  • Enhancing bank financing by increasing borrowing capacity. Banks will lend more against insured receivables.

  • Reducing bad debt reserves and freeing up cash.

  • Utilizing it as a risk management tool to improve business planning by elimination of unknown risk.

How does credit insurance protect you better than just looking at a customer’s payment history?

Unfortunately, payment history is not a valid predictor of default. Close to 50 percent of all payment defaults rise from stable and long-term customers. One sudden loss could have a devastating impact on you and your business. Consider that your receivables are a concentration of all your cost and profit, and in many cases, you create them based on a customer’s promise to pay. Therefore, there is a tremendous amount of risk facing your business. Credit insurance is a great tool to remove this disastrous risk from a balance sheet.

What do business owners need to know about purchasing this insurance?

The level of indemnity ranges from 80 to 100 percent depending on your credit management experience, accounts receivable portfolio and premium target. Policies are designed to fit a business owner’s need for coverage. Risk retention comes in the form of co-insurance and deductibles and helps in lowering the premium. Co-insurance is a percentage of the loss you retain on each insured account.

There are only a small handful of carriers that specialize in this type of coverage. Each will have their own risk appetite, underwriting philosophy, and method to how they structure and administer their policies.

Underwriters will research, approve and monitor the accounts you want to insure. They also will approve coverage limits on the customers you want to insure. You will want to provide underwriters with a balanced spread of risk that will offer best pricing and terms. It’s important to clarify with the underwriter your maximum terms of sale, lead times for customer orders and note any special circumstances that might require additional coverage.

You can insure the entire accounts receivable portfolio or a select number of accounts. The premium will be based on your loss history, customer credit quality, spread of risk, and deductible and co-insurance levels in the policy. Usually the premium is less than half of one percent of insured sales.

Your customers’ payment history is not a valid evaluator of their failure to pay. Having a carrier watching over your covered accounts and helping evaluate credit limits is a great advantage to a business owner’s risk management plan. Nonpayment and slow pay by your customers will weaken a company. Credit insurance can help protect a company’s biggest asset — your own business credit.

Shelley C. White is an assistant vice president with SeibertKeck. Reach her at (330) 867-3140 or swhite@seibertkeck.com.

Insights Business Insurance is brought to you by SeibertKeck Insurance Agency

Published in Akron/Canton

When selecting a contractor for a job, it is important to choose the most fiscally responsible one for the construction project in order to mitigate and manage risk and ensure its timely completion.

Failing to do so puts your company at risk of economic devastation as you are gambling on a contractor or subcontractor whose level of commitment is uncertain or who could become bankrupt part way into the job. However, there is a solution to decrease your risk, says Jack Gaugler, vice president, surety bond specialist, at SeibertKeck Insurance Agency Inc. and the Jack Kohl Agency.

“Surety bonds offer an optimal solution. By providing financial security and construction assurance, they guarantee project owners that contractors are capable of performing the contract and paying specified subcontractors, laborers and material suppliers,” says Gaugler.

Smart Business spoke with Gaugler about how surety bonds can help protect you from a devastating loss.

What is a surety bond?

A surety bond is a three-party agreement in which a surety company assures the obligee (the owner) that the principal (the contractor) will complete a contract as promised.

There are three primary types of contract surety bonds: a bid bond, a performance bond and a payment bond.

A bid bond assures that a bid has been submitted in good faith, that the contractor intends to enter into the contract at the price bid and will provide the required performance and payment bond if awarded the contract. A performance bond protects a company from financial loss in the event that the contractor fails to perform in accordance with the terms and conditions of the contract. A payment bond assures that a contractor will provide certain workers, subcontractors and material suppliers and guarantees they will be paid for work performed under the contract.

Even if a contractor has been in business for 100 years and has a good reputation, past performance is no guarantee of future results. Risk lies in the uncontrollable, unpredictable and the unknown and it is never a good idea to gamble on something that could jeopardize your company’s future. The relationship that an owner has with a contractor is arm’s length, while the surety agent and bond company relationship is a day-to-day partner. A surety has a much greater insight as to contractor’s abilities to perform than an owner.

How is a contractor prequalified?

Surety companies back the performance bonds with their own assets, so they conduct a careful, rigorous prequalification review of the contractor. The goal for the contractor is to get a bond line set up. The bond underwriter’s analyses look at criteria including financial strength, annual and interim financial statements, investment strategies, cost control mechanisms, work in progress (both bonded and nonbonded), cash flow, net worth, working capital and bank and other credit relationships. The underwriter will also look at ability to perform, prior experience on similar projects, equipment and personnel — including strength of management and its structure, past and current workloads and a continuity plan. Finally, it will consider the contractor’s reputation with project owners, subcontractors, suppliers and lenders.

Weakness in any of these areas can cause a contractor to fail. Evaluating each of these areas allows the underwriter to become comfortable guaranteeing that a contractor will be able to complete the job as promised.

Who requires contract surety bonds?

Congress passed a law more than 100 years ago to protect taxpayers from contractor failure by guaranteeing payment from the primary contractor to subcontractors and suppliers. An update to this law, called the Miller Act of 1935, is the current federal law that mandates surety bonds on federal public work projects valued at $100,000 or more. The act removes the risk from the subcontractors involved in the project and places it on the surety company that issues the bond.

State and local governments also require these bonds on public construction projects and each state has its own ‘Little Miller Acts.’

Surety bonds for private projects, while not required by law, are highly recommended. Every major project that could potentially cripple an individual company or a financial institution should require a bid and performance bond for protection. The cost of the performance bond ranges from 0.5 percent to 3 percent of the total contract amount. There is no other risk transfer mechanism that guarantees a construction contract will be completed.

When compared with the cost of contractor failures, surety bonds are a low-cost investment, considering the protection that is provided by them. Thousands of contractors, whether they have been in business for two years or 100, whether they are large or small, fail each year, leaving behind unfinished construction projects with billions of dollars in losses to project owners.

What happens if a claim is made on a surety bond?

The surety company will first investigate the alleged contractor default by working with the principal to make a decision on whether it must perform under the terms of the bond.

Once it has determined default of a contractor under the performance bond, it could conduct a takeover in which it will hire a completion contractor. It could also perform a tender, where a new contractor will be provided to the obligee (owner).

Other options include retaining the original contractor and providing technical and/or financial assistance, or the surety could reimburse the owner by paying the penal sum of the bond.

Without the protection of a surety bond, none of these actions would be possible. To minimize your risk when dealing with contractors, seek the advice of an expert to help maximize your protection.

Jack Gaugler is vice president, surety bond specialist, at SeibertKeck Insurance Agency Inc. and the Jack Kohl Agency. Reach him at (330) 294-1352 or jgaugler@seibertkeck.com.

Insights Business Insurance is brought to you by SeibertKeck Insurance Agency

Published in Akron/Canton

When selecting a contractor for a job, it is important to choose the most fiscally responsible one for the construction project in order to mitigate and manage risk and ensure its timely completion.

Failing to do so puts your company at risk of economic devastation as you are gambling on a contractor or subcontractor whose level of commitment is uncertain or who could become bankrupt part way into the job. However, there is a solution to decrease your risk, says Marc McTeague, president of Best Hoovler McTeague Insurance Services, a member of the SeibertKeck Group.

“Surety bonds offer an optimal solution. By providing financial security and construction assurance, they guarantee project owners that contractors are capable of performing the contract and paying specified subcontractors, laborers and material suppliers,” says McTeague.

Smart Business spoke with McTeague about how surety bonds can help protect you from a devastating loss.

What is a surety bond?

A surety bond is a three-party agreement in which a surety company assures the obligee (the owner) that the principal (the contractor) will complete a contract as promised.

There are three primary types of contract surety bonds: a bid bond, a performance bond and a payment bond.

A bid bond assures that a bid has been submitted in good faith, that the contractor intends to enter into the contract at the price bid and will provide the required performance and payment bond if awarded the contract. A performance bond protects a company from financial loss in the event that the contractor fails to perform in accordance with the terms and conditions of the contract. A payment bond assures that a contractor will provide certain workers, subcontractors and material suppliers and guarantees they will be paid for work performed under the contract.

Even if a contractor has been in business for 100 years and has a good reputation, past performance is no guarantee of future results. Risk lies in the uncontrollable, unpredictable and the unknown and it is never a good idea to gamble on something that could jeopardize your company’s future. The relationship that an owner has with a contractor is arm’s length, while the surety agent and bond company relationship is a day-to-day partner. A surety has a much greater insight as to a contractor’s abilities to perform than an owner.

How is a contractor prequalified?

Surety companies back the performance bonds with their own assets, so they conduct a careful, rigorous prequalification review of the contractor. The goal for the contractor is to get a bond line set up. The bond underwriter’s analyses look at criteria including financial strength, annual and interim financial statements, investment strategies, cost control mechanisms, work in progress (both bonded and nonbonded), cash flow, net worth, working capital, and bank and other credit relationships. The underwriter will also look at ability to perform, prior experience on similar projects, equipment and personnel — including strength of management and its structure, past and current workloads and a continuity plan. Finally, it will consider the contractor’s reputation with project owners, subcontractors, suppliers and lenders.

Weakness in any of these areas can cause a contractor to fail. Evaluating each of these areas allows the underwriter to become comfortable guaranteeing that a contractor will be able to complete the job as promised.

Who requires contract surety bonds?

Congress passed a law more than 100 years ago to protect taxpayers from contractor failure by guaranteeing payment from the primary contractor to subcontractors and suppliers. An update to this law, called the Miller Act of 1935, is the current federal law that mandates surety bonds on federal public work projects valued at $100,000 or more. The act removes the risk from the subcontractors involved in the project and places it on the surety company that issues the bond.

State and local governments also require these bonds on public construction projects and each state has its own ‘Little Miller Acts.’

Surety bonds for private projects, while not required by law, are highly recommended. Every major project that could potentially cripple an individual company or a financial institution should require a bid and performance bond for protection. The cost of the performance bond ranges from 0.5 percent to 3 percent of the total contract amount. There is no other risk transfer mechanism that guarantees a construction contract will be completed.

When compared with the cost of contractor failures, surety bonds are a low-cost investment, considering the protection that is provided by them. Thousands of contractors, whether they have been in business for two years or 100, whether they are large or small, fail each year, leaving behind unfinished construction projects with billions of dollars in losses to project owners.

What happens if a claim is made on a surety bond?

The surety company will first investigate the alleged contractor default by working with the principal to make a decision on whether it must perform under the terms of the bond.

Once it has determined default of a contractor under the performance bond, it could conduct a takeover in which it will hire a completion contractor. It could also perform a tender, where a new contractor will be provided to the obligee.

Other options include retaining the original contractor and providing technical and/or financial assistance, or the surety could reimburse the owner by paying the penal sum of the bond.

Without the protection of a surety bond, none of these actions would be possible. To minimize your risk when dealing with contractors, seek the advice of an expert to help maximize your protection.

Marc McTeague is president of Best Hoovler McTeague Insurance Services, a member of the SeibertKeck Group. Reach him at (614) 246-RISK or mmcteague@bhmins.com.

Insights Business Insurance is brought to you by SeibertKeck Insurance Agency

Published in Columbus

Hundreds of businesses were recently destroyed or severely damaged in the Joplin, Mo., tornado, and if statistics hold true, fewer than 20 percent of those will be up and running again within three years.

If that happened to your business, would you be in the 20 percent or the 80 percent?

“Too many business owners fail to obtain business interruption coverage, or, if they do have it, are surprised in a disaster to find it is not written to properly cover their needs,” says Parker Berry, an executive vice president with SeibertKeck Insurance Agency. “If your plan is not properly designed, you may find you don’t have the coverage you assumed you did.”

Smart Business spoke with Berry about how having the right business insurance coverage can mean the difference between rebuilding and going out of business.

What is business interruption insurance?

A business interruption occurs when you have a physical loss to your location. For instance, if there is a fire at your manufacturing plant, there will be a loss of income because you are no longer able make a product.

The insurance will pay for loss of business income, expenses such as moving to another location while the building is being rebuilt or repaired, and continuing to pay your employees until they are able to work again.

Business owners should look at it as disability insurance for the business itself.

What types of businesses need this insurance?

Most should at least have the extra expense piece of it. For example, contractors make most of their money in the field, but if they have office operations, and something happens to that physical location, they will still have those extra expenses, and some lost income.

With a manufacturer, restaurant or retail location, all revenue comes from the physical location. So there are certainly some classes of businesses that need it more than others.

How does a business determine how much coverage it needs?

There are formulas your agent can use to give you a good idea of the amount of coverage you need. Other businesses will use monthly multiples of sales.

For example, if you are a manufacturer that uses certain machines and they are destroyed, you’ll need to replace them. But there may be a six-month build-out time. You are never going to start loss adjustment from day one because you have to clean up and take inventory. Then you have to order new equipment and it’s a minimum of six months before it arrives.

Do you have a contingency plan? Is there disaster planning? How quickly can you replicate what you’re doing somewhere else? Those are all items for discussion when determining the amount of coverage.

Each business is different, and it’s an art to figure out the right number. This is why an experienced agent is critical when working through the process.

What questions should business owners ask their agent to make sure they’re getting the right coverage?

Are there coinsurance limits? Are there time limits? Is the coverage paying for a regular work force? Is it covering ordinary payroll — because if it’s not, your employees are not going to wait for you to start paying them again. Is it paying fixed bills like utilities and rent? For what length of time is the coverage?

The agent should be asking questions of the business, as well. While most businesses have some form of business income coverage, it may be poorly written because the coverage isn’t designed specifically for them, or the agent isn’t asking enough questions.

Without a true understanding of your business, the agent won’t be able to design the best coverage for your needs.

What other areas should a business consider when buying business interruption coverage?

You can have ordinance or law issues, or power interruptions. For example, an ice storm could cause a manufacturer to be out of business for weeks without power. Or if a restaurant loses water service, it’s out of business until that is restored. The building itself may not be physically damaged, but the business has sustained a business interruption loss.

There is also a form of contingent business income. Say you have a large vendor or client that is damaged by a fire. That can have an impact on your ability to do business.

Or you may have a retail business anchored by another large business that pulls in a lot of traffic. If that business is damaged and no longer operating, causing a loss of traffic and, as a result, income, you can recover that through dependent property coverage.

How can an agent work with a business to minimize the chances of a disaster and increase its odds of recovering if one does occur?

An agent can do a risk management audit, trying to find the weaknesses in coverage and where the company is weak in loss control. Risk management can help prevent bad things from happening, but if they do occur, it can help ensure you have the right coverage in place.

Business owners can do a lot to make sure that if a claim does happen, it will move quickly and in the way they want. If data are backed up offsite, they will be easier to recover than if everything is inside those four walls.

You will recover much more quickly if you truly spread your risk and have a disaster plan. If you lose your physical plant and don’t have a plan, it’s going to be a long road back.

Parker Berry is an executive vice president with SeibertKeck Insurance Agency. Reach him at pberry@seibertkeck.com or (330) 867-3140.

Insights Business Insurance is brought to you by SeibertKeck Insurance Agency

Published in Akron/Canton

Hundreds of businesses were recently destroyed or severely damaged in the Joplin, Mo., tornado, and if statistics hold true, fewer than 20 percent of those will be up and running again within three years.

If that happened to your business, would you be in the 20 percent or the 80 percent?

“Too many business owners fail to obtain business interruption coverage, or, if they do have it, are surprised in a disaster to find it is not written to properly cover their needs,” says Marc McTeague, president of Best Hoovler McTeague Insurance Services, a member of the SeibertKeck Group. “If your plan is not properly designed, you may find you don’t have the coverage you assumed you did.”

Smart Business spoke with McTeague about how having the right business insurance coverage can mean the difference between rebuilding and going out of business.

What is business interruption insurance?

A business interruption occurs when you have a physical loss to your location. For instance, if there is a fire at your manufacturing plant, there will be a loss of income because you are no longer able make a product.

The insurance will pay for loss of business income, expenses such as moving to another location while the building is being rebuilt or repaired, and continuing to pay your employees until they are able to work again.

Business owners should look at it as disability insurance for the business itself.

What types of businesses need this insurance?

Most should at least have the extra expense piece of it. For example, contractors make most of their money in the field, but if they have office operations, and something happens to that physical location, they will still have those extra expenses, and some lost income.

With a manufacturer, restaurant or retail location, all revenue comes from the physical location. So there are certainly some classes of businesses that need it more than others.

How does a business determine how much coverage it needs?

There are formulas your agent can use to give you a good idea of the amount of coverage you need. Other businesses will use monthly multiples of sales.

For example, if you are a manufacturer that uses certain machines and they are destroyed, you’ll need to replace them. But there may be a six-month build-out time. You are never going to start loss adjustment from day one because you have to clean up and take inventory. Then you have to order new equipment and it’s a minimum of six months before it arrives.

Do you have a contingency plan? Is there disaster planning? How quickly can you replicate what you’re doing somewhere else? Those are all items for discussion when determining the amount of coverage.

Each business is different, and it’s an art to figure out the right number. This is why an experienced agent is critical when working through the process.

What questions should business owners ask their agent to make sure they’re getting the right coverage?

Are there coinsurance limits? Are there time limits? Is the coverage paying for a regular work force? Is it covering ordinary payroll — because if it’s not, your employees are not going to wait for you to start paying them again. Is it paying fixed bills like utilities and rent? For what length of time is the coverage?

The agent should be asking questions of the business, as well. While most businesses have some form of business income coverage, it may be poorly written because the coverage isn’t designed specifically for them, or the agent isn’t asking enough questions.

Without a true understanding of your business, the agent won’t be able to design the best coverage for your needs.

What other areas should a business consider when buying business interruption coverage?

You can have ordinance or law issues, or power interruptions. For example, an ice storm could cause a manufacturer to be out of business for weeks without power. Or if a restaurant loses water service, it’s out of business until that is restored. The building itself may not be physically damaged, but the business has sustained a business interruption loss.

There is also a form of contingent business income. Say you have a large vendor or client that is damaged by a fire. That can have an impact on your ability to do business.

Or you may have a retail business anchored by another large business that pulls in a lot of traffic. If that business is damaged and no longer operating, causing a loss of traffic and, as a result, income, you can recover that through dependent property coverage.

How can an agent work with a business to minimize the chances of a disaster and increase its odds of recovering if one does occur?

An agent can do a risk management audit, trying to find the weaknesses in coverage and where the company is weak in loss control. Risk management can help prevent bad things from happening, but if they do occur, it can help ensure you have the right coverage in place.

Business owners can do a lot to make sure that if a claim does happen, it will move quickly and in the way they want. If data are backed up offsite, they will be easier to recover than if everything is inside those four walls.

You will recover much more quickly if you truly spread your risk and have a disaster plan. If you lose your physical plant and don’t have a plan, it’s going to be a long road back.

Marc McTeague is president of Best Hoovler McTeague Insurance Services, a member of the SeibertKeck Group. Reach him at (614) 246-RISK or mmcteague@bhmins.com.

Insights Business Insurance is brought to you by SeibertKeck Insurance Agency

Published in Columbus

You may think that your employees would never steal from you, but how well do you really know and trust the people who work for you? One-third of all employees steal from their employers, and it is estimated that the average loss for an act of employee fraud is in excess of $175,000, says Andrew Rowles, client adviser at SeibertKeck Insurance Agency.

“Even the best internal controls can fall short of preventing an employee from committing a dishonest act if he or she is determined to do so,” says Rowles.

Employee crime and theft have dramatically reshaped business in corporate America.  For example, on Sept. 9, 2011, Carla Jean Johnson was sentenced to 120 months in federal prison for her conviction of wire fraud that cost her employer $977,418. Columbia Lloyds Insurance Co. paid the company’s claim to cover the controller’s embezzlement.

Smart Business spoke with Rowles about why it’s worth investing $5,000 in premiums to protect your assets and ensure that employee fraud doesn’t put you out of business.

What constitutes employee theft, and what company assets are most at risk?

Employee theft can be classified into two major categories: theft of property and misappropriation of funds. Theft of property can include office supplies, inventory, work in process or scrap that belongs to the company. Misappropriation of funds can include the use of accounting records to disguise or redirect accounts receivable, misuse of credit cards, payroll fraud, outside businesses paying kickbacks or other unauthorized transactions.

What protections do general insurance policies offer companies against employee theft?

A standard ISO property policy will pay for a nonemployee stealing from your organization, but what if it is internal? A majority of today’s insurance carriers offer a crime policy to cover business assets that are stolen by an employee.

When purchasing a policy, keep in mind how the policy defines an employee and who is excluded from coverage. Crime causes a greater amount of commercial property losses than any other type of property losses. Current estimates are as high as $50 million annually in the United States for employee dishonesty losses alone. Employee dishonesty is just one of many types of commercial crime exposures that you should consider.The fundamental Crime Insurance parts are:

  • Employee theft
  • Forgery or alteration
  • Inside the premises — theft of money and securities; robbery or safe burglary
  • Outside the premises — messenger
  • Computer fraud and funds transfer
  • Money orders and counterfeit paper currency

What types of policies protect employers specifically against employee theft, and how do they differ from general policies?

Commercial crime insurance coverage can be written as a part of your commercial package insurance policy or as a separate standalone policy. The advantage of a stand-alone is that you can customize forms and coverage to meet your business’ specific needs and may be an option if the commercial package insurance company is not in a position to offer you the amount of crime insurance that you need.

There are two policy forms used by carriers to offer employee theft coverage.  Selecting the correct form is important and the forms differ in the premium charged for coverage.

  • Discovery form. The discovery form covers losses that are identified, or discovered, during the policy period, even if the loss happened some time before.
  • Loss sustained form. The loss sustained form will cover only losses that occur during the policy period and up to 12 months after the policy expires. Keep in mind that employee theft can take time to discover. This form could expose you to the risk of financial loss spread over multiple years.

What types of fraud can occur with employee pension or 401(k) plans, and how can they be prevented?

In 1974, the Employee Retirement Incomes Security Act (ERISA) established insurance guidelines to protect the assets of any employer-sponsored pension, profit sharing, or employee welfare plan. ERISA requires that 10 percent of any benefit plan assets be covered by insurance to protect the plan(s) from employee dishonesty. Coverage protects the participants and beneficiaries from dishonest fiduciaries who handle the plan assets.

There are two ways to provide such coverage, either by endorsing the crime policy or purchasing a separate bond through your insurance company. Keep in mind that it is important to regularly review your plan and review the information provided by your administrator.

What procedures can an employer implement to reduce the risk of employee theft?

In a slow economy, businesses have experienced stalled growth, reduced revenue, liquidity concerns and implementing procedures to reduce theft becomes a higher priority as a loss becomes more certain. A business owner should look into implementing loss control procedures to protect the company’s assets. Here are a few examples:

  • Isolate duties — splitting the job of taking money in and sending it out for deposit. Books kept by one person should be reconciled by another.
  • Require countersignatures on all checks.
  • Perform background checks.
  • Establish a code of conduct.
  • Implement whistleblower and hotline programs.

Nearly every business needs to consider purchasing a commercial crime insurance policy, although determining as to what limit can be difficult. Companies should consider the financial impact of an employee theft claim and discuss this with their accountant, attorney and insurance agent.

Andrew Rowles is a client adviser at SeibertKeck Insurance Agency. Reach him at (330) 867-3140 or arowles@seibertkeck.com.

Insights Business Insurance is brought to you by SeibertKeck Insurance Agency

Published in Akron/Canton
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