Denise T. Ward

Wednesday, 26 December 2007 19:00

Partners needed

Workers’ compensation claims can be a pain for both employers and employees. Employers lose out on manpower while facing a potential financial barrier. Employees suffer from a daunting ailment that sidelines them for short or long periods of time. The issue can easily be time consuming and confusing for both parties.

Steve Jacobson, a commercial insurance broker for Westland Insurance Brokers, says one way for employers and employees to find common ground on the issue is through constant training and educational programs. It’s also important for companies to implement a formal safety program in an effort to prevent accidents before they happen.

Smart Business spoke to Jacobson for a more detailed look at how companies should approach workers’ compensation insurance.

How can companies reduce workers’ compensation premiums?

The most important way is to work with a broker and insurance company who knows and understands how your business works. Regular claims reviews should be performed to make sure claims are being adjusted in the most timely and cost effective manner possible. The sooner a company can get a claim closed, the less it will affect future costs. By preventing or reducing the exposures that cause injuries, a company can assure reduced premiums in the future. Get management and employees involved. Prevention and education are key factors in future insurance costs.

What factors should companies consider when selecting an insurance carrier?

With the recent reform, many new insurance companies have recently begun writing workers’ compensation coverage in California.

When choosing a carrier, a company needs to select one that is financially sound and has an ‘A’ rating from the AM Best Co. Choose a carrier that has its own claims personnel, preferably located where the business is located. By doing so, you will get claims adjusters who know who the good doctors are and who the bad ones are, which will help in reducing fraudulent claims and increased costs on legitimate claims.

The better quality insurance companies will also have loss-control personnel, who will assist you for free with reducing exposure to losses and with employee safety programs. They also have employees dedicated to detecting and fighting fraudulent claims.

Can an employee incentive program be beneficial?

Employee incentive programs can be extremely beneficial in reducing the frequency and severity of a company’s claims. When employees feel that they have something to gain, they will work hard toward the reward. By making employees understand they are a part of the team, they will take ownership in the program. A company’s losses today affect its premiums for the next few years. The small costs of today’s incentive programs will save a lot more for years to come.

How can employers help employees understand the impact on a business of workers’ compensation?

Employers need to educate employees on the effect the company’s losses have on their employer’s premiums. Employees need to understand that today’s losses affect a business’s premiums for the next three to four years. When you educate the employees and explain that if the employer has to pay higher premiums due to WC losses and that there might not be enough money for raises or bonuses, it gives the employees an incentive to avoid a claim or to get back to work as soon as possible after a claim.

A successful workers’ compensation program really has four partners that need to successfully work together: the employer, the employees, the insurance broker and the insurance carrier.

Has the cost for workers’ compensation premiums changed for California employers in recent years?

Starting in 2000, the California workers’ compensation industry began to see significant rate increases. Since the new reform has gone into effect, our policyholders have seen decreases on average from 65 percent to 75 percent over the past two years from a number of high-quality, ‘A’-rated insurance companies. Rates are continuing to come down, but keep in mind that the cheapest rate is often not the best rate.

How can employers reduce their exposure to loss?

Regular safety and employee training meetings should take place with topics that are specific to your industry. Claims can often be avoided with proper training before an accident. Employers should also have the broker’s or insurance company’s loss control representatives perform a walk-through a couple of times a year to survey the business in order to point out any exposures to losses that could be eliminated before they cause a loss. Material handling procedures and machine usage should also be evaluated frequently. Additionally, by providing safety equipment to employees such as back-braces, goggles, etc., some claims can be virtually eliminated.

STEVE JACOBSON is a commerical insurance broker with Westland Insurance Brokers. Reach him at (619) 641-3260 or sjacobson@westlandib.com.

Wednesday, 20 September 2006 20:00

Stock option backdating

For the past several months, the issue of stock-option backdating among public companies has become the subject of substantial media attention. In May 2006, the Wall Street Journal published articles that exposed the fact that executive stock options at numerous companies had been backdated or timed to coincide with their lowest annual share price. In some cases, it was estimated the odds that the grants were not manipulated were one in 300 billion.

Smart Business spoke to DLD Insurance Brokers vice president Jim Lopiccolo to take a closer look at this matter.

Explain stock option backdating.
Stock option backdating involves the practice of selecting a date prior to the actual grant date of an option, so that the option exercise price is less than the fair market value on the date the grant actually occurred — the goal being to issue ‘in-the-money’ options that can be exercised for financial gain.

While the practice is not in itself illegal, certain conditions must be met:

  • Documents cannot have been forged.

 

  • The effect of the backdating must be properly reflected in earnings reports.

 

  • The effect of the backdating must be properly recorded for tax purposes — both in terms of the company’s compensation expense and the capital gain for the individual option recipient.

 

  • Shareholders must be clearly notified of the backdating practice.

What are spring loading and bullet dodging?
Spring loading and bullet dodging refers to a more controversial practice whereby option grants are timed to take place before expected good news or after expected bad news, respectively — to take advantage of the resulting effect on the stock price. Other questionable practices include: granting blanket board approval to set option dates for a specified period, providing special agreements to executives versus regular employees, and manipulating new hire start dates.

Will director and officers liability insurance (D&O) coverage respond to claims involving stock-option backdating?
Generally, with the exception of a few cases where criminal charges were filed, most of the claims we’ve seen thus far involve traditional securities class-action lawsuits alleging fraud or breach of fiduciary duty, or derivative suits brought by shareholders on behalf of the company. D&O policies are designed to cover defense costs and any resulting judgment or settlement amounts against the individuals, as well as the company for securities claims.

There are a number of policy provisions that could affect the availability of coverage. These include, but are not limited to, the following:

Definition of Claim - Most policies will respond in the event a civil, criminal, arbitration, administrative or regulatory proceeding is filed against the individual directors and officers. Formal investigations will often trigger a defense obligation as well, but informal investigations simply requesting documents typically would not. The directors, officers and the company would be on their own for these costs.

Personal Conduct Exclusions - The fraud, dishonesty and personal profit/advantage exclusions could come into play as well, depending on the nature of the allegations and the exact policy wording. In some instances, an ‘in-fact’ finding of fraud or personal profit would be sufficient to trigger the exclusion, whereas in better policies, the exclusions are only triggered if fraud or dishonesty is proven at a final adjudication.

Severability of the Application and Exclusions - Severability deals with the ability of the carrier to impute knowledge or facts pertaining to one insured person to another insured person to determine whether coverage applies. Policy applications now include not only the carrier’s written application, but also all public disclosures and SEC filings. Since stock option backdating investigations often lead to financial restatements, carriers can point to potential fraud in the application to deny or limit coverage. Good severability language can offer significant protection to those insured persons (such as outside directors) who had no knowledge of a misrepresentation in the application, or were not involved in fraudulent conduct.

What should a company do if a fact or circumstance is found that could lead to a claim during the renewal process?

Most carriers do not require a mainform application be completed for a renewal of a policy that is already in place. Mainform applications are more onerous than renewal applications, since they contain a warranty statement that specifically requires the insured to disclose whether they are aware of any facts or circumstances which could give rise to a claim. Nonetheless, full disclosure is best, since a claim filed shortly after a renewal can give the appearance that the insured intentionally failed to disclose information that would affect the underwriter’s evaluation of the risk.

JIM LOPICCOLO is vice president of executive liability and financial products for DLD Insurance Brokers. Reach him at (949) 553-5681 or jlopiccolo@dldins.com.

Wednesday, 30 August 2006 16:54

Shine the light

California consumers have a new level of protection for their personal information thanks to the “Shine the Light” law, which went into effect in 2005. Under the law, companies that do business with California residents have to either allow customers to opt out of information sharing, or make a detailed disclosure of how personal information was shared for direct marketing purposes. The law applies to many businesses, but companies with fewer than 20 employees and federal financial institutions are exempt from the law’s requirements.

Smart Business spoke to Jon J. Janecek of Newmeyer & Dillion LLP to discuss what companies are affected by this law and the steps they must take to comply.

Who must comply?
All three of the following must exist for a business to be covered by the law:

  • Must have 20 or more employees

 

  • Must have an established relationship with California residents

 

  • Must have shared personal consumer information with third parties for marketing purposes within the last 12 months

Many organizations are exempt from the law: nonprofits (including charities and religious organizations asking for donations); politicians and other political groups that are fundraising; banks and financial institutions; and credit reporting bureaus.

What does the law require businesses to do?
Under the law, a business must first provide contact points to allow consumers to request a business’ disclosure regarding how it shares personal information with other businesses for direct marketing purposes.

Therefore, you must designate a mailing address, e-mail address, or a toll-free telephone or fax number to which customers may make disclosure requests. The customers should also be allowed to view this contact information at all of a company’s California locations that have regular customer contact.

Finally, a business’ Web site can also be used to comply. It should provide a link on its home page using the words ‘Your Privacy Rights’ or ‘Your California Privacy Rights’ to another Web page or to the page that contains the business’ privacy policy statement.

What happens if the customer makes a disclosure request?
The business must respond within 30 days, and the response must contain the categories of personal information disclosed to third parties. This includes information such as name, address, e-mail address, phone number, Social Security number, payment history, debit or credit card information, and other personal information.

The business must also provide the list of companies to which personal information was disclosed for marketing purposes within the last calendar year. However, companies that have a privacy policy or privacy notice that allows customers the option of sharing personal information must simply provide a copy of its opt-in or opt-out policy so customers can minimize the sharing of personal information.

What is the most cost-effective way to comply?
There is a provision in the law that allows businesses to comply without building expensive new databases or business processes. A business is in compliance as long as it gives customers the ability to prevent their personal information from being shared with third parties. If a business allows customers to exclude themselves, the law says that their requests for disclosure can simply be answered with a stock response on how to go about removing their names from future third-party marketing exchanges.

What are the penalties for noncompliance?
The customer may be entitled to recover a civil penalty of up to $500 per violation, and up to $3,000 per willful, intentional or reckless violation, as well as attorneys’ fees and costs. After learning of a violation, a business may be able to argue that it complied within 90 days of learning of the violation.

What can company owners do to be sure their company is in compliance?
At the bottom of a company’s Web site home page, include a link to the privacy policy. Include a form that allows a customer to enter his or her personally identifiable information for the express purpose of excluding this information. Include an e-mail address, a toll-free telephone number, and a toll-free fax number that a customer can contact to make the same request.

You can also include a link to the privacy policy at the bottom of any promotional e-mails

If printed mail pieces include an order form, include the URL of the Web site’s privacy policy, as well as the contact point e-mail address, toll-free telephone number, and toll-free fax number.

JON J. JANECEK is a partner in the Newport Beach office of Newmeyer & Dillion LLP, a law firm that focuses on corporate, finance, real estate, general corporate and construction law. Reach him at (949) 854-7000.

Sunday, 30 July 2006 20:00

Protect your business

Understanding the grand scope of pollution liability insurance and exactly who is affected can be a complicated matter. All corporations are faced with the complexity of evaluating their exposures and may have third-party imposed requirements for pollution coverage, finding themselves needing specific coverages for a wide range of operations. Placing policies can be complicated and require extensive negotiations in coordinating coverages.

An important element for anyone seeking pollution insurance is understanding the limitations in other coverages that may be in force, according to Jamin Valdez, a risk specialist with DLD Insurance Brokers Inc.

Smart Business spoke with Valdez about the different types of coverages available.

Who needs pollution liability coverage?
Who doesn’t? When people think of pollution liabilities, people primarily think of catastrophic events like Love Canal or the Exxon Valdez oil spill. In reality, pollution liabilities can span a large array of operations and business activities.

An initial thought is that a contractor might not be considered a prime candidate for a pollution policy, but in fact an issue could result simply from its day-to-day operations. All real estate owners are subject to pollution liability at one level or another due to their and/or their tenant’s operations. Possible exposures could include standard day-to-day operations causing a pollution condition; encountering polluted soils and/or groundwater; mold; issues as result of historical operations; or migrating pollutants left undetected due to adjacent property operations.

Have any new regulations recently been released?
Regulations that brought further light to this exposure include Sarbanes-Oxley and, more recently, Financial Accounting Standards Board (FASB) Interpretation No. 47 or FIN 47, which went into effect to fiscal years ending after Dec, 15, 2005.

These regulations are now in full steam, resulting in detailed scrutiny of corporate financial statements. With transparency requirements and environmental law, companies need to become more specialized and aware of remedies environmental/pollution markets present.

Is it a required coverage? If so, by what agency?
Certain agencies that authorize specific operations may require financial assurance that can be satisfied via coverage. For example a recycling or temporary storage and disposal facilities may fall under the oversight direction of the Department of Toxic Substance Control (DTSC). Required financial assurance could be satisfied by this route. Specific insurance companies have successfully negotiated coverage issues to satisfy DTSC requirements. A financial institution could impose coverage in order to obtain funding for a project as well.

What other lines of pollution-related products and creative placement capabilities are available?
Pollution coverage can be added to multiple lines of coverage. For example, a freight hauler that causes a pollution incident could have its transportation coverage supplemented with pollution. Large environmental projects that are estimated to cost millions of dollars could be evaluated and possibly placed to cap expense overruns associated with the project. Some package deals could include pollution, general and professional liability resulting in a decrease in premium for placing multiple lines versus individual placement of each.

Pollution liability coverages have the advantage of being flexible. One example is that coverage can be placed either on a site-specific or multiple-location basis, which could assist in achieving lower costs per site due to economies of scale.

Both site-specific and portfolio placements are available for multiple-year terms and could include pre-existing, new exposures, transportation, nonowned disposal sites, business interruption, mold or any combination of these coverages.

Coverage can be assigned to a new property owner in the case of property acquisition, making once-unattractive properties more attractive in today’s market. Coverage would also provide an additional layer of protection to unknown exposures that could be discovered during activities or tenant operations.

Why is it important to have pollution coverage?
Most general liability policies exclude coverage or provide extremely limited pollution and/or mold coverage, leaving the client with a gap in coverage.

A claim scenario that comes to mind is a residential portfolio served with a claim alleging bodily injury due to fumes from a unit’s heating equipment. The claim was sent to the general liability carrier and denied, due to the policy’s pollution exclusion language. Coverage for this exposure could be obtained through pollution markets and also demonstrates how pollution can take on many forms.

The old days of asbestos exposures have transformed into today’s termed phrase, ‘mold is gold.’ No one can predict what tomorrow’s contaminant of concern will be. Companies need to not only determine what they are doing to ultimately protect and maximize their own business capabilities but should also take into consideration the accountability to the communities in which they operate.

JAMIN VALDEZ is a risk specialist with DLD Insurance Brokers Inc. with an emphasis on environmental/pollution exposures. Reach him at jvaldez@dldins.com or (949) 553-5680.

Thursday, 25 September 2008 20:00

Partners needed

Workers’ compensation claims can be a pain for both employers and employees. Employers lose out on manpower while facing a potential financial barrier. Employees suffer from a daunting ailment that sidelines them for short or long periods of time. The issue can easily be time consuming and confusing for both parties.

Steve Jacobson, a commercial insurance broker for Westland Insurance Brokers, says one way for employers and employees to find common ground on the issue is through constant training and educational programs. It’s also important for companies to implement a formal safety program in an effort to prevent accidents before they happen.

Smart Business spoke to Jacobson for a more detailed look at how companies should approach workers’ compensation insurance.

How can companies reduce workers’ compensation premiums?

The most important way is to work with a broker and insurance company who knows and understands how your business works. Regular claims reviews should be performed to make sure claims are being adjusted in the most timely and cost effective manner possible. The sooner a company can get a claim closed, the less it will affect future costs. By preventing or reducing the exposures that cause injuries, a company can assure reduced premiums in the future. Get management and employees involved. Prevention and education are key factors in future insurance costs.

What factors should companies consider when selecting an insurance carrier?

With the recent reform, many new insurance companies have recently begun writing workers’ compensation coverage in California.

When choosing a carrier, a company needs to select one that is financially sound and has an ‘A’ rating from the AM Best Co. Choose a carrier that has its own claims personnel, preferably located where the business is located. By doing so, you will get claims adjusters who know who the good doctors are and who the bad ones are, which will help in reducing fraudulent claims and increased costs on legitimate claims.

The better quality insurance companies will also have loss-control personnel, who will assist you for free with reducing exposure to losses and with employee safety programs. They also have employees dedicated to detecting and fighting fraudulent claims.

Can an employee incentive program be beneficial?

Employee incentive programs can be extremely beneficial in reducing the frequency and severity of a company’s claims. When employees feel that they have something to gain, they will work hard toward the reward. By making employees understand they are a part of the team, they will take ownership in the program. A company’s losses today affect its premiums for the next few years. The small costs of today’s incentive programs will save a lot more for years to come.

How can employers help employees understand the impact of workers’ compensation on a business ?

Employers need to educate employees on the effect the company’s losses have on their employer’s premiums. Employees need to understand that today’s losses affect a business’s premiums for the next three to four years. When you educate the employees and explain that if the employer has to pay higher premiums due to WC losses and that there might not be enough money for raises or bonuses, it gives the employees an incentive to avoid a claim or to get back to work as soon as possible after a claim.

A successful workers’ compensation program really has four partners that need to successfully work together: the employer, the employees, the insurance broker and the insurance carrier.

Has the cost for workers’ compensation premiums changed for California employers in recent years?

Starting in 2000, the California workers’ compensation industry began to see significant rate increases. Since the new reform has gone into effect, our policyholders have seen decreases on average from 65 percent to 75 percent over the past two years from a number of high-quality, ‘A’-rated insurance companies. Rates are continuing to come down, but keep in mind that the cheapest rate is often not the best rate.

How can employers reduce their exposure to loss?

Regular safety and employee training meetings should take place with topics that are specific to your industry. Claims can often be avoided with proper training before an accident. Employers should also have the broker’s or insurance company’s loss control representatives perform a walk-through a couple of times a year to survey the business in order to point out any exposures to losses that could be eliminated before they cause a loss. Material handling procedures and machine usage should also be evaluated frequently. Additionally, by providing safety equipment to employees such as back-braces, goggles, etc., some claims can be virtually eliminated.

STEVE JACOBSON is a commerical insurance broker with Westland Insurance Brokers. Reach him at sjacobson@westlandib.com or (619) 641-3260.

Wednesday, 20 September 2006 20:00

Going public

It has never been considered easy for private companies to sell a piece of their business to the general public. Numerous regulatory steps are involved, and immense financial obligations may be required. Since 2002, more regulations have caused companies to take a closer look at “going public.”

Wayne Pinnell, CPA and managing partner of Haskell & White LLP, reports that even with the increased regulatory environment, more companies filed initial public offerings during the first half of 2006 than in 2005. “Part of this increase, I believe, is because business owners are starting to become more comfortable with the regulatory environment, and have grown more assured with a stronger economy this past year, as compared to the previous year,” Pinnell says.

Smart Business spoke to Pinnell to cover the primary steps of going public, and why it is vital for business owners to carefully take this major step into the unknown.

What does a company gain by going public?
The first reason, of course, is to raise equity, which allows the company to have another source of financing beyond the money it raises in its initial public offering. As a public company, the business can use more freely tradable securities as a form of currency to conduct other transactions. For example, once public, a company can utilize its stock book, instead of only a checkbook, to spur growth by buying other companies.

The second reason is related to the succession or an ownership transition plan. Founders of the business can cash out and move on to future endeavors.

What preparations should be made?
One key preparation is for the founders to align themselves with key advisers, including legal, accounting and investment banking, at a minimum. The company also will need to secure an underwriter to complete the public offering. The key is starting early.

At the base level, a company must have at least two to three years of audited financial statements. The registration statement itself includes a prospectus, and in order to prepare that prospectus, a great deal of information gathering must be done among the legal and accounting professionals, as well as the underwriter and its counsel.

What is the lead time needed to go public, and what are the cost factors?
At least six months — and it could be more or less depending on the company’s state of preparation. Companies should consider that underwriting commissions and expenses range from eight to 12 percent of the offering proceeds, plus several hundred thousand dollars in accounting, legal and printing costs.

Business owners need to gauge how much they need to raise, and balance that against how much of the company they are willing to sell.

How has the rate of companies going public changed in recent years?
After the dot-com era, the IPO market cooled off for a period. When SOX (Sarbanes-Oxley Act) took effect in 2002, there was another cooling effect for companies going public. In fact, executives of public companies began to question whether they should remain public because of the new regulatory burdens.

Is going public now more difficult with the Sarbanes-Oxley Act?
Yes, there are strict rules for the functioning of audit committees, accounting firm requirements and, of course, internal controls over financial reporting. The internal control aspect has caused extensive work for companies, requiring internal and external resources to document and test their internal controls as required by SOX. A company is required to have this documentation and testing in place so the auditor can then test that information and include those reports in the public filings made after completing the IPO.

Private companies anticipating going public should be wary of pitfalls, including greater lead time, the extent of documentation needed, and judgment about the quality of the documents from an internal and external standpoint. If companies just barely comply with SOX’s Section 404, they will miss potential benefits, such as tightening controls over the business, streamlining operations by eliminating redundancies, and providing a higher level of assurance to investors and potential investors that the company is, indeed, taking the right steps.

What about a reverse transaction: Are public companies going private?
It certainly is one trend we see today. Some companies view the cost/benefit of staying public in the heightened regulatory environment as a lose-lose proposition and are pursuing ‘going private’ transactions, mergers or other steps to eliminate their regulatory requirements.

WAYNE R. PINNELL, CPA, is managing partner of Haskell & White LLP in Irvine. One of the largest independently owned accounting and business advisory firms in Orange County, Haskell & White provides a full complement of tax, accounting and auditing services to public and private middle-market companies. Reach Pinnell at (949) 450-6200.

Tuesday, 29 August 2006 20:00

Partners needed

Workers’ compensation claims can be a pain for both employers and employees. Employers lose out on manpower while facing a potential financial barrier. Employees suffer from a daunting ailment that sidelines them for short or long periods of time. The issue can easily be time consuming and confusing for both parties.

Steve Jacobson of Westland Insurance Brokers says one way for employers and employees find common ground on the issue is through constant training and educational programs. It’s also important for companies to implement a formal safety program in an effort to prevent accidents before they happen.

Smart Business spoke to Jacobson for a more detailed look at how companies should approach workers’ compensation insurance.

How can companies reduce workers’ compensation premiums?
The most important way is to work with a broker and insurance company who knows and understands how your business works. Regular claims reviews should be performed to make sure claims are being adjusted in the most timely and cost effective manner possible. The sooner a company can get a claim closed, the less it will affect future costs. By preventing or reducing the exposures that cause injuries, a company can assure reduced premiums in the future. Get management and employees involved. Prevention and education are key factors in future insurance costs.

What factors should companies consider when selecting an insurance carrier?
With the recent reform, many new insurance companies have recently begun writing workers’ compensation coverage in California.

When choosing a carrier, a company needs to select one that is financially sound and has an ‘A’ rating from the AM Best Co. Choose a carrier that has its own claims personnel, preferably located where the business is located. By doing so, you will get claims adjusters who know who the good doctors are and who the bad ones are, which will help in reducing fraudulent claims and increased costs on legitimate claims.

The better quality insurance companies will also have loss-control personnel, who will assist you for free with reducing exposure to losses and with employee safety programs. They also have employees dedicated to detecting and fighting fraudulent claims.

Can an employee incentive program be beneficial?
Employee incentive programs can be extremely beneficial in reducing a company’s frequency and severity of claims. When employees feel that they have something to gain, they will work hard toward the reward. By making employees understand they are a part of the team, they will take ownership in the program. A company’s losses today affect its premiums for the next few years. The small costs of today’s incentive programs will save a lot more for years to come.

How can employers help employees understand the impact on a business of workers’ compensation?
Employers need to educate employees on the effect the company’s losses have on their employer’s premiums. Employees need to understand that today’s losses affect a business’s premiums for the next three to four years. When you educate the employees and explain that if the employer has to pay higher premiums due to WC losses and that there might not be enough money for raises or bonuses, it gives the employees an incentive to avoid a claim or to get back to work as soon as possible after a claim.

A successful workers’ compensation program really has four partners that need to successfully work together: The employer, the employees, the insurance broker and the insurance carrier.

Has the cost for workers’ compensation premiums changed for California employers in recent years?
Starting in 2000, the California workers’ compensation industry began to see significant rate increases. Since the new reform has gone into effect, our policyholders have seen decreases on average from 65 to 75 percent over the past two years from a number of high-quality, ‘A’-rated insurance companies. Rates are continuing to come down, but keep in mind that the cheapest rate is often not the best rate.

How can employers reduce their exposure to loss?
Regular safety and employee training meetings should take place with topics that are specific to your industry. Claims can often be avoided with proper training before an accident. Employers should also have the broker’s or insurance company’s loss control representatives perform a walk-through a couple of times a year to survey the business in order to point out any exposures to losses that could be eliminated before they cause a loss. Material handling procedures and machine usage should also be evaluated frequently. Additionally, by providing safety equipment to employees such as back-braces, goggles, etc., some claims can be virtually eliminated.

STEVE JACOBSON is a commerical insurance broker with Westland Insurance Brokers. Reach him at (619) 641-3260 or sjacobson@westlandib.com.

Wednesday, 30 August 2006 16:38

Tracking customers

Information technology and the many advances surfacing in this field are transforming the way companies do business. Much of this new technology is strengthening the relationships between businesses and their customers. Product and service suppliers are able to track not only their customers’ information, but they can also monitor market trends in terms of what customers are buying and when.

Smart Business spoke to Kevin Teeters, vice president of marketing with Mpower Communications, to detail this new world of information technology and the connection between IT and other services.

What customer preferences can businesses track using information technology?
Product Life Cycle — By incorporating advanced data-mining techniques, businesses are able to determine what customer segments are most likely to purchase new services based on industry, horizontal application, seasonality or any combination of those various factors.

Customer Migration — Comparing customer models to standard deviation metrics that have been established, an accurate forecast can be provided to determine revenue threshold levels that quickly lead to up-ticks in product migration. These models can be looked at from several perspectives, including applications, industry and employee size. These models provide the relevant information to help determine which customers may fall into ‘danger’ zones where their growth momentum is quickly outpacing their current telecommunications services. Special attention is paid to this group to provide the support necessary to keep them in line with their growth.

Customer Needs — Using the metrics from care centers, models are built to realize better customer need assessment. Now companies know what the highest priority request is from a specific demographic, and know how to quickly provide the appropriate response that manages the customer’s situation.

How can that technology help improve customer relations?
When a customer comes aboard, an extraordinary amount of attention is paid to capturing as much of the customer’s specific details as possible. This is consistent, from simple contact management to providing schematics of the customer’s network in one or multiple locations. This way, there are several layers of contacts for multiple situations that may arise and a full data file to help manage any expectations in regard to potential problems that could arise. The higher the quality of the data a company begins with, the better the customer’s experience will be over the long term.

Give me an example of how IT can track a customer from initial sale to the end of the relationship.
When an account executive begins a conversation with any potential customer, that customer’s details are kept in a data file that ties directly into the main customer management system. If the business decides to partner with Mpower, the information carries through our entire provisioning process, as well as any changes the customer may make to his or her account in the future.

How does IT factor into the emerging VoIP (Voice over Internet Protocol) market?
With VoIP, we’re finally starting to see a true convergence of telephony and IT services. Owners of businesses of all sizes realize several advantages from the implementation of VoIP services onto their IP network.

Highest among them would be control over costs, flexibility in terms of managing their calls, reporting capability in user management from a desktop, and the ability to have one common platform and a common dialing plan regardless of location. For instance, a company with a phone center in India, headquarters in Anaheim and locations throughout California can have one inter-company dialing plan for all of them. That is hard to do without the incorporation of telephony and IP networks.

Another advantage is the ability to combine voice and data on the same IT network. VoIP provides a very fluid ‘pip’, which is more efficient than the traditional circuit-switched network used commonly today. Data applications are easily layered on an all-IP network. Voice is packetized and becomes one of the data applications.

Who should business owners consult when considering incorporating IT tracking technology?
Most Integrated Communications Providers (ICPs) that provide hosted IP Telephony and IP services would be able to provide solutions in this regard. When a business is first starting to move in this direction, we generally look to one of our VoIP or IP trunking services as the framework to build upon. Small companies naturally want to avoid large capital expenditure typically needed for more advanced systems such as legacy PBX and IP PBX telephone systems. Still, they desire the next-generation services that VoIP and IP trunking can provide in regard to tracking and such. Providers that are going after the smaller business market are taking what larger enterprises enjoy typically and pushing their services downstream to smaller and smaller businesses.

KEVIN TEETERS is vice president of marketing for Mpower Communications in Pittsford, N.Y. Reach him at (714) 453-6705.

Wednesday, 20 September 2006 20:00

Asset-based lending

Asset-based loans can be the answer to financial security for both large and small businesses. But some misconceptions exist about borrowing on this loan structure in terms of how it reflects on a business’ financial performance.

According to the Commercial Finance Association, asset-based loans hit $420 billion last year, compared to about $113 billion in factored loans. Don Starkey, senior vice president at Comerica Bank in San Diego, says the popularity of asset-based loans from a bank is, in part, because of lower interest rates and less frequent reporting requirements.

Smart Business spoke to Starkey to outline the dynamics of asset-based loans and to explain the formula to understanding the transactions.

How does an asset-based loan work?
Simply put, it’s a collateralized loan or line of credit where the credit limit is set based on the value of the collateral securing that loan. Acceptable collateral can be anything from accounts receivable, inventory, equipment and real estate, to patents, copyrights and trademarks.

What types of businesses are best suited for asset-based loans?
Many thriving businesses choose asset-based loans to:

  • Leverage assets as a means of supplementing working capital or funding an acquisition, allowing a business to grow beyond what it might otherwise be capable of;

 

  • Increase flexibility of lending arrangements through fewer loan covenants, higher credit limits, and fewer restrictions on the use of proceeds permitting a business to react quickly to opportunities, and

 

  • Decrease lending costs, as many banks charge higher interest rates for unsecured loans versus asset-based loans.

What qualities do banks look for in a company before extending an asset-based loan?
First, size is not a factor. Businesses large and small qualify for asset-based loans.

Second, collateral is king. The larger the asset base, the larger the potential credit limit.

Third, a business needs to have internal controls in place to regularly report to a lender the value of its collateral base. The key to getting more value assigned to a specific pool of collateral is to help a banker understand the business, the market for that collateral, and the strength of the industry as a whole.

How do you know if a company’s internal controls are acceptable?
A lender is more flexible in an asset-based lending arrangement because the loan is supported by collateral. Values of that collateral pool can change. For instance, the value of accounts receivable and inventory can fluctuate daily, whereas the value of equipment can fluctuate more gradually over months or years.

To ensure that the company’s credit limit does not exceed the value of the collateral pool, lenders ask businesses to monitor and report updated values daily, weekly, monthly or annually. To ensure that these controls are acceptable, most financial institutions conduct an audit of a business’ reporting mechanisms at least annually.

What is the difference between an asset-based loan from a bank and a similar arrangement with a factor or finance company?
Factoring companies typically charge about 1 percent monthly for all new receivables factored, also known as a ‘factor charge.’ A bank usually doesn’t charge this. In addition to the factor charge, the factoring company charges interest at rates in many cases at 1 percent to 5 percent higher than what a bank might charge. Last, but not least, a factoring company typically requires a business to report its collateral values on a daily or weekly basis. A bank is usually satisfied with weekly or monthly reporting.

Although more costly and labor-intensive in many cases, factoring companies will typically loan a business more than a bank on the same collateral pool and will ask for less restrictive financial covenants.

What is the lending formula for an asset-based loan?
Consumers use them all the time, whether obtaining an equity line secured by a home or a line of credit secured by a securities portfolio.

Asset-based loans for businesses work much the same way. Most lenders establish credit limits equal to a percentage of the collateral value. From a lender’s perspective, collateral value is equal to market value less liquidation costs. Then a credit limit is established equal to a percentage of the collateral value, typically up to 80 percent against eligible accounts receivable, up to 50 percent of quality inventory, up to 80 percent of new equipment, up to 75 percent of used equipment, and up to 75 percent on commercial real estate. Credit limits for other collateral types (patents, trademarks and copyrights) are highly subjective and are determined on a case-by-case basis.

DON STARKEY is a senior vice president for Comerica Bank and manages the firm’s San Diego Middle Market Banking Group. Reach him at (619) 338-1541 or dwstarkey@comerica.com.

Tuesday, 29 August 2006 20:00

Conversion hazards

Converting apartments to condominiums has become a popular phase throughout California in recent years. According to market reports, developers as well as investors are jumping into this market because of the growing need for affordable housing in the state.

But there are some risks associated with such projects. There are numerous laws and regulations surrounding the issue, and the vital need for investors and developers to be sure they have sufficient risk transfer.

Smart Business spoke to Rob Ranallo of DLD Insurance Brokers Inc. about this growing trend and how businesses can avoid the hazards that could follow.

How has the need for insurance covering condominium conversions changed over the past 10 years?
It seems to have increased or at least resurged greatly. Clients are seeing more opportunities linked with, hopefully, a better rate of return on their investments by buying apartment projects and then rehabbing them into condominiums for sale in today’s tougher marketplace, where there continues to be a high demand for affordable housing in Southern California.

But there is a very limited insurance marketplace, and carriers are closely underwriting the exposures due to heavy litigation in the past on condominium development. California laws have changed recently, making carrier underwriting standards a bit less tough. Carriers mandate brokers to send complete applications that include the claim history for owner/developer and general contractor if an outside general contractor is used, as well as a detailed forensic physical property inspection report and budgets on each location to be remodeled.

What are the major liabilities and risks facing developers of condominium conversion projects?
Courts have yet to determine the full extent of liability a developer would face on condominium conversions, so conservative clients and their counsel are very cautious and treat the projects like new construction. This translates in the purchasing of multi-year wrap-up/Owner Controlled Insurance Programs for liability insurance that include the owner, general contractor, most subcontractors and a 10-year products-completed operations extension to protect them from the 10-year property damage statute in California.

It is important that policies are purchased without any prior work exclusions. Also, some limited coverage for the architects and engineers is added when possible as their policies — like most subcontractors’ — will exclude work done on condominiums or apartments.

Wrap-up policies take more effort on behalf of the broker as well as the developer, as there is more administration of the subcontractors as well as contract amendments that must be made with counsel’s insight.

How fast is this business growing?
We are quoting quite a few risks, but only about 10 percent of them have come to fruition. The cost of these programs can be expensive, so the acquisition cost of the existing project versus insurance costs must be closely reviewed.

What liability statutes are in place?
Various statutes are in place dictating the period of time in which an owner, developer or contractor is liable for bodily injury and property damage to third parties. State statues appear to apply to new construction, but again there are a lot of unknowns as to whether the original work will be brought into a claim. The gray area is whether the statute will apply if the renovation does not involve structural changes: Is it a facelift or does it qualify as new construction?

How can developers protect their assets?
Consult with counsel in respect to setting up an LLC as well as how the statute may apply in respect to the scope of remodeling they are considering.

Consider strict contract indemnity wording with sellers as well as arbitration clauses with potential homebuyers.

Consider self-insuring to a certain level that they are comfortable with, to keep insurance costs down.

Buy appropriate limits, since condominium projects have the potential to generate large construction defect settlements, at least in the past or in a depressed economy.

Excellent customer service and warranty call follow-up after the unit is sold can go a long way with buyers as well to deter potential claims.

Are there any other concerns businesses should be aware of?
Make sure the property/fire/builders risk insurance coverage is placed correctly. This involves obtaining coverage for the entire project term, usually beyond one year; being sure coverage is there for existing structures as well as work to be done; and making sure coverage stays in place until the actual unit sells versus when the remodeling work has been completed. This last issue is especially important in this slowing economy when standing inventory may increase considerably.

ROBERT RANALLO is an assistant vice president at DLD Insurance Brokers Inc., responsible for marketing and risk management services to Southern California-based clients involved in residential construction and property management. Reach him at (949) 221-1788 or rranallo@dldins.com.

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