Computing personal property taxes can be a chore for businesses, particularly if the company’s locations cross various state and local jurisdiction boundary lines. Each state has its own statutes, due dates, assessment ratios and instructions that must be adhered to for a company to be considered “compliant.” These property tax requirements vary greatly and most often have late penalties for missing deadlines. However, digging into these very statutes and instructions can also provide an opportunity to minimize your company’s tax burden.
“Many will run the fixed asset ledger right out of the system and that’s what they’ll report,” says Jenna R. Kerwood, CMI, a principal in Tax Services at Brown Smith Wallace.
However, that usually results in paying more taxes than what is owed because not all assets are taxable. Often, fixed assets are capitalized at a project level, which results in inaccurate reporting for property tax purposes. There may be costs that are not taxable or components of the cost that should be removed. The taxability of these assets can be determined by examining the state and county websites, statutes, assessor manuals and return instructions.
Smart Business spoke to Kerwood about what constitutes personal property and why it’s worth the effort to keep an accurate track of assets.
What is the difference between real estate and personal property?
Real estate refers to land and buildings. Personal property is defined as tangible property that’s movable. It can be difficult to distinguish between the two, especially with manufacturing facilities, and each state has different rules and instructions.
Most states have a three-prong test:
- Can the item be moved without destroying the real estate?
- What is the primary purpose the item serves? The more special its use, the more likely that it will be considered personal property.
- What was the owner’s intent?
The key is whether it would destroy or cause permanent damage to the building if you were to remove the item.
What is the basis of property tax assessments?
The basis of value for real estate and personal property is fair market value — the amount a willing buyer would pay in a market when there’s no duress, such as a bankruptcy or foreclosure. Fair market value is subjective, which gives you an opportunity to analyze all of the capitalized cost to determine how best to reflect the ‘fair market value’ of the asset.
When reporting assets for property tax purposes, you need to understand their physical life, use, maintenance schedules, etc., in order to depreciate correctly. Items with a short life have faster depreciation. Manufacturing equipment might have computerized components that can be placed on a shorter life with a more reasonable depreciation schedule.
How can businesses lower their tax burden?
Start with fixed asset accounting records. When filing personal property tax returns, you report the original cost of the asset by year of acquisition. Companies might have a retirement policy by which they dispose of, melt down or cannibalize an asset, but that’s not reflected on the books.
It’s best to address problems on the front end. Review the asset ledger for listings that don’t look right — focus on the high dollar items or assets with ‘miscellaneous’ as the description. Scrutinize asset invoices and review them with the people who know them; it might be the plant manager for the manufacturing facility, facilities person for the furniture and IT people for the computer asset listing. Another area to consider is depreciation. The county will tell you the rate, but that may not be accurate and is negotiable.
How much can be saved?
Conservatively, businesses can lower personal property taxes by 20 percent. Most state rates are at 2 percent. When you tell a company that cleaning up asset lists can save $30,000 or more, it gets their attention.
Jenna R. Kerwood, CMI, is a principal, Tax Services, at Brown Smith Wallace. Reach her at (314) 983-1360 or firstname.lastname@example.org.
For more on this and other tax topics, visit Brown Smith Wallace's Tax Insights.
Insights Accounting is brought to you by Brown Smith Wallace
Bespoke means custom made, or made to order. The term originally came from custom clothiers — from suits to shirts to shoes; anything someone wears can be made to order for him or her by the right manufacturer.
“Bespoke is the art of being able to modify your production line to do custom paint and leather colors along with many other things,” says Jon Boardman, general sales manager at O’Gara Coach Company.
In addition, how your company operates with each individual that comes in or calls is bespoke. Bespoke can fit into any business, one way or another, he says.
Smart Business spoke with Boardman about made-to-order sales and what that can mean for your customers and business.
How does bespoke work in the luxury car market?
For a normal brand you just get to pick from 10 to 20 exterior colors and five to eight interior combinations. Then, the manufacturer picks where the leather goes and the color of each piece of the interior, while dictating the type of wood that goes with this.
However, Bentley and Rolls-Royce have more than 300 exterior paints and will also mix paint to sample for a client. They offer 28 leather colors for the inside, and upon special request — while staying within the legal guidelines — they will consider doing wild game leather, i.e. ostrich and alligator.
Both Bentley and Rolls-Royce take bespoke to many other levels that people don’t even think of when looking for a new car. They can do custom woods, stains and finishes, such as satin or high gloss. They can incorporate the client’s name in the doorsills, wood veneer and even into the leather. They will inlay precious metals, jewels and shells into the veneer prior to it being installed into a car. For example, one customer request was to make a car’s veneer from a tree in his yard. Yet another option is to have no wood in your vehicle at all and go with turned aluminum or carbon fiber.
The Bentley stand on bespoke is stated as follows: ‘We enjoy working with our customers on their bespoke requests and are only limited by the boundaries of good taste and our ethical and environmental responsibilities.’
What’s the relationship between bespoke and an enhanced customer experience?
Bespoke allows a person to make a vehicle — or any other product — exactly what he or she wants. Whether the customer prefers a black car or a pink car, he or she has the ability to take part in the design of the car.
Why might some business owners consider using this concept for their company?
It is a great way to distinguish your company from the next, even though you are in the same field of business. Anything that gets a client to be more active in his or her purchase can only help everyone involved.
A 2011 Los Angeles Times article pointed toward the accelerating trend for customized products, especially with millennials, those ages 18 to 39. In the article, Alexander Chernev, an associate professor of marketing at Northwestern’s Kellogg School of Management, said by doing it themselves — ‘the Ikea effect’ — customers derive additional value.
Do you have any advice for executives on how to incorporate bespoke best practices?
Bespoke doesn’t have to be used in its traditional meaning. By modifying a customer’s experience with any company or brand you are making his or her experience unique. So, be creative and think outside the box.
A unique and memorable experience will have that person returning to you and speaking highly of your company while he or she is out with friends. You can do many things to thank your customers, from small dinners to event tickets to elaborate parties, anything to make sure you stand out to a client.
Jon Boardman is general sales manager at O’Gara Coach Company. Reach him at (310) 659-4050 or email@example.com.
Social media: Visit us at facebook.com/BentleyBeverlyHills.
Insights Luxury Autos is brought to you by O’Gara Coach Company
Economic hardships, the sluggish job market and continued uncertainty surrounding the future of health care reform have taken a toll on employees. Now is the time to demonstrate your commitment to your workforce and boost morale by finding ways to effectively communicate your organization’s employee benefits package.
“Employers in the United States spend nearly 40 percent of payroll on benefits. That being said, a strategic approach to benefits communication is no longer a business tactic geared toward only large organizations; it is a necessity for employers of all sizes,” says Jessica Galardini, chief operating officer at JRG Advisors, the management arm of ChamberChoice.
Smart Business spoke with Galardini about taking a strategic approach to benefits communication.
Why should employers be taking a strategic approach to benefits communication?
A strategic approach can boost employee appreciation and comprehension. Maximize your annual open enrollment period by reiterating the positive aspects of what your company offers. ‘Value-adds’ such as paid holidays, vacation time or paid time off, and profit-sharing plans should not be overlooked.
Remind employees about the relevance of the financial contributions made on their behalf. Employers often pay a significant portion of the premiums for medical, dental and vision benefits, and full premium for life and disability insurance benefits. It’s not uncommon for employees to overlook how much employers pay for all components of the benefits package, which is why personalized benefit statements can be powerful communication tools. Referred to as the ‘hidden paycheck,’ these statements incorporate annual salary, the total value of all employee benefits, paid time off, etc.
What should be considered when preparing a benefits communication strategy?
A variety of factors should be considered, including life stages. In what stage of life are your employees? Are they single? Newly married? Ready for retirement? Employees have different needs from their benefits packages at different stages of their lives.
Employees respond differently to technology, which also should be taken into consideration. Email communications, a company intranet site and/or webinars might be well received by some, while others will benefit more from group forum discussions and presentations. Technology creates greater efficiencies and a new approach to benefits communication, but it should not be substituted for face-to-face and ongoing personal communication.
Another challenge is communicating with employees working remotely or in other locations, as well as those working weekends and/or shifts other than 8 a.m. to 5 p.m. Monday through Friday. You also are faced with new employees entering your workforce and older employees who might retire. People get promoted, married, divorced and have children. All of these life stages and factors can present challenges to effective communication if not taken into consideration upfront.
How do employers develop a benefits communication strategy?
Utilize your benefits advisor to help develop the communication strategy that will work for your organization. Ongoing education and communication are critical since the benefits needs of employees change throughout the year. So, provide employees with instruction and access to make needed changes. Effective programs work best when communication is employee friendly. Employees need to be shown how benefits work together, and they need guidance in order to make the best decisions.
If your organization is facing a change in benefit or contribution structure, make sure to plan how it will be communicated. Be honest, accurate and concise when delivering any message that relates to change. Your advisor can provide benchmarking data to compare your package to others in your industry, geography, etc., to help keep changes in perspective.
Because benefits have a profound impact on job satisfaction, effective benefits communication is one of the most challenging responsibilities facing employers today. The right approach and techniques can put some control back in the hands of employers, and boost employee morale.
Jessica Galardini is the chief operating officer of JRG Advisors, the management arm of ChamberChoice. Reach her at (412) 456-7231 or firstname.lastname@example.org.
Insights Employee Benefits is brought to you by ChamberChoice
As summer begins, more of us will be taking some well-deserved vacation time, but business doesn’t grind to a halt just because you happen to be away from the office. That means more entrepreneurs and business executives will be relying on online and mobile banking tools to stay in touch with their business finances.
Given the need to access financial information in real time, what does the future hold for online and mobile banking? More importantly, how can these resources help business executives make better decisions for meeting their strategic goals — now and in the future?
Smart Business spoke with Susan Brown, senior vice president and Marketing Group manager at California Bank & Trust, about how online and mobile banking tools are helping executives not only access account information, but also provide sophisticated technologies for meeting complex business and treasury management needs.
Why has mobile banking become so important to business customers?
In today’s fast-paced business environment, you can’t afford to be out of touch with your finances. It’s become more essential than ever for entrepreneurs and their teams to have 24/7 access to a variety of business metrics, such as account balances, payables, receivables, cash on hand and more.
In the past, traditional online banking tools accessible via desktop PCs and laptops met these needs, but smartphones and tablets are now becoming preferred devices for accessing information. A recent report predicted that by 2014 smartphone shipments are likely to top 1 billion units, and that by next year sales of tablet devices will exceed sales of traditional laptops.
Data like this makes it clear that mobile devices are going to be key tools for business leaders to get more done in less time.
Has mobile overtaken online banking?
Mobile banking is not different from online banking — you’re just using a different device and tools to access information remotely. The more people rely on tablets and smartphones, the more mobile apps will grow in popularity. The most likely scenario for the near future is that most business users will adopt a hybrid approach, using traditional online banking tools in the office and mobile apps on the road.
Why is online banking expanding from transaction-oriented to customer-centric?
The best financial institutions are customer-centric. These banks focus squarely on strong relationships between their clients and business bankers. Clearly, customer-centric institutions want online and mobile banking resources and technologies to reflect and mirror those values.
Transactions are important, so of course online and mobile services need to support high-transaction volumes. However, the real value is banking experts helping clients make the best use of sophisticated tools to meet complex needs, such as cash management and fraud prevention. This is why a customer-centric approach will continue to be a focus.
Will the popularity of online and mobile banking impact the future of bank branches?
When online banking first emerged, many in the industry thought it might mark the end of branch banking. However, face-to-face contact is still important, especially in a business-banking context. Many transactions, such as those involving deposits and cash withdrawals, require a network of branches. There will be a gradual decrease in the number of branches, but branch banking isn’t going away anytime soon.
What online or mobile options are available?
Most people know they can pay bills online, check the status of payments and review balances, but there are other online tools that offer more sophisticated capabilities. For example, businesses can use advanced treasury and cash management solutions customized to meet highly specific needs.
What new capabilities under development could be used in the future?
Institutions are investing in user friendly and interactive websites, as well as introducing new apps that allow clients to service their banking needs from tools like mobile devices and iPads. As the capabilities of these devices grow and devices are introduced, banks will develop new, interactive ways to support their clients’ growing needs that complement the traditional avenues.
Susan Brown is senior vice president and Marketing Group manager at California Bank & Trust.
Mobile: To learn more about California Bank & Trust’s business mobile banking app, now optimized for iPads, visit www.calbanktrust.com.
Insights Banking & Finance is brought to you by California Bank & Trust
A space plan is a made-to-order layout of your office space. If well designed, it will be flexible enough to accommodate future changes in your organization, such as staffing additions or managerial promotions, without the need for major interior renovation.
“An efficient space plan will increase productivity, efficiency and employee morale by maximizing the capabilities of your space,” says Sam McWilliams, managing partner at SMC Consulting, LLC.
As companies grow and reorganize, space can become fragmented, which challenges departmental and personnel adjacencies.
“These are common challenges that come with organizational change and growth, but can be addressed with proper planning,” says McWilliams.
Smart Business spoke with McWilliams about how a space plan can help you get the most out of your office space.
How is a space plan developed?
Determine what your current and future needs are, then reach out to a professional space planner or designer. He or she can evaluate your existing space plan and determine whether it can be reconfigured to accommodate those needs, or requires additional space.
Architects are not always required for interior planning. By hiring a designer/space planner, you will be able to keep your professional fees to a minimum.
What should be expected from a designer?
The interior design professional should be knowledgeable about building codes and Americans with Disabilities Act requirements to ensure that your space is properly designed.
Expect the designer to conduct site surveys and perform employee interviews to identify company goals. It is important to understand what challenges employees and companies are facing with their current space to understand why a company is looking to make a change. This process is called programming and is a critical step in developing a space plan that will make the best use of the space available.
What are the next steps?
The designer will generate a space plan that reflects the compilation of details gathered from programming. Generating these drawings should be a collaborative effort between you and your designer.
Departmental adjacencies and alignments will be identified, that can create ‘neighborhoods’ of groups that need to collaborate and interact with one another on a daily basis. Workspaces will be designed to accommodate work processes that allow daily activities to be performed more efficiently. By developing a standard footprint for an open plan environment, your new space plan can promote collaboration, increase productivity and reduce real estate costs.
How much flexibility does a space plan offer?
A flexible space plan allows companies to preserve space for future use by utilizing temporary space via ‘hotelling,’ a method that allocates unassigned space for visitors, field personnel or huddle rooms for small meetings. These temporary areas can be easily converted to more permanent workspaces without interruption or loss of existing space allocations.
Incorporating an open environment in your space plan can increase space allocation. Designing workstations in modular size will allow for easy reconfiguration in the future. Workstation ‘typicals’ can be easily reconfigured using the same panels to create smaller or larger workstations depending on your needs.
How will implementing this space plan render measurable results?
By utilizing the appropriate square footage, you can reduce overhead costs and increase workplace efficiency and productivity by:
- Implementing company standards.
- Workstation and office design.
- Defining and improving adjacencies.
- Reducing or eliminating architectural fees.
- Proper allocation of square footage.
- Eliminating wasted space.
- Alternative work solutions.
- Improving IT infrastructure.
Change can be a challenging but rewarding process. Developing your space plan may take time, but the effort is worthwhile when you see the impact it has on your company.
Sam McWilliams is a managing partner at SMC Consulting, LLC. Reach her at (724) 728-8625 or email@example.com.
Insights Furnishings is brought to you by SMC Consulting, LLC
Business owners and corporate executives tend to overinvest in their businesses, often ending up with a large portion of their wealth at risk to the fortunes of one company. However difficult, these owners need to diversify their financial assets to better survive periods of stress. The rules of prudent investing tell us that any more than 10 percent of one’s wealth invested in any one company is too much.
“Diversifying is not natural to individuals so closely connected to one business, but it can be a serious risk to their underlying wealth and the financial health of their entire family,” says Nina M. Baranchuk, CFA, Senior Vice President and Chief Investment Officer at First Commonwealth Advisors.
Smart Business spoke with Baranchuk about how to structure portfolios to diversify or offset these concentrated risks.
Why do corporate executives or business owners need to diversify?
Even regular employees get a company paycheck and buy company stock in the 401(k) or the employee stock purchase plan, so the concentration risks for all employees can be severe. Senior executives often accumulate additional large holdings of company stock and options as part of their compensation.
A business owner’s company may also be a disproportionately large part of his or her portfolio as well. An owner bears the risk of the entity and any economic, competitive or regulatory forces that might impact it. Like putting all your chips on red, there are serious consequences to holding so much ‘concentrated’ wealth if things don’t go well. In addition, these holdings can be illiquid — there is no easy exit under times of stress.
How should business owners construct their passive investment portfolios?
In some cases, it may not be possible to diversify much. If an owner can take cash out of the business, he or she should work with a qualified portfolio adviser to ensure that all of his or her passive investments are built to complement or offset the risk. A qualified adviser can craft a portfolio that helps to mitigate your specific concentration risks and manage your overall exposures.
For example, a local Pittsburgh businessperson might be concentrated in a steel or metal fabrication business. So, he or she would share exposure to the fates of this or other industries as well their end markets in the U.S. or overseas. He or she also may have significant risks to things like geography, interest rates, significant product input costs, etc.
You can easily have issues of exposure based on subtle or indirect connections. Some risks to a firm are really in your supply chain or the financial health of a customer’s industry. Maybe you have one or two dominant clients that represent a large percentage of your revenue stream. Geographical risks loom large for some companies as well.
A portfolio built to offset these risks might exclude many other holdings in the industrial arena and overinvest in industries that often do well when industrials/metals do not — think consumer-purchase staples like food and household products or utilities.
What’s another example of offsetting your risk?
One family we worked with had made its wealth in the real estate business — owning everything from apartment complexes to high-rises. Our analytic work found that two good offsets for these holdings were private equity and financial stocks. Thus invested, whatever happens to interest rates, private equity and financials will react in opposition to the direction of real estate, counteracting one of its most impactful environmental factors.
What should executives consider?
While many executives have limited ability to divest their options or stock, they should certainly not invest their 401(k) in the company stock or buy additional shares. Remember that the executives at Enron and WorldCom went down together, along with their options, pensions, paychecks and other compensation.
In this world of heightened competitive and financial risks, no business is immune from potentially negative outcomes. We urge our clients to make sure they have done everything possible to ensure their family’s financial health by planning for worst-case scenarios.
Nina M. Baranchuk, CFA, is a senior vice president and chief investment officer at First Commonwealth Advisors. Reach her at (412) 690-4596 or firstname.lastname@example.org.
To learn more, call (855) ASK-4-FCA, or visit ask4fca.com.
Insights Wealth Management is brought to you by First Commonwealth Bank
Historically, defined benefit plans have held a dominant position in the health care market since they were first introduced in the middle of the 20th century. Because the contributions were tax-deductible for employers and pre-tax for the employees, it was a popular way to increase employee benefits without raising wages.
But over the years, the rising cost of health care has caused employers to re-examine how much they pay for insuring their employees and caused them to think more about defined contribution plans.
“With a defined contribution plan, an employer can decide exactly how much they want to contribute to an employee’s health insurance and have a certainty about the cost,” says John Mills, senior director, Consumer Products, Product & Consumer Innovation at UPMC Health Plan. “And a defined contribution plan can be offered by a company of any size.”
Smart Business spoke with Mills about defined contribution plans and their increasing popularity with employers.
What is a defined contribution plan?
Technically speaking, a defined contribution plan is not any specific kind of health plan. Instead, it is a concept that can be applied to different approaches that employers can use to manage health care for employees.
With a defined contribution plan, a company gives each employee a fixed dollar amount that the employees can use to purchase health insurance and dental and vision benefits.Some employers will allow employees to put any money not spent on these benefits into a flexible spending account or to take as a cash benefit.
Why are these plans becoming so popular?
Certainly, the rising cost of health insurance is a major factor in the increased popularity of defined contribution plans. Any plan that can place some kind of limit on health care expenses, or provide some certainty about how much money will be paid, will get close scrutiny by those companies concerned about the bottom line.
But defined contribution plans also touch on areas that are becoming more important to both employers and employees than was possible under managed care. These include:
- The consumer’s desire to have more choice and involvement in health care.
- Concern about quality.
- Increased information.
- More freedom for providers.
What are some common characteristics of defined contribution plans?
The most common characteristic is choice. Defined contribution plans are intended to give members greater flexibility in benefit decisions. The choices include: plan choices, care choices and the ability to opt out.
Other common characteristics include increased cost sharing between the employer and the member, as well as greater knowledge and engagement in management of health care by members.
What do employers like about defined contribution plans?
One popular feature is that there is no limit on the amount of money an employer can contribute to an employee’s defined contribution health plan. Also, there is no minimum contribution requirement. That allows the employer to set the amount that makes the most sense for the company.
Employers also can give employees different contribution amounts based on classes of employees. The combination of cost management and decreased employer involvement makes defined contribution plans very attractive.
What other factors are driving the growing popularity of defined contribution plans?
Rising costs of premiums are a factor, as is the desire of providers to regain control over decisions concerning patient care. At minimum, they want a greater ability to advise patients who will make the final decision.
Concerns about quality are another factor. There is evidence that defined contribution plans will enhance the quality of care and also increase the amount of information available on the quality of health care, which makes them popular when there is such a focus on quality. And, small businesses find that with defined contribution plans they can have a feasible way to provide some kind of health insurance for their employees.
John Mills is a senior director, Consumer Products, Product & Consumer Innovation, at UPMC Health Plan. Reach him at (412) 454-8821 or email@example.com.
For more information about defined contribution plans available through UPMC Health Plan.
Insights Health Care is brought to you by UPMC Health Plan
The Family and Medical Leave Act (FMLA) entitles eligible employees of covered employers to take unpaid, job-protected leave for specified family and medical reasons. However, should an employer fail to comply with the FMLA requirements, the employer could be subjecting itself to litigation and possibly fines from the Department of Labor.
“There are a lot of obligations on the employer. To the extent that you’re not aware of these, you should contact an attorney to make sure you’re following the strict requirements of the FMLA,” says Michael B. Dubin, a member at Semanoff Ormsby Greenberg & Torchia, LLC.
Smart Business spoke with Dubin about employer compliance with the FMLA.
What does the FMLA allow employees to do?
Eligible employees are entitled to 12 workweeks of unpaid leave in a 12-month period for:
- The birth of a child and to care for the newborn child.
- The placement with the employee of a child for adoption or foster care and to care for the newly placed child.
- To care for the employee’s spouse, child or parent who has a serious health condition.
- A serious health condition that makes the employee unable to perform the essential functions of his or her job.
- Any qualifying exigency arising out of the fact that the employee’s spouse, son, daughter or parent is a covered military member on ‘covered active duty;’ or 26 workweeks of leave during a single 12-month period to care for a servicemember with a serious injury or illness if the eligible employee is the servicemember’s spouse, child, parent or next of kin (military caregiver leave).
What employers are covered by FMLA?
The FMLA only applies to employers that meet certain criteria. A covered employer includes a private-sector employer with 50 or more employees in 20 or more workweeks in the current or preceding calendar year; and public agencies and public or private elementary or secondary schools, regardless of the number of employees.
What employees are eligible for FMLA leave?
Employees are eligible if they: have been employed by a covered employer for at least 12 months, which need not be consecutive; had at least 1,250 hours of service during the 12-month period immediately preceding the leave; and are employed at a worksite where the employer employs at least 50 employees within 75 miles.
Can an employee take intermittent leave?
Under certain circumstances, an employee may take FMLA leave on an intermittent or reduced schedule basis. That means an employee may take leave in separate blocks of time or by reducing the time worked each day or week for a single qualifying reason. When leave is needed for planned medical treatment, the employee must make a reasonable effort to schedule treatment so as to not unduly disrupt the employer’s operations. Employers must be careful to accurately track intermittent leave.
Can an employee be terminated at the conclusion of the 12-week leave?
Upon return from FMLA leave, an employee must be restored to his or her original job or to an equivalent job with equivalent pay, benefits, and other terms and conditions of employment. However, there is a limited exception for ‘key employees’ where reinstatement will cause ‘substantial and grievous economic injury.’
Many employer FMLA policies provide that if an employee fails to return to work at the conclusion of the 12-week leave, the employee will be deemed to have abandoned his or her job and/or will be automatically terminated. Employers are discouraged from maintaining this type of policy as it may be deemed a violation of an employee’s rights under the Americans with Disabilities Act (ADA). At the conclusion of an employee’s FMLA leave, employers should consider whether the employee will be able to perform the essential functions of the job with or without a reasonable accommodation (pursuant to the ADA), which may include additional time off following FMLA leave.
If confronted with an issue under FMLA, employers are cautioned to contact an attorney to ensure they are acting in conformity with the FMLA and avoiding the numerous pitfalls inherent in complying with the FMLA.
Michael B. Dubin is a member at Semanoff Ormsby Greenberg & Torchia, LLC?. Reach him at (215) 887-2658 or firstname.lastname@example.org.
Insights Legal Affairs is brought to you by Semanoff Ormsby Greenberg & Torchia, LLC
If a manufacturer, distributor or merchant incurs a loss from your product, you need product liability insurance to protect your business. Product liability is generally considered a “strict liability offense” — if your product has a defect, you’re liable.
“Like most things, the devil is in the details. From an insurance perspective, it’s important to look at all of the terms and conditions of your general liability policy,” says Shane Moran, vice president at ECBM.
Smart Business spoke with Moran about the facts of product liability insurance.
What are some product liability claims?
Product claims typically fall into three categories, claims arising from:
- The manufacturing or production process — opening a can of soup and finding a piece of metal in it.
- A design failure or hazard — a chair designed with one of its legs significantly shorter than the others.
- A product that is not adequately labeled as to the potential hazard of the product — the label on a cigarette pack or a warning label on prescription medicine.
Who should have product liability coverage?
Manufacturers are not the only companies with product liability exposure — every company from the manufacturer of the components down to the retailer can be brought into a suit, and potentially has an exposure. A retailer may have an exposure if it assembled or installed the product and didn’t follow the manufacturer’s instructions properly. The retailer also would have a duty to the buyer to test the product for safety.
What possible damages could be awarded?
Your company can be legally obligated for damages to a third party that your product causes. These damages range from bodily injury to property and economic damage, with punitive damages potentially awarded.
You also can sustain loses in terms of recall cost, further product testing, advertising cost to prevent damage to your reputation, and business income and extra expense loss.
Why do some policies cover economic damages, but not punitive or statutory damages?
When policies cover economic damages, they mean compensation for a verifiable monetary loss, which can include loss of future earnings, loss of business opportunities, loss of use of the property, cost of repair or replacement, loss of employment and even medical expenses.
Punitive damages are awarded for the purpose of punishment, or to deter a reckless decision or action. Typically, they are used when compensatory damages are deemed inadequate. Punitive damage is a tricky area for insurance, as most jurisdictions have ruled that it is uninsurable. You need to examine your commercial general liability policy’s terms and conditions to see whether you have coverage. In most cases, you will find a punitive damages exclusion included.
Why is it a bad idea to underreport sales volume to lower your premium costs?
Most general liability policies are auditable. While an owner may want to use a lower exposure base to keep upfront premiums low, at the end of the day that same owner runs the risk of a large additional premium payment with the audited exposure.
Right after the policy expires, the audit occurs, which coincides with when the deposit premiums are paid. Deposit premiums are usually 25 percent of the total premium, so without using the proper exposure base at the beginning, a company could be looking at a very large outlay of cash in a short time period. This cash flow crunch could cause the cancellation of a company’s insurance for nonpayment.
Most carriers also lower their rates as the exposure base increases. So, by understating your exposure, you could be causing your company to have a higher rate and premium.
What other mistakes do companies make in this arena?
Many business owners think their insurance covers everything. But, for example, you may or may not have a product recall exclusion. The cost associated with recalling a product can be enormous, and you don’t want to find out that you have no coverage when faced with a claim.
If you’re unsure of your coverage, contact your insurance broker and/or risk manager to review the language.
Shane Moran is a vice president at ECBM. Reach him at (610) 668-7100, ext. 1237, or email@example.com.
For more information about risk management, see ECBM's blog.
Insights Risk Management is brought to you by ECBM
Many owners of small and midsize businesses are aware of cloud technology and software as a service, but don’t understand its radical cost transformation. It’s no longer a technical curiosity but a competitive necessity.
“The cloud brings a tsunami of cost-effective IT to the small business’s front door,” says Kevin O’Toole, senior vice president and general manager of Business Solutions at Comcast Business Services. “But it does bring two challenges with it. You have to pick the right partners, adopt the right technology and have good support. And your competition is going to embrace these technologies, so if you don’t figure out how to embrace this your business will be at a competitive disadvantage.”
Smart Business spoke with O’Toole on what to know about software as a service.
Why are small and midsize businesses buying software in the cloud?
IT for small and midsize businesses used to be about scarcity. They couldn’t afford expensive servers and staff to maintain them. Now, the cloud allows everyone to buy applications and services on demand, as they need it. Instead of having a server that may or may not get backed up or upgraded, everything is housed in an industrial data center with strong security and software that is regularly patched.
Also, when you buy a server, you’re buying capacity for the future. But when you buy software from the cloud, you can get it on a per user basis, adding or taking off users as your company changes.
Overall, software as a service allows you to focus on your core business. The cloud can help you get customers and serve them more efficiently, help your back office run more productively and help keep your costs down.
What kind of software applications are businesses getting from the cloud?
Pretty much anything can be managed out of the cloud at this point. Business owners are getting messaging through a hosted email exchange service. They are buying data backup services and file sharing services. With conference services, literally a couple of minutes later you can be doing a conference from six different locations with video and screen sharing. Other applications being adopted are financial and human resources services.
What do businesses need to know upfront?
The biggest things to know are:
- There are a lot of providers out there, but you want to buy from providers you can trust. It’s actually not that hard to start a cloud company, but it is hard to run one well. Sorting through the clutter and having someone vet providers for you is very valuable. Make sure when you put your business information into someone’s hands, it’s someone you trust.
- Have insight on what you intend to do with the system, so you don’t implement one system only to find out you really wanted additional features in a larger system. Also, even though your overall financial costs are lower with the cloud, there are also adoption efforts to consider, such as training your employees.
- Try to buy services in an environment with great user management and support. For example, if you’re using five different cloud applications, you don’t want each employee to need five logins and passwords. From a support perspective, make sure you have a partner on the other end to help with any troubleshooting.
- While a Google search of any cloud-based application or service will give you many listings, it is important to work with someone who can sort through it all. Find someone to ask hard questions of the cloud provider and set the bar high on quality.
What do companies do if they have technical questions about cloud-based software?
Like any technology project, you will have support questions — things do go wrong and there is confusion. It goes back to how you bought your cloud service. You can go to the source and work directly with a software vendor to purchase, onboard and maintain business applications via the cloud. You may get great support, or your provider may not always answer the phone leaving you with a major problem that you can’t solve right away. By going through a cloud expert that has the technical know-how to answer questions and troubleshoot when necessary, you can maintain that focus on your core business while also making your business more effective with the cloud.
Kevin O’Toole is a senior vice president and general manager of Business Solutions at Comcast Business Services. Reach him at (855) 867-5010 or firstname.lastname@example.org.
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