How to determine if your exposures stretch beyond your current insurance

As executives and other successful business people climb the career ladder, they accumulate wealth. But many of them don’t consider how their exposures change from year-to-year.

They may turn to independent agents and brokers for help — but often only on the heels of an unpleasant situation, mishandled claim or the inability to secure coverage on an important asset.

You didn’t become successful in business by taking a reactive approach to risk. So, why wouldn’t you take the same stance in your personal life?

Smart Business spoke with Tim Able, director of sales & marketing at SeibertKeck Insurance Agency about how high net worth individuals need to proactively approach their property and casualty insurance.

How do you know if you’ve outgrown your current insurance?

As your earning power and assets increase, you may not be receiving proper guidance from professionals who are familiar with the market you are now in.

It’s not uncommon to believe an agent employed by one of the major, mass-market insurers is still your best source for advice or to mistakenly think that all insurance policies and companies are alike.

For example, you may believe that you already purchased the maximum available limits, but you can buy personal excess liability or umbrella policies with limits that go above $10 million from a select group of insurance carriers.

In addition, you now face some unique exposures that your agent or broker needs to be able to discuss, such as international property, private staff liability, board of directors involvement, special event coverage for large-scale home entertaining, exotic collections or parental liability and social media.

Is it common that high net worth individuals are underinsured in their liability limits?

Most wealthy U.S. consumers do not carry adequate coverage to protect their family and hard-earned assets, and discussing liability limits is one of the most vital topics in the insurance conversation.

You need to have a comprehensive risk profile that requires exploring you and your family’s lifestyle, purchase and investing habits, in addition to geographic presence and future aspirations.

How can a risk manager provide value-added service, versus a non-specialty insurance broker?

Your needs become increasingly complex as your personal wealth grows. So, you should take advantage of the value-add services and unique offerings that can improve your risk profile, such as:

  • Annual risk analysis.
  • Dedicated claims teams.
  • Preferred vendor access.
  • International capabilities.
  • Travel accident and medical evacuation coverage.
  • Digital home inventory.
  • Fine arts specialty coverage.
  • Notary services.
  • Personal security consultation.
  • Domestic employee exposure.

What do you tell people who hesitate to switch providers out of loyalty?

Fifty-nine percent of consumers would likely switch providers if their insurer was unable to offer solutions meeting all of their unique needs. The problem is you may not realize that your needs aren’t being met.

Personal insurance and financial protection for your family and your assets is critical. You deserve adequate coverage and above-and-beyond service, even if it means switching to another provider.

In our litigious society, jury verdicts and settlement amounts are higher than ever. Those with deep pockets can become targets for liability lawsuits. Adequate protection has to be a cornerstone of your insurance portfolio.

Insights Business Insurance is brought to you by SeibertKeck

Knowledge is power when crafting a global insurance plan for your business

Company executives need to understand the coverage provided by countries’ local reinsurance pools to best manage the unfortunate reality of terrorism risk.

The unpredictable nature and potential severity of a terrorism event make it a difficult peril for insurers to include in the property policy. In order for insurance companies to offer coverage while protecting their own solvency, they can transfer or share the risk through reinsurance mechanisms.

Many countries have thus created reinsurance pools (typically government-organized) for insurers writing business within their borders, but it’s not a perfect system.

“It’s impossible to procure uniform terrorism coverage across your global exposures solely through participation in the local pools,” says Casey Soares, vice president and property specialist at Woodruff-Sawyer & Co.

“Standalone terrorism policies are available to fill some of the gaps, but the key is identifying your exposures and making an informed decision on what to buy vs. self-insure.”
Smart Business spoke with Soares about recognizing the coverage shortfalls and weighing the options in the market.

What are the local reinsurance pools?

Each reinsurance pool has been born out of necessity, and therefore addresses terrorism concerns specific to that country. As a result, each pool is unique in how it defines terrorism, how it’s funded, and how it calculates limits, deductibles and premium. For instance, the pool in the United Kingdom was created as a result of attacks attributed to the Irish Republican Army and responds to relatively small but frequent acts.

The pool in the U.S., Terrorism Risk Insurance Program Reauthorization Act (TRIPRA), was first created as a result of the 9/11 terrorist attacks and responds to severe loss events. Some sort of pool exists in 20-plus additional countries, hence the need for an educated risk partner to guide you through your options.

Where do you see problems arising?

U.S.-based companies are presented with the option to add the peril of terrorism back into their global property policy by opting in to TRIPRA with a premium surcharge. The buyer checks the box and can answer to management or the board that they have terrorism coverage. The scope of coverage, however, is more limited than is perhaps emphasized: TRIPRA applies to acts only within the U.S. and must meet a minimum industry loss amount, and does not cover NBCR (Nuclear, Biological, Chemical, or Radiological) events.

Similarly, other country pools have their own triggers that must be met to receive payment for claims. Add-on participation in pools is easy and provides matching limits and deductibles for property risks, making it an appealing option for the sake of simplicity. It can, however, present serious problems if a loss occurs and coverage doesn’t respond as you thought it would.

How does a company find the right option?

Conduct an exposure analysis that includes each country your company houses assets, as well as those involved in transit to and from suppliers and customers. A conversation can then be had between client and broker using the output in a grid view, looking at existing country pools, what is covered under each, requirements mandated by the country, and additional coverage available in the private terrorism insurance market to replace or supplement the pools.

Finally, loss scenarios giving estimates of damage and business interruption should be reviewed and updated at each renewal.

Any choice for participation in local pools should be the result of a clear understanding of how it fits in with your risk management strategy. Strategies may range from keeping insurance spend to a minimum while meeting local lender requirements, to obtaining competitive rates with a standalone policy blended with local policies (difference-in-conditions/difference-in-limits insurance) to secure the broadest protection available.

Abundant catastrophe capacity in the insurance market has helped standalone terrorism pricing and now is a good time to explore this option if a company’s exposures justify it. Whatever risk management strategy you employ, an informed decision will make the threat from terrorism a little less menacing. ●

Insights Business Insurance is brought to you by Woodruff-Sawyer & Co.

How transactional risk insurance makes sense for many M&A deals

As merger and acquisition activity has increased recently, it has become in vogue for buyers and sellers alike to secure representations and warranties insurance to cover risks.

“Sales of these policies have gone up exponentially,” says Emily Maier, group leader, transaction services at Woodruff-Sawyer & Co. “About 1,000 reps and warranties policies were sold in the U.S. last year — probably more than the last five years combined.”

This insurance protects against breaches in the reps and warranties made in a sale and purchase agreement. It is especially growing in use by private equity firms, which have been on a buying spree of companies in the past two years.

Smart Business spoke with Maier about what reps and warranties insurance offers.

What is reps and warranties insurance?

Should a loss occur as a result of a misrepresentation or breach in an agreement, this insurance provides protection against the loss.

Buyers in the M&A transaction are the ones who most frequently purchase the insurance, but it is available to either sellers or buyers. If a buyer agrees to purchase a company based on the reps and warranties given, and then those reps and warranties turn out to be false, the buyer has the right to take action against the seller. Similarly, should the seller purchase the insurance and the buyer file a dispute, the seller can expect the insurance to cover the matter.

Is reps and warranties insurance useful in all M&A deals?

It isn’t necessary in all transactions. It mostly works when large differences occur during negotiations between the buyer and seller. For instance, if the buyer and seller differ on the amount of escrow, or if the seller only wants warranties to last for a certain number of months post-transaction and the buyer wants them to last several years, insurance can cover that gap.

What are some of the latest trends?

M&A activity has been so brisk that competitive auction situations may arise. In response, insurance coverage has evolved to include a zero seller indemnity structure, which has enabled private equity firms to use such coverage as an enticement and win auctions.

Under this structure, the seller has an entirely free exit from liability should issues arise with regard to providing true and accurate reps and warranties.

How else has reps and warranties insurance evolved?

Until a couple of years ago, there were certain aspects that underwriters were unwilling to cover, including consequential and multiple damages. With consequential damages, for example, the buyer could claim that a breach of inventory representation meant not only that the inventory promised wasn’t there, but that the buyer lost ongoing operating revenue because it was unable to fulfill a contract.

This type of loss used to be specifically excluded from policies — it no longer is. The purchase price is often based on a multiple of the company’s earnings before interest, taxes, depreciation and amortization (EBITDA). In the event of a breach, the argument could be made that any loss suffered should be subject to the same multiple.

In other words, ‘I paid you 10 times EBITDA for your company so, when a contract you said was valid turned out not to be, I want 10 times the value of that contract as my loss.’ Previously, looking at loss in this way was a standard exclusion, but again, underwriters are now willing to offer this form of coverage.

How does a company choose a qualified reps and warranties insurance broker?

An organization that is or may be involved in M&A should find a broker with experience, a long-term view and well-established relationships with the underwriters to get the best results.

A broker without the right experience may likely get in the way, and can potentially create more difficulties. Using a broker who has a proven track record in covering the risks associated with M&As is worth the cost of engagement; you wouldn’t want to entrust an amateur with these risks because the stakes are high — and can be exponentially more costly. ●

Insights Business Insurance is brought to you by Woodruff-Sawyer & Co.

Are you compliant with ERISA?

ERISA — the Employee Retirement Income Security Act of 1974 — was originally designed for the protection of individuals enrolled in pension plans, but today it affects almost all employers very broadly.

Smart Business spoke with Tobias Kennedy, executive vice president at Montage Insurance Solutions, about how to adequately protect your company from ERISA regulations with ERISA Wrap.

What is ERISA’s history and the basics of how it works?

ERISA actually has a pretty interesting history. Back in the 1960s pension reform gained some momentum after the Studebaker Corporation, the automotive manufacturer, closed its plant. Due to a poorly funded program, thousands of people were left with no pensions at all and thousands more received lump sum settlement payments valued at a fraction of the proper amount.

The basics of the law require employers to meet certain standards for employee benefits programs and the responsibility really does extend beyond just the retirement piece.

To comply with all of the regulations that ERISA levies, employers need to take action on their benefits products as well, such as the group medical, dental, life insurance, etc.

Which employers are affected by these regulations?

While a lot employers know about ERISA broadly, many don’t realize that it is a federal law affecting almost all employers. It doesn’t matter what is the size of the company, or whether the plans are fully insured or self-funded. It impacts all employers including private sector, corporations and partnerships.

What else don’t employers realize about ERISA?

Additionally, not only are there are a lot of employers who are a little under-informed, but the Department of Labor (DOL) also has been awarded funds to audit groups who may not be fully ERISA compliant by cross referencing retirement with the health and welfare.

It’s really a perfect storm where employers are being hit hard for thousands, sometime hundreds of thousands of dollars.

The DOL has the authority to assess penalties up to $1,100 per day, per line of insurance with no maximum cap and no statute of limitations, so non-compliance can be expensive!

How can employers best be aware of potential regulations and avoid these kinds of penalties?

You should consider looking into ERISA Wrap, because unfortunately master contracts, certificates and benefit summaries do not qualify as a written plan document. ERISA Wrap is an approved IRS solution because it includes all of the required information all in one place.

A good ERISA Wrap will gather things like the plan administrator’s name, how the plan is funded, eligibility requirements for employees, rules about protected health information, and required notifications such as Women’s Health and Cancer Rights Act enrollment, Newborn’s Acts, Michelle’s Law, information regarding COBRA administration and much more.

To make sure this is done properly, the easiest thing to do is simply call your broker.

But this isn’t just one document and then you’re good to go — it’s an annual upkeep, and you’ll want to be sure you’re working with a partner versed in the arena to ensure this gets completed after each renewal period.

Insights Business Insurance is brought to you by Montage Insurance Solutions

How looking beyond a calamity can help mitigate other issues

Preparing for a major loss event — an earthquake, a significant data breach, a devastating fire — requires companies to take a broader view of the potential impact from a total-risk standpoint, whether damages affect property, employees or multiple areas of a company.

“In any major loss event, and an earthquake is a particularly good example, inadequate insurance protection can obviously create significant problems for the affected company, including the end of a business if the event is bad enough,” says Andy Barrengos, partner and senior vice president of Woodruff-Sawyer & Co.

“However, poor planning for such an event will almost certainly create immediate and long-term problems for a business, even if the event is smaller in scale. While some people look at insurance as a solution to most large loss events, there are more encompassing measures to consider as part of a broadened risk perspective.”

Smart Business spoke with Barrengos about expanding the mindset companies have so they look beyond individual risk issues and think more broadly about the enterprise impact of a catastrophic event.

Why should companies take a wide-ranging view when considering the impact of a catastrophe?

Companies should look at their risk differently because the event can cause a variety of damages across all aspects of a business. Instead of a bottom-up approach, think of how a major loss could seriously affect the company’s ability to do business.

What is a tangible example of a wide-ranging view of risk?

Consider an earthquake in California. The possibility of this event is not in question, it’s unfortunately a matter of when, not if, one occurs.

Many businesses focus on the potential property loss following an earthquake. However, the potential impact to employees is far greater. While employees injured at work in an earthquake are insured under their employers’ workers’ compensation coverage, employers need to plan for this risk more broadly.

This includes having emergency response plans that are practiced in advance to ensure employees are as insulated from significant injury as possible, and making sure the building(s) occupied are retrofitted if at all possible.

The emergency response plan should also account for employees’ needs in the hours and days following the event. Most will be trying to get home. They may not be able to reach family and loved ones and could become quite upset.

Following the immediate employee issues, companies need practiced disaster recovery plans to mitigate the impact of the event on it and its customers in the near and long term.

This includes back-up sites for critical data and processes as well as alternate production (if applicable) to enable a speedy return to pre-loss work levels.

Disaster recovery isn’t about insurance, but the broader need to plan for the event and its impact across the entire business. Doing this effectively will bring tangible, long-term benefits to the company beyond insurance recoveries.

Employees will appreciate the concern and help provided by their employers. Customers will value the quick return to business and the company will enhance its reputation overall.

Does this approach also apply to a different kind of major loss, such as a data breach?

Absolutely. Many companies immediately focus on the liability they may face following a data breach and specifically the possibility of lawsuits from third parties for failure to protect the breached information. While this is an important risk to plan for, the most immediate issue is the required response and associated expenses following the breach.

Though lawsuits may or may not be filed, a company must have a plan it can trigger immediately to: conduct forensic analyses to determine what actually occurred and who was affected; notify affected individuals; provide credit monitoring and identity theft services; and work with the appropriate authorities, including regulatory agencies in some cases.

There is no substitute for a sound plan in order to minimize a company’s financial and reputational risk, and to protect both its employees and customers. By taking into account the overall impact an incident could have and planning accordingly, a company is acting responsibly — and is better prepared — for the long term. ●

Insights Business Insurance is brought to you by Woodruff-Sawyer & Co.

Add an extra layer of liability protection through umbrella insurance

Life can be unpredictable, and as much as you plan, your insurance policies may no longer cover every aspect of your needs. This is especially true in today’s litigious society where people are filing more lawsuits and receiving larger judgments.

For these situations, it is important to have an umbrella insurance policy with the right amount of coverage. For example, a survey of 600 agents by ACE Private Risk Services found that 92 percent of high net worth individuals were likely underinsured on their umbrella liability.

“Umbrella coverage can usually offer broader coverage than the underlying policy and, in some cases, can act as the primary liability coverage,” says Craig Hassinger, president of SeibertKeck Insurance Agency.

Smart Business spoke with Hassinger about how umbrella coverage can extend your protection.

What is umbrella liability insurance?

Umbrella insurance is an additional insurance policy that covers losses above the limit of underlying policies, such as home and auto insurance, and can be written to cover both commercial and personal risks.

For your business, umbrella liability insurance provides an extra layer of coverage for claims that exceed your primary business liability limits. Standard insurance policies will cover your business in most situations, but when serious circumstances occur, umbrella liability helps guarantee that your business is completely protected.

What are the functions and benefits of umbrella liability policies?

Your insurance policies are in place to protect your home and auto or business. When accidents occur or you experience a large loss, the umbrella policy is designed to:

  • Provide additional limits above each occurrence limit of the insured’s primary policies.
  • Take the place of primary insurance when primary aggregate limits are reduced or exhausted.
  • Provide broader coverage for claims not covered by the insured’s primary insurance policies, which would be subject to policy retention.

In addition, an umbrella policy expands the limit of liability insurance above your other polices and also can offer broader coverage than the underlying policies. For example, you could be sued for slander. Your homeowner’s policy may not cover that, but the umbrella may pick it up.

Your insurance adviser will work with you to identify and provide umbrella liability coverage to pick up where your basic coverage left off.

How much coverage do you need?

There is no exact answer to the amount of coverage one should have for an umbrella policy, but there are ways to determine possible exposure.

For example, you are driving and accidently run a red light and create an accident. Unfortunately, one person in the car you hit is killed and the other is injured. An auto accident can easily result in damages of $1 million, especially if someone is injured or killed.

You are responsible for the $1 million of damages. If you have an auto liability with a limit of $500,000 that will be used — leaving you with an outstanding balance of $500,000. You are responsible for paying that amount. After exhausting your personal assets, say $400,000, you would still be left with $100,000 of damages, which you could be sued for and have your wages garnished.

In the scenario above, if the driver had a $500,000 or $1 million umbrella policy, it would have covered the damages above the auto policy.

To determine the amount of umbrella insurance that is right for you, start with your assets, your exposure and your future earnings, and consider how much risk you are comfortable with and how much risk you want to transfer. Are you willing to take on more risk, or do you want a safer bet by purchasing higher limits?

View the decision through the lens of how a lawsuit could affect not only you but also your family. Some people may be risk-takers, but they don’t want to risk something that can affect their whole family.

No matter the size of your exposure, your insurance agent can help you analyze your risk and provide you with options that fit your needs.

Insights Business Insurance is brought to you by SeibertKeck

Culture is far reaching

“Culture is something that can be influenced by leadership. The extra things we do for our employees are far reaching,” says Danone Simpson, CEO of Montage Insurance Solutions. “Reaching beyond the normal sets you apart.”

Smart Business spoke with Simpson about her company’s culture and what she’s doing to improve it.

Can you provide an example of how leadership can improve a company’s culture?

Spending time at my niece’s home last May while her three month old had a major surgery inspired a kid’s camp in our office, which included the employee’s children.

I witnessed two young parents juggling their schedules so they could be home with the children as often as they could. The surgery allowed both the baby and her three-year-old, older brother to be at home for the week. As the time grew closer for me to leave and the children to go back to day care I saw the pain in my niece’s face.

On the flight home my thoughts shifted to my employees and their children. It was on that trip that I decided to have a kid’s summer camp at the office.

The first young lady we hired decided at the last minute to take another job, putting us in a bit of a bind. Luckily, another employee spoke up, ‘I have a friend whose sister may love a job like this.’

We asked the young lady to come in the next morning. She appeared at first glance a serious girl. I was a bit concerned since camp was starting the next day.

Taking a leap of faith like this drew a few internal questions; however I had committed to the employees and after reading “Lean In” by Sheryl Sandberg I knew this was a step in the right direction.

As it turned out the young lady’s first sentence to me during the interview was, “I was working on science projects last night and the play dough came out really good.” I hired her immediately.

How did Sheryl Sandberg’s book weigh into your decision?

In the story she wrote about being pregnant and running to the door for a meeting after parking far away. She was out of breath, and when she sat down Mark Zuckerberg asked her why they did not have closer parking for pregnant women.

She paused and realized that leadership needed to get back to thinking about some of the unique differences we enjoy as women and men.

We push to be the same, but the truth is in some ways we are not.

Today, parents equally share in caring for their children and I see in both our young fathers and mothers the gratitude in having their children experience their workplace if even for a day.

What was the result of your summer camp?

It was a fun-filled summer for the children. They spoke about what they had learned about their mother’s and father’s heritage, presenting boards filled with family photos to our employees.

Recently, we moved our offices and it was important to me that our culture remained intact as we transitioned from a homey office environment to a more modern one.

So, during the spring break we invited the employees’ kids (ages 6-11) to return once more.

This time they presented what they wanted to be when they grew up. I asked them to think beyond sports, art, singing and dancing and to think about these important talents along with a second career to take them even further out. Daniel wants to be a football player and a Paleontologist, studying fossils to determine organisms’ evolution and interactions. His younger brother wants to study the sea as an oceanographer.

They all stood proudly in front of the employees in our conference room presenting to our familiar faces smiling, cheering them on and asking them questions. It was a special bonding time for us all.

We impact our employees in many various ways, and when we include their families it leads to growing strong commitments, and less reduction in workforce, which creates a culture that lasts.

Insights Business Insurance is brought to you by Montage Insurance Solutions

Think your insurance covers your ATV, golf cart or sports car — think again

Spring is finally here, and you’re cleaning out your garage and getting out of the house as much as you can.

But as you take out your all-terrain vehicles (ATVs), golf carts, boats, recreational vehicles (RVs) and more, grab your insurance policy, dust it off and make sure your summer toys are covered. More than likely, they’re not.

“It’s a common misconception,” says Parker Berry II, CIC, executive vice president at SeibertKeck Insurance Agency. “People think, ‘I have an umbrella; it covers me for everything.’ It’s just an assumption that their personal insurance will take care of it, and it probably won’t.”

Depending on how you utilize these vehicles, your claim will be denied — accidentally exposing your personal assets to lawsuits — unless you schedule them properly or obtain additional coverage, Berry says.

Smart Business spoke with Berry about steps you need to take now to properly insure your toys.

Why aren’t ATVs, golf carts or other off-road vehicles included in the personal insurance you already own?

Your policy covers ATVs or golf carts when you stay on your own property and your family drives or rides on them — that’s it.

As soon as you go on the road, head over to the neighbors, load up the ATV to take it camping or allow someone else on the vehicle, you need to buy and list coverage for that specific unit on your policy.

Not only are you covered if the vehicle is damaged, but you also have bodily injury coverage. This is in case you hit somebody or someone riding on it falls off and hits his or her head, resulting in a lawsuit.

You might also need to buy coverage for your kids’ toys, such as motorized John Deere gators.

If you know your kids’ friends will use it or they are going to drive over to the neighbor’s yard, you should pay a small fee each year to have it covered.

What does it cost to get coverage?

It’s not a huge amount of premium dollars but it can create a world of trouble if you don’t talk to your agent.

He or she can explain the benefits and where a particular item would best be covered, but you’ve got to have the conversation first. For example, a gator licensed for road use, even though it doesn’t go over 25 mph, could be put on either a homeowners or auto policy.

If it’s so simple, how does it get overlooked?

Your agent may have had a good idea of what you owned when they first insured you, but since then you probably have purchased, sold and gotten rid of a variety of things.

It’s time to bring your agent up to speed on the toys you have now, and who plays with them and where.

When are people denied coverage with their sports cars?

Those who own Porsches, Corvettes or Ferraris often drive those cars on racetracks, perhaps on a track at a driving school.

These drivers think they are covered if they wreck their car, but nine out of 10 personal auto policies have a specific exclusion in the language that says, ‘We will not cover anyone who is driving — and they list it out — if they are racing, preparing for a race, practicing, qualifying, doing speed contests or demolition derbies.’

Some policies will go as far as stating that if you’re within a racing facility or compound, you’re excluded.

There are, however, a few insurance companies who cover track driving at a school.

Make sure to discuss this with your agent to confirm if you have coverage or not, prior to attending the driving school.

What’s the necessary coverage for watercraft, motorcycles or RVs?

Watercraft like motorboats, personal watercraft or pontoon boats are placed under a marine liability policy. RVs, motorcycles and summer cars require a separate auto policy specialized for unique autos.

In some cases, these items can be added to your current home policy as an endorsement.

But again, the most important thing is to disclose that you have them.

So, as you’re doing spring-cleaning with your house and cars, look at your policy and look in the garage. What toys do you have out there? ●

Insights Business Insurance is brought to you by SeibertKeck Insurance Agency

How transactional risk insurance makes sense for many M&A deals

As merger and acquisition activity has increased recently, it has become in vogue for buyers and sellers alike to secure representations and warranties insurance to cover risks.

“Sales of these policies have gone up exponentially,” says Emily Maier, group leader, transaction services at Woodruff-Sawyer & Co. “About 1,000 reps and warranties policies were sold in the U.S. last year — probably more than the last five years combined.”

This insurance protects against breaches in the reps and warranties made in a sale and purchase agreement. It is especially growing in use by private equity firms, which have been on a buying spree of companies in the past two years.

Smart Business spoke with Maier about what reps and warranties insurance offers.

What is reps and warranties insurance?

Should a loss occur as a result of a misrepresentation or breach in an agreement, this insurance provides protection against the loss.

Buyers in the M&A transaction are the ones who most frequently purchase the insurance, but it is available to either sellers or buyers. If a buyer agrees to purchase a company based on the reps and warranties given, and then those reps and warranties turn out to be false, the buyer has the right to take action against the seller. Similarly, should the seller purchase the insurance and the buyer file a dispute, the seller can expect the insurance to cover the matter.

Is reps and warranties insurance useful in all M&A deals?

It isn’t necessary in all transactions. It mostly works when large differences occur during negotiations between the buyer and seller. For instance, if the buyer and seller differ on the amount of escrow, or if the seller only wants warranties to last for a certain number of months post-transaction and the buyer wants them to last several years, insurance can cover that gap.

What are some of the latest trends?

M&A activity has been so brisk that competitive auction situations may arise. In response, insurance coverage has evolved to include a zero seller indemnity structure, which has enabled private equity firms to use such coverage as an enticement and win auctions.

Under this structure, the seller has an entirely free exit from liability should issues arise with regard to providing true and accurate reps and warranties.

How else has reps and warranties insurance evolved?

Until a couple of years ago, there were certain aspects that underwriters were unwilling to cover, including consequential and multiple damages. With consequential damages, for example, the buyer could claim that a breach of inventory representation meant not only that the inventory promised wasn’t there, but that the buyer lost ongoing operating revenue because it was unable to fulfill a contract.

This type of loss used to be specifically excluded from policies — it no longer is. The purchase price is often based on a multiple of the company’s earnings before interest, taxes, depreciation and amortization (EBITDA). In the event of a breach, the argument could be made that any loss suffered should be subject to the same multiple. In other words, “I paid you 10 times EBITDA for your company so, when a contract you said was valid turned out not to be, I want 10 times the value of that contract as my loss.” Previously, looking at loss in this way was a standard exclusion, but again, underwriters are now willing to offer this form of coverage.

How does a company choose a qualified reps and warranties insurance broker?

An organization that is or may be involved in M&A should find a broker with experience, a long-term view and well-established relationships with the underwriters to get the best results.

A broker without the right experience may likely get in the way, and can potentially create more difficulties. Using a broker who has a proven track record in covering the risks associated with M&As is worth the cost of engagement; you wouldn’t want to entrust an amateur with these risks because the stakes are high — and can be exponentially more costly.

Insights Business Insurance is brought to you by Woodruff-Sawyer & Co.

 

How to negotiate your insurance renewal to get the best value

Business owners purchase insurance based on emotion. Actually, almost all purchases are based on emotion — people think logically but decide emotionally.

For insurance, employers reach out to people they trust — friends, relatives, golf buddies or community and business connections in the insurance industry — to discover where to turn for an insurance relationship. They also typically remain loyal, unless the owner experiences a bad loss or poor service.

As word gets around about the soft insurance market, employers need to guard against getting too price conscious.

“You are buying a service. Not only are you buying insurance to put your mind at ease so you can sleep at night, but you need a partner to work with you proactively to make your risk profile look attractive to the insurance company,” says Kerry K. Gregoire, an assistant vice president at SeibertKeck Insurance Agency.

Smart Business spoke with Gregoire about using the strong bargaining position you have now in the insurance industry to set your company up for the long term.

If business owners constantly shop their insurance, how can it backfire?

Insurance representatives and insurance companies will lose interest in quoting if a business owner shops his or her insurance annually. Most carriers today, although hungry for new business, are seeking long-term relationships and looking for loyalty, including after they’ve paid claims. They look at the whole picture, including how frequently you’ve been shopping your property and casualty insurance.

A business owner needs to be in a position of having an insurance company available and interested to quote when it’s really needed, such as a tough loss history or circumstances that drive premiums up.

Where exactly is the marketplace cycle and what is it doing for premiums?

For the past two years, we’ve been a soft market with 5 to 10 percent increases. That has moved over to flat renewals, and there are reports projecting a 5 to 15 percent decrease for 2015, depending on your risk profile. Cyber insurance, however, continues to increase because it’s new, people are getting hit with cyberattacks and the marketplace is still being tested.

No one has a crystal ball, but a typical soft market tends to hang on one to three years, depending on the outcome of catastrophic losses and market performance. The insurance market is a cycle. Educated buyers understand that eventually everything will go back up, so you don’t want to burn bridges with available insurance companies.

How would you recommend businesses negotiate renewals?

In a soft or hard market, business owners should consider bidding insurance out once every three years, and remember it’s not all about price. Make sure you aren’t losing any coverages if you switch to another insurer. Plan ahead and standardize the process for obtaining all of the necessary documents that pertain to the quoting process.

Also, limit agents who are competing; streamline the process of market selection. If you have more than a couple, agents end up approaching the same markets.

In a soft market, besides reduced or flat pricing, an insurance buyer can request more value-added services from an insurer or its representatives, such as a multiyear rate guarantee program that is contingent upon staying below a loss ratio threshold.

Plus, many insurers have been enhancing their risk management techniques and loss control resources to help customers manage their insurance costs and claim activity. Make sure you express to your agent your company philosophy — you want to self-insure or have higher deductibles for certain coverages. You can take a more proactive approach to try to prevent a claim or lessen its impact. You’ll also want to plan necessary time for loss control visits by insurers.

In the meantime, between shopping your insurance, be involved. Review your claim history so you can implement internal changes, if needed, prior to shopping. You may need to ask for quarterly loss run reports or quarterly claim review — via meetings or conference calls with the insurer — if you have claims activity. Insurers like to see that the business owner is demonstrating good risk management, which in the end controls losses and insurance costs.

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