Drug use and substance abuse must be addressed by employers

There can be an element of “don’t ask, don’t tell” to employee drug and alcohol use, but this is no time to bury your head in the sand.

With the opioid epidemic, prescription drug utilization has many of the same potential consequences as someone who is using illegal drugs, in terms of the ability to be present and fully engaged. Additionally, shifting societal views and Ohio’s acceptance of medical marijuana create even more change.

“Job candidates are already coming in for pre-employment drug testing, and when they test positive for marijuana, saying, ‘Wait, that’s not a drug anymore.’ But just because it’s legal in more than 30 states doesn’t mean it’s not a controlled federal substance,” says Stephen Ligus, vice president and employee benefits leader at Hylant.

With the low unemployment rate, some employers realize not only will they probably employ individuals in the future who may not pass a drug test, they already have employees who wouldn’t pass.

A zero-tolerance policy and hardline approach may no longer be an option for everyone. But a comprehensive policy for a drug-free workplace or substance abuse is a must for all business owners.

Smart Business spoke with Ligus about employer drug policies in businesses today.

Do companies typically have a drug-free workplace or substance abuse policy?
Given the rapidly changing environment, having a current drug-free workplace policy is essential. Some businesses have integrated a drug-free workplace with safety programs and do random drug tests to get discounts on workers’ compensation premiums. Others are federal contractors that must have a drug-free workplace policy, or they employ drivers, which need to meet Department of Transportation qualifications.

Why is it important to have a comprehensive policy in your handbook?
If you don’t have a policy, it’s difficult to enforce the conditions you want for your workplace. Take a holistic approach — recognize the risks inherent in your population, the potential safety issues involved and understand that society is changing. A comprehensive policy doesn’t mean a failed test is grounds for immediate termination, but it should help protect your organization and provide resources to, hopefully, help individuals.

To assist employees with substance abuse, employers provide employee assistance programs (EAPs), awareness of community resources and even peer counseling.

What’s important to understand about Ohio’s medical marijuana law?
Ohio’s medical marijuana law, like other states, does not provide a ‘free pass’ to use marijuana in the workplace. Nor does it provide employees freedom to show up to work under the influence. Your policy should state that employees can’t work under the influence if it interferes with workplace safety, ability to work, etc.

Employers also can take a hardline stance against possession and use of the drug and its paraphernalia, as well as distribution. From a federal standpoint, it remains an illegal drug.

Overall, it’s increasingly difficult to determine whether someone is under the influence. Proper training and education of your supervisors and managers is essential. As an example, mood swings or being lethargic may indicate use of a substance, medical prescription or it could mean the person is just having a bad day.

How does an employer’s health plan play into this?
Medical marijuana is not a benefit paid for by health plans; however, virtually every health plan covers mental health and substance abuse treatment. From a mental health parity standpoint, it’s important that employees and their dependents understand their plan’s access to care.

For employers, there needs to be a firewall between your health plan and your employment decisions. For example, there may be additional protections for employees through other laws and regulations, such as the Americans with Disabilities Act, which should be consulted.

In all instances, employers should consult their attorney and employee benefits professional to review their policies.

Insights Business Insurance is brought to you by Hylant.

Protect your company with written telecommuting guidelines

Telecommuting and working remotely have both advantages and disadvantages. Traditionally telecommuting refers to employees working from their residence. These types of programs are becoming increasingly popular due to advances in technology and flexibility demanded by today’s workforce.

In fact, the Bureau of Labor Statistics found that, on an average day in 2017, 24 percent of full-time employed workers spent some time working while at home.

Smart Business spoke with Chris Zito, president of Zito Insurance Agency, Inc., about the variables an employer needs to consider, including the business risk, before deciding whether or not to implement a telecommuting program.

What are the benefits and risks to allowing employees to telecommute?
There are benefits to telecommuting for both employees and employers. Some of these benefits are:
  Reduction of brick and mortar expenses.
  Aids in employee attraction and retention.
  Eliminates the stress of commuting.
  Fewer sick days.

On the other hand, some challenges are:
  A lack of collaboration.
  Technology and/or security concerns.
  Limited face-to-face time.
  Equipment costs.

The extent to which a business experiences these pros and cons depends upon the industry, organizational structure and location, as well as how the telecommuting program is introduced and designed.

Before telecommuting is implemented, what factors need to be addressed?
The employer will need to determine which employees are permitted (or possibly required) to work remotely.

Consideration must be given to the role, hours worked and equipment required. Allowing some employees to telecommute but not others in the same or similar positions could create the impression of being discriminatory or giving preferential treatment.

Compliance with the Fair Labor Standards Act (FLSA) is extremely important. Allowing employees not covered by an FLSA exemption to work remotely outside of normal work hours could result in overtime wage issues. When an employer offers an option to work remotely, several issues must be addressed through written guidelines.

One area of concern is cyber liability and confidentiality. Because equipment is out and about, and not contained in an office, there is potential for non-authorized users to access the devices. Measures should be in place to protect equipment, secure internet connections, back up data and protect files. A computer and cellphone care policy ought to be created to outline how employees should care for both hardware and software.

The beauty of allowing telecommuting is that employees can work almost anywhere — the problem is this could be a vehicle. A driver safety policy should be enacted for any employees who work on the road or telecommute. Guidelines to reduce distracted driving should be incorporated into this policy. Employer liability also remains a concern for telecommuting employees. Although the location the employee is working in may be personal, the employee working remotely is still acting in the scope of employment.

Because of the lack of supervision and variance in environments, it is especially critical that preventative measures and adequate training is in place. Some telecommuting policies incorporate clauses allowing the employer to reserve the right to inspect off-site locations for safety concerns. When an injury occurs at home, for example, it is more difficult to determine if that injury was suffered in the scope of employment.

Before your company offers telecommuting, be sure to analyze if the duties of the position can be successfully fulfilled through telecommuting, while also considering the costs and risks involved. It is very important to have a telecommuting policy to ensure the employee and employer understand the expectations, requirements and responsibilities. This will help ensure that such a program benefits your organization.

Insights Business Insurance is brought to you by Zito Insurance Agency, Inc.

Avoid the pitfalls of group life insurance. Offer personally-owned policies.

Placebo: medicine or procedure prescribed to the patient more for the psychological effect than any physiological effect; a measure designed merely to calm or please someone.

“Really, if you’re looking at percentages, that’s what group life insurance is,” says Greg Zito, vice president of Life Services at Zito Insurance Agency, Inc.

“Ninety-nine percent of group life insurance policies never pay a benefit because it’s rare for employees to die during their working years. Most people make it to retirement. People leave their job and they leave those benefits behind,” Zito says.

Smart Business spoke with Zito about group life insurance’s false sense of security and what employers can do about it.

Why is group life insurance so risky?
When employers offer group life insurance, they don’t realize it’s not something of value to the overwhelming majority. Group life insurance doesn’t apply when someone retires, goes to another job or leaves work because they’re terminally ill. So, when life insurance is needed, it’s likely not in force.

People often have a $15,000 death benefit as part of their group medical benefits. Employees are told they have life insurance through work, therefore they believe their mortgage will be paid off or their family taken care of. In reality, $15,000 won’t cover a lot of funerals.

Many employers and employees don’t think through the implications of group life insurance. If you make it to retirement and try to buy life insurance, your age or health issues may make it cost prohibitive or impossible to procure.

What should companies be doing instead? Why is this option better?
It makes more sense — and may cost less — to introduce a program where employees have individually-owned permanent life insurance policies, so something that has actual value. It’s often referred to as a supplemental insurance benefit.

Your organization can start a basic plan for everyone and then offer your employees the opportunity to enhance the benefits. These plans can cost an employer the equivalent of giving employees a nickel an hour raise. And by offering this type of program, you could be supplementing or replacing a plan that will not pay 99 percent of the time, with a plan that will pay 100 percent of the time.

Employees can cover family members — significant others, children, grandchildren — at their own expense, all on a guaranteed issue basis. That’s where you can’t be declined for any reason. Employees also can take the plan with them when they leave your employment and be billed at home with no change to cost or benefits.

What should employers keep in mind when designing these plans?
Any time you’re setting up a plan, make sure you have an experienced, independent agent. Independent agents have access to multiple programs and know which insurance company best fits your situation. You also want someone with an easy-to-digest presentation who can enroll your employees smoothly and efficiently without any pressure. The agent should provide strong service for you and your team, including keeping relationships going when employees leave.

There are a few types of life insurance to choose from. Permanent insurance is level for life in benefits and cost, while term life policies might be good for 20 years. Permanent plans have other benefits, like a cash surrender for emergencies or retirement needs. There also are policies where you can withdraw half of your death benefit, tax free, if diagnosed with a grave illness or confined to a nursing home. Also, ensure the plan is inexpensive. Some programs start as low as $1.78 a week.

What else would you like to share about life insurance?
It’s all about getting a plan that can actually be used. People aren’t well versed in life insurance. They don’t understand it and they don’t want to think about it. In fact, 75 percent of Americans don’t have personally-owned life insurance. They believe their employer has taken care of it, so they fall through the cracks.

Since employers offer employee benefits to attract and retain good people, it is a win-win to avoid the placebo with personally-owned protection.

Insights Business Insurance is brought to you by Zito Insurance Agency, Inc.

Don’t overlook the need for subcontractor agreements

It’s alarming how often subcontractor agreements are disregarded by companies that subcontract work to vendors. The biggest exposure tends to be for contractors who subcontract work regularly. However, manufacturers, building owners and any other company that utilizes vendors or suppliers can also have this exposure.

“The importance of risk transfer is frequently overlooked by many industries. It is surprising how often businesses — particularly in construction — do not utilize subcontractor agreements. We often hear that a company has used the same subcontractor for many years and trusts them. However, the right risk transfer mechanisms have not been put in writing,” says Nate Bell, CIC, commercial insurance specialist at Zito Insurance Agency, Inc.

“The need for risk transfer is starting to be recognized, but has not become universal.”

Smart Business spoke with Bell about tools like subcontractor agreements to transfer risk.

How do subcontractor agreements work?
Subcontractor agreements outline the responsibilities of each party, to ensure that if a claim were to arise, the responsible party is accountable. A subcontractor agreement provides protection to the company that hired the vendor or subcontractor by transferring the risk back to the party performing the work.

There isn’t necessarily a template or standard subcontractor agreement. They are often written by the business’s attorney. The agreement should include hold harmless and indemnification language. Many insurance companies require that specific insurance form numbers be incorporated as well.

When a business subcontracts work to a third party, it should complete a signed subcontractor agreement and obtain a certificate of insurance from the subcontractor. This certificate should reflect that the hiring company is an additional insured and needs to be retained and updated annually.

Why have both indemnity language and additional insured status?
Indemnification contract language outlines which entity or entities would be responsible to provide compensation for injury, loss or damage.

An additional insured is an endorsement added to an insurance policy. The endorsement ensures that the business contracting work coverage is on the subcontractor’s insurance policy. It’s a mechanism to transfer risk.

Do insurance companies require subcontractor agreements?
Insurance companies regularly consider the implementation of subcontractor agreements when underwriting a business. While a company may not accept or reject a business based on its use of the agreements, businesses that utilize subcontractor agreements consistently see more favorable pricing. The same holds true for businesses keeping track of subcontractor certificates of insurance.

Where do you see companies make mistakes with certificates of insurance?
There are typically two concerns with information provided on certificates of insurance. The first is if the limits shown meet or exceed the coverage requirements outlined in the subcontractor agreement. These limits should be determined based on the extent and scope of the work performed, industry and size/assets of the company, among other variables. Therefore, it’s a good idea to have both an attorney and insurance agent review the agreement.

The second concern is verification that the additional insured endorsement is correctly in place and the business is not solely listed as a certificate holder.

When should a company have these documents in place?
It is key that subcontractor agreements and certificates of insurance be completed and obtained in advance of work being started. Getting these documents in place upfront prevents the need to chase down documents after work has started. More importantly, it ensures that the mechanisms to transfer risk are in place before it is too late.

Insights Business Insurance is brought to you by Zito Insurance Agency Inc.

What you should know about insurance before your next M&A deal

“When companies merge or when one company is acquired by another, it is imperative that both parties review and update their insurance coverages” says Chris Zito, president of Zito Insurance Agency, Inc.
Smart Business spoke with Zito about the do’s and don’ts of insurance for your next merger or acquisition.

From an insurance perspective, how should you prepare for a merger or acquisition?
M&A deals can be complicated. Extensive research and preparation must be completed prior to the deal’s closing to ensure there are no gaps in insurance coverage. It’s crucial to understand how the buyer’s policy and seller’s policy will respond to a change in control and to secure run-off coverage for any claims made following policy expiration dates. To avoid saddling your combined company with uninsured liabilities, you must be knowledgeable about your insurance policies and how each might be modified.

Are liabilities assumed in an acquisition?
In some cases, during a merger or acquisition, the buyer takes on the liabilities of the acquired company. The extent to which liabilities are taken on, however, is determined by the type of sale.
If the sale is an asset sale, the seller retains possession of the legal entity and its liabilities. In a stock sale, the buyer purchases the selling shareholders’ stock directly, and therefore obtains ownership of the seller’s complete legal entity and all of its accompanying liabilities.

What should be done to ensure your company isn’t blindsided by surprise liabilities after the deal closes?
It’s worth your time to do your due diligence and perform an insurance review. Through this process additional uncovered liabilities are frequently discovered. Here are some items to consider:
  Ensure all the seller’s existing policies have sufficient limits and adequate coverage.
  Determine whether the seller has any potential liabilities that aren’t insured. Review the seller’s claim history and existing policies.
  Take note of the seller’s existing contracts guaranteeing indemnification, or agreeing to additional insured status.
  Review existing contracts to look for any indemnities or insurance that was presented to the seller from other parties.
  Pinpoint new exposures that could pop up if operations are added or moved. New coverage may be needed or old policies may require updating.
  Address any circumstances or conditions that could generate claims that would fall under the seller’s coverage.
  Address any differences in the way the seller reported claims with the way the buyer reports claims.

Are there other coverage considerations?
If you have a directors and officers (D&O) policy, the coverage of both entities needs to be examined prior to the completion of the transaction. Run-off insurance to extend D&O coverage (for a selected time period) for any claims that arise after the seller’s policy expires should be secured prior to the merger or acquisition closing.

Another factor to examine is the ‘change in control’ provision, which can be included in many different policies. This clause modifies or voids the coverage if the company is merged into or acquired by another company.

Is there any insurance that should be purchased when a M&A deal takes place?
During a merger or acquisition, discrepancies may appear in the way each company has represented itself. These inaccuracies could cause significant liabilities after closing that may not be covered by general liability policies. If indemnification hasn’t been promised, representations and warranties insurance should be purchased. This type of insurance:
  Removes the worry of not being able to collect on a seller’s promised indemnification.
  Allows a seller to fully and completely leave a business, if desired.
  Helps speed up a business sale.
  Enables the buyer to maintain a good relationship with the seller.
Your agent can assist you in reviewing your policy language and whether you should consider buying representations and warranties insurance.

Insights Business Insurance is brought to you by Zito Insurance Agency Inc.

How to limit the risks when employees use their personal wheels for business

Your employees likely operate vehicles for tasks like client visits, product deliveries, or bank and post office runs. Larger organizations often provide vehicles for these tasks, but small and midsize companies may not have that luxury.

“Most companies are conscious of the risks associated with employees operating corporate-owned vehicles. What they aren’t aware of, however, are the significant risks created by the operation of vehicles the company doesn’t own,” says Chris Zito, president at Zito Insurance Agency, Inc.

Smart Business spoke with Zito about the risks of employees using personal vehicles for business-related activities and how companies can better protect themselves and their employees.

What are the liability risks of employees using personally owned vehicles in the scope of business?
An employee is considered an ‘agent’ of the corporation when using his or her vehicle to perform duties on behalf of his or her employer. This opens the door for the employer to be named as a defendant in a lawsuit due to a claim caused by the employee-owned vehicle.

The employee’s personal auto policy limits are typically primary and, without inclusion of ‘non-owned auto liability’ on the employer’s policy, may be the corporation’s only insurance protection. It is common for employees to carry auto liability limits that are much lower than what the employer would normally carry, leaving the company with a significant exposure.

If the employer carries non-owned auto liability, it is important to know that the standard coverage protects only the company/employer.

In cases where an employee’s job description requires him or her to use his or her personal vehicle on a regular basis, endorsements can be added to the employer’s auto policy to provide additional coverage for the employee — in excess of the employee’s personal policy.

What about operation of vehicles not owned by employees?
Similar to the vicarious liability companies are exposed to by an employee using his or her vehicle for work, a similar exposure exists for vehicles operated directly or indirectly on behalf of the company, such as:
  Independent contractors hired to perform repairs, e.g., office equipment technicians, painters or landscapers.
  Third-party transportation services hired by the company, e.g., express delivery services, couriers, contract or common carriers.
  Rental vehicles operated by employees in the course of business.

Aside from liability, what other risks should employers be aware of?
One risk is damage to a rented vehicle. Most rental contracts hold the renter responsible for any damage sustained while the vehicle was in the renter’s possession — typically regardless of cause or fault.

When including coverage for rented vehicles in a policy, it is important that the coverage limit provided be adequate to cover the replacement value of the most expensive vehicle likely to be rented in the course of business.

In addition to the cost of the repairs to the rental vehicle, many rental agreements also hold the renter responsible for the loss of rental revenue incurred while the vehicle was out of service. In cases of severe damage where extended repair times are required, insurance coverage is often inadequate.

How can employers minimize their non-owned vehicle risk?
Companies should:
  Establish a minimum level of auto liability coverage required by all employees who regularly use their own vehicles as part of their job description.
  Run motor vehicle reports on employees who may operate vehicles in the scope of employment.
  Thoroughly read rental agreements before signing.
  Request certificates of insurance from contractors and suppliers to ensure they maintain adequate levels of auto liability.

Insights Business Insurance is brought to you by Zito Insurance Agency Inc.

Are you in denial about your liability risk for employment-related claims?

“My people would never do that.” “We have a family-like environment.” “I know everybody here and I trust them.” These are the sentiments of employers that have a false sense of security when it comes to employment-related claims, says Chris Zito, president of Zito Insurance Agency, Inc.

“They feel it couldn’t, or wouldn’t, happen to them,” he says. “The problem is when somebody does get terminated that relationship changes immediately — and generally not for the better.”

Employers also use the fact that it has not happened to them yet as rationale that it isn’t likely to occur in the future. Zito says that’s like saying: my house has never burned down, so there is no reason to buy homeowner’s insurance.

Much like in a divorce, once people believe they have been harmed due to unfair or illegal treatment (i.e. termination of employment), an employee’s mindset can change from loyal to vindictive. There are few cases where employees who have been terminated accept responsibility.

Smart Business spoke with Zito about what employers today need to remember about employment practices risk and insurance.

Why does employment practices liability (EPL) play such a big role?
EPL claims were relatively uncommon 20 years ago, but their frequency has increased dramatically over the past decade, with claims coming from past, current or even prospective employees. (Some people interview with the intention of getting the employer to say or do something to violate employment law, so they can file a lawsuit.)

As with many types of liability insurance, protection against legal defense costs are as much a reason to purchase coverage as the fear that your company will be deemed liable for damages.

Damages alleged in EPL claims often are intangible, so it typically boils down to the current or former employee’s word versus that of the employer. Accordingly, a significant amount of discovery is required to build a defense, including deposition of other employees, review of personnel files, etc., making the cost of defending EPL claims disproportionately high.

Are claims costs rising?
Yes. The combination of increases in the rates charged by law firms and the inflationary impact on settlements continues to inflate claim costs annually.

How does EPL insurance help companies?
In addition to paying for the cost to defend and as necessary settle EPL claims, many of the better policies on the market include access to employment law specialists. These specialists can provide guidance on sensitive employment-related issues — advice that could prevent a claim from occurring. They also can provide guidance about how to mitigate damages if a claim occurs.

What scenarios could fall into this coverage?
Although wrongful termination is the most common allegation in EPL claims, complaints can include harassment; discrimination for age, gender or health related issues; improper evaluations; and wage and hour disputes.

Beyond insurance, how do you limit EPL risk?
Keys to preventing EPL claims from occurring or controlling damages in the event they do occur largely center around:
■  Proper communication and education of employees regarding the terms and conditions of their employment.
■  Adequate documentation of employee files regarding disciplinary hearings or actions, as well as performance evaluations.
You also should review all employment related documents, such as employment applications and employee handbooks, to assure the language adheres to the current employment laws in your state.

Is there anything else you’d like to share?
In spite of the fact that some employers remain in denial, most:
■  Have incurred an incident that was settled internally, when no coverage existed.
■  Are aware of situations that could have easily turned into employment claims.
■  Know of other employers that have dealt with employment-related suits.
EPL coverage, even if at a nominal level, should be a standard component in most companies’ insurance and risk management programs.

Insights Business Insurance is brought to you by Zito Insurance Agency, Inc.

Robots, internet of things and the coming cyber liability revolution

Cyber liability remains one of the most prevalent and hottest topics in insurance — and will continue to be so — especially with high profile cyberattacks against companies like Home Depot, Deloitte and, most recently, Equifax.

Small and midsize businesses tend to limit their perceived risk to a narrow set of circumstances; if they don’t take credit card information, there’s no reason to buy cyber liability. However, the risk of a data breach can take many forms, including stolen credentials, malware/extortion, social engineering and even disgruntled employees.

“While cyberattacks take place on a daily basis across the world, we face a somewhat unique exposure here in Northeast Ohio — the growing number of robots being used in industrial and manufacturing settings,” says Chas Lowe, commercial insurance specialist at Zito Insurance Agency, Inc.

The Brookings Institute ranked Ohio second in the nation for the number of robots being utilized in industrial processes in 2015. In fact, the number of robots in the workforce grew by 143 percent between 2010 and 2015, and that number is expected to compound over the next decade.

These interconnected robots can communicate with each other, which opens the door for hackers to reprogram these robots remotely to inflict as much damage physically, financially and technically to the companies using them as possible.

Smart Business spoke with Lowe about these evolving risks moving forward.

What’s an example of what a hacked robot could potentially do?
Take, for instance, a robot that’s designing an integral part of an engine. A hacker could reprogram the robot to inject small defects by remotely changing a configuration file. Should these defects successfully evade detection by a vendor’s quality control program, and depending on the nature of the engine’s final use, it has the potential to cause injury or even a fatality down the line.

While this example highlights potential physical harm, it doesn’t include the cost of the manufacturer’s product recall, business interruption, cost of finding and fixing the problem and the costs of potential lawsuits as a result of the error. Needless to say, without the right insurance coverage, these hacks could financially devastate a company.

What is the internet of things exactly? What potential threats may result from it?
In layman’s terms, the internet of things is the concept of connecting any device, machine or object to the internet to transmit data between each other or with a company. An example would be your alarm clock notifying your coffee maker to start brewing coffee. The potential to implement the internet of things in transportation networks, smart cities and in manufacturing/industrial uses is truly boundless.

A report by Research and Markets estimates that anywhere from 20 to 100 billion devices will be connected by 2020. This brings the issue of privacy and security to the forefront. Each device connected to the internet within your home or business becomes a point of vulnerability.

The real questions moving forward will be how will all the data these devices are collecting be secured? How do we prevent hackers from taking control of these devices in real time? How do we prevent hackers from gaining access to a city’s or company’s critical infrastructure?

How will robots and the internet of things affect the insurance industry and, more specifically, cyber liability insurance?
Robots and the internet of things have the ability to boost productivity and create efficiencies. Unfortunately, these same advancements have created more opportunities for cybercriminals. In the past five years, cyber insurance has expanded as a distinct line of business. These policies have been designed to primarily cover claims for data breaches and privacy violations.

Moving forward, more nuanced policies should be designed to address specific issues facing internet of things claims (i.e. value of stolen intellectual property). There are going to be industry growing pains as claims involving robots proliferate, with questions like whether liability falls to the manufacturer, software developer, company using the robot or another party in the supply chain. As the technological landscape continues to evolve, reviewing your cyber liability policy is more important than ever.

Insights Business Insurance is brought to you by Zito Insurance Agency, Inc.

Don’t stick your head in the sand. Transfer your risk

Transferring risk through the use of indemnity or hold harmless clauses in a contract is common for large corporations with attorneys on staff, but owners of small and midsize businesses need to spend time on this, too.

“It’s become a much larger topic, both from an underwriting and risk management standpoint. People don’t always understand the importance of risk transfer. But there’s a greater emphasis being placed on it by the insurance companies. Taking the approach, ‘that’s why I have insurance’ is not something insurance companies want to hear,” says Chris Zito, president of Zito Insurance Agency, Inc.

Because there is no direct revenue tied to it, business leaders tend to view risk transfer as an administrative burden. What they don’t realize is it reduces their overall cost of risk.

“Every day we see companies executing contracts that have not been read thoroughly,” Zito says. “This results in the unintentional assumption of risk.”

Smart Business spoke with Zito about the importance of risk transfer in business contracts.

How does risk transfer work? What are some examples?
When it comes to risk transfer, construction companies are an easy example. General contractors hire subcontractors and pass the risk down; a lower tier of subcontractor indemnifies the tier above it. The intent is that the party responsible for any damage or injury is held accountable for its actions, while protecting the people it is working on behalf of.

A company takes the risk and pushes it back to the people who created it.

A retail store, distributor, wholesaler or a manufacturer’s rep might sell a product made by somebody else. If that product causes injury or damage, the way the legal system works, everyone in the supply chain can be named in the litigation — from the end seller to the manufacturer, even if they had nothing to do with the product’s design, manufacturing or packaging.

Say for example, a manufacturer outsources a portion of its manufacturing process, such as plating, grinding, heat-treating, etc., to a third party. If the work wasn’t done properly or to the specification required, it might have an adverse impact on the end product. As a part of its risk transfer process, the manufacturer should ensure the proper insurance and indemnity provisions are in place.

Ideally, how do companies use contracts to move risk away?
In a perfect world, the company has contractual hold harmless language in place, along with the proper insurance for the people who supply it goods and/or services. In some cases, a buyer of a product might be named as an additional insured. The ability to do that varies based upon the industry and type of services being provided.

The hold harmless or indemnity clauses range in length. If you’re trying to transfer the risk, you want the scope of that indemnity language to be as broad as possible. If you’re the entity assuming the risk, you want the language to be narrow. Like anything else in business, it becomes a negotiation.

In addition, risk transfer is a negotiating tool for purchasing insurance. Companies that demonstrate the best risk transfer practices are more attractive to insurance companies. The best businesses spend time on risk transfer practices, which helps their rates and lowers their risk profile.

What role does an insurance agent play?
Your insurance agent can educate you about risk transfer tools, and possibly help facilitate the process — becoming your back room, so to speak. If your insurance agent reviews contracts before you execute them, he or she can alert you to red flags or help you push the risk back to the people who ultimately create it.

Prudent businesses have a system in place where they make sure they’ve got current information on all vendors, suppliers and subcontractors, because those relationships have the ability to create and pass down risk to the people who are purchasing their goods and services.

In some cases — particularly when doing business with large corporations — implementing risk transfer can be difficult. However, at the very least, companies can quantify the risk they are assuming at the time of the transaction.

Insights Business Insurance is brought to you by Zito Insurance Agency Inc. 

Better to develop an internal disaster plan than be sorry after disaster strikes

Most business owners understand the need for insurance to pay for damage to their business assets. However, many companies have overlooked an important aspect of risk management — the development and implementation of an internal disaster plan.

Up to 40 percent of businesses affected by a natural or man-made disaster never reopen, according to the Insurance Information Institute. At the same time, a 2013 study by Cintas Corp. found fewer than one in three employed U.S. adults believe their workplace is proactive about emergency preparedness.

A disaster plan can not only assist in establishing evacuation and storm sheltering plans, but it also includes procedures to notify government agencies, contact vendors, allocate emergency funds and backup records.

“Should a disaster occur, following established procedures could help a business get up and running more quickly,” says Chris Zito, president of Zito Insurance Agency, Inc. “While insurance carriers may reimburse or advance funds required to pay for damages, they don’t have an obligation to manage the company’s disaster procedures.”

Smart Business spoke with Zito about how to get started on an internal disaster plan at your company today.

How does a disaster plan benefit an organization?

Disaster planning can help establish contingency plans to allow for the continuation of products or services to be provided to your customers during the period of time the company is out of business. This may include arrangement for alternative locations or the outsourcing of products or services.

A disaster plan also helps your company prepare how to put your customers at ease before they panic and contact your competitor.

It clarifies and identifies who within the company is responsible for:

  • Backing up critical data.
  • Restoring data.
  • Working with the disaster recovery company.
  • Assessing the equipment.
  • Communicating with staff, suppliers, government agencies and the media.
  • Allocating emergency funds.
  • Arranging for security.

What is important to remember when developing a disaster plan?

When developing a disaster plan, be sure to consider if the business has multiple locations. It also can be beneficial to coordinate with neighboring businesses.

It is important to involve employees from all levels in the company as well as employees with special needs.

Many disasters that impact businesses are due to forces of nature, but some can be man-made. Given this, it is also important that a disaster plan address these types of incidents, too. These types of disasters can include chemical spills or violent acts. Supervisors should to know what to do when a violent act occurs. Your disaster plan may include incident reports and investigation forms.

Before a disaster occurs, employees should be familiar with warning systems, know what type of evacuation is needed as well as their role in the completion of the evacuation plan. Some training may also be required. (For example, how to use fire extinguishers and critical operation shut down.) Another good idea is to have someone create different variations of how a disaster could play out; you can then identify holes and work out the kinks during trial runs.

Disaster plans should be reviewed periodically with all staff. And, it is important that new employees be trained in how to handle an emergency as well.

Should a disaster occur at your business, implementing a well-structured disaster plan could reduce the size of your insurance claim and help the business get up and running faster with limited loss to revenue.

Insights Business Insurance is brought to you by Zito Insurance Agency, Inc.