Covering the property of others when you have care, custody and control

When you take custody or possession of someone’s property you can create a bailment situation. Companies who perform operations such as warehousing, storage, transportation, construction, auto repair, dry cleaning amongst others could all have care custody and control exposures. But when property of others is damaged while in your possession, standard insurance policies may limit or exclude coverage.

With the acceptance of someone else’s property comes the duty to exercise proper care in protection of that property from damage. The company or individual in possession of the property (the bailee) is responsible for their negligence to exercise proper care.

“What is considered proper care will vary widely depending on the type of property in question,” says Kevin Forbes, sales executive at ECBM. “Whether you are garaging or parking automobiles, warehousing or transporting temperature controlled food, or are a contractor with a piece of leased construction equipment, the degree of care required to protect each piece of property will be different.”

Smart Business spoke with Forbes about how your company can mitigate this care, custody and control exposure.

Does a commercial general liability policy provide protection?

The standard commercial general liability policy has an exclusion for property in the named insured’s care, custody and control. Even though the policy covers damage to other’s property, this exclusion removes coverage for any property that can be defined to be in the named insured’s possession and/or control. The policy is not meant to cover ‘your work’ and often property of others in your care is being worked upon as part of business operations.

The exclusion removes coverage from your liability policy, but there are other policies designed to specifically protect the insured for this exposure.

How would a company go about getting the right protection?

Depending on the type of operations, there are various policies that will cover the exposure. A warehouse legal liability policy covers the exposure of holding other’s people property and goods for storage under some form of warehouse receipt.

In some instances, where a warehouse receipt might not be used when storing other’s property, there are alternate ways to properly cover this exposure other than the warehouse legal liability policy. If you have an automobile repair business, a garagekeepers policy is designed to cover the exposure of having someone else’s automobile in your possession. A builder’s risk policy is how a contractor covers the property that they are performing work on.

Always do a thorough review of your operations with your insurance broker or individual placing your policies.

How does ownership know which one is right for its organization?

An analysis of the goods in question that is in their care, custody and control must be done. Review the contract or agreement that the goods are being held under. Federal and state laws and regulations, as well as various industry standards will also outline the extent of each bailee’s liability. But the right insurance and risk management professional should be your guide through the process.

Is there anything else you’d like to share with business owners?

Understanding your exposure is the first step in making sure your business is protected. Know the dollar amounts your business is exposed to — warehouse operators review the values under agreement by location, auto repair shops know the value of vehicles on their lot and motor carriers understand the values in each loaded trailer.

In many instances, the best way to limit your exposure is through the contract or agreement used in your business. When storing goods, a warehouse receipt can reduce one’s liability significantly compared to that of a true bailee. Your contract also limits amounts paid should damage occur to any property. The motor carrier’s contract with a shipper can limit or increase the amount they are liable for in the event of a loss. These are just some examples, but each industry has their own risk management practices that can help reduce the exposure your company faces.

Insights Risk Management is brought to you by ECBM

How to prepare for a wage and hour claim — before it hits your business

Wage and hour claims are liability claims or lawsuits from an employee (plaintiff) against their employer for uncompensated work hours.

Some examples of these allegations are unpaid overtime, misclassification of an exempt versus a non-exempt employee, missed meals/breaks, pooling of tips, donning and doffing, which is putting on and taking off certain work cloths or protective clothing, and on/off the clock allegations. All of these fall under the Fair Labor Standards Act that sets minimum standards for wages and overtime.

“An allegation of a wage and hour claim can quickly become an employer’s nightmare,” says Shane Moran, vice president at ECBM. “The claim can very easily become a class action lawsuit involving hundreds or perhaps thousands of employees. Plaintiff counsel will petition the court to get a court order requiring that the employer release the names and addresses of similar situated employees, and now counsel has a way of adjoining many other employees to effectively increase any settlement amount.”

Smart Business spoke with Moran about what employers need to know about wage and hour claims, including how to protect your company.

Where do wage and hour claims occur?

There are really no sectors of the economy that are immune to wage and hour allegations. There are, however, several sectors that see a larger percentage of allegations, such as health care, financial services/insurance and retail. These areas represent the bulk of the claim activity. Other sectors that contribute include transportation, food and manufacturing.

Geographically, California continues to lead in terms of allegations as well as the percentage of dollars paid. Florida is another state that has seen a recent increase in both allegations and dollars paid. Two other states that continue to be problematic are New York and Illinois. However, according to the 2013 National Economic Research Associates (NERA) survey, New York has seen a significant drop — approximately 50 percent — in its percentage of dollars paid.

How costly can these suits be for employers?

Again, according to the NERA 2013 Trend in Wage and Hour Settlement Report, the average cost to resolve a case in 2013 was $4.5 million dollars, while the median settlement value was $2.8 million dollars. So, as you can see these allegations can become very costly for an employer.

What else do employers need to know about wage and hour claims?

For the most part, there is no insurance coverage under Directors and Officers Liability or standalone Employment Practices Liability Insurance (EPLI) policies
Some carriers will provide a sublimit for defense only. Several years ago, a few carriers were offering sublimits of $500,000 or even $1 million, but those limits have now been reduced to $100,000 to $250,000. So when you look at the average cost to resolve a claim versus the sublimit of coverage, you are in affect self-insuring this exposure.

For very large companies, there are policies that you can purchase to cover this exposure, but they have large retentions and premiums that can be prohibitive.

What is the biggest mistake employers make when it comes to covering this exposure?

Many business owners simply assume that since they purchased an EPLI policy, they have coverage for these allegations.

The first step to correcting this problem is to understand what is covered — and more importantly what is excluded within the policy. Like every insurance policy, the devil is in the details; look at both the individual exclusions and the definition of a ‘loss.’

With little insurance coverage available, what can business owners do to avoid or reduce the risk of these lawsuits?

Having an audit of policies and procedures is a good starting point. Are you classifying employees correctly, such as exempt versus non-exempt? How are you capturing work time records? Are you in compliance with minimum wage? Do you pay commissions? How are deductions handled?

Also, ensure your HR and payroll departments understand the laws that apply in each state you operate. Keeping accurate and up-to-date records is essential to any defense.

Insights Risk Management is brought to you by ECBM

What’s in a name? How important is the named insured on your insurance policy

It seems simple. Make sure all entities are listed on your insurance policy.

However, companies often have multiple entities within one organization, which could be created for various reasons.

The named insured defines who is an insured under your insurance policy. When a claim occurs, if the entity that is named in a suit is not listed on the policy, you’re going to have problems because the named insured triggers coverage.

“I have clients who may have a hundred different company names,” says Scott Nuelle, vice president at ECBM. “They might have different operating companies. They might have real estate held in separate companies or partnerships.

“So, you need to make sure that all of those are listed on the policy.”

Smart Business spoke with Nuelle about the biggest mistakes he sees with named insured.

Do you need to list every single entity on all types of insurance?

With workers’ compensation, you’d only have named insureds that actually have employees and payroll. But with general liability, automobile, directors and officers or employment practices liability policies, every entity needs to be listed as a named insured.

This can be an extensive list. For instance, within a trucking company, you may have separate entities with operating authority. However, another company could own all of the equipment — the tractors and the trailers — under a separate name. Then, each terminal could be owned by a different entity. The business might even have another company that actually acts as the employer and leases those employees back to the operating company.

What about organizations that have a Blanket Named Insured endorsement?

To make it easier, many brokers will include a Blanket Named Insured endorsement. But that won’t necessarily protect you because the language in that blanket named insured may not include partnerships, for instance, and you may have a partnership that owns a piece of real estate.

It is always safer to list each entity as a named insured.

What are the most common mistakes you see with named insured?

Many times, people shut down an entity, such as a subsidiary that they are not operating anymore, and then they want to eliminate that name from the policy.

The problem is that you don’t know if a lawsuit is going to be filed in the future. You want to make sure that the coverage remains for an entity that’s no longer operating. It doesn’t cost you anything, so just leave it on.

The other common mistake is not informing your broker of a new entity.

For example, you have a policy that renews on June 1, and you start a new entity on June 15 but don’t tell your broker until the renewal. So, now you’re nine months out and that entity has not been added to the policy.

There is language in most insurance policies that will cover new entities for a period of time, usually 90 to 180 days, which gives you a short grace period. In this example, you would still have a gap where coverage isn’t effective.

Your broker should be proactive about asking you quarterly or every six months to update the named insured list, but on your end you can look at your internal business practices to make sure whoever handles the insurance is informed any time an entity is formed.

How long should you keep an entity on the policy after it has been shut down?

Generally after five years you can eliminate it, assuming there is no activity. But again, they don’t charge you per name.

If you think there’s a chance you could start re-using a name in the future, keep it on.

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Why not every cyber policy is the same — and what to do about it

In business today, people are starting to recognize the need for cyber insurance, after hearing about hacker attacks.

“People look at what happened to Target and still say that’s not going to happen to me, but cyber breaches involving small companies have tripled,” says Charlie E. Bernier, Esq., principal consultant of Professional Liability at ECBM.

The average breach costs about $7.2 million — for any size company — so a cyber claim could bankrupt your business.

But if you’ve decided to buy cyber coverage, what happens next?

Cyber coverage doesn’t have standard forms, and not every carrier’s policy is the same, Bernier says.

Smart Business spoke with Bernier about getting cyber coverage with the right limits, endorsements and exclusions.

What do cyber policies generally cover?

Cyber polices typically provide both first-party and third-party coverage. First-party coverage insures for losses to the insured’s own data, lost income or other harm to the business from a data breach or cyberattack. Third-party coverage insures for the liability to third parties, such as clients.

Some companies buy a cyber endorsement for an errors and omission policy, but that never covers first-party losses.

How should businesses obtain full first-party coverage for all scenarios?

Even if it’s through an endorsement to your cyber policy, you need to ensure the first-party coverage includes business interruption and reputational harm. After you discover a cyber breach, your business is stopped while you go through your systems, and this lost revenue can add up. In addition, after you notify people about lost information, you want to get reimbursed for reduction in profit during the period after the breach. There’s a good chance you’re going to lose customers due to reputation damage.

What’s important to know about the third-party coverage?

The most common mistake is not getting enough breach notification limit coverage and not setting coverage for regulatory action proceedings.

If your company discovers a cyber breach, under state and federal law, you must notify everyone whose information has been compromised. The limit needed depends on the type of personally identifiable information (PII) and amount of records you hold. As an example, a $500,000 limit is not enough for most retailers. With a few questions, your insurance professional should be able to tell how much it will cost to notify people, and therefore help set the correct limit. The ROI is six to one; for every dollar you spend on premium for a cyber policy, you save $6 per breach.

Also, you should get full coverage for regulatory action proceedings. If your company faces a government regulatory proceeding for a breach or not storing information properly, the policy should cover both the defense of that proceeding and the fine you’ll pay if you lose.

What are exclusions to avoid?

Some policies include an encryption exclusion. If one of your employees has his or her laptop stolen, which is only password protected but not encrypted, then with this exclusion the coverage is void.

Two other exclusions to avoid are a failure to upgrade software exclusion and a failure to maintain exclusions. Both of these severely limit the claims you can file.

What else do employers need to know?

A Verizon study found 66 percent of cyber breaches discovered in 2013 happened months or years prior. Don’t ever get a cyber policy that starts when you buy it. It’s worth asking for unlimited prior acts but don’t take less than a five-year retroactive date.

It’s not common, but it’s possible to include indemnification coverage on the policy. For instance, if your law firm is working for a bank, the bank can say, ‘You can’t defend our cases and work for us unless you agree to indemnify us for your breaches of PII.’ Then, if your firm loses PII, you have to pay for the notices your firm and the bank are required to send out. Cyber insurance will cover this indemnification.

Finally, keep in mind now is the time to buy a policy, with insurance carriers hungry to write cyber. The prices will never be lower and the power of the buyer will never be higher than it is right now.

Insights Risk Management is brought to you by ECBM

How to use service plans to gain control over commercial insurance

James Misselwitz, CPCU, vice president, ECBM

James Misselwitz, CPCU, vice president, ECBM

When it comes to insurance, many customers feel they have no control over their price, product, how incidents happen, losses, etc. A properly constructed service plan mitigates this frustration.

James Misselwitz, CPCU, vice president at ECBM, says a service plan is something business owners should be asking their broker about upfront.

“They should say, ‘OK, you’ve given me this spiel on all the wonderful things you’re going to do. Now show me how you’re going to deliver it to me,’” he says. “‘Show me how you deliver it to your existing customers, and show me what happens when something doesn’t get done. Give me that blueprint, so I know I can depend on you.’

“There’s no question that somebody who doesn’t follow an active service plan with a broker will ultimately pay the highest premium out in the marketplace.”

Smart Business spoke with Misselwitz about effective service plans that help manage risk.

How do service plans create fail-safe procedures?

Although most brokers use some version of a service plan, many do not monitor and control it. A service plan is a client-driven method where business owners determine, along with a broker or agent, what services they need, how often they need it and who is responsible for delivering it to them.

Some services might be a review of market conditions before renewal; a review of the loss experience and current claim activity; a review of the outstanding reserves on claims that have already occurred; a review of information for the renewal like the current automobile schedule or payroll; and a tentative experience modification factor review that shows the impact of workers’ compensation on your renewal.

The service plan helps manage the insurance throughout each cycle of the policy. Both the company and broker know the expectations, and the plan can operate as a safeguard. When the broker doesn’t complete a claim review at six months, for example, a fully automated, computerized service plan notifies the underwriter by triggering an alert at the brokerage firm. At the same time, executives have a copy of the plan and can ask the broker about it.

What happens when service plans aren’t properly executed?

Things fall through the cracks. The insurance business is a deluge of paper and electronic messages, so it’s easy to lose a due date or report that needs to be run. If companies don’t actively manage insurance with the help of their brokers, they give up control of pricing, coverage, and losses to the whims and vagaries of the insurance companies and marketplace.

For instance, if your company doesn’t have a regular claim review on workers’ compensation activity, you could have a few large claims on reserves. You might not be working on action plans to mitigate those claims. So your renewal comes up, and it’s running a temperature with a poor loss ratio. Your insurer might ask for 40 percent more to underwrite the risk or send out a notification of cancellation. Now, you and your broker are scrambling to put together a response that will allow the underwriter to stay on a reasonable price.

With what types of insurance is a service plan most important?

With a commercial account, service plan diligence is most critical with insurance lines that have loss activity and when there is anticipated change. You want to automatically stay in control of critical items like losses, payroll, premiums, sales, etc.

Also, you need a service plan if there’s an anticipated change, such as a merger or expansion. It’s important to have the right coverage at the inception, as well as coordinating existing coverage so you’re not being overcharged because of overlap.

Why is flexibility key?

As a commercial insurance purchaser, it is important to develop a system with your broker that will deliver the service that you want and need. A service plan is one such system that can help you control costs and deal effectively with change, both in your operations and in the insurance marketplace. While flexibility is the key to tailoring a service plan for each business owner, it is the ability of the broker to audit the process that seems to be the critical element in making the program work extremely well.

James Misselwitz, CPCU, is a vice president at ECBM. Reach him at (888) 313-3226, ext. 1278, or [email protected]

Visit our blog, for more information about risk management.

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How to minimize your product liability and exposure through insurance

Shane Moran, vice president, ECBM

Shane Moran, vice president, ECBM

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 protected]

For more information about risk management, see ECBM’s blog.

 

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How the Compliance Safety Accountability initiative is factoring into your insurance

Kevin Forbes, Sales Executive, ECBM

Kevin Forbes, Sales Executive, ECBM

The Compliance Safety Accountability (CSA) initiative, rolled out in 2011, is the most recent way the federal government regulates the heavy truck and bus industries to ensure safe operation of commercial vehicles on our highways.

Companies directly affected are trucking companies, hazardous material haulers, some private carriers, heavy truck fleets and bus companies. But shippers, freight brokers and any companies that hire motor carriers to handle business transportation needs should review and monitor the safety scores of the companies they use.
“Courts have found liability in hiring a motor carrier with known safety issues and violations. This has placed an even greater need for motor carriers and other transportation companies to ensure they have good CSA scores,” says Kevin Forbes, sales executive at ECBM.

Smart Business spoke with Forbes about the CSA program and its impact on insurance.

How does the Federal Motor Carrier Safety Administration’s CSA work?

The goal is to reduce the number of crashes and crash-related deaths involving large trucks; statistics show the federal government’s involvement in safety compliance has helped. With local partners like state police and Department of Transportation (DOT) officials performing inspections and collecting data, the government uses the CSA system to rate motor carriers and bus companies against their peers and create standards of safety compliance. Motor carriers that don’t follow safety regulations can be put out of business.

How has the safety measurement system (SMS) changed?

The SMS is the database that stores and sorts the safety information collected by the various enforcement agencies. The old model was limited in its scope and effectiveness. The new system breaks the safety areas into seven categories called BASIC, or Behavioral Analysis and Safety Improvement Categories, which are:

  • Unsafe driving.
  • Hours of service, the amount of time drivers are allowed to drive.
  • Driver fitness.
  • Controlled substance/alcohol.
  • Vehicle maintenance.
  • Hazard substance compliance.
  • Crash indicator.

Information collected during roadside inspections and DOT compliance audits is used to promote safety by rating carriers in these areas. By monitoring these, the system seeks to identify problem motor carriers that need compliance review, as well as notify motor carriers of issues they might be having so they can focus on those areas.

How has CSA affected insurance?

The initiative stores information on all of the different roadside inspections for each company, which is available online to anyone at ai.fmcsa.dot.gov/sms. With this information and more at the underwriter’s fingertips, motor carriers and bus companies have had to focus on keeping BASIC category scores down to ensure competitive insurance pricing.

This trend will likely continue as the CSA program provides regulators and insurance carriers with long-term data trends. Insurance companies are using the data to develop predictive modeling programs that identify loss-indicating trends of transportation companies. In renewal negotiations there is sometimes a greater focus on CSA scores than that company’s specific loss history.

How can businesses decrease their risk?

For transportation companies, a proactive approach to understanding the regulations should provide for lower insurance costs, quality shipper/customer relationships and more money to the bottom line.

The CSA regulation places a greater onus on the drivers, so proper communication and education of the driver workforce is necessary. Strong hiring practices are crucial. Investing in newer equipment and technologies also can help reduce scores. Vehicles can be equipped with safety features such as lane departure warnings, rollover warning devices, computer/video monitoring devices for driver behavior and more.

Companies must monitor their scores and see what areas they need to focus on. Your broker can help you in this constantly changing process.

Kevin Forbes is a sales executive at ECBM. Reach him at (610) 668-7100, ext. 1322 or [email protected]

For more information about risk management, see ECBM’s blog.

Insights Risk Management is brought to you by ECBM

How building ordinance or law coverage impacts your property loss

Phil Coyne, Vice President, ECBM

Phil Coyne, Vice President, ECBM

You are insured and sustained a fire loss. The township has now told you to demolish the damaged and undamaged portions of your building, and when you re-build make sure the building is fully sprinklered. How will you pay for these additional costs?

“The additional costs to comply with an ordinance due to the loss can be substantial, such as the loss of value of an undamaged portion of the building, demolition costs and the additional costs to reconstruct a building to comply with the ordinance,” says Phil Coyne, vice president at ECBM.

Smart Business spoke with Coyne about how building ordinance or law coverage would fill this gap in your standard property insurance policy.

What is ordinance or law coverage?

Standard property ‘cause of loss’ forms have a coverage exclusion for loss or damages that occur as a direct result of enforcement of any law or ordinance regarding construction, use or repair of the property, which includes demolition. Three coverages are available to address this exclusion under the ordinance or law coverage of your property loss form:

  • Coverage A — Loss to the undamaged portion of the building. The limit should be included in the building limit.
  • Coverage B — Demolition coverage, the cost to demolish and clear the building. The amount of coverage should be determined.
  • Coverage C — Increased cost of construction, which covers the additional costs to comply with the ordinance or law. Limits should be determined.

In some cases, Coverage B and C are combined under one limit.

Why is ordinance coverage necessary?

Each state, county, township and municipality chooses to adopt and amend national codes, such as the National Fire Protection Association’s Fire Code, according to their needs and concerns. It can be an ever-changing landscape, and many times older buildings are grandfathered or exempt from these codes until a loss occurs.

The coverage should be on every insured’s wish list. It’s probably most critical for buildings that are older, or have older portions, and may have grandfathered codes or regulations for square footage and density. Many lenders have a requirement for this coverage in mortgage agreements.

What triggers the coverage?

There has to be a covered cause of loss that results in the application of a building ordinance. For instance, in 1990 a city ordinance said every new building in excess of three stories had to be sprinklered. Your building is four stories and built in 1985, so the ordinance doesn’t apply. However, the ordinance also might say if 50 percent of an older building is damaged, the entire building has to be demolished and rebuilt. If, after a large fire, you must demolish the building and put in a sprinkler system, this triggers your ordinance or law coverage.

Where might this coverage not apply?

The ordinance or law coverage will not apply if an insured was required to comply with an ordinance and chose not to. Let’s say, a township requires buildings with four or more apartment units to have hardwired smoke detectors and you decided not to install them. If you chose not to install them and then the building sustains a covered loss, the coverage won’t apply.

The three ordinance coverages all have to do with direct loss to the building or property. There’s no provision for the loss of business income. Standard business income policies exclude coverage for the increased period of restoration due to the enforcement of laws or ordinances. Therefore, you would need to endorse your policy to pick up coverage for this increased time.

Also, anything excluded from the policy would not be covered, such as flood loss. Every building ordinance and business income policy excludes any costs regarding pollution or mold and fungi.

What should you consider when buying this coverage?

Look at the current value on your building(s) and what coverage you get under your policy form because each insurance company adapts it differently. Have a thorough discussion with your broker regarding what coverage you think you need and what you can actually get. The insurance company may limit the amount of coverage, based on your premium and portfolio size.

Phil Coyne is a vice president at ECBM. Reach him at (610) 668-7100 or [email protected]

 

For more information about risk management, visit ECBM’s blog.

 

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How manufacturers manage workers’ compensation, disability costs

Mike Stankard, managing director, Industrial Materials Practice, Aon Risk Solutions

Mike Stankard, managing director, Industrial Materials Practice, Aon Risk Solutions

Joe Galusha, managing director, leader for casualty risk consulting, Aon Risk Solutions

Joe Galusha, managing director, leader for casualty risk consulting, Aon Risk Solutions

Middle market manufacturers often think workers’ compensation and disability are uncontrollable costs items. However, it’s more important than ever to change this way of thinking.

“Workers’ compensation is a significant variable cost element for manufacturers,” says Joe Galusha, managing director and leader for casualty risk consulting at Aon Risk Solutions. “It’s an area where controlling workplace injuries and their associated costs can actually become a competitive advantage.”

“We’re coaching our clients to take more responsibility over workers’ compensation and disability prevention, as well as claim management,” says Mike Stankard, managing director, Industrial Materials Practice, at Aon Risk Solutions. “If they do, there’s a significant opportunity to lower costs, and with that comes boosts in productivity, morale and many intangibles.”

Smart Business spoke with Galusha and Stankard about why workers’ compensation and disability management is crucial as well as cost containment and reduction strategies.

What’s the manufacturing landscape today?

Post-recession manufacturing activity is increasing, partially due to repatriation. But with that comes payroll growth, and then typically growth in workforce costs, which for manufacturing can largely be workers’ compensation and disability. There’s also negative trends related to the profile of the typical American worker that will compound the current challenges, so manufacturers that don’t put more effort into managing injuries and related costs may be at a disadvantage.

What workforce demographic trends make this management so essential?

About one-third of adults and almost 17 percent of youth are obese, according to the Centers for Disease Control and Prevention. Obesity drives comorbidity and complexities in an individual’s health, creating a link to the cost of care and recovery from injury.

At the same time, workers 55 and older are expected to be nearly 20 percent of the workforce within a year. A number of physical impacts — decreased strength, more body fat, poorer visual and auditory acuity, and slower cognitive speed and function — come with aging and affect a workers’ ability to recover from injury. People over 60 also are much more likely to be obese.

These trends not only affect employment-related injury costs, but also productivity and business continuity costs when workers are absent for non-occupational injuries.

How can big data be used as a tool here?

There’s never been as much data available for a nominal cost — the challenge is leveraging it. You need the right data at the right time to compare it to the right things. When benchmarking against other companies or applying data sets to your environment, jurisdictions, evaluation base and the age of the benchmarking sources are important to ensuring your data is pure.

Although there are external sources, many times third-party administrators (TPA) or insurance carriers have already done a tremendous amount of data mining and predictive modeling. Businesses just need to know it’s there and to start using it to drill deeper into the cause of loss and the cost drivers of workers’ compensation.

What are some best practices for managing workers’ compensation and disability?

The secret is preventing injuries and creating a healthy workforce. But injuries will occur, so focus on responding quickly with the right amount of effort at the right time on the right claim. Predictive modeling can help identify the types of claims likely to become more costly.

Understand what’s driving your costs by doing a baseline assessment of cost drivers and utilizing benchmarking to drill down. Then, align the incentives of all internal and external parties — TPA, carrier, broker, and vendors involved in loss control and claims management — to focus on the cost-driving elements, using a dashboard to monitor performance. This creates a sustainable loss control and claims management effort.

Many organizations need to align all stakeholders — human resources, finance, legal, operations, etc. Also, combine the efforts of health and wellness with workers’ compensation and safety. A streamlined approach creates a healthier workforce, reducing injuries and their costs.

Joe Galusha is a managing director, leader for casualty risk consulting at Aon Risk Solutions. Reach him at (248) 936-5215 or [email protected]

Mike Stankard is a managing director, Industrial Materials Practice at Aon Risk Solutions. Reach him at (248) 936-5353 or [email protected]

 

Hear more expert advice about workers’ compensation and disability management in manufacturing by visiting our archived webinar.

 

Insights Risk Management is brought to you by Aon Risk Solutions

 

How tenants and landlords can have a clear understanding of lease intent

Phil Coyne, Vice President, ECBM

Phil Coyne, Vice President, ECBM

Many times landlords and tenants don’t realize that their commercial lease is unclear, contradictory or out of date until it comes time to resolve a claim, whether it’s a case of liability or property damage.

The payout is then delayed as the insurance companies review the entire lease to try and determine responsibility, liability and how the policy should respond.

“The real world is this — when the landlord and tenants go to renew an option, they just want to renew it. They don’t want to look at anything else because they don’t want to open up opportunities for negotiation that could be detrimental to either party,” says Phil Coyne, vice president at ECBM.

Smart Business spoke with Coyne about how knowing what’s in your lease and fixing problems now will save you a headache later.

What is one of the biggest risk exposures involved with a commercial lease? 

You can avoid significant risk by making sure the lease language doesn’t expand, broaden or increase the liability and exposure to the point where your insurance coverage either doesn’t apply or would be limited. Therefore, each party — tenant and landlord — needs to have an understanding of the intent of the lease and its language.

Also remember that it’s not only the insurance provisions that have an effect on the outcome of a claim, but also definitions, maintenance, landlord/tenant obligations, use of premise and indemnity provisions. The insurance section alone only outlines limits and coverage; it’s the other sections of the lease that outline responsibility and ownership.

If two insurance companies review the same lease, and there are questions, it delays the claim process. For example, who is responsible for or owns the improvements and betterments to the space? Is that the responsibility of the tenant or the landlord?

How can tenants and landlords best mitigate risk when drafting and negotiating commercial lease provisions?

By understanding the intent of the lease and its language, the tenant and landlord can mitigate a potential problem prior to a loss and have an understanding of how their policies will respond.

Therefore, both insurance brokers should have an opportunity to review the entire lease during negotiations. He or she can explain what each party is accepting and not accepting, and how your policy will respond in the event there is a claim.

Some important areas for discussion are:

  • Who is responsible for what, such as common area, tenant space,  maintenance and repairs.
  • Who is responsible to insure these items?

The commonly discussed issues in the insurance section are limits, coverage, indemnity provisions and specific wording, but policies respond to the entire lease and its language in sections other than the insurance section.

How should a lease be updated when up for renewal?

Many times lease options are renewed without re-examining the entire lease’s language. There could be simple items such as a name change or an increase in the square footage, other times it can be a change in use and occupancy and therefore changes in various other sections need to be amended and addressed.

Although the landlord and tenant likely just want to sign a quick renewal, it is important that all parts of the lease are carefully reviewed and understood. This will ensure each side is in agreement on the terms prior to a loss instead of after a loss, as the latter could lead to delays or restrictions in coverage.

Phil Coyne is a vice president at ECBM. Reach him at (610) 668-7100 or [email protected]

 

BLOG: For more information about risk management,visit ECBM’s blog.

 

Insights Risk Management is brought to you by ECBM