What emerging managers need to know about hedge fund management liability insurance

When investment professionals start their own hedge fund, one of the top priorities is to purchase management liability insurance, otherwise known as directors and officers/errors and omission (D&O/E&O) coverage.

“The insurance is used to pay defense costs and any judgment/settlement amounts the hedge fund may incur when responding to litigation,” says James R. Lopiccolo, vice president, alternatives team leader, Woodruff-Sawyer & Co.

Hedge funds have come under increased scrutiny by their investors and regulatory agencies of late, and D&O/E&O coverage is critically important in protecting the personal net worth of the individuals and the assets of the investment funds.

Smart Business spoke with Lopiccolo about what management liability insurance covers, what it costs and how much is needed.

What is covered under D&O/E&O insurance, and who sues?

The insurance is triggered by claims alleging acts, errors or omissions in the performance of investment advisory services or in the management of the advisory business. Insured parties under the policy include the individual directors, officers, partners and employees, as well as the adviser entity and the investment funds themselves.

Protection for the individuals is most critical in circumstances when indemnification from the funds or the adviser entity is unavailable, such as instances when the fund has been wound down and assets have been distributed, or in the case of bankruptcy. However, the policy also pays on behalf of the insured entities their indemnification obligations to the individuals, and for costs associated with their own liability.

This last piece is important, since non-buyers often voice objections about the coverage — that they’re relying on the broad indemnification language in the fund to protect them. That may be the case, but in addition to those circumstances where indemnification is unavailable, any litigation costs paid out of fund assets will directly impact the investment return of the fund — which could be substantial depending on the nature and scope of the claim.

Two additional coverage components that can be included are employment practices liability (EPL) and trade error/cost of corrections coverage. EPL coverage responds to claims by employees alleging wrongful termination, sexual harassment and discrimination. Trade error/cost of corrections coverage reimburses the fund and/or adviser for costs to proactively correct trade errors that could have otherwise resulted in claims by clients/investors.

The type of claimant and nature of the allegations are dictated primarily by investment strategy. All strategies are susceptible to claims by investors, regulatory bodies such as the SEC and employees. However, more complex strategies may lend themselves to claims in other instances.

What does it cost?

The cost is influenced by a variety of factors, but the primary drivers are investment strategy and total assets under management (AUM). Other considerations will include experience/pedigree of the investment managers, prior litigation history, etc.

The annual minimum price per million is about $15,000, but that rate is often discounted when purchasing higher limits.

How much coverage is an adequate amount?

Most start-up hedge funds with AUM under $100 million are purchasing $1 million to $2 million in coverage. Bigger launches of $200 million and higher will seek $3 million to $5 million and even higher in some instances.

Once the AUM gets above $1 billion, firms generally purchase limits equating to 1 percent of AUM for straightforward liquid strategies and more for more complex, illiquid or hard-to-value strategies.

Notwithstanding the above, there are generally three types of buyers: 1) “Check the Box,” those only wanting to satisfy minimum investor requirements; 2) Coverage for Defense Only, those who realize the nature of today’s litigious environment and that anyone can get sued for anything, but they have a straightforward strategy and won’t do anything wrong; 3) True Alpha Protection, those that realize that litigation is a reality of their strategy. They purchase enough to fund a vigorous defense, with enough left over to pay judgment/settlement amounts.

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

 

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.

Insights Risk Management is brought to you by ECBM

How a new Missouri law provides incentives to self-insure with captives

Alan J. Fine, CPA, JD, member in charge, Captive Insurance Advisory Services, Brown Smith Wallace

Alan J. Fine, CPA, JD, member in charge, Captive Insurance Advisory Services, Brown Smith Wallace

William M. Goddard, CPCU, principal, Captive Insurance Advisory Services, Brown Smith Wallace

William M. Goddard, CPCU, principal, Captive Insurance Advisory Services, Brown Smith Wallace

Missouri Senate Bill 287, which becomes effective Aug. 28, puts the state on equal footing with others that have been popular domiciles for captive insurance companies.

“It changes certain capital requirements for pre-existing types of captives, as well as provides additional flexibility by allowing segregated cells, also known as shared captives or rent-a-captives,” says Alan J. Fine, CPA, JD, member in charge, Captive Insurance Advisory Services practice at Brown Smith Wallace.

Smart Business spoke with Fine and William M. Goddard, CPCU, principal, Captive Insurance Advisory Services practice at Brown Smith Wallace, about the new law and why companies should consider captive programs to address insurance needs.

Is a captive program the same as self-insurance?

It’s a formalized program for self-insurance. Captives generally provide incentive to the insured — the captive owner — to pay more attention to safety and other matters that improve the results.

Captives can be used with health insurance as well as property and casualty. Companies should consider captives if their risk profile is such that they’re a better risk than others in their industry. When you’re in the commercial marketplace, companies with good risk profiles are used to fund risks of those that are not so good. There’s also a built-in profit for the insurance company, so self-insuring through a captive allows you to keep those profits.

What are the benefits of captives?

In addition to savings, which can be $200,000 to $400,000 annually for most midsize captives, you may be able to get types of coverage that are not available in the commercial marketplace. If structured properly, there also are potential tax benefits.

What does the new law change?

It allows for new types of captives. Prior law allowed companies to start a captive for their own company, known as a single-parent captive. You put up the capital, you are responsible for the audit and you reap all of the benefits.

The new law adds the option of going with the concept known as shared captive, rent-a-captive or sponsored captive. Generally speaking, someone else puts the captive together and you own a piece. There are certain efficiencies created with sponsored captives. For example, you have regulatory filings due quarterly and annually. With 10 standalone captives, they would each file separately with the Department of Insurance and be audited independently. The sponsored captive concept allows those 10 to band together for efficiency, while still providing the same asset protection of having your own captive.

The bill’s passage also affirms Missouri’s continued commitment to the captive industry.

Will more companies form captives?

There are more than 6,000 captives worldwide, so those companies have figured out that this can be a good alternative to the traditional insurance market. You can save money on insurance, obtain coverage that’s not available elsewhere and formalize your self-insurance program.

Health care had not been a big subject for captives; however, companies looking to save money on health insurance are now throwing captives into the mix of things they are considering. Companies have been insuring workers’ compensation in captives for years, but with medical insurance it takes some innovative thinking to figure the best advantage to you in forming a captive. You need someone that understands health care, as well as a tax expert to understand regulations from the tax perspective because health care reform is really a tax law.

When it comes to captives, it’s not always readily apparent how they can be utilized. Answers are not easy to determine, and no two situations are alike. You have to examine your individual case and analyze how a captive could benefit you. Fortune 500 companies have studied captives; companies that fall below that — middle market to small companies — have few advisers out there spending time to educate them about potential benefits.

If you have a good risk profile, are profitable and have good cash flow, it is worth exploring the available options.

Alan J. Fine, CPA, JD, is a member in charge, Captive Insurance Advisory Services, at Brown Smith Wallace. Reach him at (314) 983-1292 or [email protected]

William M. Goddard, CPCU, is a principal, Captive Insurance Advisory Services, at Brown Smith Wallace. Reach him at (314) 983-1253 or [email protected]

To learn about the benefits of starting a captive insurance company, watch our video at www.bswllc.com/captivevideo.

Insights Accounting is brought to you by Brown Smith Wallace

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 Santa Claus could create the right insurance policy this holiday season

Andrew Rowles, Vice President, SeibertKeck Insurance Agency

’Twas the night before Christmas and Santa was in doubt. He read his insurance policy and wondered what was left out? He sees his agent but once a year, and his policy and coverages are not so clear …

“We are all busy — sometimes too busy — especially around the holidays, and many business owners put off looking at their insurance,” says Andrew Rowles, vice president at SeibertKeck Insurance Agency. “It is far from the most important item in their mind.”

As the holidays approach, Smart Business spoke with Rowles about insuring one of the most familiar companies we all know — Santa Claus, CEO of the North Pole.

How does Santa know if he should purchase a liability insurance policy?

Santa is liable for the products he makes, along with potential property damage from coming down your chimney. To cover this exposure, Santa, just like every other company, should purchase a comprehensive general liability policy. Reviewing this with your agent to determine the appropriate limit specific to your risk management plan is key to defending against losses. Keep in mind, there are exclusions in a liability form that can limit coverage. For example, your policy excludes coverage for ‘your work’ in a typical CGL form.

How does Santa properly insure the North Pole operations facility?

Similar to many of today’s large corporations, there are many complexities to an insurance policy. Here is a quick overview of how Santa might cover his facilities.

  • North Pole — Since no one owns the location, he must have a tenant betterments and improvements policy to cover the buildout of the workshop.
  • Toys — Since Santa ships only by air freight, he should purchase business personal property off premise or, depending on the contract, an ocean cargo policy to cover the inventory when in transit.
  • Elves’ tools — Santa should have employees’ tools coverage under the property form for the extra small equipment his workers bring to the workshop. One reason this is important to review is many policies limit the amount provided for theft under the property form unless a specific limit is provided.
  • Reindeer insurance — These are expensive livestock that Santa should insure against mortality, loss of use and major medical. So don’t worry about that hole in your roof, if Rudolph breaks a leg; Santa has it covered.
  • The sleigh — This should be on an inland marine form. Like forklifts that your company sends to multiple locations, Santa uses this valuable equipment all over the world.
  • Workshop interruption — Santa works year-round to get ready for Christmas. Losing the workshop for just one day could make a difference between Dec. 25 and Dec. 26. Business interruption insurance would ensure that Santa has adequate cash on hand to make sure he meets his obligations, continues to employ the elves and could set up a temporary facility at the South Pole.

Why does Santa need directors and officers insurance?

We all know about how Santa determines who is ‘naughty’ and ‘nice.’ Business leaders make business decisions every day that could impact others, just like Santa does. Directors and officers liability coverage pays for defense in a lawsuit. If purchased on a duty to defend basis, the insurance company will supply expert counsel for a suit not resulting from bodily injury or property damage. Just wondering what list your insurance agent would be on?

Now that the world is in cyberspace, how does that impact Santa?

It’s true kids can now email their letters to Santa. Most insurance policies do not cover blogs, emails or electronic messages of any kind under liable and slander. Cyber liability coverage would protect Santa from any electronic communications by him, or his elves, that might be the subject of a suit, breach of security or business interruption.

What if the reindeer sued because of who Santa promoted to lead the sleigh?

Employment practices liability insurance (EPLI) is often a missed coverage in a risk management program. EPLI was developed to protect the employer from losses not covered by directors and officers or general liability. This form applies to discrimination, wrongful termination, failure to promote, sexual harassment, wage and hour, and whistle-blowers claims. This protects Santa and Mrs. Claus, as well as elves that supervise others working at the North Pole.

What if Santa uses the 401(k) contributions to upgrade the sleigh?

Under the Employee Retirement Income Security Act (ERISA), all 401(k) plans must be insured up to 10 percent of the plans’ assets for theft. So if Santa misappropriates funds, the elves’ retirement fund is OK. This is purchased under an ERISA bond or endorsing the crime policy.

How can Santa be ready for what the workshop is like after Christmas day?

All year, Santa’s helpers were busy working late hours. This can cause unwanted tension in the workplace and irritable elves could finally lash out. As an employer, you can purchase protection against the expenses that result from incidences of workplace violence. These can include the cost to hire independent security consultants, public relations experts, business interruption expenses and payment of death benefits.

Unfortunately, the ideal insurance policy is not gift wrapped and waiting for you under the tree. Business leaders need to invest their time meeting with an agent committed to helping you manage your risks to develop the right risk management plan and coverage to protect your company.

But I heard him exclaim, ere he drove out of sight, Happy Holidays to all, all my coverages are right …

Andrew Rowles is a vice president at SeibertKeck Insurance Agency. Reach him at (330) 865-6587 or [email protected]

Insights Business Insurance is brought to you by SeibertKeck Insurance Agency

How Santa Claus could create the right insurance policy this holiday season

Marc McTeague, President, Best Hoovler McTeague Insurance Services

’Twas the night before Christmas and Santa was in doubt. He read his insurance policy and wondered what was left out? He sees his agent but once a year, and his policy and coverages are not so clear …

“We are all busy — sometimes too busy — especially around the holidays, and many business owners put off looking at their insurance,” says Marc McTeague, president at Best Hoovler McTeague Insurance Services, a member of the SeibertKeck Group. “It is far from the most important item in their mind.”

As the holidays approach, Smart Business spoke with McTeague about a look at insuring one of the most familiar companies we all know — Santa Claus, CEO of the North Pole.

How does Santa know if he should purchase a liability insurance policy?

Santa is liable for the products he makes, along with potential property damage from coming down your chimney. To cover this exposure, Santa should purchase a comprehensive general liability policy. Reviewing this with your agent to determine the appropriate limit specific to your risk management plan is key to defending against losses. Keep in mind, there are exclusions that can limit coverage. For example, your policy excludes coverage for ‘your work’ in a typical CGL form.

How does Santa properly insure the North Pole operations facility?

Similar to many of today’s large corporations, there are many complexities to an insurance policy. Here is a quick overview of how Santa might cover his facilities.

  • North Pole — Since no one owns the location, he must have a tenant betterments and improvements policy to cover the build-out of the workshop.
  • Toys — Since Santa ships only by air freight, he should purchase business personal property off premise or, depending on the contract, an ocean cargo policy to cover the inventory when in transit.
  • Elves’ tools — Santa should have employees’ tools coverage under the property form for the extra small equipment his workers bring to the workshop. Many policies limit the amount provided for theft under the property form unless a specific limit is provided.
  • Reindeer insurance — These are expensive livestock that Santa should insure against mortality, loss of use and major medical. So don’t worry about that hole in your roof, if Rudolph breaks a leg; Santa has it covered.
  • The sleigh — This should be on an inland marine form. Like forklifts that your company sends to multiple locations, Santa uses this valuable equipment all over the world.
  • Workshop interruption — Santa works year-round to get ready for Christmas. Losing just one day could make a difference between Dec. 25 and Dec. 26. Business interruption insurance would ensure that Santa has adequate cash on hand to met his obligations, continues to employ the elves and could set up a temporary facility at the South Pole.

Why does Santa need directors and officers insurance?

We all know about how Santa determines who is ‘naughty’ and ‘nice.’ Business leaders make business decisions every day that could impact others just like Santa does. Directors and officers liability coverage pays for defense in a lawsuit. If purchased on a duty to defend basis, the insurance company will supply expert counsel for a suit not resulting from bodily injury or property damage. Just wondering what list your insurance agent would be on?

Now that the world is in cyberspace, how does that impact Santa?

It’s true kids can now email their letters to Santa. Most insurance policies do not cover blogs, emails or electronic messages of any kind under liable and slander. Cyber liability coverage would protect Santa from any electronic communications by him, or his elves, that might be the subject of a suit, breach of security or business interruption.

What if the reindeer sued because of who Santa promoted to lead the sleigh?

Employment practices liability insurance (EPLI) is often a missed coverage in a risk management program. EPLI was developed to protect the employer from losses not covered by directors and officers or general liability. This form applies to discrimination, wrongful termination, failure to promote, sexual harassment, wage and hour, and whistle-blowers claims. This protects Santa and Mrs. Claus, as well as elves that supervise others working at the North Pole.

What if Santa uses the 401(k) contributions to upgrade the sleigh?

Under the Employee Retirement Income Security Act (ERISA), all 401(k) plans must be insured up to 10 percent of the plans’ assets for theft. So if Santa misappropriates funds, the elves’ retirement fund is OK. This is purchased under an ERISA bond or endorsing the crime policy.

How can Santa be ready for what the workshop is like after Christmas day?

All year Santa’s helpers were busy working late hours. This can cause unwanted tension in the workplace and irritable elves could finally lash out. As an employer, you can purchase protection against the expenses that result from incidences of workplace violence. These can include the cost to hire independent security consultants, public relations experts, business interruption expenses and payment of death benefits.

Unfortunately, the ideal insurance policy is not gift wrapped and waiting for you under the tree. Business leaders need to invest their time meeting with an agent committed to helping you manage your risks to develop the right risk management plan and coverage to protect your company. But I heard him exclaim, ere he drove out of sight, Happy Holidays to all, all my coverages are right …

Marc McTeague is president of Best Hoovler McTeague Insurance Services, a member of the SeibertKeck Group. Reach him at (614) 246-RISK or [email protected]

Insights Business Insurance is brought to you by SeibertKeck Insurance Agency

How to build a health care plan that meets your needs and those of your employees

Steve Slaga, Chief Marketing Officer, Total Health Care

Health care costs are increasing at an alarming pace and many businesses are struggling to maintain the level of health care benefits provided in the past.

While executives are keenly aware that comprehensive benefit programs play a significant role in attracting top-notch talent, many companies have neglected to analyze the effectiveness of their benefit strategy.

Reviewing your employee benefit program regularly offers the opportunity to revisit your carrier’s rates and ensure they are still competitive, says Steve Slaga, chief marketing officer at Total Health Care. Further, it presents an opportunity for employers to ensure their program continues to measure up against others in their industry.

“Health care benefits are important and serve as a very useful tool for employee retention and attracting new recruits,” Slaga says.

Smart Business spoke with Slaga about assessing the needs of your employees, how to determine an appropriate benefit plan and the importance of employee education.

How can a company assess the needs of its employees?

First, examine your health care plan to ensure you’re providing affordable, quality coverage with good service, flexibility and access to care. Make sure your plan isn’t prohibitively priced, so employees can afford to participate, and gauge employees’ satisfaction levels by utilizing surveys to determine which areas of the plan they consider strong and which can be improved upon. Bear in mind all employers are different and operate within circumstances unique to them, so not every health care plan fits every group.

The level of flexibility a health care plan facilitates is also an important consideration. Some plans work through Health Maintenance Organizations, which have a specific provider network, while others offer Preferred Provider Organizations or Point-of-Service plans with which employees have the option to go in or out of a predetermined physician and hospital network of preferred health care providers without fulfilling certain conditions, such as obtaining a referral. When choosing a health care plan, make sure the services fit the needs of your employees and that employees have access to a selection of physicians and specialists in their area.

How can employers determine an appropriate benefits plan for their employees?

Ask your agent or broker to do a comparative analysis among health care plans. That person will review the factors important to your employees, including pricing, access to care and type of benefits. The actual pricing is determined by the health care plan and is dependent on factors including the business, its industry and the average age of employees.

Employers at a minimum should review their benefit plans annually. By comparing your current plan to other plans, you can stay apprised of options in the marketplace, new products and how your premiums compare with other options. By reviewing plans regularly, you can assure employees you have shopped around and are providing them with the best value for their needs.

How can employers best balance the cost of the plan with employee needs?

This is a decision every employer must make on its own, and it hinges on factors including the type of benefit program desired for employees and how much employees will be expected to contribute.

As the cost of providing health care coverage continues to rise, many businesses have scaled back benefits. Among those companies that continue to offer benefits, their employees are more often asked to make higher contributions to offset costs. Other companies pass along a portion of the increased costs through higher deductibles or higher co-insurance; both solutions reflect the challenge of dealing with today’s rising medical costs.

Companies are also coping with escalating health care costs by implementing wellness plans designed to encourage employees to take preventive action to improve their health. The idea is that a healthier pool of insured employees makes fewer claims.

How can employers help employees understand the features of their health care plan?

Education is key. Employees need to have a clear, concise understanding of their benefits from day one. There are numerous ways to make information available to employees, including health plan websites, interactive assessment tools, newsletters and other communications.

It is also important to provide employees with forums where they can ask questions about the plan and provide feedback. In addition, many employers are looking beyond employee communication and implementing multipronged education programs that engage employees throughout the year.

Most employees receive benefit information during open enrollment periods and that’s often the last time they examine the details of the plan. Instead, there should be ongoing education with information distributed regularly to employees so they are fully aware of what their benefits cover. This will allow your employees to utilize and access their plans efficiently and effectively.

What value should a benefit provider bring to the table?

Your benefit provider should present clear and concise information about the health care plan in a timely manner. On a group level, a provider should be able to help you with billing, invoice and claims questions. On the member level, the provider should be able to answer benefits questions. Contact your provider to see what other services are available.

Steve Slaga is chief marketing officer at Total Health Care. Reach him at (313) 871-7810 or [email protected]

Insights Health Care is brought to you by Total Health Care

How a culture statement helps drive success at Brown & Brown like no other message can

Fred McClaine, executive vice president, Brown & Brown of Indiana Inc.

Fred McClaine wasn’t sure he wanted to go work for a big company. He was an entrepreneur who owned his own insurance agency, and he was being courted by Brown & Brown Inc., one of the largest independent insurance intermediaries in the country.

As with most buying and selling experiences, the buyers and sellers spent time going over the offers and other considerations.

“When I met [executives] J. Hyatt and Powell Brown, they brought us down to their headquarters, and we stayed overnight at their house, which I thought was kind of unusual,” McClaine says.

Even though he had received better offers, he wanted to see this one through.

“But that’s when I met them and really got to know them as people. We ended up signing with them because they were insurance people.”

McClaine knew the business, and he knew how to spot a buyer who was in it for the long haul and the love of serving people’s needs versus one who was out to make a quick buck.

“Because we are a different kind of business from a bank or financial institution, we have a lot of fluctuations over the years, and to have someone at the top who understands the business and who says it’ll all work out – that’s important,” he says.

While McClaine was impressed with the leadership’s positive attitude, that wasn’t his only surprise.

At McClaine’s first annual sales meeting, in 2009, he got to experience a tradition that was an effort to get people to let their guard down – a toga party.

The tradition of a Brown & Brown costume party began in 1993 when a merger with Poe & Associates was completed and the integration had started. Some of the Poe top brass was let go since their leadership style wouldn’t be a good fit. About 20 other potential leaders were identified and kept on board.

“They were entrepreneurs at heart, and they were brought into a room of about 20 of our top people – 20 of their top people and their wives, in a hotel,” McClaine says.

“They were all ‘suits and ties’ and everybody was looking good. Hyatt said, ‘OK, guys, the men come with me and the women go with my wife; her name is CiCi,’ and they separated in different rooms. In those rooms were togas. Hyatt said, ‘Everybody strip down and get into your toga, and we’ll go back into the room and have a party.’ So they did.”

The custom of a costume party has lived on ever since.

“That’s typical of how the company culture was derived,” McClaine says. “He came into the room and said, ‘We were all dressed differently when we got here, we were all different people, and we are now all looking the same.  And we’re going to be that way.’”

McClaine says the event was it was not only symbolic of combining the two companies but costume parties such as this were more of a humility thing than anything else.

“We want to have humble people who understand how to work with staff members, because we have a real range of incomes in the business – that’s just part of our business.

“I think the experience does keep us in place, to be able to work with others. Every day those people are out there making your life better.”

Here’s how McClaine, executive vice president of Brown & Brown of Indiana Inc., takes the principles of a “let your guard down” company culture to help drive the sales of the $1.2 billion, 6,300-employee company.

Try writing a culture statement

Most companies have a mission statement. It tells about the company’s ideals. But boiling those ideals down to two or three sentences about your standards, expectations and goals can end up with a statement of unproductive phrases.

With a culture statement, it can define who you are, and it can set the principles of a unified group.

If you are an existing company, start by listing observations of success that have worked in your company in the past. Brown & Brown has been doing that since it was founded in 1939, and its culture statement is now a booklet.

“The company culture is an intangible mosaic of history, ideals, goals, sayings, signs, quotes, fables, aspirations and event which considered together, present a body of thought that is central to understanding the essence of our company,” says McClaine, quoting from the culture statement.

A major advantage of a culture statement over a mission statement is that the mission likely will stay the same over the years, but the culture can breathe, evolve and adapt over time. Take for example when a new acquisition is made … some points of their culture may be worth assimilating into your statement.

“Probably half of our culture statement has been developed newly since I have been here,” McClaine says. “Those who were responsible for some of the things that have been added are the people who have joined us. We look at every acquisition that we make and what are their strengths and how we can bring that into the whole culture of Brown & Brown. The culture has been designed over the years by taking in the strengths from the ones we have acquired and casting out the weaknesses that we had or they had to make us all stronger.”

Your company leader needs to support the continuous improvement in the culture statement.

“Hyatt came up with a lot of the sayings and the culture,” McClaine says. “Over the course of time, it’s been pushed out to all of us. Most of us really enjoy it but 80 percent of the leaders of the 190 branches across the country were entrepreneurs to begin with.

So we brought those guys in, taught them, and gave them the culture that they can buy into which is independence, decentralization, and making your own decisions but still turning a profit for the company.”

While McClaine bought into the culture fairly quickly, he says most people will decide within two or three years if they are going to buy into it or not.

“In terms of acquisition, we don’t acquire them if they aren’t a good fit and if it is after the acquisition that we made a mistake, then they will either get a different role or no longer be with us,” he says.

“It’s few and far between that those decisions are made but those do occur and sometimes after they are here three or four years; they figure it is not the right thing for them and they go their merry way.”

Know all about your acquisition

Integrating a merged or acquired company can be made a lot easier if a good fit is determined beforehand. And the real emphasis on whether it is the right fit is on the people. While there are other obvious concerns to be considered, such as financial and geographical benefits, it’s the people that deserve the most consideration.

“If your company has an entrepreneurial spirit, look for one that is in a similar entrepreneurial spirit to yours,” McClaine says. “You have to find somebody who hasn’t been in a stodgy, power-down kind of situation but has been in one of entrepreneurship.”

Should your company be more vertical, with decisions being made at the upper level and followed all the way down, it is a different story.

“If they are into making all the decisions at the top, and you want a company that’s ‘Here’s the manual, here’s how you run the place,’ then you’ve got to look for people who are used to that, who would have been in that kind of structure before.”

Look for a fit in the same kind of style of business more than anything else.

“Ask, what’s your style? Is it entrepreneur? Is it top down? Are you structured and rigid in your accounting principles and everything you do? McClaine says.

The chances that you will find a fit are often not good.

“Maybe three out of 10 will fit,” he says. “The year they acquired our agency we looked at 920 possible acquisitions across the country. We made 43. So, not everybody fits. You may have to walk away from some deals when you don’t think it is going to work. I would say sometimes make a decision more with your gut than with your head.”

When assessing the nature of the possible acquisition, look at the character of the company.

“Review their reputation,” McClaine says. “If you know them, you should be able to get recommendations from fellow companies about their honesty, their integrity, basis of who their clients are, and that they are a good fit for those statements.”

“We are looking for people who look like us, I suppose. And not everybody does, but we try to find them.”

Teach the key principles

Many say the most important thing that all employees new to the fold need is some type of training. It can be as elaborate as Brown & Brown University that was created five years ago to teach the skills or in-house training programs.

Whatever it is, three areas need to be addressed, according to McClaine.

“The biggest thing that you need to teach to your young staff is to listen to people,” he says. “When you learn the most about your businesses is from people and listening to what they have done and how they’ve done it.

“When to listen is one of the things that separates the big boys from the small boys,” McClaine says. A sale can be lost by an associate who doesn’t let the customer talk.

Another important aspect of learning the culture is the teamwork part.

“You feel like you’re part of a team. The team is part of the pack. The support people know that all they can do to help a producer to be successful is to go and help the pack. They have bought into the idea that we have to help a new client either save the money or find a better product. It brings the team together.

Celebrate the successes of the teams. This is a time to observe your good showings.

“When we announce a new sale or acquisition, we get cheers,” says McClaine, who is the de facto chief cultural officer in Indiana. “We do a cheetah growl across PA system. We sound the bell; maybe we have a party. So we do things that bring them all in. We understand that that’s a big deal, and so they are happy when deals occur. The culture of doing that is bringing the pack together of those who really help you, reward them and bring sales in the door.

Another part of your culture is employee retention. While many advisers suggest that financial reward motivates employee service, there is an intangible that helps, too.

“One of the things that does help to keep people on the job and make more things stable is to say you are built forever,” McClain says.

It takes committed and disciplined people to focus on forever.

“We’re built to last; that’s another saying that we have,” McClaine says. “We will continue to acquire and grow and grow. But others will be acquired by someone else.

And so as the people go, the culture goes, then that drives them to hang around because they don’t feel like there is going to be a big change.”

How to reach: Brown & Brown of Indiana Inc.,  (317) 228-3773 or www.brownandbrownindiana.com

 

The McClaine File

Fred McClaine
Executive vice president
Brown & Brown Indiana Inc.

Born: Greencastle, Ind. In southwest Indiana, between Indianapolis and Terre Haute.

Education: Indiana State University in Terre Haute. I majored in in marketing with minors in economics and accounting.

What was your first job?

Selling “Grit” magazined. I sold it for 20 cents a copy and made seven cents. It was a great rural magazine. I met my future wife at 13 when I started working for her father as a hod carrier. I know I didn’t want to do that the rest of my life.

What was the best advice you ever received?

Not everything is black-and-white. I got that from a guy who ran a large multinational company. I was in my 20s back then and when you’re that age, you think everything is either black or white but there’s a lot of gray out there so you have to learn about that.

Who do you admire in business?

J. Hyatt Brown is definitely the guy who I admire the most after seeing a lot of different people in business. He one smart guy and has the most energy at 73 that I know of anyone. What I love about jim is that when you talk to him, no matter if there are 100 people around you in the room, he listens to you. And he asks really great questions about you personally. That to me is symbolic of his humble nature, and who he is. He’s chairman of the board.

What is your definition of business success?

Balance between life, family and God. I don’t think you can be successful in your life if you don’t have that balance. I think if people get too stressed or into their life, one or the other too much, you get too far one-sided or the other it’s just not good for your business.

 

 

 

How to maximize indemnity clauses — an important risk management tool

Paula Devaney, Director, Claims Services, ECBM

Indemnity clauses are included in contracts to provide a means by which the contracting parties can shift the responsibility of risk.

“Indemnity clauses can expand, limit or even eliminate the obligations of one party to another with regard to property damage, personal injury and contractual obligations,” says Paula Devaney, Director, Claims Services, at ECBM. “Indemnity clauses are drafted in order to establish the terms and conditions upon which one party can shift risk associated with the performance of the contract.”

Smart Business spoke with Devaney about how to make indemnity clauses work for you, shifting risk away from your business.

What’s an example of how indemnity clauses work?

Here’s an example: Company A owns a building and retains Company B to complete parking lot repairs. As a result of the activities of Company B, a visitor to the building falls and sustains an injury. The visitor files a claim for damages against Company A. Pursuant to the indemnity clause in the contract, Company A demands that Company B respond to the claim since it arose out of their operations. If the contract did not include a properly drafted indemnity clause, Company A would have to bear the risk and costs of resolving the claim on their own behalf.

Do indemnification or insurance provisions apply first?

Indemnification provisions are evaluated first, as these clauses establish the parameters that will govern the risk being shifted. Insurance provisions are then evaluated to determine if the circumstances of the claim or demand will fit within the purview of the insurance coverage requested to be purchased. Not all of the risk that is shifted by an indemnity clause is or can be covered by insurance.

Both indemnity clauses and insurance are risk transfer vehicles. In a contractual relationship where an indemnity agreement exists, the parties will also include insurance language to support the indemnity. In the insurance world, the indemnity clause is commonly referred to as the ‘belt’ and the insurance provisions are referred to as the ‘suspenders.’

If the indemnity clause and insurance provisions are successfully drafted and implemented, the insurance purchased by the indemnitor will provide the indemnitee with a certain level of comfort that there is a means by which the indemnitor will be in a position to pay for the risk that has been shifted to them.

How does the language of the indemnity clause affect the end result? 

Language that must be thoroughly evaluated is anything in the clause that establishes very broad terms of the risk being transferred. Both parties who are depending on the viability of an indemnity clause should draft indemnity language that is specific to their relationship, complies with the jurisdiction in which the clause will be interpreted and clearly, or as best as possible, defines the proposed intent of both parties entering into the agreement. Effective communication is paramount to ensure that intent is clearly understood.

What must you include when creating a contract’s indemnity clause to provide the most protection for your company?

One way to establish a high level of clarity is to include or create definitions of key terms in the indemnity clause. Terms such as claim, damages and contractor/vendor conduct can be included in a definitions section of the contract so that there is little to question as to what type of act constitutes a breach, what constitutes a claim and what damages are subject to indemnification. Simplifying and defining the terms can allow a more clear and concise interpretation of the indemnity clause against the circumstances giving rise to the demand for indemnity.

The identification of the parties to be indemnified is also crucial. The party potentially granting indemnity will wish to limit the parties to be indemnified, whereas the party requesting indemnity will seek to expand or broaden the list of potential indemnitees.

The duty to defend and associated costs must be clearly established and can also include issues such as which party controls and/or must consent to defense, the degree to which one party must consent to settlement and the remedies available if there is a refusal to defend an indemnified claim.

Other factors to be addressed are:

  • Losses/damages or limitations on types of damages. Issues such as attorney’s fees must be included as a recoverable cost, while consequential damages should be contemplated along with fines and penalties.
  • The period of time in which an indemnity clause survives the contract.
  • Including and/or defining the type of event that can trigger the obligation to indemnify.
  • Insurance procurement. The indemnity clause in a contract should not rely on the viability of the entity granting the indemnity. If the indemnitor goes out of business, their insurance may still be in effect.

When your business is signing a contract that includes indemnity clauses, what should you watch out for?

It is crucial for both parties to read the contract, and specifically the indemnity provisions, carefully. Every indemnity clause is different. There is nothing standard, and many times nothing fair, about an indemnity clause. If you do not read the clause and carefully consider the implications, you can be accepting a tremendous amount of risk you never intended to undertake.

The indemnity clause should be drafted in a manner that carefully considers the intent of both parties. When negotiating indemnity provisions, you may win some battles and lose others. However, with effective communication between both parties and effective review of the contract by legal counsel and, just as importantly, your insurance broker, the intent of the contract will at least be understood. Therefore, you can enter the contractual relationship with an understanding of the risks and liabilities.

Paula Devaney is a Director, Claims Services, at ECBM. Reach her at (610) 668-7100, ext. 1216, or [email protected]

Insights Risk Management is brought to you by ECBM Insurance Brokers and Consultants

How to incentivize employees to participate in company wellness programs

Marty Hauser, CEO, SummaCare, Inc.

Current statistics show an average of three in five employers offer wellness programs, so it’s no surprise employers are seeking help from their benefits administrators and insurers to get employees interested and engaged.

“Getting employee participation and buy-in can be a struggle for some employers introducing a wellness program in their workplace,” says Marty Hauser, CEO of SummaCare, Inc.  “Fortunately, there are a few easy things you can do to increase your chances of having a successful program.”

Smart Business spoke to Hauser about things employers should consider to get employee buy-in and participation when implementing a new wellness program.

What is the most important factor when implementing a wellness program?

Before you commit to and implement a wellness program, make sure you have dedicated resources within your company who can give your wellness program the attention it needs and deserves. Coordinating a successful wellness program requires at least three to four hours of attention each week, and it means more than simply hanging or displaying posters and sharing health tips. Having an internal employee committed to sharing information about the wellness program, answering questions that may come up from other employees and acting as the ‘go-to’ person to assist with any necessary preparations for wellness-related events will increase your chances of having a successful program.

A successful and well-managed wellness program involves on-site activities, including events such as flu shot clinics, worksite wellness seminars, fairs and information sessions, and even group exercise classes.

It is also important to make sure you have more than just senior level buy-in; a wellness program requires time and attention from others in your company who can help make it happen.

How can I get employees in my company involved and committed to a wellness program?

Two questions we often receive from employers that have implemented wellness programs in their workplaces are, ‘Why are our programs not working?’ and, ‘Why are our employees not engaged?’ Simply put, wellness requires attention and nurturing, and a successful wellness program needs ‘cheerleaders’ to support it.

One way to get your employees involved and committed to a wellness program is to create a wellness committee comprising representatives from several areas or departments in your workplace. Forming a wellness committee that includes employees acting as representatives will allow for more feedback about the wellness program you are offering, while serving as a listening platform for challenges and questions among other employees in different areas of the company. These employees and committee members are great sounding boards for what is working and what isn’t, and they can help lead and coordinate the programs and services.

The other benefit of having employees on your wellness committee is that they, too, can and will encourage wellness and participation from their co-workers and friends. Co-workers are likely to support others who are leading wellness efforts, and these relationships can turn into future opportunities for wellness initiatives and activities, such as healthy brown bag lunch days, walking and weight-loss clubs and more.

What kind of wellness program is most popular and attractive to employees?

Wellness programs that offer incentives for participation are successful at getting employees involved. The fact is, people like — and sometimes expect — to be rewarded for good behavior. Offering perks for involvement can help give your wellness program longevity.

When incentives for participation are offered, employees are more likely to be motivated to participate, and this is especially true when the incentives for participation involve money. With this in mind, many employers are moving to an outcome-based rewards program that essentially gives employees the opportunity to earn money back on premiums they pay if certain pre-established wellness goals are met. Outcome-based rewards are popular incentives to influence the behavior of your employees and have a better chance at encouraging behavior and lifestyle changes because of the opportunity to ‘pay less’ for premiums. Because these rewards are often tied to employees’ paychecks and premiums paid for benefits, they are more likely to be motivated to participate when they see the effects of their participation — or lack thereof — on their regular pay stubs.

If you are interested in offering a wellness program that offers incentives and/or an outcome-based rewards program, it’s a good idea to start small and slowly cultivate your program based on employee feedback. In the first year or two, you can offer employees small incentives for participation in activities such as screenings and/or completion of a Health Risk Appraisal, and in the next couple years build up to an outcome-based rewards program with varying levels of rewards depending on goals met.

It’s also important to note that under the Patient Protection and Affordable Care Act, beginning Jan. 1, 2014, employers will be permitted to offer employees rewards of up to 30 percent, potentially increasing to 50 percent, of the cost of coverage for participating in a wellness program and meeting certain health-related standards. This would give employees an even better incentive for living a healthy lifestyle, which, in turn, could give you greater employee engagement.

Regardless of what kind of wellness program you decide to implement, it is important to check with your legal department and labor laws before committing to any program.

The key to any successful program is the support it receives, as well as communicating the program to employees. Discuss your company’s culture and wellness goals with your benefits administrator or insurer so they can help you select a wellness program that is right for you.

Marty Hauser is the CEO of SummaCare, Inc. Reach him at [email protected]

Insights Health Care is brought to you by Summa Care, Inc.