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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Bill Onion: Plan of attack

Bill Onion, managing director, Briteskies

Bill Onion, managing director, Briteskies

As the business partner who remained in the office, leading the company and being charged with keeping the train on the tracks, I developed my own critical advice to plan for and survive an unexpected crisis like this one.

I had no idea that a phone call saying, “Mike’s in the hospital with a fever,” would turn into a four-month absence, leaving the company we had run together for 12 years solely in my charge.

Here are four valuable lessons I learned:

Over-communicate

Once I knew that Mike was going to be out for a significant amount of time, possibly weeks, months or years, I needed to take action. We pride ourselves on a culture of commitment and transparency, so it was only natural that I began to communicate to the team on a regular basis, sharing whatever latest information I knew about his condition and updates on what was happening across the organization.

In a vacuum of information, people will fill it, and the last thing you need is for employees to start thinking that the business is falling apart because they’re not hearing anything from the top.

Cross-train

This may seem like very basic business advice, but it’s amazing how often it’s overlooked in today’s fast-paced environment. In general, as owners, we have a lot of key client and project knowledge in our heads. Assuming that we’ll always be around, this information is rarely shared with others, much less documented. This is a bad idea.

This goes for other employees as well. There shouldn’t be just one single person capable of doing any mission-critical tasks. At the same time, key customers should have multiple points of contact. Key company accounts like banking and insurance shouldn’t be in one person’s name, as it creates a problem when trying to gain access during a crisis.

Get comfortable with uncertainty

About three months into Mike’s absence, I faced a choice about a critical hire for the organization. If Mike were going to return, I would not need to make the hire. If he were going to be out for even a few more months, I would need to make the hire. I had no idea what would come next.

I looked at my internal resources and determined whether we could keep picking up the slack for just a little longer. We did, and he returned soon enough. The bottom line is that you have to be OK with trusting your gut and rolling the dice.

Prepare for re-entry

During Mike’s absence, by necessity, life had moved on — people had new roles, and there were new ways of doing things. One thing I wish we had done was to have a minimum two-week grace period after he returned dedicated to his transition back.

We could have had a summit with the entire organization about what had happened, who picked up which roles and what had changed. Then we could have scheduled individual sessions with each person who now owned a piece of Mike’s role and allowed them to take him through that on a specific level.

Every business is only one phone call away from a crisis. The company should be set up and prepared to perform under uncertain circumstances. At the same time, when a crisis does strike, remember to trust your team, because they are more talented than you may think. They will rise to the challenge and will be willing to help out.

 

William Onion is the managing director at Briteskies, an eCommerce design, development and integration firm, and can be reached at (216) 535-4099 or www.briteskies.com.

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.

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How to manage third-party risk

Jim Stempak, principal, Crowe Horwath LLP

Jim Stempak, principal, Crowe Horwath LLP

Failure to assess and plan for risks associated with third parties can be costly. Of the more than 250 executives surveyed by CFO Research Services, 75 percent were harmed by action or inaction of a third party, resulting in financial loss, supply chain issues and data breaches.

“Companies initially think about risks with high-cost providers. But they may have a $10,000 contract with a small marketing or advertising firm that fails to adequately protect their customer information. Their servers get hacked and experience a breach that in turn raises concerns with their customers and brings reputational and financial risk and penalties,” says Jim Stempak, principal at Crowe Horwath LLP.

Smart Business spoke with Stempak about assessing third-party risk and solutions to limit exposure.

What poses third-party management risks?

Relationships that drive the most risks are:

  • Service providers — processing, accounting, computer services, IT, service centers, advertising and marketing, leasing, legal and collections.
  • Supply-side partners — production outsourcing, research and development, material supplies and vendors, and software development providers.
  • Demand-side partners — customers, distributors, franchises and original-equipment manufacturers.
  • Other relationships — alliances, consortiums, joint ventures and investments.

The Japanese tsunami and Hurricane Sandy illustrated this. If something happens to a single-sourced company, what’s the impact on suppliers or business partners?

What are some gaps that expose risk?

A ChainLink Research study found that 70 percent of organizations reported no resilience and risk mitigation standards for service providers. It also noted that risk assessment often focuses on the easiest risks to quantify, such as financial viability and business continuity plans.

With supply-side partners, vendor risk assessments are hampered by a lack of good data and poor visibility into contractor use.

How often should companies conduct risk assessments of third parties?

Risk assessments should be done at least annually for all vendor relationships that are high risk. Those with moderate or low risk can be done on a rotational basis.

In determining high-risk relationships, consider the financial risk penalty if a supplier has a breach. Another risk is reputational, such as a third party compromising private health information found in hospital records. Other high-risk areas are protection of systems and data, and reliability or continuity of operations. Are there contingency plans if a vendor faces a natural disaster or labor strike?

Many organizations don’t address risk management of third-party relationships until a problem arises. Before that happens, establish ownership for the organization’s third-party risk management framework, and responsibility for review and monitoring of individual relationships.

What other solutions address these risks?

First, establish ownership and buy-in, which requires executive leadership and oversight, with clear goals and objectives. Strengthen the overall relationship with the third party. Then evaluate risks by developing a risk profile of the organization that covers financial, integrity and operational issues. This spurs initiatives to audit, inspect, benchmark performance and costs, verify, and gain assurance or attestation.

A third-party risk management program should have:

  • Risk measurement and monitoring.
  • Performance measurement and monitoring.
  • Incident tracking.
  • Evaluation of the value received from the relationship.

This information guides decisions about when and whether to renegotiate an agreement. Success depends on customizing the assessment to the relationship, using automation to streamline the process, and analyzing trends of incidents.

In the CFO Research Services study, less than half of companies had a formal process for assessing and managing third-party risks, and 97 percent said at least one aspect of their third-party risk management should be improved. Businesses do their due diligence when entering contracts but tend to take their eyes off of it once a contract is signed.

Jim Stempak is a principal at Crowe Horwath LLP. Reach him at (214) 777-5203 or [email protected]

 

Website: Learn more about third-party risk management with a webinar, podcast, white papers and more.

 

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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.

 

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In order to navigate the risk, you need to understand the terrain

The enterprise risk management process helps businesses identify hidden dangers. If used correctly, it could also uncover opportunity. James P. Martin, managing director for Cendrowski Corporate Advisors LLC, shares how risk management is beneficial.

Q. How might risk affect company value?

A. Risks are uncertainties in the business environment. Alone, they do not degrade a company’s value. Degradation of value often comes from management making poor decisions based on incomplete or erroneous information. Sometimes, this is from long-standing assumptions about the business or the competitive environment that are not founded in fact.

The objective of enterprise risk management is to engage the entire organization in a continuous and proactive discussion about risk, about what could go wrong, and to proactively plan to mitigate risk and perhaps even capitalize on risk events.

When implementing an enterprise risk management process, it’s important to include participants from all levels of the organization — people throughout the organization will have a different perspective on risk and about how things really operate. Senior management will tend to focus on strategic issues, while process operators will tend to focus on process anomalies and nonconformances. The enterprise risk management process should bring these perspectives together.

For example, senior management may have a strategic initiative to increase customer satisfaction scores by a certain percent. The process operators with direct knowledge of customer order fulfillment, including knowledge of complaints and processing issues, would have vital information to help accomplish the strategic initiative. Too often, without a process to gather, analyze and organize such information, companies overlook the wealth of information they have within their own organization. The enterprise risk management system should help facilitate this information flow and allow everyone within the organization to understand their role in accomplishing organizational objectives.

James P. Martin, CMA, CIA, CFE, is managing director for Cendrowski Corporate Advisors LLC. Reach him at (866) 717-1607 or [email protected]

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.

 

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Now is not the time to drop or lower your business liability insurance

Peter Bern, CEO, Leverity Insurance Group

Peter Bern, CEO, Leverity Insurance Group

The economy is still recovering from the recent recession and businesses continue to experience budget pressures. Companies often react by cutting back, which can be a wise decision in some instances. But one area that should never be impacted by budget cuts is insurance coverage. “In fact, when budgets are tight, having proper insurance coverage is more important than ever,” says Peter Bern, CEO of Leverity Insurance Group.

“When business owners want to lower limits or eliminate coverage completely, we explain to them that it exposes their company to the risk of greater financial hardship when they can least afford it. If you don’t think you can afford insurance coverage now, then how could you possibly sustain the financial impact of a claim or loss?”

Smart Business spoke with Bern about ways to control costs without cutting coverage, as well as other risks businesses might be exposed to that would warrant additional insurance.

What can businesses do to protect their bottom line when it comes to insurance and risk management?

Most businesses strive to do four things: save money; boost productivity; increase profits; and employ happy, healthy individuals. These can be accomplished by establishing safety programs and other risk management strategies that can reduce the probability of injury and downtime. Safe environments also improve employee morale, which positively impacts productivity and service. And industry studies report that there is a direct correlation between safety and a company’s profit.

Instead of lowering or eliminating coverage to save money on insurance premiums, business owners should be strategic with deductible structures, self-insurance retentions and leveraging their insurance to be sure that they are receiving all the potential credits. Most importantly, get a comprehensive second opinion from an insurance professional who will audit your risk management and insurance program for deficiencies, and be creative in finding ways to save money while providing maximum benefit.

What are the risks of purchasing insurance based solely on a budget?

Not only does lowering insurance coverages expose your company to greater risk from a claim, it can also expose your company to possible lawsuits. For instance, if you lower and raise your coverage level annually based only on price and then have a claim for which you aren’t fully covered, shareholders or claimants could sue you for negligence because you did not have a strategic risk management and insurance program in place. Employers should develop a risk management plan based on what their company needs with respect to all lines of coverage. It’s important to follow it, regardless of budget.

Why should business owners consider adding insurance in a down economy?

There are many business owners who expose their company and themselves to risk because they are neglecting management liability insurance. In a tough economy, employment practices liability and director and officer’s insurance become even more vital. During a workforce reduction, there is the potential that someone will sue for discrimination, wrongful termination or other reasons. If there is an alleged breach of duty, perceived mismanagement of business operations or even potential violation of state and federal laws, the decision makers of the business can be held liable.

Another area that’s often overlooked is cyber and privacy liability. Policies can insure businesses for notification expenses and lawsuits that result from breaches of database information. Hackers are constantly attacking networks in an attempt to disrupt operations and/or steal credit card and personal client information; it’s a major exposure that many businesses have not considered. State and federal laws require you to notify everyone in your database if there’s a breach of client personal information. That expense could cost a fortune and be catastrophic to your business. Many companies think these types of coverage are part of their standard business insurance policy, but in reality they are excluded. Unfortunately, they may not realize it until they have a loss.

Peter Bern is CEO at Leverity. Reach him at (216) 861-2727 or [email protected]

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