Commercial Insurance – Page 17 – Setnor Byer Insurance & Risk

Why Your ERISA Fidelity Bond is NOT Enough: The Case for Fiduciary Liability Insurance

A surprising number of employers offering employee benefit plans to their employees, including 401(k) plans, are refusing to purchase fiduciary liability insurance. Despite the dubious wisdom of refusing the insurance, the decision must be accepted if it was made with a complete and accurate understanding of all the facts. However, a significant number of employers may be deciding to forego fiduciary liability insurance because they believe their ERISA fidelity bond provides all the protection they need. Unfortunately, such a belief is wrong.

By virtue of offering an employee benefit plan, employers find themselves within the purview of the Employee Retirement Income Security Act (ERISA), thereby exposing their organization to significant risk. Although many of these risks can be covered by a fiduciary liability insurance policy, confusion and misunderstanding may prevent the employer from making an informed decision about whether to purchase the insurance. As a result, the employer rejects insurance that would otherwise have been accepted if the correct information was known and considered.

Given the significance of refusing such insurance, it is helpful to debunk some of the myths surrounding the meaning, need, and purpose of ERISA fidelity bonds and fiduciary liability insurance, so that those who may be in need of one or both of them, may make an informed decision.

Myth: There is little difference between a fidelity bond under ERISA and a fiduciary liability insurance policy. Fact: Although both may ultimately operate to replace a plan’s assets that were lost due to a wrongful act, any perceived similarities between the two are mostly superficial. The actual differences between the two, in terms of the purpose of the coverage, who is covered, what is covered, and coverage triggers, may render fidelity bonds and fiduciary liability insurance mutually exclusive in some cases.

Myth: Under ERISA, the fiduciary of a 401(k) plan has the option of purchasing a fidelity bond.

Fact: Fidelity bonds are mandatory. ERISA provides that “every fiduciary of an employee benefit plan and every person who handles funds or other property of such plan…shall be bonded.” ERISA generally requires the bond to be in an amount equal to at least 10 percent of the plan’s assets, as determined at the start of each fiscal year. However, the amount of the bond is subject to ERISA’s minimum of $1,000 and maximum of $500,000. [Note: Though not discussed in this article, ERISA does have defined exemptions to the bonding requirement.]

Myth: Every person involved with a plan must be bonded.

Fact: ERISA’s bonding requirement only applies to those described in the statute. If a person does not qualify as a fiduciary of an employee benefit plan or a person who handles funds or other property of the plan, then a bond is not required such person.

Myth: Fiduciary liability insurance is required by ERISA.

Fact: Although ERISA does not prevent a plan, a fiduciary, or an employer from purchasing fiduciary liability insurance, obtaining such insurance is not required by ERISA.

Myth: A fidelity bond protects a plan’s fiduciaries against liability.

Fact: Under ERISA, a fidelity bond must protect “the plan against loss,” not the fiduciaries. Although a fiduciary’s actions may serve as the trigger for coverage under the fidelity bond, the plan itself is the named insured.

Myth: A fidelity bond protects a plan against all losses, regardless of the cause.

Fact: A fidelity bond under ERISA protects the plan against losses caused only by “acts of fraud or dishonesty” on the part of a plan’s fiduciaries. If the cause of a loss is anything other than fraud or dishonesty, it will not be covered by the fidelity bond.

Myth: A fidelity bond protects plan fiduciaries from personal liability.

Fact: Under ERISA, a fidelity bond is limited to protecting only the plan against a loss, not the fiduciaries. This limitation is problematic for plan fiduciaries, since ERISA provides that “any person who is a fiduciary with respect to a plan who breaches any of the responsibilities, obligations, or duties…shall be personally liable to make good to such plan, any losses to such plan resulting from each such breach.”

Myth: I am not listed as a plan fiduciary, so I do not need to worry about fiduciary liability.

Fact: Under ERISA, a person may be deemed a fiduciary if that person uses discretion in administering and managing the plan, or controlling the plan’s assets. Indeed, fiduciary status is based on the functions performed for the plan, not just a person’s title with respect to the plan. Those who rely on their title to determine their own status may discover that, for purposes of ERISA liability, they are in fact a fiduciary.

Myth: It is unlikely that the fiduciary of a plan will ever breach the standards of conduct required by ERISA, so a fiduciary liability insurance policy is not necessary.

Fact: Since the responsibilities and loyalties of a fiduciary are strict and demanding, the chances of experiencing a breach cannot be fairly categorized as unlikely. The nature of the relationship requires that a fiduciary discharge his duties with respect to a plan solely in the interest of the participants and beneficiaries and with the care, skill, prudence, and diligence under the circumstances then prevailing that a prudent man acting in a like capacity and familiar with such matters would use in the conduct of an enterprise of a like character and with like aims. For more information about the nature of a fiduciary’s obligations, read An Employer’s Liability under ERISA for 401(k) and Other Employee Benefit Plans.

Myth: Since the greatest risks to a plan’s assets always involve fraud or dishonesty, a fidelity bond is usually all that is needed to cover any losses.

Fact: While fraud and dishonesty pose a real threat to a plan’s assets, they are by no means the only threats. Breaches of the fiduciary duty can come in many forms which do not involve fraud or dishonesty, including: negligent errors and omissions; improper disclosures to plan participants; remiss investment advice; imprudent choice of outside service provider (OSP); faulty advice of counsel; and improper amendments to plan documents. None of these examples would be covered by a plan’s fidelity bond.

In addition to clearing up any confusion caused by the foregoing myths, these facts reveal that fiduciary liability insurance is necessary to maximize the level protection enjoyed by the plan’s fiduciaries, as well as the plan’s assets. The frequency of ERISA litigation involving employee benefit plans continues to increase as the economy remains sour. Expenses associated with defending these lawsuits, regardless of whether the plan breached its duties, can deplete critical assets. Moreover, in the event of litigation, plans electing to observe the statutory cap for fidelity bonds may discover the unfortunate fact that $500,000 is not nearly enough to protect the plan’s assets.

While the benefits associated with a fidelity bond should not be minimized, they should also not be exaggerated to justify a risk management profile that relies solely on the fidelity bond. In today’s financial climate, it is likely that a plan’s investments will decrease experience a decrease in value, with the predictable result being litigation. By combining a fiduciary liability insurance policy with any required ERISA fidelity bonds, two of the most significant vulnerabilities to the plan, fraud/dishonesty and a breach of fiduciary duty, have been addressed, so the plan’s fiduciaries are free to focus on increasing the value of the assets.

Computer-Related Crimes on the Rise: Is Your Business Insurance Keeping Up with the Criminals?

According to the Department of Justice and the Federal Trade Commission, the nation’s computer fraud problem is increasing on a yearly basis. Those using computers to perpetrate their crimes have introduced the business community to a plethora of risks that are typically uninsured by traditional insurance policies. However, there are several insurance products designed to protect against the risks posed by those intent on using computers to carry out their crimes.

One such risk involves the loss of property resulting from computer fraud. The Department of Justice generally defines computer fraud (or Internet fraud) as any type of scheme that relies on the Internet to present fraudulent transactions, or to transmit the proceeds of fraud to others connected with the scheme. Such schemes often use chat rooms, e-mails, message boards, and Web sites to perpetrate the fraud.

Funds transfer (or wire transfer) fraud is another type of computer fraud which may result in significant losses to a business. Although a computer is not necessarily required to execute a fraudulent transfer of funds, a common scenario involves the transmission of an electronic instruction to a bank which appears to have been given by a company’s authorized representative, when the instruction was in fact sent by someone else without the company’s knowledge or consent. In these cases, a fraudulent e-mail may have been sent to the financial institution or the perpetrator may have fraudulently gained access to a company’s online banking account.

A typical crime insurance policy may provide coverage for losses resulting from these kinds of computer fraud. Additionally, since an estimated 75% of employees reportedly steal from their employers, a business may increase the scope of protection afforded by a crime policy if employee theft coverage is also obtained.

In addition to these typical coverages, products aimed at specific computer-related risks may also be obtained. For example, if a business relies on electronic data, computers or networks to support its critical operations, it may be especially vulnerable to computer-related criminal activity. In such instances, a business should be insured against any criminal activity which constitutes a denial of service attack, which jeopardizes the ability to protect sensitive client data, or which otherwise causes network damage, such as unplanned network interruption or electronic infection.

If a business stores sensitive information, then insurance may be obtained to protect against security breaches resulting in privacy injuries, such as identity theft. Insurance may also help cover the often substantial cost of complying with security breach notice laws, which may require notice to those individuals affected by a breach of security involving their non-public, personal information.

For those seeking comprehensive coverage for many of the risks faced by those businesses relying on computers and networks, various insurance products offer protection against privacy injury liability, security and content injury liability, qualifying professional liability, extortion, and network loss. Some policies even provide business interruption coverage for network dependent income.

Given the variety of products in this market, a comprehensive risk analysis must be undertaken to determine the precise risk in any particular situation and to avoid duplicate coverage or gaps in coverage. Failing to understand the risk may lead to a policy that does not adequately address the risk.

Those dependent on computers and networks for the continued and successful operation of their business face developing and sophisticated computer-related risks to their bottom-line. However, the right insurance policy can go a long way toward neutralizing the threat.

If you would like more information about insuring against crime, including computer fraud, please contact us.

Maximizing Protection by Pairing Ordinance and Law Insurance with Business Interruption Coverage

Building ordinances and laws (building codes) are upgraded regularly to improve a structure’s resistance to windstorm, earthquake, fire, and collapse. Since some of these changes apply to new construction on a go-forward basis, it is not uncommon for older buildings to increasingly depart from current code requirements over time. Since it can be expensive to update an older building to comport with current building codes, building owners must have a plan to cover the cost. Even though ordinance and law insurance may contribute to the cost, the number of owners electing to forego such coverage is surprisingly high.

Ordinance and Law insurance is designed to pay for the extra expense of rebuilding to comply with ordinances or laws, such as building codes, which did not exist at the time the building was originally built. If an owner is required to rebuild pursuant to new codes, the cost is virtually certain to exceed the cost of merely restoring the building back to its pre-loss state.

Unfortunately, it is not uncommon for inexperienced building owners to first learn of this possible expense until after experiencing a property loss, since the loss is often the trigger for the property owner’s obligation to bring the property up to current code. For example, if an older building suffers severe structural damage from a fire, the property owner may be required to implement current building codes in the repair or reconstruction of the property. Since this can be a very expensive proposition, the value of obtaining ordinance and law coverage is obvious.

Although ordinance and law coverage is an important part of a building owner’s insurance program, it does not necessarily protect against all risks associated with bringing a building up to code. What about losses caused by delays in rebuilding the property caused by the need to comply with the current building code?

For example, consider a building damaged by fire. Restoring the building to its pre-fire condition without fixing any code violations would take one month, whereas correcting all of the code violations would extend the restoration by three months. The building owner would be out of business for an additional three months by virtue of complying with new building codes. Even in the best of circumstances, such a suspension of operations can cause severe financial hardship. However, there is a type of insurance coverage designed to protect building owners against such a loss—business interruption coverage, which can be obtained in conjunction with ordinance and law insurance.

Business interruption insurance generally covers reductions in net income and provides a business with the funds needed to pay normal operating expenses during periods of time when a business unable to continue its operations. Such coverage is often critical in the event of a lengthy property closure because expenses do not stop. Indeed, payroll, mortgage/rent payments, money owed to suppliers, taxes, and other continuing expenses must be met, and business interruption insurance may keep badly needed capital flowing when it is needed the most. However, if business interruption coverage is rejected, a property owner will be required to either fund the continued business operations or survive without the income those operations generate.

Although ordinance and law insurance provides valuable protection against potentially debilitating expenses, combining it with business interruption coverage fills a potentially significant gap in a building owner’s insurance portfolio. The combination of the two increases the likelihood of surviving not only the initial property loss, but the protracted suspension of operations resulting from the obligation to rebuild in accordance with current building codes.

While the decision to obtain ordinance and law insurance and business interruption coverage should be easy, understanding specific policy provisions and terms may be more difficult. Since there may be variations among different policy forms, it is important that you consult with an experienced insurance agent to discuss your options.

If you would like more information about ordinance and law insurance and business interruption coverage, please contact us.

An Employer’s Liability under ERISA for 401(k) and Other Employee Benefit Plans

Employers offering 401(k) plans to their employees assume significant responsibilities under the Employee Retirement Income Security Act. As the federal law designed to protect employee retirement plans, ERISA imposes strict standards of care upon those who establish and administer such plans. Unfortunately, many employers fail to understand the true scope of their obligations, as well as the consequences for failing to live up to them. Since wrongful acts can result in significant liability, employers must understand precisely what the law requires and what the law prohibits.

Employers looking for additional motivation to take their obligations seriously need only consider that ERISA violations may result in personal liability. Specifically, ERISA provides that “any person who is a fiduciary with respect to a plan who breaches any of the responsibilities, obligations, or duties…shall be personally liable to make good to such plan, any losses to such plan resulting from each such breach.

In addition to covering 401(k) plans, ERISA’s broad definition of “employee benefit plan” means that many different types of employee plans may be covered by ERISA, including various health plans, short- and long-term disability plans, deferred contribution plans, SIMPLE plans, TOP HAT plans, pension and profit sharing plans, employee stock ownership plans, and flexible benefit plans. Given ERISA’s broad applicability, employers offering various employee benefit plans must confirm ERISA’s applicability to such plans.

It is important to establish ERISA’s applicability, whether to a 401(k) plan or some other covered employee benefit plan, because of the strict standards of care imposed upon those deemed “fiduciaries” of the plan. Although a plan must have at least one named fiduciary, if a person uses discretion in administering and managing the plan, or controlling the plan’s assets, then that person may be deemed a fiduciary of the plan by virtue of taking control of the plan. Indeed, fiduciary status is based on the functions performed for the plan, not just a person’s title with respect to the plan.

The significance of being a fiduciary comes from the responsibilities and standards of conduct associated with the designation. Fiduciaries are subject to standards of conduct because they act on behalf of participants in a retirement plan and their beneficiaries. Under ERISA, a fiduciary shall discharge his duties with respect to a plan solely in the interest of the participants and beneficiaries and with the care, skill, prudence, and diligence under the circumstances then prevailing that a prudent man acting in a like capacity and familiar with such matters would use in the conduct of an enterprise of a like character and with like aims.

In the context of serving a plan, a fiduciary’s responsibilities include:

Acting solely in the interest of plan participants and their beneficiaries and with the exclusive purpose of providing benefits to them;
Carrying out their duties prudently;
Following the plan documents (unless inconsistent with ERISA);
Diversifying plan investments; and
Paying only reasonable plan expenses.

Although all of a fiduciary’s responsibilities must be observed, the duty to act prudently is one of a fiduciary’s central responsibilities under ERISA. It requires expertise in a variety of areas, such as investments. Lacking that expertise, a fiduciary will want to hire someone with that professional knowledge to carry out investment and other functions. Prudence focuses on the process for making fiduciary decisions. Therefore, it is wise to document decisions and the basis for those decisions.

Diversification—another key fiduciary duty—helps to minimize the risk of large investment losses to the plan. Fiduciaries should consider each plan investment as part of the plan’s entire portfolio. Once again, a fiduciary will want to document their evaluation and investment decisions.

In addition to establishing minimum standards of behavior, fiduciary obligations also prohibit specific behavior. For example, fiduciaries are prohibited from engaging in self-dealing and must avoid conflicts of interest that could harm the plan. Moreover, ERISA prohibits specific parties (parties-in-interest) from doing business with the plan, such as employers, unions, plan fiduciaries, and service providers. Some prohibited transactions are:

A sale, exchange, or lease between the plan and a party-in-interest;
Lending money or other extension of credit between the plan and a party-in-interest; and
Furnishing goods, services, or facilities between the plan and a party-in-interest.

As previously mentioned, fiduciaries may face personal liability to restore any losses to the plan, or restore any profits made through improper use of the plan’s assets. So, fiduciaries should limit their liability exposure wherever possible. One way fiduciaries can control liability is by demonstrating that they have carried out their responsibilities properly by documenting the processes used to carry out their fiduciary obligations.

Another way to limit potential liability is by giving plan participants control over the investments in their accounts. Importantly, this option does not eliminate a fiduciary’s duties, it only limits the scope. For participants to have control, they must be given the opportunity to choose from a broad range of investment alternatives. Under the Department of Labor’s regulations, there must be at least three different investment options so that employees can diversify investments within an investment category, such as through a mutual fund, and diversify among the investment alternatives offered. Additionally, participants must be given sufficient information to make informed decisions about the options offered under the plan. Participants also must be allowed to give investment instructions at least once a quarter, and perhaps more often if the investment option is extremely volatile.

If an employer sets up their plan in this manner, a fiduciary’s liability is limited for the investment decisions made by participants. However, a fiduciary retains the responsibility for selecting the providers of the investment options, the options themselves, and monitoring their performance.

A fiduciary can also hire a third-party administrator, or service provider, to handle fiduciary functions, setting up the agreement so that the person or entity then assumes liability for those functions. If an employer appoints an investment manager that is a bank, insurance company, or registered investment advisor, the employer is responsible for the selection of the manager, but is not liable for the individual investment decisions of that manager. However, an employer is required to monitor the manger periodically to assure that it is handling the plan’s investments prudently.

It is important to specifically address an employer’s potential liability as a fiduciary when a third-party administrator is retained to handle an employer’s plan. Many employers believe that retaining a third-party administrator absolves the employer of any fiduciary obligations. This is wrong. Although retaining a third-party administrator may limit the scope of an employer’s fiduciary obligations, it does not eliminate them.

Hiring a third-party administrator is in and of itself a fiduciary function, so an employer must exercise appropriate care in its selection. A reasonable number of candidates must be interviewed and the entire process must be documented. At a minimum, the following information should be requested from each potential third-party plan administrator:

Information about the firm itself, including the financial condition and experience with retirement plans of similar size and complexity;
Information about the quality of the firm’s services, including the identity, experience, and qualifications of professionals who will be handling the plan’s account, any recent litigation or enforcement action that has been taken against the firm, and the firm’s experience and performance records;
Information about business practices, including how the plan’s assets will be invested and how participant investment directions will be handled, the proposed fee structure, and whether the firm has fiduciary liability insurance.

An employer’s fiduciary responsibilities extend beyond the selection of a third-party administrator, and include the duty to monitor the performance of a third-party administrator. This scenario provides yet another example in which an employer can face a breach of its fiduciary responsibilities even though a third-party administrator was retained.

Compliance with the duty to monitor a third-party administrator requires, at a minimum, formal reviews at reasonable intervals to decide whether to retain the third-party administrator or look for a replacement. Monitoring efforts should include:

Reviewing the third-party administrator’s performance;
Reading any reports they provide;
Checking actual fees charged;
Asking about policies and practices (such as trading, investment turnover, and proxy voting); and
Following up on participant complaints.

In addition to complying with all fiduciary obligations, a plan is required to obtain a fidelity bond to protect the plan’s assets. A fidelity bond is a type of insurance that protects the plan against loss resulting from fraudulent or dishonest acts of those covered by the bond. Such bonds do not typically protect the fiduciary from personal liability; rather, it only protects the assets of the plan.

Those seeking to protect against the personal liability of fiduciaries may obtain fiduciary liability insurance. Fiduciary liability insurance generally covers the discretionary decisions made by fiduciaries which may be the source of litigation. Since retirement plans are often targets for litigation, fidelity liability insurance is a necessity in today’s environment, especially considering that the frequency and costs of such claims are increasing at a staggering pace.

Given the importance of 401(k) and other employee benefit plans in today’s workplace, it is unlikely that employers will stop making such plans available to their workforce. As a result, employers will continue having to deal with ERISA’s obligations and liabilities. This means that the risks associated with being a fiduciary must be considered and controlled. Otherwise, significant personal liability could result.

Setnor Byer Insurance & Risk’s 401(k) Division is available for a complimentary ERISA compliance assessment. If you would like to take advantage of this benefit, please contact Katie Grimmer.

The average premium for a mid-sized fiduciary liability bond is $1,000. Download anERISA Fiduciary Bond application.

The Death of Single-Member LLCs?

Ordinarily, a ruling handed down by the Supreme Court of Florida will find its way into the law books with little fanfare and in relative anonymity. Such a fate was not in store for Olmstead v. FTC, wherein the Court held that a person who owns a single-member limited liability company, and who is personally sued (ex., for injuring someone while driving drunk), may be compelled to surrender the LLC, and everything that goes with it, in order to satisfy a personal judgment. Rather than anonymously passing into law, the Olmstead ruling has caught the attention of people who own single-member LLCs, as well as those who have judgments against them.

The Olmstead case started as a fairly routine matter in which the Federal Trade Commission (FTC) sued the defendants for deceptive and unfair trade practices for their participation in an advance-fee credit card scam. The FTC ultimately prevailed and obtained a judgment against the defendants in excess of $10 million. The case took a turn for the interesting when the FTC informed the lower court how it intended to go about satisfying the judgment—taking the single-member LLCs owned separately by the defendants.

Since the defendants did not personally have enough money or assets to satisfy the judgment, the FTC asked that the lower court order the defendants to surrender to the FTC all right, title, and interest in the defendants’ single-member LLCs. The FTC would thereafter liquidate the LLCs to generate money that can be used to satisfy the judgment. Essentially, the FTC wanted to go after the LLCs much like a creditor would any other personal property, like a boat or jewelry.

The defendants argued that the FTC’s approach is prohibited by Florida’s LLC Act. The only way that the FTC can seek satisfaction of the judgment through the LLCs, the defendants argued, is to resort to a charging order. A charging order is a statutory procedure whereby a creditor of an individual member of the LLC can satisfy its claim from the member’s interest in the LLC. The defendants made every effort to convince the Court that the charging order is the FTC’s exclusive remedy. Why? Because, charging orders often fail to provide any real remedy to creditors.

Under the LLC Act, a judgment creditor obtaining a charging order is treated as an assignee of the debtor’s membership interest in the LLC. As such, the assignee is only entitled to share in the profits and distributions that the debtor may receive from the LLC. However, since an assignee of a debtor’s interest is not entitled to participate in the management of the LLC—one cannot call a vote to distribute profits—the creditor holding the charging order is at the mercy of the other LLC members who would, in all likelihood, vote to not make any distributions to the creditor. It is this relative impotence of the charging order that provides LLCs with significant asset protection benefits.

Since the FTC knew that any remedy afforded by a charging order would be illusory, it argued to the Court that in the context of single-member LLCs, the charging order is not the exclusive remedy. Rather, the FTC argued that it is entitled to use another statutory provision which would allow it to treat the defendants’ LLCs like any other personal property for the purpose of satisfying the judgment.

The Court ultimately agreed with the FTC and held that a judgment debtor can be ordered to surrender all right, title, and interest in the debtor’s single-member LLC to satisfy an outstanding judgment. In making its decision, the majority concluded that the absence of the word “exclusive” in the LLC charging order statute was deliberate and significant, thereby precluding the conclusion that the charging order displaces any other remedies that may be available to creditors of debtors who are members of single-member LLCs.

As evidenced by the resulting buzz, the majority’s ruling is not without detractors, not the least of whom are the dissenting judges, who some believe wrote the more persuasive opinion. The dissenters state, in no uncertain terms, that the majority failed in their duty to interpret the law in favor of their desire to seek an equitable outcome. The only way the majority’s result could be achieved, argued the dissent, is for the legislature, not the Court, to change the law.

The dissenting opinion goes to great lengths to undermine the majority’s reasoning and is troubled by the majority’s decision to disregard the principle that in general, an LLC exists separate from its owners. Additionally, the dissent is critical of the majority’s decision to create an exception for single-member LLCs that does not exist in the law and is bothered by how it might be used in the multiple-member LLC context.

Rather than upset the traditional application of the charging order to single-member LLCs, the dissent describes alternative remedies available to the FTC, including dissolution of the LLC and seeking an order of insolvency. Though they may be more complicated than the “shortcut” created by the majority, they are prescribed by statute.

Notwithstanding the technical and legal arguments for and against the majority’s decision, many have questioned whether the Court was right in ruling the way it did. Some believe the Court arrived at an equitable solution, since the FTC was merely trying to remedy a fraud and prevent the perpetrators from hiding money. But do the ends justify the means or is this what people mean when they say bad facts make bad law?

Regardless of the answer, the ruling could lead to some questionable outcomes. For example, while few would express concern over the loss of a single-member LLC that does little more than warehouse its owner’s money, what would happen if the single-member LLC operated a robust business with dozens of employees and hundreds of customers? Would it be acceptable for the creditor to take over the LLC, fire every employee and leave the customers wanting?

Another questionable consequence, which was touched on by the dissent, involves a situation in which the single-member LLC is worth more than the value of the judgment. Is the creditor entitled to keep the surplus or must it be returned to the debtor? Or, consider an example involving a judgment in the amount of $500,000 and a single-member LLC that earns an annual profit of $250,000. Is the debtor entitled to simply take over the business and reap the rewards of a thriving business in perpetuity or would the creditor have to give the LLC back once the judgment has been satisfied? Clearly many questions remain regarding the fallout of the Court’s ruling.

Thus, it is possible that the Olmstead case will be considered during the next legislative session. The legislature may elect to change the law to either conform to the majority’s position or expressly reject it outright. The outcome may hinge on who has the stronger lobby—the large corporations trying to close loopholes that make it difficult to collect on judgments or the wealthy individuals who routinely use single-member LLCs to protect their assets from judgments.

Nevertheless, those who are members of single-member LLCs must understand that the Court’s decision is the current law and that they must proceed accordingly. Prudence demands, at a minimum, an evaluation of their current situation in light of the new risk. Responsive options include converting single-member LLCs to corporations, adding a member to their single-member LLC to (presumably) fall beyond the scope of the Court’s decision, and making defensive amendments to operating agreements. Some are electing to do nothing.

Unfortunately, the uncertainty surrounding the post-Olmstead future precludes a defensive response that will preserve the status quo in every situation. This remains to be the case despite the passage of time since the Court’s ruling. Moreover, creditors may begin to test the fringes of the Court’s decision in the multiple-member LLC context. Thus, those who are members of single-member LLCs, and even multiple-member LLCs, should remain informed about any developments and consult with counsel as needed.

Insuring the Green Movement

Facing increasing and unpredictable energy costs, buildings capable of significantly reducing energy consumption have become increasingly attractive to those in the market for real estate. The increased public awareness and concern for the environment, coupled with an increasing consumer demand for the cost savings generated by energy efficient buildings, have operated to propel the green movement into the real estate industry in the form of green buildings.

There are many benefits associated with constructing, retro-fitting, and occupying green buildings, beyond those involving the environment. Studies show that buildings certified by Leadership in Energy and Environmental Design (LEED), an internationally recognized green building certification system, have an almost four percent higher occupancy rate, as well as increased retention rates. Such buildings may also experience an almost 10 percent decrease in operating expenses, and a similar increase in building value. Subsidies, incentives, and tax credits may also be counted as potential benefits associated with green buildings.

All of these benefits have operated to grow the green building industry despite the otherwise underperforming real estate market. According to one study, construction of green office space has increased by approximately 25 percent over the past decade, with significant continued growth predicted for the near future. Moreover, according to the U.S Green Building Council, green building construction is expected to reach $60 billion, with approximately 10 percent of new commercial construction starts expected to be green. These numbers confirm that building green has become, and is predicted to remain big business.

Given the increasing popularity and value of green construction, the insurance industry has entered the field by developing policy endorsements geared specifically toward green properties. These policies recognize that green buildings contain unique features, in the form of materials and designs, which are typically more expensive than those found in traditional buildings. Thus, in the event of a covered loss, a typical insurance policy may not cover the extra expense and procedures ordinarily associated with green buildings. That is why it is important to understand the manner in which insurance companies are catering to those property owners seeking to become, or remain, green.

Given the relative novelty of insuring green buildings, many companies are routinely adjusting their products to accommodate this developing industry. Nevertheless, there are a few commonalities among the varying products in terms of coverages, including:

Green Rebuilding: Green coverage will cover many of the costs related to rebuilding a covered property to its budgeted level of green certification. Some companies offer policies that cover the costs of replacing standard materials with a green equivalent in the event of a covered loss.
Business Income: In the event of a covered loss, an insured may suffer a loss as a result of a suspension of business operations. If business interruption insurance was purchased by the insured, a green policy may pay for the additional suspension of an insured’s operations for the extra time required to make the green qualifying repair.
Certification or Recertification Expenses: For insureds desiring a green certification post-loss or who desire the continuation of a pre-loss green certification, policies may cover the reasonable certification expenses for the repaired or replaced covered property.
Accredited Professional Expenses: Obtaining or maintaining a green certification may require the services of green-accredited professionals, such as architects and engineers. The cost of additional professional services used in planning and designing the applicable green qualifying repairs may be covered by insurance.
Debris Recycling: Although most policies cover debris removal, obtaining a green certification often requires that the debris be properly recycled, often at additional expense. The increased costs of such recycling efforts can be covered by insurance.

In addition to these somewhat typical green coverages, some companies offer more specialized insurance products relating to obtaining or maintaining a green certification. For example, one company provides for the payment of additional costs incurred to replace or repair a damaged roof with a vegetative roof, which is a roof that utilizes plants and vegetation as an alternative to a conventional flat roof. Another reimburses an insured’s actual loss sustained in the form of lost tax incentives, cost credits, reduced loan rates, or other financial incentives as a result of a loss of green certification.

In light of the variations in policy forms, maximizing the benefits afforded by green insurance is best accomplished by matching the appropriate form with a specific need. Thus, property owners must evaluate their risks and then purchase the green insurance protection from the insurer providing the best form.

For those in the business of leasing real estate, choosing the best policy form is just the first level of protection. Such property owners should clearly outline insurance requirements, specifically green insurance requirements, in the lease. If a particular company or policy form is the best fit for a specific location, then landlords should consider making the purchase of precisely that type of insurance an express requirement in the lease.

Alternatively, landlords can detail the precise minimum green insurance requirements in the lease. For example, if a particular building has obtained a specific green certification, such as a gold or platinum LEED rating, then the lease should expressly require each tenant to purchase a particular green insurance policy that would ensure the continuation of such rating in the event of a covered loss.

The effort and expense required to construct and operate a green building can be significant, and the numbers show that property owners are willing to invest the extra money to reap the many benefits associated with an environmentally sound structure. Given the unique risks involved in maintaining a green building, it is important for owners to properly insure their investment in order to enjoy the benefits of green ownership despite a covered loss.

For more information about obtaining green insurance, please contact us.

Did You Know About Leasehold Interest Coverage?

Did you know that in response to the high number of commercial property vacancies, landlords, in an effort to entice new tenants, are increasingly offering more favorable lease terms? But even sweetheart deals like these carry some risks that business owners need to protect themselves against with well-designed insurance policies.

Generally, a lease is considered favorable when the rate per square foot is somewhat or substantially less than the rate for comparable space currently available in the local commercial real estate market. Landlords are often willing to offer these extremely favorable lease rates in tough economic times to attract tenants, who can lock into these deals not only to save now but also to enjoy a better-than-market lease agreement when the real estate market recovers.

But favorable lease agreements are not without risk. These lease agreements generally allow a landlord the option of cancelling a lease should a specified event, such as major property damage, occur. If a tenant has a lease rate that cannot be replicated in the local real estate market, then losing that favorable lease can result in an unplanned increase in operational expenses for years to come.

Here is an example: ABC Advertising enters into a five-year agreement with its landlord, paying $15 per square foot for 20,000 square feet of space. When the building suffers major property damage during the first year of the agreement, ABC’s lease is cancelled, forcing ABC to either find a new operating location or accept a renegotiated lease at a higher cost. With the current area market price for equivalent space at about $20 per square foot, ABC, to lease 20,000 square feet of space, would see its monthly lease payments jump from $25,000 to $33,333, an increase of 33 percent. Such a spike in monthly lease payments translates into $100,000 of additional annual operating costs in rent alone, a potentially crushing increase.

Business owners can protect themselves against the risk of cancellation of a favorable lease by obtaining Leasehold Interest Protection insurance. This policy covers the losses suffered by an insured tenant when a premises lease with favorable terms is cancelled as a result of damage to the premises from a covered cause of loss, thereby forcing the insured to lease a replacement premises at a significantly greater expense. Like a Business Income policy, Leasehold Interest coverage protects against the harsh financial consequences of an indirect loss that arises from a direct loss.

There are four exposures that can be insured by Leasehold Interest Protection:

Tenants Lease Interest: the difference between the rent actually paid by the tenant and the market value of the premises.
Bonus payment: a non-refundable amount of money paid by the tenant to acquire the reduced lease (not equivalent to a security deposit). For example, a landlord, for an upfront payment of $100,000, agrees to lease space at $10 per square foot rather than at the market value of $15 per square foot. The landlord receives an immediate infusion of revenue, and the tenant gets a favorable lease, saving the insured hundreds of thousands of dollars over the term of the lease.
Improvements & Betterments: additions and upgrades the tenant has made to the property that cannot be removed, thus becoming the property of the building owner.
Prepaid Rent: rent the tenant has paid in advance that will not be returned.

Given the volatility of the current commercial real estate market, savvy business owners with favorable leases must protect themselves from the devastating financial losses that can result if their lease agreements are cancelled. Contact a Risk Management professional today to learn more about Leasehold Interest Protection and how it can help you dodge this speeding bullet.

Converting a Safe Workplace into Lower Workers’ Compensation Insurance Premiums

In many states, including Florida, workers’ compensation insurance rates are set by the state, which means that regardless of which insurance company ultimately provides the insurance, the rates remain the same. Therefore, unlike with other types of insurance, consumers are limited in their ability to go bargain shopping for workers’ compensation insurance. However, this lack of bargaining power does not necessarily mean that employers are powerless to reduce their premiums. There is one way employers can lower the cost of their workers’ compensation insurance: maintain a safe working environment.

Workers’ compensation insurance provides indemnity and medical benefits to employees who are injured on the job. Each time an employee files a workers’ compensation claim, the insurance company must make a payment on the claim. Needless to say, insurance companies prefer insuring safe, or safer, workplaces because there are presumably fewer claims to pay, thereby increasing the company’s profits.

Thus, in an effort to encourage employers to maintain a safe working environment and to reward those that successfully do so, experience modification ratings are used to adjust an employer’s workers’ compensation premiums. Those employers who experience fewer or no claims are rewarded with a credit toward their premiums, while those employers who experience a higher number of claims may face increased premiums.

Determining an employer’s experience modification rating, or experience mod, involves fairly detailed and complex calculations which are designed to tailor the final premium cost to the employer’s actual claims experience. In short, the experience mod compares an employer’s actual workers’ compensation claims experience, typically over a three year period, with that of other employers operating in the same type of business with a similar number of employees.

If an employer’s claims experience is consistent with the industry average, then the experience mod is 1.0, which when multiplied by the base premium, will not serve to increase or decrease the premium. However, if an employer’s claims experience is 25% better than the industry average, then the experience mod will be .75, which when multiplied by the base premium, will decrease the premium by 25%. Alternatively, if an employer’s experience is 25% worse than the industry average, then the experience mod will be 1.25, which will operate to increase the premium by 25%. Therefore, by maintaining a safe workplace, employers can significantly reduce their workers’ compensation premiums.

In addition to having this basic understanding of the experience modification rating process, it is helpful to know some of the features of the rating process so an employer can tailor its safety and loss control procedures to maximize the benefits afforded by the experience mod.

For example, since the cost of a specific workplace injury is statistically less predictable than the likelihood of an occurrence of an injury, the experience mod places greater weight to accident frequency than it does to accident severity. In other words, an employer having one loss totaling $100,000 compared to an employer having 10 losses totaling $100,000 will have a better experience mod. This is because the employer suffering one loss is seen as the more stable risk. And, given the unpredictability of the total cost of an injury, the experience mod calculation takes into consideration the possibility that any single injury could have astronomical costs, thereby making a higher frequency of claims a greater risk than a single, expensive claim. Since a workplace with a higher frequency of claims involves a greater risk, the experience mod will operate to make the premiums higher.

Employers should also know that medical-only claims do not have as much of an impact on the experience modification as do indemnity claims. Since the calculation reduces the value of medical-only claims by 70%, employers are not necessarily penalized when they occur. Moreover, the existence of open claims, or claims that have not yet been resolved, can negatively impact the experience mod, so employers benefit from getting claims resolved and closed.

In addition to adjusting an employer’s experience mod, some insurance companies may reward employers by offering payments, typically called dividends, to insureds that eliminate or otherwise limit the number of claims filed by their employees. These dividends, which are generally reserved for the most attractive risks, are usually based on a sliding scale wherein the amount of the dividend decreases as the number of claims increases. However, it is important not to get too caught up in the most generous dividend percentage. For example, if an employer has a history of at least four workplace injuries per year, then it is unrealistic to focus on the dividend percentage that is available only to those insureds experiencing no injuries. The best approach is to compare dividend percentages that comport with an employer’s specific claims history.

Understanding all the aspects of the workers’ compensation experience modification rating system, including the manner in which it can be addressed to achieve the maximum benefit, can be overwhelming. That is why it is important to utilize the services of an insurance agent who is familiar with not only the ins-and-outs of the experience mod rating system, and available dividend plans, but who can also provide information regarding loss control and workplace safety.

Despite the lack of competitive premiums in some states, maintaining a safe work environment remains the best way to reduce the cost of workers’ compensation insurance. By understanding the nature of the workplace, including procedures which may be incorporated to reduce the number of claims, the right insurance agent can work with the insurance company to ensure claims are treated appropriately in order to take advantage of the benefits afforded by the experience modification rating system.

If you would like more information about obtaining workers’ compensation insurance for your organization, contact us.

Alternative Group Benefits: Another Option for Employers Coping with Rising Healthcare Costs

Every American is painfully aware of the impact of skyrocketing health insurance costs. Rising premiums, higher deductibles, larger co-pays, reduced benefits – both employers and employees are feeling the pinch as they look for plans that are affordable for everyone.

That’s why HRAs – Health Reimbursement Arrangements – are a welcome addition to the range of options that employers can offer their workforce. HRAs allow employers to give tax-free dollars to their employees, who then can use the money to purchase their own health insurance as well as pay for other eligible medical expenses. While HRA plans may not be the panacea for all the “ills” of the health insurance dilemma, they represent significant progress from the point where we were even just a few years ago when I first began to tackle this problem.

Then, in January 2002, fresh out of college, I was hired to administer a group health plan for my parents’ company. Though I knew little about health insurance, I learned quickly that the premiums we were paying were too expensive for both the company and our employees. After doing extensive research and reading numerous Internal Revenue Service (IRS) publications relating to health care, I uncovered one solution for the family business: a High Deductible Health Care (HDHC) plan. The high deductible encourages employees to make healthier lifestyle choices and spend their medical dollars more prudently while also allowing them to save for future medical expenses in their Health Savings Account (HSA), funds that they can take with them if they change jobs. The HDHC is good for employers also: Under the plan, our premiums were reduced by about half.

Not stopping there, we also began to offer HRAs as an alternative to our HDHC Group plan. Our hybrid benefits package gave employees a choice: Those who felt more comfortable remaining on the traditional HDHC group plan did so, while employees who wanted greater economy, portability, and freedom of choice opted for the HRA. We structured the packages so that employees choosing either plan received the same amount in benefits. The plans’ common denominator is that both increase employees’ awareness of how they spend their health dollars, thus encouraging them to live a healthier lifestyle because, quite simply, it saves them money to do so.

In 2007 The Wall Street Journal took note of our success and wrote a cover story on our creative benefits packages. Increasingly, employers asked me to assist them in designing an HRA or a hybrid plan for their businesses, even though I was not then an insurance agent. But after years of administering (and participating in) an HRA/Group Plan hybrid, I decided to change my career path and obtained a health insurance license, allowing me to use what I had learned to assist other small businesses.

However, finding an agency that provided both group and individual health insurance and that was sufficiently forward-thinking to consider these newer options was more difficult than I had anticipated. Surprisingly, I found that many agents in the mainstream insurance industry know little about HRAs, particularly those plans in which employees can access a broad range of products from different providers.

After pitching dozens of insurance agencies on employer-based hybrid health care plans, I finally found an agency willing and able to offer these cutting-edge health insurance solutions: Setnor Byer Insurance & Risk, which recognized the advantages of hybrid plans and was excited about offering their clients and prospects an even fuller range of cost-saving options.

Setnor Byer, with almost 30 years of experience in the insurance industry, can help employers expand their benefits offerings, promote wellness in their workforce, and reduce health insurance costs for both the company and its employees. With dozens of plan structures available, Setnor Byer’s insurance professionals will help you choose the right one so that your employees – and your business – remain healthy.

Here’s to wellness.

For more information about these and other types of healthcare insurance policies, contact the professionals at Setnor Byer Insurance & Risk or visit the Employee Benefits page.

Dangerous Shallows: Using Credit Insurance to Protect Your Assets

John F. Kennedy once said that “a rising tide lifts all boats” to illustrate the idea that everyone benefits from a strong economy. Although the accuracy of this macroeconomic view may be challenged, its optimism cannot. However, if this premise is correct, then the opposite must also hold true – a falling tide lowers all boats. Unfortunately, since the economy appears to be in the midst of the lowest tide in distant memory, this could prove disastrous for many businesses.

During difficult economic times – low tides, if you will – many consumers shift into survival mode by cutting costs to the absolute minimum and stretching dollars to the absolute maximum. Despite their best efforts, however, many are left insolvent and unable to pay their bills. If one of these commercial consumer’s bills happens to be one of your accounts receivable, then you may find your boat sinking along with the rest; a victim of the falling tide.

The importance of protecting commercial accounts receivable during a struggling economy cannot be overstated. An account receivable is money owed by a customer for products or services that were provided on credit. It represents dollars a company does not have at its disposal to pay its obligations, reinvest in inventory, or finance growth. And, since accounts receivable are treated as a current asset on a balance sheet, the loss of receivables can jeopardize a company’s financial stability on multiple levels, from making payroll to obtaining financing.

The most effective method of protecting accounts receivable is to only do business with financially strong commercial customers. Unfortunately, the increasing difficulty of locating such customers has left many businesses considering the option of eliminating the practice of providing goods or services on credit, thereby foregoing the maintenance of accounts receivable altogether. However, the extent to which sales on credit are embedded as an ordinary business-to-business practice in many industries renders this option unrealistic.

Yet, there is another way businesses can protect their accounts receivable – credit insurance. Credit insurance, sometimes called accounts receivable insurance, provides protection against the commercial risk created by customers who fail to pay, or delay in paying, their open accounts. For instance, credit insurance can protect against the loss created by a customer with an open account who files bankruptcy, struggles with cash flow issues, or lacks sufficient insurance to withstand an adverse liability judgment.

Credit insurance is not new (it has generally been available in some form for over 100 years), but the ever-increasing number of customers defaulting on their open accounts has recently brought more attention to this risk management product. Hence, more and more businesses are considering whether credit insurance is for them.

Other than the obvious benefit of satisfying a defaulting customer’s open account, credit insurance may offer other benefits as well, including the reduction of collection costs, the reduction of bad-debt reserves, and an overall strengthening of the balance sheet. Moreover, credit insurance may serve to enhance a company’s financing relationships since insured accounts receivable are considered stronger collateral than non-insured or mature receivables. Lending institutions may consider the insured receivables when calculating a business’s borrowing base, thereby allowing the business to achieve more favorable financing to fund growth. By strengthening the balance sheet, credit insurance may also serve to increase the value of the business in the eyes of prospective purchasers.

Although credit insurance may not be necessary for every business, those sharing certain characteristics may want to consider giving the prospect of purchasing such coverage a closer look. If the following statements represent your business, then you may be a good candidate for credit insurance:

Does your company provide commercial goods or services on credit?
Would the non-payment of one or more of your large commercial accounts jeopardize your company’s ability to continue as a going concern?
Does a small percentage of your commercial customer base make up a significant portion of your accounts receivable?

There is an additional factor that should be considered – sales in foreign markets. Several credit insurance products also protect against foreign political risks that may prevent or delay payment, such as a war in the customer’s country, cancellation of a contract by the government of the customer’s country, or adverse regulations imposed by the government of customer’s country which prevent or restrict consummation of the transaction.

During any time, but especially during difficult economic times, risk-free ventures are virtually impossible to come by. However, as with any insurance product, the goal is to reduce the risk to a manageable level so the focus can optimistically remain on the upside potential of a business venture rather than the debilitating downside.

So, if one or more of these conditions apply to your business, raising the option of obtaining credit insurance may not be a bad idea. Let us know if you would like to discuss your risk management options.