Tag: Business Strategies

Florida’s New Transitory Foreign Substance Law: Altering the Landscape in Slip-and-Falls?

Whether you operate an amusement park, a restaurant, or a grocery store, the thought of a customer slipping and falling on the premises can cause an unsettling, if brief, feeling of panic in proprietors who invite the public onto their premises for the purpose of doing business. Since a slip-and-fall case can easily result in a significant judgment for damages, business owners are right to be concerned. However, while business establishments should remain proactive in preventing a dangerous condition on the premises, a new Florida law defining the scope of liability for transitory foreign substances may operate to protect against successful slip-and-fall lawsuits.

In order to understand the ramifications of the new Florida law, a brief history of transitory foreign substance liability is helpful. Prior to 2001, when a person slipped and fell on a transitory foreign substance, such as food, water, or grease, the injured person had to prove that the business had actual or constructive knowledge of the dangerous condition and that the condition existed for such a length of time that in the exercise of ordinary care, the premises owner should have known of it and taken action to remedy it.

In 2001, the Florida Supreme Court rendered its opinion in Owens v. Publix Supermarkets, Inc., and changed the standard of proof in slip-and-fall cases. The Court found that premises liability cases involving transitory foreign substances are appropriate cases for shifting the burden to the premises owner or operator to establish that it exercised reasonable care under the circumstances, thereby eliminating the specific requirement that the customer prove that the store had constructive knowledge of the transitory foreign substance. Thus, under this new standard, the existence of a foreign substance on the floor of a business premises that caused a customer to fall is not a safe condition, and the existence of that unsafe condition creates a rebuttable presumption that the premises owner did not maintain the premises in a reasonably safe condition.

Unhappy with this ruling, the Florida legislature adopted Florida Statute section 768.0710 in 2002. This statute recognized that a business owner owes a duty of reasonable care to its customers to maintain the premises free from transitory foreign objects or substances that might foreseeably give rise to loss, injury, or damage. However, rather than force the premises owner to prove that it acted reasonably, the statute required the plaintiff to prove that: the business owed a duty to the plaintiff; the business acted negligently by failing to exercise reasonable care; and the failure to exercise reasonable care by the business was the cause of the loss, injury, or damage. By enacting this statute, the legislature effectively overruled the Florida Supreme Court’s decision in Owens.

However, remaining dissatisfied with the manner in which Florida courts were dealing with transitory foreign substance liability cases, the Florida legislature repealed section 768.0710 in 2010, and enacted Florida Statute section 768.0755. According to the legislature, the purpose of this new transitory foreign substance statute is to approximate the law with respect to slip-and-fall suits as it existed before the Court’s Owens decision.

Effective July 1, 2010, the newly-enacted section 768.0755, entitled “Premises liability for transitory foreign substances in a business establishment,” provides that if a person slips and falls on a transitory foreign substance in a business establishment, the injured person must prove that:

  • the business establishment had actual or constructive knowledge of the dangerous condition; and
  • the establishment should have taken action to remedy it.

Additionally, the statute provides that a plaintiff may prove constructive knowledge by circumstantial evidence showing that:

  • the dangerous condition existed for such a length of time that, in the exercise of ordinary care, the business establishment should have known of the condition; OR
  • the condition occurred with regularity and was therefore foreseeable.

Although this new statute may operate to make it more difficult for an injured customer to successfully sue a business establishment for a slip-and-fall incident, owners and operators of business establishments must still observe their duty to prevent dangerous conditions from occurring. The new statute by no means alleviates a business establishment from its duties in this regard. Moreover, the statute’s constructive knowledge provision could allow a plaintiff to prevail in a slip-and-fall case if the business owner or operator fails to routinely inspect the premises for hazardous conditions.

The lack of any judicial opinions applying this new statute makes it impossible to predict the precise manner in which it will impact the law of transitory foreign substances. Nevertheless, the law clearly preserves a claimant’s right to sue for damages resulting from a slip-and-fall, as well as a business establishment’s duty of care in this regard. Regardless of whether this new law is seen as a victory for business owners and an obstacle for plaintiffs, those who operate business establishments wherein people are invited onto the premises would be wise to continue their preventative efforts as though the law had not changed. Reducing your commitment to maintaining a safe business establishment would be shortsighted, and it could serve to transform the cause of those moments of panic from imagined to real.

For more information about managing the risks associated with slip-and-fall liability, contact us.

Exception to the Going and Coming Rule: Workers’ Compensation

Pursuant to Florida’s workers’ compensation laws, an employer is generally required to pay compensation or furnish benefits to an employee who is injured on the job. To be considered compensable, an employee’s injury must arise out of and in the course of his or her employment. This requirement prevents the workers’ compensation system from becoming an insurance policy of general applicability. And, it is this requirement that generally operates to prevent the recovery of workers’ compensation benefits by employees injured while commuting to and from work.

Specifically, the relevant Florida statute provides that “an injury suffered while going to or coming from work is not an injury arising out of and in the course of employment….” This provision, known as the “going or coming” rule, reflects the principle that an employee’s commute to and from work is not considered to be in the course and scope of employment.

Regardless of whether one considers such an assumption to be arbitrary, since an employee cannot get to work without actually travelling to work, a line had to be drawn somewhere along the continuum of an employee’s efforts in preparing for and getting to work . And, Florida’s “going and coming” rule operates to draw that line at an employee’s arrival at the workplace. However, there are instances in which an employee injured during his or her commute may be entitled to workers’ compensation benefits.

One such exception to the “going and coming” rule, often referred to as the dual purpose doctrine, provides that “an injury which occurs as the result of a trip, a concurrent cause of which was a business purpose, is within the course and scope of employment, even if the trip also served a personal purpose, such as going to or coming from work.” Such a situation could arise, for example, in a case where an employer asks an employee to run an errand for the employer during the employee’s commute.

The basis for this exception is found in the same statute which codified the “going and coming” rule, and it provides that the “going and coming” rule applies, “unless the employee was engaged in a special errand or mission for the employer.” If an employee is found to have been engaged in a special errand or mission for the employer, then an injury occurring during such efforts by the employee may ultimately be considered within the course and scope of employment, thereby making such injury compensable.

While the dual purpose exception to the “going and coming” rule may appear simplistic in its description, it is anything but simple in its applicability. The extent and importance of the errand or mission will face significant scrutiny before the issue of compensability is resolved. The analysis is fact intensive and generalized rules of broad applicability should be treated with caution.

While the precise applicability of the “going and coming” rule’s dual purpose exception may not necessarily be predicted accurately or consistently without the assistance of professional guidance, it is important that employers understand the possible consequences of sending employees on work-related errands or missions on their way to or from work. By understanding all of the risks involved in a specific course of action, employers are in a better position to not only make informed decisions, but to control those risks which may significantly harm an organization.

To learn more about how Florida’s workers’ compensation laws affect your business, contact us.

Independent Contractor or Employee? Answering Incorrectly Can Prove Costly

Determining whether a new worker should be classified as an employee or an independent contractor has always been an important decision. The choice is not always an easy one, and the absence of a clear-cut rule of universal application often leads to inadvertent misclassifications. Moreover, the lack of a clear rule, coupled with the potential organizational benefits resulting from classifications of convenience, also open the door for manipulation and abuse.

Classifying a worker as an independent contractor rather than an employee may benefit an organization in various, often significant, ways. For example, an employer must generally withhold income taxes, withhold and pay Social Security and Medicare taxes, and pay unemployment taxes on wages paid to an employee. Since these obligations do not generally carry over to independent contractors, a business can experience significant cost reductions by classifying individuals as independent contractors rather than employees. Additionally, since amounts paid to independent contractors are not typically included in payroll calculations, a business can effectively reduce its workers’ compensation insurance premiums by classifying employees as independent contractors. Thus, the decision to classify an employee as an independent contractor can result in significant financial benefits.

The deliberate misclassification of employees as independent contractors in order to reap these benefits is tantamount to theft in the form of unpaid taxes. Since the amount of lost revenue is significant, the federal government is undertaking aggressive initiatives designed to catch those organizations participating in employee misclassification.

One report suggests that the federal budget assumes the government will collect approximately $7 billion over the next ten years through a federal crackdown on employee misclassification. The budget also allocates approximately $12 million and 90 new investigators for the express purpose of catching violators. Additionally, the Internal Revenue Service announced that it is planning to randomly audit thousands of employers to prevent misclassifications and, more importantly, collect unpaid taxes, fines, and penalties.

Given this increased scrutiny, it has never been more important for businesses to properly classify their workforce. Unfortunately, a simple rule or standard does not exist for making this determination. Rather, the nature of the relationship must be considered on a case-by-case basis by looking at all the facts of a particular situation.

The first step is to know the difference between an employee and an independent contractor. According to the IRS, anyone who performs services for a business is an employee if the employer can control what will be done and how it will be done. This is true even if the employee has freedom of action. What matters is that the employer has the right to control the details of how the services are performed. By contrast, a person is an independent contractor if the business for which the services are performed has the right to control and direct only the result of the work and not the means and methods of accomplishing the result.

Thus, the degree of control and independence are the critical factors for determining the nature of the relationship. According to the IRS, evidence of the degree of control and independence fall into three categories.

  1.  Behavioral. Does the company control or have the right to control what the worker does and how the worker does his or her job? One element to this category involves examining the type and degree of instructions that the business gives to the worker. Employees are generally subject to instructions about when, where, and how to work. Instructions may detail when and where to do the work, what tools or equipment must be used, where to purchase supplies/services, and what order the work must be done. Employees may be trained to do the job, whereas independent contractors ordinarily use their own methods. The key consideration is whether the business has retained the right to control the details of a worker’s performance or instead has given up that right.
  2.  Financial. Are the business aspects of the worker’s job controlled by the payer? Facts that show whether the business has a right to control the business aspects of the worker’s job include: the extent to which the worker has unreimbursed business expenses (independent contractors are more likely to have unreimbursed expenses); the extent of the worker’s investment (independent contractors often have a significant investment); the extent to which the worker makes his services available to others (independent contractors often work for others and advertise); how the business pays the worker (employees generally get a guaranteed wage whereas independent contractors usually get a flat fee); and the extent to which the worker can realize a profit or loss (an independent contractor can make a profit or a loss on a job).
  3.  Type of Relationship. Are there written contracts or employee type benefits? Additionally, relevant facts include the permanency of the relationship and whether the services performed by the worker are a key aspect of the regular business of the organization.

Businesses must weight all these factors when determining whether a worker is an employee or independent contractor. While some factors may indicate an employment relationship, others may suggest that the worker is an independent contractor. Unfortunately, there is no magic combination or set number of factors that make a worker one or the other. Since it is the entirety of the circumstances that must be considered, no one factor stands alone. Moreover, since each situation is specific, factors which may be relevant in one case may not be relevant in another.

This analysis must be undertaken for each individual worker or category of worker. Since different circumstances can affect the relevancy of any specific fact, it is very difficult to develop a one-size-fits-all approach to making this determination. The key is to look at the entire relationship, including any specific or unique facts, and consider the degree or extent of the right to direct and control.

Given the severity of the consequences for improperly classifying a worker, it may be necessary to seek the assistance of a licensed professional. Alternatively, a business or a worker may request a determination by the IRS by submitting Form SS-8 to the IRS; however, it can take up to six months to get a response. In any event, guessing at the right answer, or even worse, deliberately misclassifying workers can result in severe consequences. And, given the government’s renewed focus on finding violators, the chances of proceeding undetected have significantly decreased.

If you would like more information, 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.

Did You Know? January 2010

Did you know that the need for spoilage coverage extends beyond food-based risks? If your business has any stock that would be destroyed or rendered unusable due to an extended loss of power, then you would be wise to consider coverage that protects this perishable stock.

Spoilage coverage is designed for any business that processes, stores, or sells perishable items that must be maintained under controlled conditions to avoid damage. This insurance applies to both properties owned by you and the property of others that is in your care, custody, or control (as long as the property is located at the insured’s premises).

There are two coverage options, both or either of which may be obtained:

  • breakdown of equipment and contamination; and
  • power outage.

The breakdown or contamination option covers spoilage caused by the breakdown of refrigeration, cooling, or humidity control equipment, as well as damage from refrigerant contamination. The power outage option covers interruption of power, whether the source of the outage is on or off the premises.

Property covered under this insurance is valued using the same valuation method that applies to personal property in a commercial property policy. However, insureds can opt for another method that uses the “selling price” of the product for valuation purposes. This option assigns value to the stock based on the amount for which the insured was selling the product, less any applicable discounts and usual expenses.

If a refrigeration maintenance agreement is in place, an insured can receive a rate credit on the breakdown/contamination coverage. However, the agreement must be maintained in full force throughout the policy term for the rate credit to apply.

Businesses that may have a spoilage exposure include:

  • Restaurants, bakeries, and ice cream operations
  • Fruit and vegetable retailers
  • Grocery stores, convenience stores, and butchers
  • Florists, nurseries, and greenhouses
  • Pharmaceutical operations
  • Cigar stores
  • Exotic fish stores
  • Candy stores
  • Blood banks
  • Laboratories
  • Cold storage warehouses

If your business is vulnerable to the risks covered by a spoilage policy, you need to protect it from the potentially devastating losses that can occur should such an event occur. To talk to a Setnor Byer Risk Management professional about spoilage coverage, or any particular risk that your business is vulnerable to, please contact our office, and a member of our team will be happy to assist you.

Insuring Against Claims Brought Under the Fair Labor Standards Act

Employers face numerous federal laws that govern the employment relationship. These laws, such as Title VII of the Civil Rights Act, the Family and Medical Leave Act, and the Americans with Disabilities Act, impose requirements on employers regarding the manner in which they interact with their employees. If these requirements are overlooked, employers can expect to be called upon to pay a potentially substantial damage award to the aggrieved employee. While avoiding a violation of all applicable employment laws is the goal of every organization, there is one law which employers should be concerned about above the others—the Fair Labor Standards Act.

The Fair Labor Standards Act (FLSA) is the federal law that establishes the minimum wage and that governs the payment of overtime compensation. Its broad applicability, the manner in which it was drafted, and its complex and highly technical requirements, make it one of the most feared federal employment laws. The significance of potential FLSA violations has only increased since the economy began taking a turn for the worse because the ever-increasing number of laid-off employees has served to increase the number of potential plaintiffs.

The FLSA has been described as the perfect plaintiff’s law. Consider that in most cases, the FLSA’s attorney’s fee provision operates to only benefit the employee. Under the FLSA, an employer who successfully defends an employee’s claim is typically not entitled to an award of attorney’s fees. The FLSA also allows a single employee to file a lawsuit on behalf of all similarly situated employees. Under the FLSA’s collective action provision, the burden a plaintiff must satisfy before being authorized to notify all potential class members is relatively low. This means that an employer may be faced with the prospect of defending a collective action involving dozens, or even hundreds, of current and former employees.

In addition to the procedural benefits afforded employees under the FLSA, the complexity of the law itself serves to increase the level of concern faced by employers. Unlike laws that prohibit discrimination or harassment, which are relatively easy to understand, the FLSA is replete with complex and technical provisions which, in many cases, are counterintuitive. For example, when does the amount of time an employee spends on a break constitute hours worked? If an employee is compensated at two or more different rates, how is the overtime calculated? When can an employer make salary deductions without jeopardizing the employee’s exempt status? If an employee violates company policy and works overtime without permission, does the employer have to pay the employee overtime? In many cases, the answers to these questions cannot be obtained by relying on common sense. So, in addition to being relatively plaintiff-friendly from a procedural standpoint, the FLSA’s complex and highly technical nature increases the likelihood of a violation.

Given the confluence of these factors, it should not be surprising to discover that literally thousands of lawyers and law firms have developed a niche practice involving nothing more than filing lawsuits under the FLSA. These firms seek out recently laid-off employees for the purpose of putting their former employer’s compensation practices under a microscope. And in most cases, the employer’s attorney will likely recommend settling the lawsuit as soon as possible.

Electing to settle the lawsuit early is virtually predetermined by the FLSA itself. In most cases, the employee will be entitled to a relatively small amount of unpaid wages. The real evil lurking behind the lawsuit is the attorney’s fees. Almost immediately after filing the lawsuit, the amount of attorney’s fees that the employee will be entitled to receive from the defendant-employer likely dwarfs the amount that may have been due the employee under the FLSA. This amount does not include the amount the employer will have to pay its own attorney. From a purely economic standpoint, it makes more sense to settle the case early for $10,000 and be done with it, than it does to litigate the case by paying at least twice that amount for the employer’s own attorney, and still face the prospect of having to pay the employee’s damages plus the employee’s attorney’s fees. Thus, the most common course of action is to settle the lawsuit, even if the employer has a valid defense to the employee’s allegations.

These reasons, coupled with the surge in lawsuits brought under the FLSA, compelled many insurance companies to exclude claims brought under the FLSA from standard employment practices liability insurance (EPLI) policies. Since the numbers simply did not support insuring against FLSA claims, FLSA exclusions found their way into virtually every EPLI policy.

However, some insurance companies are beginning to offer defense coverage for FLSA claims in their EPLI policies once again. Although the coverage may be subject to a sub-limit, some coverage is being provided nonetheless, oftentimes at very reasonable premium rates. By purchasing this coverage, employers no longer need to be held hostage by the plaintiff-friendly FLSA. The existence of such coverage gives employers, through their insurance company, the option of actually defending against such claims rather than being forced by the economies to settle. In the current economy, no amount of money is considered disposable, and by obtaining an EPLI policy that offers coverage for FLSA claims, employers no longer have to feel compelled to buy their way out of a lawsuit brought under the FLSA.

If you would like to learn more about obtaining an employment practices liability insurance policy to insure against FLSA claims, contact us.

Did You Know? Employee Dishonesty

Did you know that eight out of ten crimes against businesses are carried out by employees? Workplace fraud and employee theft are more prevalent than ever: It is estimated that the average American business loses six percent of its total annual revenues due to some form of employee fraud. Small businesses are particularly vulnerable to occupational fraud and abuse because they usually cannot afford extensive safeguards against these risks, nor can small firms easily absorb the large losses to which employee fraud and theft can lead.

Most business owners prefer to think of their employees as loyal, trustworthy and honest, and are unwilling to accept the reality that those whom they regard as “family” might be stealing from them. But there are many reasons why an employee may be tempted to defraud an employer, not the least of which is financial pressure on the employee. Also, a dishonest employee may attempt to rationalize a crime with such excuses as “The company will never miss this money” or “This isn’t really stealing because I’m not being compensated as I deserve.”

Typically, losses attributable to employee fraud can range from relatively small, one-time thefts to long-term schemes that go undetected for years. Statistics indicate that the average length of time that an employee fraud goes undetected is eighteen months, during which time an employer can lose enormous sums of money. That’s why early detection of employee fraud is vital. To protect against this ever-present risk, companies would be wise to establish loss prevention programs that include training in fraud prevention and detection for all managers.

Additionally, sound controls must be in place to prevent employee fraud, with thorough reviews of these loss control practices occurring regularly.

But no loss prevention program is foolproof, which is why all companies ought to obtain separate employee dishonesty insurance coverage. Under virtually all commercial property policies, employee dishonesty coverage, also known as employee theft coverage, is a standard exclusion. But employee dishonesty insurance is specifically designed to protect an employer from financial loss due to the fraudulent activities of an employee or group of employees, including such employee-driven crimes as embezzlement and internal theft. No business owner wants to believe that employee dishonesty insurance is necessary, yet without such coverage, a business is severely exposed to potentially devastating losses. That’s why no business insurance program is complete without appropriate employee theft coverage.

To learn more about how you can protect your business from employee dishonesty, contact us.

The Downside and Economic Risk of Email, Web and Other Digital Communications

The ease with which a brick and mortar business can transform into an e-commerce operation, at least to some degree, can be startling. What was once accomplished face-to-face is now done virtually. What was once kept in a filing cabinet is now stored on electronic databases. Pens and stamps have been replaced by PINs and clicks. In the blink of an eye, even those who swore they would never do business in the cyber-world are now making considerable efforts to expand their business by establishing a virtual presence.

Even those who do not consider their business to be a typical online operation are finding that more and more of their processes are being done electronically. Those who would readily dismiss the suggestion that their operation is technology-based routinely rely on the Internet, email, computers, networks, databases, online storefronts, and even their own websites to conduct and expand their business.

Since such a transformation in business practices often leads to new liability and damage exposures that were previously nonexistent, it is not uncommon for businesses to find that they have outgrown their insurance coverage. This is understandable since those charged with managing risk typically focus on the traditional exposures ordinarily covered by an organization’s general property and liability insurance policies. Unfortunately, in the context of risks associated with the use of technology in commerce, these policies do not offer the protection required to keep pace with developing business practices.

The risks associated with the use of technology in commerce can be significant, and if they are not properly mitigated and insured against, the consequences may be devastating. Thus, it is important for every business to conduct an audit of potential risk exposures stemming from the use of technology.

A business may be exposed to unique risks if it:

  • Generates revenue online;
  • Advertises online;
  • Maintains a website;
  • Deals with clients, customers, suppliers, partners, etc, online;
  • Relies on computers and networks to conduct business;
  • Stores and uses valuable or confidential personal information on internal or external networks or servers;
  • Outfits its sales or support staff with portable devices, such as laptops or PDA’s; or
  • Uses a computer network to control production, inventory, delivery, etc.

Perhaps the most surprising part of this list is that an operation does not need to conform to the stereotypical dot.com image in order to be exposed to traditional dot.com-like risks. The nearly universal integration of technology into the business world means that virtually every organization faces at least some technology-based exposures.

These exposures can be broadly categorized as first-party and third-party risks. First-party risks include liabilities involving data recovery, business income, denial of service, virus or hacker sabotage, and theft of system resources. Third-party risks include liabilities involving theft or disclosure of data, damage or loss to someone else’s data, media liability for website content, privacy liability, network security, malicious sabotage, malicious virus, and administrative errors.

If one of these risks comes to pass, it can be extremely expensive. For example, many states, including Florida, New York, and California have enacted laws requiring businesses to notify their customers in the event of a breach of security involving computerized personal information, such as names, social security numbers, driver’s license numbers, and account or credit card numbers. A business that stores such information electronically is at risk of having to comply with these statutes even if the business has absolutely no online retail components. The loss of a salesperson’s laptop computer containing such information may require a business to initiate the required notice protocols, the expense of which may be debilitating.

While businesses can take steps to minimize exposures, it is unlikely that any efforts will operate to completely insulate an organization from the possibility of loss. Therefore, businesses should obtain insurance that is specially designed to meet specific operations and risks. There are many insurance products which can be tailored to match exposures to coverages. Given the scope of the risk exposure, good business judgment demands that an organization look into updating their insurance coverage to cover all of their risks, not just the traditional ones.

If you would like to learn more about how we can help you obtain the necessary insurance to cover your business, please contact us.

Did You Know? July 2009

Business owners commonly agree to accept the liability of another party, in a practice known as “risk transfer.”  Contractual risk transfer is a non-insurance contract between two parties whereby one agrees to indemnify and hold another party harmless for specified actions, inactions, injuries, or damages. The ideal use and true purpose of contractual risk transfer is to place the financial burden of a loss on the party best able to control or prevent the incident leading to injury or damage. However, in practice, some parties attempt to contractually absolve themselves of responsibility for injury or damages they are solely liable for.

When entering into a contract with another company or a government entity, business owners often find themselves agreeing to insurance terms that may not be supported by their current insurance program.  In business contract situations, it is common for the parties with the most bargaining power, such as large general contractors, corporations, and government entities, to demand onerous insurance requirements from the other party to the contract. A few examples:

  • Requiring outdated additional insured endorsement language in the contract;
  • Demanding that the commercial general liability policy continue in force, with no specific termination date, even after all work has been completed;
  • Forbidding any exclusionary language for risks such as pollution, mold, or earth movement;
  • Asking for omnibus wording that essentially requires anyone and everyone be listed as additional insureds; and
  • Requiring that language in the standard certificate of insurance form be modified or deleted.

Typically, most insureds expect their commercial general liability policies to support all of the risk transfers outlined in a contract, but this is not always the case.  In fact, the coverages sought for those risks may be unavailable from the current insurance carrier or generally unavailable in the insurance marketplace as a whole. The result is that the risk is ineffectively transferred or not transferred at all, contrary to the expectations of all parties.  So, if one party to the contract does not fulfill its obligations by failing to provide additional insured status or to obtain proper coverage, litigation may result in the form of a breach of contract action. That’s why it’s essential for business owners to understand insurance requirements before agreeing to meet them. Be sure to consult your insurance agent to assist you with this analysis.

For more information about properly insuring against contractual risk transfers, contact us.