Tag: Business Strategies

Did You Know? November 2008

Did you know that your business equipment is exposed to a unique set of risks not common to other types of property? When your equipment suffers a sudden, accidental breakdown, as a result of an event like an electrical short circuit or a power surge, your business operations and income flow may stop just as quickly. Standard property insurance does not provide protection against the unique risks associated with the breakdown of equipment. Equipment Breakdown Insurance, also referred to as Boiler and Machinery Insurance, covers accidents involving electrical equipment; air-conditioning and refrigeration systems; boilers and pressure vessels, computers and communications equipment; and mechanical equipment. This insurance will pay the cost of repairing and replacing damaged equipment covered under the policy, costs that often greatly exceed the policy’s premium. Any resulting losses in business income, as well as additional costs incurred in trying to restore operations quickly, may also be covered under such a policy.

Virtually every business needs equipment to operate. If you use electricity; heat, cool, or refrigerate your premises; or manufacture goods on machines, then you do rely on some type of equipment to generate revenue for your business. When that equipment stops, so does your business.

Don’t take that chance. For more information regarding Equipment Breakdown Insurance, please contact us today.

Protect Your Business: Dishonesty Bonds

True story: A bookkeeper for a gas station began stealing from his employer, embezzling thousands of dollars in just a few months. The owner, unaware of the employee’s dishonesty, went on vacation, leaving the bookkeeper with unsupervised access to the business’s bank accounts. Upon returning, the owner discovered that the bookkeeper had absconded and that the business had suffered a huge financial loss.

If you’ve ever had to deal with employee theft, then you know what a serious threat it poses to your business. But how bad is the problem? Consider these sobering statistics:

  • According to a study by the Association of Certified Fraud Examiners, businesses lose an average of 7% of their annual revenues to fraud, a figure that translates to about $994 billion in losses when measured against the projected Gross Domestic Product (GDP) for 2008.
  • The same study revealed that businesses with 100 employees or less, because they typically have fewer fraud-detecting resources than larger companies, suffer disproportionately higher losses, amounting to a median loss of $200,000.
  • A U.S. Chamber of Commerce survey reported that one-third of business bankruptcies are due to employee theft.

Given the current state of the U.S. economy, business trend watchers predict that employee theft is likely to increase next year. And while all employers would prefer to believe that their employees are above suspicion, experts recommend that they take sensible measures to protect their businesses from this insidious “inside” threat.

Some anti-theft measures include these:

  • Hire the Right People: Conducting background checks before hiring individuals, especially those whose positions give them access to cash or credit card information, is a necessity. The process includes past employment verification, criminal background checks, drug screenings, education/certification verification, etc
  • Implement Effective Controls: Limiting access to cash and financial information, keeping certain employees’ duties separate to prevent collusion, and conducting both regular and irregular audits all make it harder for employees to steal.
  • Keep Employees Informed: Regularly explaining to employees your company’s policies and procedures on preventing, detecting, and punishing fraud, as well as reviewing the company’s ethical standards, can discourage theft.
  • Provide a Confidential Reporting System: Giving employees access to an anonymous “hotline” by which they can safely report their suspicions has reduced theft and fraud significantly in companies that have implemented such a system.

Yet, even with strict controls in place, theft and fraud happen. That’s why businesses require the protection of a Dishonesty Bond.

The Dishonesty Bond is a type of fidelity bond in which the insurer agrees to indemnify an employer for any loss the employer sustains as a result of the dishonesty of its employees. Because employee dishonesty is now regarded to be as predictable as other common business risks such as fire and liability, the Dishonesty Bond is handled more like insurance than a surety. In fact, the Dishonesty Bond is sometimes referred to as a crime policy, or, more formally, as Employee Dishonesty Coverage and is usually written on either a schedule or a blanket bond.

There are two types of schedule bonds:

  • The Name Schedule Bond, which covers only those employees listed on the schedule for a set amount accorded to that person; 
  • The Position Schedule Bond, which covers any employees occupying any one of the positions listed on the schedule for a set amount accorded to that position.

The other type of Employee Dishonesty Coverage is the blanket bond, which covers all of the insured’s employees without specifically naming them.

The two bond forms each have their advantages and disadvantages, so employers must choose the form that best addresses their particular risks. An insurance professional will assist employers in selecting the right coverage, as well as explain the terms of a policy, including:

  • Eligibility;
  • Types of losses covered;
  • Liability limits; and
  • Continuity of coverage.

Dishonesty Bonds are relatively easy to obtain and not that expensive; smart employers would do well to consult their insurance specialists if they do not have coverage already.

Any business can become a victim of employee theft, so don’t wait until your company is hit. Protect the business you have worked so hard to build.

Did You Know? October 2008

Did you know that in the event of a disaster, business interruption insurance can be just as vital to the survival of your business as coverage for your building and its contents?

While many business owners are concerned about property damage and the accompanying financial loss that can result from a disaster, they often neglect to protect themselves against the impact such damage could have on their revenue stream. That’s why they should consider acquiring business interruption insurance, which covers reductions in net income and provides an organization with the funds needed to pay normal operating expenses. Remember that a forced temporary closure of your business does not mean that your expenses stop. Payroll, mortgage/rent payments, money owed to suppliers, taxes, and even your own salary draw are all necessary expenses that you must meet. Business interruption insurance will keep needed capital flowing when you need it the most.

Extra expense insurance is also available to cover those expenses over and above normal operating costs that your company may incur as a result of maintaining operations during the repair/reconstruction period. Extra expenses are those that would not have been incurred had there been no loss or damage to your property, including the costs associated with relocating your business, such as renting space in a temporary location, advertising the new location, and obtaining additional equipment and supplies to sustain operations.

You have worked hard to establish your business and make it profitable. Being forced to suspend operations because of a fire, hurricane, or any other disaster has the potential to cause severe financial hardship. Adding business interruption coverage to your current insurance program is a prudent measure that can ensure that your company remains operational in the most difficult of circumstances – the times when the value of having the right insurance coverage becomes immeasurable.

Is Crime On Your Menu? If So, Take It Off

You’ve often heard that crime doesn’t pay, but you should be aware that it can be quite costly when it occurs at your place of business.

According to the Federal Bureau of Investigation, approximately 1.5 million violent crimes occurred in the United States in 2007. Usually, it is the criminal justice system that metes out punishment to perpetrators, most often in the form of incarceration; occasionally, however, a victim may file a civil lawsuit to recover money damages from a perpetrator. In any event, it might seem that violent crimes generally involve only victims and assailants.

But that is not necessarily so. The dynamic may be significantly altered if the crime takes place on the premises of a food service establishment. Why? Because food service establishments, as possessors of land, owe a duty to their patrons to protect them from hazardous conditions, including the risk of suffering a criminal attack, on their premises. In fact, under certain circumstances, a food service establishment may be held liable to a victim of a crime that occurs at their establishment if it is determined that the establishment has failed to protect victims from perpetrator[s].

Notwithstanding jurisdictional variations, it is generally the case that a possessor of land who holds it open to the public for a business purpose may be held liable to those members of the public for physical harm that is caused by a third person’s intentional, harmful act when that act takes place while individuals are upon the land for a business purpose. In other words, a food service establishment may be held liable for harm that is inflicted on patrons during a crime that takes place on the establishment’s premises.

An establishment’s liability could be triggered when a patron suffers physical harm during a crime if the harm is caused by the failure of the food service establishment to exercise reasonable care:

  • To discover that such harmful acts are being done or are likely to be done; or
  • To give a warning adequate to enable the patrons to avoid the harm, or otherwise to protect them from it.

In interpreting this duty, courts have noted that since a possessor of land is not necessarily an insurer of its patrons’ safety, the possessor of land is ordinarily under no duty to exercise any care until it knows or has reason to know that the criminal acts of a third person are occurring or are about to occur. In other words, a possessor of land has a duty to take reasonable precautions to protect patrons from foreseeable criminal attacks. Whether or not a criminal attack is foreseeable often turns on the frequency with which crimes have occurred at an establishment.

One method of establishing foreseeability is to prove that the possessor of land had actual or constructive knowledge of a particular assailant’s inclination toward violence. Another method is to prove that the possessor had actual or constructive knowledge of a dangerous condition on the premises that was likely to cause harm to a patron. If the place or character of the business, or its experience with crime on the premises, is such that the establishment should reasonably anticipate criminal conduct on the part of third persons, either generally or at some particular time, the establishment may be under a duty to take precautions against it, and to provide reasonably sufficient personnel to afford reasonable protection to patrons. Simply put, if a criminal attack on a patron is foreseeable, then the food service establishment has a duty to protect its patrons.

It is also important to note that this duty to protect has often been extended to ensuring the safety of the parking area and to providing a safe and suitable means of ingress and egress. In appropriate circumstances, this duty may require the implementation of safety and security measures that include employing on-site security personnel, installing video surveillance equipment, and erecting a fence to protect the parking and the entrance areas. Whether an establishment’s protective measures are deemed “reasonable” will depend to a significant degree on the circumstances.

The statistics prove that anyone can be a victim of crime. Nevertheless, people often believe that it happens only to someone else. While this perception may provide some level of comfort as you go about your everyday life, such thinking does not reflect sound business judgment. In the event you fail to do everything in your power to mitigate patrons’ risk of being victims of crime on your premises, you may find that you have also been the victim of a crime – even though it really did happen to someone else.

“Have a Nice Trip, See You Next Fall”: Why Food Service Establishments Aren’t Laughing

The classic routine in which a hapless person “slips on a banana peel” has been a staple of comedy guaranteed to elicit laughter from an audience. Unfortunately, there is nothing funny about watching a similar scene unfold in real life, especially when the person falling down is a patron being seated for dinner or picking up food from a take-out counter.

Transitory foreign substances – banana peels, if you will – pose a significant risk to patrons in the front of the house and are a leading cause of slips and falls. Unlike other businesses, food service establishments play host to many conditions that exponentially increase the risk of slips and falls, including constant food and beverage service, hurried service personnel, and inattentive patrons. Although it is unlikely that a banana peel will be the culprit, the presence of slippery conditions should place all food service establishments on high alert for potential slip-and-fall situations.

A patron injured in a slip-and-fall accident will often file a negligence lawsuit against a food service establishment, and it is not uncommon for a successful plaintiff to obtain a judgment in excess of $100,000. Given such significant risk exposure, food service establishments must know their duties under the law with regard to protecting their patrons from hazardous conditions, as well as take the steps necessary to protect their bottom line from adverse judgments.

Slip-and-fall cases are traditionally based on the duty that a possessor of land owes to a business visitor who is invited to enter the premises for the purpose of conducting business with the possessor of the land. Legally speaking, such a person is considered an invitee, and, under common law, a possessor of land owes a legal duty to protect invitees from hazardous conditions.

Although each state’s common law may have its own peculiarities with respect to defining the precise duty a possessor of land has to protect its invitees, the general duty can be restated in the following manner:

A possessor of land (in this case, a food service establishment) is subject to liability for physical harm caused to his invitees (patrons) by a condition on the land only if:

  • he knows or by the exercise of reasonable care would discover the condition, and should realize that it involves an unreasonable risk to such invitees; and
  • he should expect that they will not discover or realize the danger, or will fail to protect themselves against it; and
  • he fails to exercise reasonable care to protect them against the danger.

In the context of a transitory foreign substance, such as a spilled beverage or a spot of grease that has not been cleaned up properly, it is fair to assume that in many cases, the substance will create an unreasonable risk to patrons that they would not discover unless it is brought to their attention, thereby typically satisfying the second element. Similarly, if the establishment were to fail to clean up the slippery substance, or otherwise fail to warn patrons of the dangerous condition despite knowing of its existence, it is fair to say that the third element would also be satisfied.

That leaves the first element: whether the food service establishment knows of, or by the exercise of reasonable care would discover, the dangerous condition. In most cases, food service establishments have a policy of cleaning up slippery surfaces immediately after discovering the condition. Therefore, determining whether an establishment cleaned up a known transitory foreign substance is usually not a matter of significant debate. Yet, should a food service establishment be shown not to have a practice of cleaning up slippery surfaces upon discovery, it may find itself in quite a lot of trouble.

The stickiest issue, then, is usually the determination of whether the food service establishment should have discovered the dangerous condition before it caused injury to a patron. In turn, this issue raises another: a possessor of land’s duty to inspect the premises. Generally speaking, the possessor of land must act reasonably to inspect the premises to discover dangerous conditions. Precisely what is considered reasonable in any given situation depends on the circumstances.

For example, consider a crowded restaurant/bar packed with people on a weekend evening. It may be reasonably assumed that its restrooms will receive significant traffic, thus increasing the likelihood of wet or slippery floors. If a patron were to slip and fall in the restroom, the establishment would have a difficult time defending its position if the restrooms had not been inspected or cleaned since opening for business earlier that day because such a lapse would likely not be considered the exercise of reasonable care to discover dangerous conditions. Conversely, an establishment that takes seriously its duty to protect its patrons would likely implement a policy of inspecting the restrooms several times during the night, with more frequent inspections during the busiest hours.

A food service establishment’s duty to protect its patrons, including the duty to reasonably inspect the premises, may also be found in a state’s statutes. For example, Florida’s statute provides that “the person or entity in possession or control of business premises owes a duty of reasonable care to maintain the premises in a reasonably safe condition… which includes reasonable efforts to keep the premises free from transitory foreign objects or substances that might foreseeably give rise to loss, injury, or damage.” Louisiana has a similar statute requiring reasonable efforts to keep the premises free of any hazardous conditions. Both of these statutes implicitly require reasonable inspections to discover dangerous conditions as soon as is reasonably possible.

According to common law or in some instances state statutes, a food service establishment is required to remove a dangerous transitory foreign substance immediately upon discovery, or at least place adequate signs warning patrons of the dangerous condition. Such long-standing requirements have been widely acknowledged, if not always followed. Of equal importance, though often overlooked, however, is the duty to inspect the premises to discover dangerous conditions before an injury occurs. It is in precisely this circumstance that many owners find that they have failed in their duty, and, consequently, where juries typically decide that a judgment in favor of the injured patron is warranted. For operators of food establishments, when it comes to transitory foreign substances, what you don’t know can actually hurt you.

“Slippery When Wet”: Preventing Falls in Food Service Establishments

When asked to identify workplace hazards, people tend to recall extreme situations, such as collapsed mines or chemical explosions – incidents that make front-page headlines. Yet statistics show that employees face the greatest risk from falls, which can occur in any workplace – including yours.

According to the Bureau of Labor Statistics’ (BLS) Injuries, Illnesses, and Fatalities program, falls make up a significant percentage of nonfatal injuries in the workplace. Since 2003, the BLS has recorded approximately one quarter of a million nonfatal injuries per year that have resulted from employee falls in the workplace. In 2006, the BLS reported 151,750 nonfatal injuries from employee falls that caused them to miss work. Additionally, the BLS reported almost 800 employees died in 2006 due to a workplace fall.

Although falls can occur almost anywhere, some workplaces, by their very nature, pose a greater risk of falls than others. Food service establishments certainly fall within this category, particularly in back-of-the-house areas such as kitchens and storage rooms. Many of the risk factors for falls are found in food service establishments: frequent spills, slippery floors, and hurrying employees.

The good news is that the risk of falls in food service establishments can be significantly reduced, if not eliminated, by implementing a slip prevention program that includes the following elements:

  • Slip-Resistant Flooring: Slips and falls occur most often when an individual loses traction on a slick floor. The degree of traction afforded by a particular flooring surface can be measured by calculating the surface’s coefficient of friction. A higher coefficient of friction means more traction. Based on a study performed by the University of Michigan, the Occupational Safety and Health Administration (OSHA) noted that a coefficient of friction of 0.5 is recommended as a baseline for effective slip resistance. However, according to OSHA, a higher coefficient of friction may be necessary in certain workplaces. Thus, a food service establishment should consider installing flooring surfaces that provide the highest possible coefficient of friction for that workplace
  • Floor Coverings Made of Non-Slip Materials: Non-slip matting or floor coverings should be placed in all areas that routinely get wet. Areas exposed to oily or greasy substances, such as the floor around stoves and deep fryers, may require special matting specifically designed to maintain a high coefficient of friction even when these areas become greasy. Establishments that cannot afford to install slip-resistant flooring can use non-slip matting or floor coverings that provide better traction. And even workplaces that have slip-resistant flooring should use non-slip matting in areas regularly exposed to water or other slick substances.
  • An Appropriate Footwear Policy: Food service establishments should require that staff members wear slip-resistant shoes that provide a high coefficient of friction. The appropriate slip-resistant footwear may depend on the type of flooring surface in the establishment, so employers should determine which type of footwear is most suited to their workplace and make it a part of an employee’s required uniform.
  • Clean, Dry Walking Surfaces: OSHA regulations regarding walking surfaces require that employers keep floors clean and dry at all times, which can be accomplished by having in place a procedure for regular cleaning and drying of wet walkways. Additionally, an establishment’s maintenance policy should require the immediate cleanup of all spills. Employees must be trained in the proper methods of cleaning slick or oily surfaces and should be provided with the proper cleaning materials, such as warm water, brushes, wet/dry vacuum cleaners, and degreasing solvents.
  • Prominently Placed Warning Signs: In the hurried environment of a commercial kitchen, immediate cleanup may not always be possible. In such instances, signs that warn patrons and employees of wet floors or dangerous conditions should be used.
  • Sensible Service Policies: Anyone who has ever worked in a food service establishment knows that customers want their food immediately. However, harried employees under pressure to serve food and beverages quickly are at a significantly higher risk of falling themselves or of inadvertently increasing the risk of fall for others by spilling food or beverages they are carrying. Establishments must make sure that service policies encourage employees not to sacrifice safety for speed.
  • Consistent Rule Enforcement: It’s a given that anti-slip policies will protect employees and patrons only if rules are consistently enforced. Non-slip matting is useless if it is not properly placed, cleaned, and maintained. Warning signs serve no purpose if they are not placed when and where they are needed or if they have been left out so long that they are routinely ignored. And if employees are not reprimanded for wearing the wrong shoes, then a safe footwear policy becomes meaningless. Maintaining a safe workplace requires vigilance. Employees who repeatedly fail to abide by the rules created to protect them must be retrained, and, when necessary, appropriately disciplined

Workplace slips and falls can have dire consequences, resulting in serious, even fatal, injuries to employees, as well as damage to employers in the form of increased employee turnover, declines in productivity, and increased workers’ compensation costs. When employers make a coordinated and consistent effort to reduce the risk of slips and falls in the workplace, the benefits to both employees and the business itself exceed the costs associated with implementing fall prevention practices.

The “Intentional Act” Exclusion: A Chink in the Armor of Workers” Compensation Statutes

In addition to increased productivity, the Industrial Revolution brought with it the unwanted consequence of increased workplace injuries. The explosive growth in industry made the workplace increasingly dangerous, and the frequency and severity of workplace injuries soared. As the number of injured workers increased, so too did the number of lawsuits against employers. The result was an inefficient, time-consuming, and costly judicial process that did little to address the problems encountered by employers and their injured employees.

The State of Washington echoed these sentiments in its workers’ compensation statutes by noting that “the common law system governing the remedy of workers against employers for injuries received in employment is inconsistent with modern industrial conditions. In practice, it proves to be economically unwise and unfair…The remedy of the worker has been uncertain, slow and inadequate. Injuries in such works, formerly occasional, have become frequent and inevitable.”

In response to a judicial system that no longer met the needs of those it sought to serve, states began enacting workers’ compensation laws in the early 1900s. The dual goals of providing for injured employees and of reducing employer/employee litigation served as the foundation for many of today’s workers’ compensation statutes.

States achieved these goals by opting for a legislatively mandated allocation of risk that employed a two-pronged approach: compelling employers to provide for injured employees outside of the traditional tort system, and prohibiting injured employees from suing their employers for workplace injuries. Employers and employees were forced to accept this statutory compromise known as the “compensation bargain,” an arrangement based on a mutual renunciation of common law rights and defenses by employers and employees alike.

On one hand, employees enjoy the benefit of what is essentially a no-fault workers’ compensation system that offers prompt medical attention and benefits regardless of any fault on the part of the employee. Consequently, employers are prohibited from asserting any defenses against the injured employee seeking compensation, effectively making employers strictly liable for injuries suffered by their employees.

However, in exchange for providing this no-fault insurance, employers benefit from the statutory removal of injury-based employer/employee lawsuits from the common law tort system. An example of this is illustrated in West Virginia’s workers’ compensation statute, which provides that the “enactment of… the workers’ compensation system in this chapter was and is intended to remove from the common law tort system all disputes between or among employers and employees regarding the compensation to be received for injury or death to an employee… .”

Such a provision theoretically protects an employer from being sued by an injured employee who claims, for example, that the employer’s negligence caused the workplace injury. Recall that under the compensation bargain, the injured employee relinquishes the right to sue for potentially greater, although uncertain, damages via a common law negligence claim in exchange for the right to automatic and prompt workers’ compensation benefits.

The chosen method for removing employee injury claims from the common law was by granting employers immunity from any such lawsuits or, alternatively, by mandating that the benefits provided under a state’s workers’ compensation laws are the exclusive remedy available to an injured employee. Regardless of which method is chosen, the substance and effect are the same, and the benefits of taking such cases out of the traditional common law tort system are realized.

In describing these benefits, one state’s supreme court noted that “in return for accepting vicarious liability for all work-related injuries regardless of fault, and surrendering his traditional defenses and superior resources for litigation, the employer is allowed to treat compensation as a routine cost of doing business which can be budgeted for without fear of any substantial adverse tort judgments. Similarly, the employee trades his tort remedies for a system of compensation without contest, thus sparing him the cost, delay, and uncertainty of a claim in litigation.”

Compliance with the letter and spirit of the compensation bargain is essential to maintaining the benefits both parties enjoy. Many states, recognizing the importance of maintaining this balance, have withdrawn any immunity an employer may have been entitled to if the employer fails to obtain the necessary workers’ compensation coverage, thus freeing the injured employee from his or her obligation to abstain from suing the employer under a traditional common law theory.

However, despite the compensation bargain, injured employees, or their personal representatives in cases involving the employee’s death, have routinely tried to sue their employers by claiming that the employee’s injury or death was the result of an intentional act. If an employee’s cause of action succeeds, then his or her employer will generally lose the immunity it enjoys under the workers’ compensation laws.

This loss of immunity is consistent with the general policy against allowing an individual to insure against the consequences flowing from an intentional act. The concern is that if an individual were permitted to insure against a loss brought about by an intentional act, then there would be no incentive or deterrent to keep that individual from intentionally harming another. In other words, how effective would the prospect of incarceration be if a criminal was able to have another serve his or her prison term? Such is the reasoning that underlies the intentional act exclusion.

Although intentional act exclusions are commonly found in workers’ compensation statutes or state judicial opinions, the precise articulation and application of these provisions can vary. Some states, like Louisiana, provide that “worker’s compensation [is] an employee’s exclusive remedy for a work-related injury caused by a co-employee, except for a suit based on an intentional act…which means the same as an intentional tort.” The statute defines intent to mean that the person who acts either “consciously desires the physical result of his act, whatever the likelihood of that result happening from his conduct, or knows that that result is substantially certain to follow from his conduct, whatever his desire may be as to that result.” Simply stated, intent in Louisiana refers to the consequences of an act rather than to the act itself.

Florida uses a slightly different approach. Like Louisiana, Florida waives workers’ compensation immunity for any injury or death caused by an employer’s intentional tort. The existence of an intentional tort, which must be proven by the heightened standard of clear and convincing evidence, can be established in two ways. The first way simply requires proof that the employer deliberately intended to injure the employee. The second way requires proof that the employer engaged in conduct that the employer knew, based on prior similar accidents or on explicit warnings specifically identifying a known danger, was virtually certain to result in injury or death to the employee. Additionally, there must be proof that the employee was not aware of the risk because the danger was not apparent, and that the employer deliberately concealed or misrepresented the danger so as to prevent the employee from exercising informed judgment about whether to perform the work. This is a significant obstacle to overcoming Florida’s workers’ compensation immunity.

West Virginia’s statute makes overcoming workers’ compensation immunity similarly difficult by requiring an injured employee to prove “deliberate intention,” which is a legal term of art encompassing numerous (and effectively higher) standards of proof that the employee must meet.

The considerable hurdles that stand in the way of overcoming workers’ compensation immunity reflect one of the central aims of the compensation bargain: that workplace accidents be addressed outside of the traditional common law framework, regardless of the severity of the injuries they cause. However, the fact that an employer will not be shielded from liability for “intentionally” injuring an employee, regardless of how that term is defined in a particular state’s statute, should serve to remind employers that their employees are not disposable assets that can be casually placed in harm’s way. Employers should become familiar with the duty of care owed to employees and should abide by that duty to be assured of enjoying the benefits of the compensation bargain.

How Secure is Your Security Blanket?

Too often, when shopping for insurance, consumers will focus most of their attention on the amount of the premium they will have to pay rather than on the financial strength of a prospective insurance company. Unfortunately, those who focus primarily on premium rates may find that they have “backed the wrong horse,” so to speak, and could wind up suffering big losses.

Although the cost of insurance is certainly an important factor when seeking coverage, the financial strength of an insurance company can prove to be the most significant factor of all, especially in instances when a financially weaker insurance company is chosen over a stronger one. After all, an insurance company that becomes insolvent or bankrupt will likely not be able to pay the claims of its policyholders; if you are one of those policyholders, then your insurer’s insolvency may have serious implications for you or your business.

Conceptually, an insurance company’s ability to pay the claims of its policyholders is fundamental to the underlying purpose of insurance. The significance of premiums, deductibles, coverage limits, policy terms, and exclusions virtually vanish when the prospect of insurer insolvency surfaces. After all, what difference does the amount of the deductible make if there is no money to pay a claim?

Although it is always important to evaluate the financial strength of an insurance company, doing so takes on even greater significance during periods of national economic contraction because insurance companies face considerable obstacles during recessionary periods. Insurance companies are, after all, businesses like any other.

A business is considered insolvent when it is unable to pay its debts as those debts become due. And the debts of insurance companies are generally the claims of policyholders. Thus, when viewed from this perspective, it becomes clear that not only shareholders are injured when an insurance company becomes insolvent. Policyholders with claims may also be left holding the bag for any losses that they assumed their insurers would cover.

Although there are no guarantees that a particular insurance company will remain solvent, it is commonly understood that financially strong insurance companies are more likely to meet their ongoing obligations to policyholders than financially weak ones. That’s why a company’s solvency, in the context of being able to pay claims as they become due, is critical.

An insurance company may become insolvent for a number of different reasons, such as mismanagement, undercapitalization, poor underwriting standards, ill-advised investments of premium reserves, or overexposure to a specific risk. The existence of one or more of these conditions may increase the risk of insurer insolvency.

For example, an insurance company that elects to sell an inordinate number of wind insurance policies in coastal communities, when compared to the insurance company’s overall risk exposure, would be susceptible to a large loss in the event of a single catastrophic hurricane. In this example, the imprudent risk is that of aggregation. This is why insurers typically favor limiting their exposure to loss from a single event to a small percentage of their overall capital base. However, an insurance company that operates contrary to this logic by overexposing itself to a specific risk faces the very real possibility of being wiped out financially in the event that risk comes to pass.

Given the severity of the consequences that usually flow from insurer insolvency, there is a benefit to knowing whether or not a prospective insurance company possesses one or more of the conditions that may lead to insolvency. Unfortunately, conducting the requisite investigatory due diligence may be difficult, if not impossible, for the average insurance consumer. However, there are resources available to assist consumers with this task.

A.M. Best®, a company that evaluates and rates the financial health of insurance companies, conducts independent evaluations to form an opinion regarding an insurance company’s financial strength. Based on an evaluation of an insurance company’s balance sheet, operating performance, and business profile, A.M. Best issues its “Financial Strength Ratings,” which have been recognized as a benchmark for assessing an insurance company’s financial strength.

The Financial Strength Ratings assign letters to convey A.M. Best’s opinion as to the financial strength of a particular insurance company. Similar to academic report-cards, a higher rating suggests that, in A.M. Best’s opinion, a particular insurance company is more likely to meet its ongoing obligations to policyholders as opposed to an insurance company with a lower rating. “Secure” insurance companies are graded as Superior (A++, A+), Excellent (A, A-), and Good (B++, B+). “Vulnerable” insurance companies are graded as Fair (B, B-), Marginal (C++, C+), Weak (C, C-), Poor (D), Under Regulatory Supervision (E), In Liquidation (F), and Suspended (S).

In addition to A.M. Best, there are other rating agencies available for those wishing to investigate the financial health of prospective insurers. However, consumers should understand that each rating agency may use different standards, processes, and methods to rate insurance companies. Despite the fact that many such agencies may use some form of alpha-rating methodology, not all “A” ratings are necessarily created equally. Consumers should investigate not only the methodology used by their rating agency of choice but also its reputation in the insurance and financial industries. As usual, the more information insurance consumers obtain at this stage of the purchasing process, the better off they will likely be.

Regardless of which system is used, it is important to note that a rating is not intended to be a guarantee of an insurance company’s financial strength. The ratings merely reflect opinions based on detailed evaluations. Consequently, a higher rating does not guarantee solvency, nor does a lower rating necessarily demand insolvency. This is because the ability to predict an insurance company’s future solvency falls short of mathematical precision. Insurance companies must rely on probabilities, not absolutes when underwriting risks and setting premiums. When calculating such probabilities, insurance companies generally apply a mathematical theorem known as the law of large numbers. If the predicted probability of a loss is high, then the insurance company will either charge a higher premium or reject the risk outright.

However, unknown or unanticipated risks may compromise the predictability provided by the law of large numbers. Since these risks were unknown, the actuarial science initially used to calculate the risk is undermined. In such cases, even insurance companies with the highest ratings may not be able to survive a deluge of unanticipated claims for which premiums have not been collected and reserves have not been allocated.

Given the inherent imprecision of insurance underwriting, it is unlikely that forecasting the likelihood of continued solvency will ever be sufficiently predictable so as to warrant a guarantee. Nevertheless, the wisdom of considering a prospective insurance company’s financial strength should never be dismissed, and at least a cursory review of the insurer’s financial rating should be undertaken.

It is worth noting that insuring with a highly rated insurance company is not always a viable option. One reason is that the security provided by a highly rated company often comes at a price, usually in the form of higher premiums. For many consumers operating on a fixed budget, going with an A-Rated insurance company may be cost prohibitive.

Another obstacle that consumers may encounter is the fact that many A-Rated companies are simply not offering the type of insurance coverage being sought. For example, in light of the devastating hurricanes of a few years ago, many homeowners living in coastal communities have experienced great difficulty finding insurance companies willing to insure against wind damage. In such cases, many consumers simply do not have the option of going with a highly rated insurance company.

Despite any obstacles that may stand in the way of obtaining insurance from a highly rated company, consumers should nonetheless add the financial strength of prospective insurers to their list of factors to consider when purchasing insurance. By doing so, you may increase the likelihood that the insurance company that is always there to collect your premiums will also be there to pay your claims.

When Are Accidents Preventable? A Guide for Organizations Seeking to Minimize Losses and Keep Auto Insurance Rates Reasonable

Every organization’s risk manager dreads a phone call like this from one of the company’s drivers:

“I’ve been in an accident. I’m okay, and so is the other driver, but my vehicle is totaled. It wasn’t my fault, though – the other car just came from nowhere!”

Of course, you’re relieved no one was hurt, but you can’t help thinking with chagrin, “This could cost us a lot of money.”

And you have good reason to be concerned. Aside from the cost of replacing the vehicle and the likely disruption in business operations, you’re worried that another claim against your commercial auto policy could result in a substantial increase in your premium.

That’s why the time to act is before you send your drivers out on the road, and that means having in place a robust loss control and safety program that includes training drivers in accident avoidance. And since the objective of all safe driving courses is to teach drivers to prevent accidents from happening in the first place, drivers must be taught the concept of preventability.

Preventability is the basis for determining whether an accident could have been avoided in spite of any adverse driving conditions and in spite of any unsafe practices on the part of the driver who caused the accident. In other words, even if a driver is not ticketed for or charged with causing an accident, that doesn’t necessarily mean that the accident was not, from the driver’s perspective, preventable.

It should be made clear that preventability is not, in this context, a legal concept used to determine fault or establish negligence. Instead, preventability is a determination based on the belief that driving safely and minimizing the risk of accidents requires consistent adherence to defensive driving principles and techniques endorsed by the National Safety Council.

Of course, given the many factors involved in auto accidents, establishing specific criteria for determining when an accident should be deemed preventable is difficult. Nonetheless, managers must have in place standards for preventability that they explain clearly to drivers and that they apply consistently and impartially when assessing drivers’ performance.

Negotiating Intersections

It’s well known that many accidents occur at intersections, and while you might assume that even safe drivers are powerless against drivers who run red lights or stop signs, that’s not the case. A basic principle of defensive driving is that drivers should approach, enter, and cross intersections in a manner that compensates for other drivers’ failure to obey traffic signs or conform to traffic laws.

Here’s a perfect example: After the light at an intersection turns green, a driver immediately accelerates and is then struck by another vehicle, coming from the opposite direction, that has run a red light.

The driver whose vehicle was struck will not be charged with the accident, as it is clear that it was the other driver who broke the law. But the accident might still have been prevented if the driver not at fault had paused, looked to the left, to the right, and then to the left again before proceeding. In other words, that driver could have prevented the accident by allowing for the other’s recklessness.

That’s why defensive drivers, when they encounter the complex traffic flow, blind spots, and illegal maneuvers of other drivers that are all too common at busy intersections, can prevent accidents by proceeding with caution.

When Cars Collide

The key to preventing front-end collisions rests largely on whether drivers observe the proper following distance at all times. In ideal road conditions, a driver should maintain a two- to three-second following distance between his or her vehicle and the one immediately ahead; in bad conditions, an even greater following distance is recommended.

Nighttime front-end collisions often occur when drivers “overdrive their headlights,” that is, they travel at a speed at which they cannot come to a complete stop within the distance illuminated by their vehicle’s headlights. Instructing drivers to stay within “the headlight zone” is key to preventing nighttime collisions.

When their vehicle is struck from behind in a classic “rear-ender,” drivers may automatically assume that the accident could not have been prevented, but experience suggests otherwise. The risk of rear-end collisions increases if the lead driver has not maintained a proper following distance with the car in front. So when a driver must stop suddenly to avoid hitting the car ahead of his or her own, and then gets rear-ended by another tailgating driver, that accident may legitimately be deemed “preventable.”

Similarly, other rear-end collisions that can be prevented include those that occur when the driver in front:

  • Allows the vehicle to roll backwards;
  • Stops too abruptly when a traffic signal changes (usually because the driver was speeding); and
  • Fails to use turn signals.

Backing accidents are almost always preventable, even when the driver reversing the vehicle is getting “help” with the maneuver. Simply put, the driver is the only person who can control the vehicle and therefore is entirely responsible for checking the vehicle’s clearance by using rear- and side-view mirrors properly and looking backward when necessary.

So what should defensive drivers do to prevent both front- and rear-end collisions? Slow down, pay attention, maintain a safe distance from other cars, and be sure to signal their intentions to other drivers.

Passing Fancies

Accidents that occur during passing maneuvers are preventable for the simple reason that the act of passing another vehicle is almost always voluntary; therefore, the passing driver is responsible for and capable of preventing accidents that could result from his or her driving decisions.

Let’s say that a driver is struck by the vehicle he or she is attempting to pass because that vehicle unexpectedly and improperly speeds up to avoid being overtaken. While the other driver has technically “caused” the accident by striking the passing vehicle, it is possible that the passing driver’s judgment will be deemed poor and the maneuver ill-considered. Such an accident is certainly preventable.

And what about when a vehicle is sideswept or cut off by another vehicle attempting to pass it? If the driver being passed has failed to yield to the other vehicle by slowing down or by safely moving to the right, then the resulting accident, though not the fault of the driver being passed, could have been prevented by defensive driving.

Safe Driving is No Accident

Of course, there are other situations in which driving defensively can prevent accidents often thought of as unavoidable, and we’ll discuss some of these in next month’s newsletter.

But it’s always a good idea to review the standards of defensive driving with those employees who operate a vehicle as part of their job.

Defensive drivers:

  • Make allowances for other drivers’ lack of skill and improper driving habits;
  • Adjust their driving to the current weather, road, and traffic conditions;
  • Compensate for the unsafe actions of pedestrians;
  • Remain alert to accident-producing situations and take every precaution to avoid accidents; and
  • Know when they must yield right of way, slow down, or stop to avoid being involved in accidents.

Adherence to these standards is in both your employees’ and your organization’s best interest.

Filling the Risk Management Gap: How Employment Practice Liability Insurance Can Protect Your Business

Consider this scenario:

An employee in your organization files a discrimination lawsuit, alleging that she was not promoted because of her gender. You’re confident that the promotion went to the better-qualified candidate and believe you have sufficient documentation to support this decision. Still, having to defend your organization against her claim in a court of law could be costly; legal fees might seriously deplete your business’s cash reserves, perhaps even lead to bankruptcy. But you were smart: Two years ago, you purchased an Employment Practice Liability Insurance (EPLI) policy, which covers precisely this sort of situation. While you’ll have to do some serious damage control with your clients and work to boost employee morale, your business is protected from devastating financial losses.

Learn more about employment liabilities with our online course “An Overview of Employment Liabilities.”

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Such a scenario is quite possible in today’s increasingly litigious business climate, in which even the most proactive employers can find themselves in violation of one of the many employment laws governing the workplace. That’s why EPLI has become an almost necessary part of a business’s insurance umbrella. EPLI protects employers in the event of such workplace claims as discrimination, wrongful termination, and sexual harassment. Generally, a policy covers eligible losses stemming from such causes of action, as well as associated litigation costs, including attorneys’ fees. And the insurer will provide the services of attorneys who specialize in defending against such claims, significantly increasing the likelihood that employers will prevail in the event litigation does occur.

Maybe you think that your business’s Commercial General Liability (CGL) policy protects you in such situations. Think again. In most cases, CGL policies specifically exclude employment practice claims. All CGL policies protect your business against losses resulting in bodily injury or property damage; employment practice claims, however, generally involve injuries that are mental, emotional, and economic in nature and are therefore outside the range of protection offered by CGL insurance.

What does an EPLI policy typically cover? Among the most common situations are:

  • Discrimination and retaliation;
  • Sexual and general workplace harassment;
  • Negligent hiring;
  • Breach of employment contract;
  • Wrongful termination, dismissal, or discharge;
  • Violations of the Family and Medical Leave Act;
  • Situations involving defamation, libel, and slander; and
  • Denial of training or deprivation of seniority.

EPLI is available in many different forms. Most commonly purchased as a stand-alone policy or as an endorsement to a Directors & Officers policy, an EPLI policy is generally available in claims-made format, meaning that the policy will cover only those claims made during its term. An EPLI policy also requires that the insured give prompt notice to the carrier as soon as the insured becomes aware of facts or circumstances that might give rise to a claim. Most EPLI policies are subject to a single-policy aggregate limit of liability covering both defense and indemnity, meaning the costs of defending against a claim will diminish the amount paid to cover settlements or judgments. Some carriers will allow an insured to purchase defense as well as policy limits, thereby placing the litigation defense costs outside the amount available for indemnity. Ultimately, the best course of action is to consult your insurance agent, who can assist you in choosing the policy that suits your business’s needs and provides you with the appropriate level of protection.

As with any liability policy, EPLI may not cover certain risks, including:

  • Risks covered by other policies, such as a CGL;
  • Intentional, criminal, fraudulent, or malicious acts;
  • Contractual liability;
  • Strikes and lockouts; and
  • Violations of the Occupational Safety and Health Act.

Of course, EPLI insurance should be considered only the last line of defense in a healthy business’s risk management arsenal. As is the case in so many situations, knowledge is power: Providing your employees with comprehensive, regular training can substantially reduce the risk that they will engage in the sort of illegal or unethical behavior that leads to litigation. Also, well-written and properly enforced Human Resources policies and procedures are essential for keeping your business in compliance with the many and varied regulations covering the workplace. A good example of the inestimable value of training in preventing employee misconduct is the decline since 2000 in the number of sexual harassment claims filed each year; the drop is often attributed to the comprehensive sexual harassment training many employers now require as a condition of employment. By contrast, one area that seems to be giving rise to more claims against employers is that of wage and hour law; given the ambiguities of some businesses’ salary classifications and overtime policies, there is more room for charges of improper treatment that can lead to litigation against an employer. And though most EPLI policies currently exclude wage and hour claims, some insurers have begun offering coverage for these claims as an extension of an EPLI policy.

The good news is that EPLI policies are practical and usually quite affordable. You should carefully examine your business’s training programs, employment practices, and compliance record to determine its degree of exposure to litigation and weigh these factors against the costs of EPLI. Such a risk inventory may make clear that the cost of an EPLI policy may be a relatively small price to pay when measured against the ruinous financial penalties that can result from employment-practice litigation.