September 2011

The economic downturn that began in late 2007 has taken a severe toll on all sectors of the U.S. economy, but it hit the real estate sector especially hard. Real estate research company Green Street Advisors reported in March 2011 that commercial property values were 17% below their peak in August 2007. CoStar Group reported that the values of the highest quality office buildings, relatively new retail and industrial properties, and apartment complexes were down 33% since June 2007. These large price decreases might attract investors in search of good buying opportunities. However, potential buyers should look beyond the low purchase price when they evaluate these properties. The properties’ physical state, legal issues, and insurance considerations also affect whether they are smart investments.

Many of these properties were only partially completed when the financial crisis hit, so buyers must assess their economic viability and physical condition. They need to ask:

• How much of the project has been completed and how much remains to be done?
• Does any of the work need to be repaired or redone because the builder, facing financial difficulty, took shortcuts in material quality or construction?
• Do the original construction plans comply with current building codes? Are there any design errors that need correction?
• Are there any significant changes the buyer would like to make to the project?
• What liabilities (debts, lawsuits, penalties, etc.) will the buyer assume with the property?
• Who will be legally liable for any defects in the design or construction of the project?
• If the original owner and builder are responsible for the problems, can the buyer recover from them?
• What insurance covered the original project? Did one program apply to the entire project, or did each individual contractor have its own coverage?
• Will the insurance apply to construction defects?
• If a single wrap-up insurance policy covered the project, did it include a deductible or self-insured retention? If so, and the insured owner or contractor has declared bankruptcy and is unable to pay it, will the insurance still apply?
• Are there special conditions that must be met before the policy will apply when the deductible or SIR cannot be paid? Does the original wrap-up policy extend completed operations coverage beyond the policy’s expiration date? If so, for how long?

Prospective buyers need to pay special attention to Builders Risk insurance on the project. If the original developer bought this coverage, the policy might have cancelled after work on the project stopped. A policy purchased by the general contractor might still be in force, but the buyer should review its terms and conditions carefully. Due to the long period of inactivity, vacancy and unoccupancy provisions might have taken effect. The buyer should also check to see if the policy covers catastrophic perils such as flood and earthquake; lost income and extra expenses resulting from delays due to covered perils such as fire or vandalism; and the extent of coverage for testing.

Regardless how low a property’s price might be, it is no bargain if it comes with a host of physical and legal problems. Arranging insurance on a property with severe problems might be very difficult or even impossible. An insurance agent or broker experienced in obtaining coverage for such properties can help sift through the issues and identify appropriate policies. There is no substitute for a careful examination of a property and all that comes with it. Buyers who do their homework will uncover the profitable opportunities.

On the opening day of the 2011 baseball season, a San Francisco Giants fan named Bryan Stow attended the Giants’ game against the rival Los Angeles Dodgers at Dodgers Stadium in L.A. After the game, as Stow tried to hail a taxi, two men accosted him for wearing Giants fan apparel and administered a brutal beating.

Violent crime is not unique to Los Angeles or Major League Baseball teams. Something like this could happen in a school, an apartment complex courtyard, or in the parking lots of a shopping mall, a convenience store, a library or a restaurant. If it is common for groups of people to gather at your business, there are a few lessons you can take from this incident.

1. The amount of liability insurance you buy matters — a lot. All businesses try to stretch their dollars, so limiting insurance costs is a natural thing to do. When a severe event like this happens on your property, however, the questions that will matter are: Will my insurance cover it? Do I have enough insurance to cover all of it? The insurance premium might seem like a minor consideration.

2. One of the most important features of liability insurance is that it covers the cost of providing a legal defense. In smaller towns, good lawyers cost a few hundred dollars an hour; in a large city like L.A., the cost is many times that. Many insurance policies provide an unlimited amount of coverage for defense costs in addition to the amount of coverage for the settlement or judgment. Check your policy or ask our agents if you’re not sure how your policy handles this.

3. Your business might have an exposure to this kind of incident even if your relationship with the location is incidental or indirect. The Stow family’s lawsuit names 19 parties and has placeholders for dozens more. Each of these parties will require legal defense and a source of funds for potential payments. Some of the parties operate parts of Dodgers Stadium, while others are part owners. The team’s principal owner is named individually and in his role as owner. In the case of a severe injury like this, the plaintiffs will look to sue anyone with any slight relationship to the incident.

4. Security, including video surveillance, is vital. Monitored security cameras can catch an incident before it begins or before it escalates to the extremes that this one did. Also, the mere visible presence of security cameras can deter some individuals from starting trouble.

5. Incidents like this can and will hurt your business. Attendance at Dodgers games was down 200,000 through the first two and a half months of the 2011 season. The median ticket price is $27, with many seats selling for much higher amounts, so it’s safe to say that the attack is at least partly responsible for more than $5 million in lost revenue. Due to the principal owner’s personal problems, the Dodgers were already in financial trouble, so this comes at a particularly bad time.

This horrible attack is, fortunately, quite rare, but violent crime is still a very real possibility. Every business owner should consider how something like this would affect the business, take precautions to prevent such incidents or make them less severe, and work with one of our insurance agents to make sure it has appropriate financial protection.

By the beginning of 2011, the social networking Website Facebook had more than 600 million users. An estimated 200 million people use micro-blogging service Twitter. The business networking site LinkedIn has reported that it has more than 100 million members. In addition, the Internet hosts millions of blogs and tens of thousands of podcasts. These sites and media, popularly known as “social media,” have opened up new ways for people and businesses to communicate with each other. As the numbers show, they have become extremely popular. Consequently, businesses are increasingly using social media to reach current and potential customers.

However, use of these services presents risks together with the potential benefits. For example:

• Employees making posts on these sites might make inaccurate statements, particularly when not all the relevant facts of a developing situation are known.
• They might inadvertently release confidential information.
• They might make statements that embarrass the company, such as negative remarks about racial or ethnic groups.
• They might make statements that violate a person’s privacy.
• Disparaging statements might provoke others to sue the company for libel. For example, if an employee of a restaurant posts on Twitter that a competitor’s stew looks and tastes like cheap dog food, the competitor might sue.
• Blog posts that offer advice might expose the employer to lawsuits if others take the advice and get undesirable results.
• Disgruntled customers, employees or competitors might post disparaging comments about the company.
• Any of these situations can harm the company’s reputation.

The company’s General Liability insurance policy might not pay for the costs of defending against these claims or paying settlements. For example, the insurance will not cover losses resulting from:

• An injury caused by or at the direction of an employee when he knew that the action would violate a person’s right to privacy.
• An injury caused by or at the direction of an employee when he knew that a statement was false.
• Claims that the business’s products or services do not live up to statements about their quality.
• Injury arising out of statements made on Internet chat rooms or bulletin boards the business owns or over which it has control
• . Unauthorized use of someone’s name or product in a manner that misleads that company’s potential customers.

In addition, the insurance only covers liability for certain types of injuries that are not bodily injuries. It will not cover a lawsuit filed by someone who suffered financially after relying on advice on the company’s blog. To reduce the chance that an uninsured loss will result from the use of social media, businesses should consider:

• Written procedures for employee use of social media, including:
  • Who may post on the company’s behalf.
  • Definitions of acceptable and unacceptable behavior.
  • Employees’ personal sites should make clear that that the employees are not speaking on behalf of the company.
  • When a discussion should move offline and into the company’s regular workflow (for example, when a customer has a specific complaint that should be handled out of public view).
  • The consequences of non-compliance.
• Company policies regarding employees’ ability to link to the company’s Website on their personal social media pages. The policy should also address employees’ use of the company name, logo, or other advertising on their sites.
• Company policies on the content that employees may post on blogs, both those of the company and others blogs where the employees post on the company’s behalf.
• Purchasing special insurance to fill in gaps left by the General Liability coverage.

Social media offers exciting new opportunities for businesses to build relationships with customers. However, they need to approach it with care and proper planning if they want to reduce the risks.