March 2012

An employee in a high school’s finance department steals $279,000 to support her gambling habit and cover her mortgage payments. A bank employee in Pennsylvania allegedly embezzles $750,000. The former CEO of a Colorado insurance brokerage pleads guilty to stealing $353,400 from the brokerage’s employee benefits plan. The office manager of a Texas law firm gets four years in prison for forging checks and depositing client payments in her personal bank account.

When people become desperate, they may succumb to temptation and turn to crime. The FBI reported that one in 28.2 employees was caught stealing from an employer in 2007, and that was before the worst of the recent economic downturn. Vendors’ employees and other visitors to an organization’s premises may also have the opportunity to steal computer equipment or network passwords.

Most business property insurance policies cover losses resulting from some types of crime. For example, they will cover the cost of cleaning up graffiti that vandals spray paint on an exterior wall or the value of merchandise burglars steal, plus the cost of repairing the damage they did breaking into the store. However, insurance companies did not design these policies to cover money stolen from a cash register or deposits never made to a bank; in fact, the policies almost never cover employee crime. For this reason, every organization should consider buying crime insurance.

Employee dishonesty insurance, often called fidelity coverage, pays for losses due to employee theft of money, securities, and other property. It covers property the organization owns or leases, property of others in the organization’s custody, and property for which the organization has legal liability. Insurance companies can provide one amount of insurance that applies separately to each loss, regardless of how many employees were involved in the theft and regardless of whether the employer can actually identify the responsible employees. Alternatively, the policy can contain a list (known as a schedule) of either employee names or positions with a separate amount of insurance listed next to each one. The policy can cover permanent, temporary and leased employees for up to 30 days or more after they terminate employment. Some companies will extend coverage to certain non-employees who may have the opportunity to commit theft, such as equipment support technicians, consultants, and vendors.

Many policies include a “prior dishonesty” clause. This immediately cancels coverage for an individual employee if the organization discovers that the employee has committed a dishonest act, including acts other than theft and acts he committed prior to his current employment. Even relatively minor dishonest acts will eliminate coverage for that employee. Some insurance companies will amend the policy to cover certain individuals on a case-by-case basis, so the employer should work with the insurance agent and company to arrange coverage.

Insurance companies offer this coverage either as a separate policy or as part of a package policy. If it comes as part of a package, the employer should carefully review the policy to determine whether the amount of insurance provided is adequate. Package policies often come with certain insurance limits built in, and they may or may not be enough for a given situation. For example, a package policy that automatically provides $100,000 coverage may be fine for the smallest of businesses, but it would have been way too small to cover the losses described at the beginning of this article.

Employees can either make a business successful or drag it down. No organization wants to believe that its workers would steal from it, but unfortunately some of them will. To make sure that they have adequate protection, all employers should work with a professional insurance agent and purchase employee dishonesty coverage. With the right insurance, the organization and its trustworthy employees will survive a large loss caused by the untrustworthy few.

How does safety pay dividends to the business owner?

Time and resources spent on developing a culture of safety repays the business in the long run. Safety cultures rely on reducing the number of workers compensation claims, in return, the odds of a disastrous claim are reduced.

Business owners with Workers Compensation experience modifications above 1.25 need to review their safety policies with professionals. It is possible one year or even one claim causes this situation; but it should not be ignored. Discover and repair the root cause.

A 1.01 to 1.25 modification indicates worse than average experience. State rates can be less than adequate for a short period of time. The actuarial or mathematical calculations just incorrectly reflect the average expected claims. Slightly elevated modifications may be caused by these issues; however, review your losses by department in these cases and see if a problem area exists.

For slightly elevated modifications, review the safety program and types of losses. Seek out a professional risk manager for help if needed. Look for patterns in the losses, and consider changes in safety equipment or procedures to reduce problem issues.

Proactively nurturing a safety culture will pay long-term dividends. Experience modifications will decrease with positive results. How?

Each state calculates Workers Compensation experience modifications independently. Many states do utilize the services of the National Council on Compensation Insurance (NCCI) to gather data and promulgate base rates and experience modifications; but each state regulates its own Workers Compensation system.

Workers Compensation experience rating predicts future behavior by analyzing past performance. It is a consequence of loss control performance, neither a reward for no losses nor a punishment for too many claims.

The generic formula for experience modifications follows some rules:

Just as payrolls are the basis for the standard premium, they form the basis for expected claims. Payroll is multiplied by an average claim factor to produce total expected claims. A discount factor is then applied to predict the potential severity of the claims. The product of this equation is expected losses. Actual medical only (MO) claims combine and report as a number of claims/total amount. Some states designate the MO claims as primary (maximum average) and excess, and then apply a discount rate to one or both of these amounts. Most states set a limit on the value of any one claim, and then discount large claims on a sliding scale. This historical claim experience is divided by expected losses. That quotient is the experience modification.

The insurance industry spends millions of dollars to find ways to predict the future. Loss analysts discovered one important fact: the best predictor of future claims is the frequency with which companies suffer losses in the past.

Frequency reflects the number of claims per employee, usually expressed as claims per payroll unit ($100), claims per year, or claims per time unit. Frequency, however, more importantly, reflects the safety culture of the business.

If the frequency of claims is predictable, how about the severity of an individual loss? No, severity, the magnitude of the loss, is not predictable. With greater frequency, however, come greater odds that a severe claim will occur.

Experience modifications indicate the status of the safety culture within a business. Good management listens to risk management and loss control experts who ultimately reduce Workers Compensation costs.

Insurance funds losses; it transfers risk from your company to the insurance company for a fee – premium. Deductibles are used to reduce the number of claims by having the business pay small amounts and only reporting larger issues. The order in which claims are funded is: Deductible, liability limits, and then company assets — and sometimes personal assets. Your company needs high liability limits to protect company assets.

Claims exceeding $1 million in liability are infrequent, but not rare. Umbrella insurance covers above all other liability insurance in one million dollar layers. High liability limits become affordable this way. Business nightmares, such as the $3 million cup of coffee, the truck catching fire under a railroad bridge, or your vehicle colliding with a school bus, unfortunately do occur. A million or two is not sufficient coverage for most operations.

Asbestos and tobacco companies produced legal products for years before lawsuits started as the result of long-term exposure, and these very successful companies were brought to the brink of extinction. These companies kept tens of millions in umbrella layers. How much is enough?

Commercial Liability insurance covers injuries to other people and damage to their property caused by your company, your employees, or you. The cause of loss might be vehicle, products, premises, operations, liable, slander, poor advice, or even aviation related. The amount of liability and types of insurance depends on your company’s exposure to risks. Most companies face fleet risks, premises-operations risks, and employee injury risks; some add professional liability risks, aviation risks, common carrier and garage liability risks.

Insurance companies recognize these typical risk scenarios and respond by offering Business Automobile, Truckers, Garage, General, Aviation and Professional Liability policies.

Purchasing sufficient liability limits for disastrous claims is costly when purchased one liability risk at a time. In fact, most companies simply could not afford purchasing insurance this way. Insurance companies offer Umbrella coverage to serve this need. The company proscribes underlying, or first dollar coverage limits, over which umbrellas pay claims settling for more, or in excess, of these policies. Since these claims are infrequent, premiums are affordable; and each added million dollar layer decreases in cost.

In addition, most umbrella forms add liability coverage by insuring more risks than the underlying policies. A relatively modest – $1,000 to $10,000 – deductible is required, but then the umbrella limits cover unscheduled liabilities. So, with an Umbrella policy, the order in which claims are paid is: deductible or underlying liability limits, umbrella limits, and then company assets.

How much is enough combined liability limit? How well can you predict the future of litigation? Products, operations, and vehicle claims in excess of $3 million are not rare. The cost effective answer depends on the amount of assets you’re protecting, the cost of the coverage, company profit from which to expense the premium, your risk tolerance, and the availability of Umbrella coverage.

Three more factors are worth considering: Products claims might take years to discover. Claim inflation requires high limits at the time the claim is paid. Large liability claims take time to settle. Claim inflation is rampant. Even though an event occurs today, you may be settling at the going rate three years from now. Million dollar claims were rare 20 years ago; not so much now. Courts have been chipping away at the corporate liability shield for smaller businesses. Personal assets might be at risk. Now consider how far that erosion of corporate protection might progress by the time you get your day in court.

Umbrella liability limits should be high enough that business assets are not at risk. Business survivability is at risk with a too low limit. Your current limits can be assessed and reviewed by your broker and/or attorney for adequacy.