August 2014

In any traffic accident, two entities can be held liable for damages: the at-fault driver and the vehicle owner. Insurance companies generally view the vehicle’s insurance to be primarily liable with the driver as secondary.

Let’s assume you’re an entrepreneur using your personal vehicle for company business. You are the owner of the car and the driver. Only one responsible party, right? No. Since you’re using the car for business, the business can be held responsible since you’re driving on its behalf.

So, who pays when the company has no automobile insurance?

The business pays all damages not covered by your personal insurance. Worse, the business pays for legal representation whether you are at fault or not.

The answer is simply to purchase hired and non-owned automobile liability, usually as an endorsement to your general liability policy if you have no automobile coverage. This add-on is inexpensive for small companies, but saves much heartache in the event of a major accident.

Now, let’s look at the other side. Your business owns the car, and you drive it personally. If you do not have a personal auto policy, you are personally unprotected against the liability of car accidents.

The other driver will claim against you as an employee and the business as vehicle owner, both covered by business automobile insurance. If the claim extends to you personally, you may be liable for damages in excess of the business policy limits, plus all of your legal expenses.

The solution to this potential gap in coverage is a “drive other cars” endorsement which allows the business policy to act on behalf of the driver whether in a rental car, a borrowed car, or a car used in business. The endorsement will add only named people to the policy, it is not blanket coverage for all employees.

Loss limit policies insure property on an occurrence basis to a limit of the probable maximum loss rather than an actual total property value.

If a manufacturer has ten locations in ten states each valued at three million dollars including contents, the probable maximum loss might be three million dollars. No one storm, earthquake, or fire will destroy any two in one occurrence. If all ten locations are within a mile of the east coastline, a hurricane might destroy several plants, for a probable maximum loss of, say for example, nine million dollars.

In the first case, the policy limit might be four million, in the second, maybe ten rather than thirty million.

This method of valuation provides insurance for very high value risks or when some portion of the risk is hard to reinsure.

Reinsurance is a spread of risk system for all insurance companies. For very high value risks, sometimes it is not possible to reinsure the total value of property. Insurers and reinsurers each have a maximum limit per loss.

Windstorm, flood and earthquake hazards can be difficult to insure. Insuring all locations with a single maximum loss is a way to get some insurance for all locations.

Loss limit policies tend to be more expensive because total losses are theoretically many more times as likely.

Co-insurance became popular with insurance companies because insureds only wanted to buy enough insurance for the probable maximum loss on a single property. Loss limit policies can be viewed as total protection without a coinsurance clause. The insurance underwriter goes into the process with eyes wide open about pricing each occurrence for ten potential first dollar losses or one catastrophic loss.

The principles of spread of risk and actuarial loss prediction remain constant but apply differently.

If you have a portfolio of properties spread geographically, with perhaps a few in hurricane or earthquake zones, review your loss limit options.

Sarbanes-Oxley reinforced the idea that public companies have a duty to be transparent in dealings. No insider trading or enriching corporate executives through questionable perquisites like low interest loans.

But when does transparency become speculation?

Estimating costs accurately for remediation work is difficult. Add to that difficulty the uncertainty that the work will be undertaken, or the property will be sold as is. Complete the estimate in the face of changing regulations and newly discovered contaminants. This defines speculation.

Sarbanes-Oxley combined with new trends in accounting implies these costs must be estimated and property values written down.

Yet, if property values are decreased with an environmental liability, what happens when a company then chooses to remediate the contamination?

The costs associated with the clean up are expensed.

Your books just took a double hit, and there is no provision to reduce the liability until the building is sold.

Good risk management can help avoid this situation.

First, avoid spills and contamination by using proper handling and secondary containment. If spills occur, clean them up immediately.

Perform, or have an environmental professional complete, a survey of all current conditions which could lead to property devaluation. Fix the problems you can.

Review your environmental liability insurance options. In other words, think about pre-funding any contamination loss. Like fire insurance, once the claim occurs, the building is worth less. The fire insurance will either pay the actual cash value (economic loss) or rebuild the structure (physical loss)

If you accept the actual cash value, the building value decreases and your cash position increases for no net gain. If you rebuild, the books do not change.

What happens when the building burns, and you’re uninsured? You still must account for the loss with a reduced property value.

Look at environmental liability with the fire insurance analogy in mind. If you insure against environmental impacts and one occurs, you will then have the option as to how you want to handle the claim.

Usually, you think of retirement programs when you consider fiduciary liability, like the headline cases of the nineties, like Enron and Rite-Aid, where fiduciaries suffered class action judgments for investing employee funds in company stock.

The Employee Retirement Income Security Act (ERISA) is the law which demands fiduciaries act in the best interests of the employees, not the public or private company. And, it covers all employee benefits, not just retirement.

The duties of the plan or trust fiduciary are simple:

1. Loyalty to the beneficiaries.
2. Prudence and skill of a professional investor or trustee.
3. Diversification of investments to minimize risk.
4. Adherence to the rules set forth in plan documents and/or ERISA and similar laws. Plan documents
must be brought into compliance if they’re not simpatico with the law.

This level of professional care is quite high.

In 1996, the Health Insurance Portability and Accountability Act (HIPAA) set regulations and standards regarding the portability of health benefits in reaction to the preexisting conditions clauses of new group health insurance.

Interestingly, HIPAA prohibits discrimination based on health related issues in the premiums charged or the enrollment of employees or family members. Also, it prohibits sharing employee medical records.
With these requirements in mind, now consider the impact of the Affordable Care Act.

Fiduciaries must sorb the new act, a poorly understood and untested health care funding option, into their decision making process. And, they are liable for imprudently applying the cost-benefit analysis to this unknown quantity.

If health insurance is mandatory, what happens with the cafeteria plans of the past? Is it prudent to allow an opt-out of a mandate? Even if the spouse has family healthcare already, couldn’t they lose that job?
Much of the potential growing pain into this new era of universal health care cannot be predicted. But fiduciaries are not immune from accountability.

Let professionals review all your plan documentation for flexibility in application, and give your trustees that flexibility. Have other professionals check your fiduciary liability coverage and your directors and officers coverage too.