M&As Can Create E&O Exposures

banner_e-o-landing-page-template-01It’s a familiar tale: An agency has enjoyed great success, so its principals decide the time is right to expand their business and acquire another agency. After finding one that will blend in perfectly, they arrange meetings, sign contracts and the deal is done. Nothing left to do but enjoy the payoff, right?

Not so fast. The assumption that “bigger is better” can lead to disaster if the agency’s focus is on growth alone, with no attention to E&O risks.

What if the agency you’re acquiring made a few missteps that escaped attention? When those mistakes finally come to light, how can you ensure your agency isn’t stuck footing the bill? Here are a few steps to keep in mind.

  1. Learn about the acquired agency’s policies and practices as soon as you can. Multiple locations increase exposure to professional liability claims: The larger the agency, the more people involved, and the greater the opportunity for error.
  2. Establish a plan regarding each employee’s responsibilities. This should include a review of current responsibilities and training on how to handle business the acquired agency previously procured.
  3. Actively integrate successful, well-established procedures into the merged agency. Meet with new employees and educate them on procedures and expectations. Consistent and uniform utilization of policies and procedures is imperative as an agency grows.
  4. Before the deal is finalized, the acquiring agency should confirm that the purchase contract includes indemnification language protecting it from claims related to the negligence of the acquired agency, in case it committed a wrongful act prior to the acquisition. Similarly, the acquired agency should purchase tail coverage for its own protection.
  5. Notify your E&O carrier about the acquisition. Acquiring another agency typically means a change in risk, so E&O policy language commonly requires reporting of all mergers & acquisitions within 90 days. But not all E&O policies are created equal: Effective Sept. 1, Swiss Re Corporate Solutions will add an enhancement to its policy which increases the maximum reporting time to 120 days.

Bigger can be better, but only if you take the proper steps to learn about the new agency, install your culture, educate your people and clearly document that your firm is not taking on the liabilities of the acquired agency for past mistakes.

What might a typical E&O scenario look like in an M&A?

Consider the following example: A successful agency, “Buyer,” reaches an agreement to acquire a smaller firm, “Seller,” whose principal is retiring. Some, but not all, of Seller’s employees will move to Buyer. The contract includes indemnification language, and Buyer makes Seller an additional insured on Buyer’s E&O policy, with a retroactive date reflecting the date of acquisition. Seller terminates its E&O policy as of the date of the acquisition, but purchases tail coverage. So far, so good.

Here’s what Buyer doesn’t know: Seller had procured workers compensation coverage for a longtime client, Widget Co., which had multiple facilities and locations. At renewal, but before the acquisition, Widget Co. requested a separate workers comp policy for one of its out-of-state facilities. Seller went to the state workers comp pool to procure coverage. Afterwards, Buyer completed its acquisition of Seller.

The Widget Co. account had still not been reassigned when, several months later, one of its employees was injured on the job. At this time, it comes to light that the pool never issued the policy, but instead returned the premium. The precise timing of the returned premium and notification of “no issuance”—right around the agency acquisition date—is a matter of dispute between the two agencies’ employees.

Seller’s employees claim it was Buyer’s responsibility to complete the follow-up and issue the policy, and if not, advise the client. Buyer’s employees disagree, arguing that their agency planned to perform a review prior to the next renewal. Regardless, Widget Co. was never informed that the policy was not issued, much less refunded the premium. The client has little choice but to file a lawsuit against both agencies, after which it will find a new broker.

If Buyer and Seller clearly articulated procedures and responsibilities and notified all employees, someone may have caught the fact that the policy was never issued and the premium had been returned, and the agencies could have taken corrective actions in a timely manner. Instead, a client went without coverage—and two groups of employees who are meant to be on the same team ended up pointing fingers at each other. —B.R.

Reprinted with permission from IA Magazine.

About the author

Barbara Rocco is an assistant vice president and claims specialist at Swiss Re Corporate Solutions and teleworks out of the Chicago office. Insurance products are underwritten by Westport Insurance Corporation, a member of Swiss Re Corporate Solutions

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How Paid Parental Leave is Evolving: Lack of clarity surrounding paid parental leave creates uncertainty

In 2016, the U.S. placed dead last in a Pew Research study list of 41 countries that compared parental leave laws, where it was the only country that does not mandate any paid leave for new parents.

Nationally, it seems like maternity leave laws are clear—but the rules for fathers are not set in stone. The lack of clarity surrounding parental leave for male employees has created uncertainly at home and in the workplace—causing employers from both the private and public sectors to realize the importance of accommodating the needs of working families.

Under current federal law, most employees can take up to 12 weeks of unpaid leave under the Family and Medical Leave Act (FMLA) when they become new parents. However, to be eligible for leave under FMLA, employees must have worked at least 1,250 hours over 12 months, and their employer must employ more than 50 people. These requirements leave 95% of low-wage workers with no option to take paid family leave for a new child, according to Tim Shand, global co-coordinator of the MenCare Campaign.

Recently, both Democrats and Republicans have addressed the issue of paid parental leave at the federal level. During President Trump’s presidential campaign and first State of the Union speech, he referenced the need for a national law on the topic. Sen. Marco Rubio (R-Florida) proposed a plan to allow parents to use their Social Security funds to pay for their parental leave. Similarly, Sen. Kirsten Gillibrand (D-New York) and Rep. Rosa DeLauro (D-Connecticut) suggested a family leave bill to be funded by small employee or employer payroll contributions.

But while FMLA provides a baseline for unpaid parental leave for both mothers and fathers, federal law does not yet comprehensively address paid parental leave—leaving individual states and employers to take matters into their own hands.

California, New Jersey, Rhode Island, New York, Washington, D.C. and Washington, for example, have all mandated paid parental leave laws for female and male employees, enabling employees to receive 55-90% of their wages for up to six weeks for parental leave.

Earlier this month, Washington, D.C. started collecting increased taxes from employers to help fund the implementation of the Universal Paid Leave Act, also known as “paid FMLA.” This law provides full-time and part-time employees, including those at nonprofit associations, up to 90% of their wages and up to eight weeks of paid leave for the birth or adoption of a child. To qualify for paid FMLA, an employee needs to be actively employed in Washington, D.C., even if they reside in a different city or state. This program will be funded by a payroll tax increase of 0.62%.

Many major companies have also taken the burden upon themselves to get ahead on parental leave trends. For example, Johnson & Johnson increased parental leave time to up to eight weeks of paid leave during the first year after a child’s birth or adoption. Additionally, the Gates Foundation is now offering new mothers and fathers 24 weeks of paid parental leave and a $20,000 stipend when they return to work—unprecedented in the U.S.

When companies fail to keep their policies up to date or apply their policies consistently, they may expose themselves to liability. Consider JPMorgan Chase, which in July 2017 faced a first-of-its-kind class action lawsuit initiated by a male employee who claimed fathers were being denied full parental leave benefits because of their gender. JPMorgan had been allowing mothers to take up to 16 weeks as primary caregivers and fathers up to two weeks as non-primary caregivers. The class action stated that fathers who attempted to take up to 16 weeks off for parental leave were prevented from doing so because, unlike mothers, JPMorgan did not consider fathers “primary caregivers.”

In May, JPMorgan agreed to pay fathers who were denied the full paid parental leave between 2011 and 2017 in a settlement of $5 million. Since then, the company has changed its policy so that both men and women may designate themselves as a child’s primary caregiver and be equally granted full paid parental leave.

Last year, in another parental leave case, Estee Lauder agreed to a $1.1 million settlement with a class of fathers. As part of the settlement, the company agreed to treat fathers in a non-discriminatory manner in its paid parental leave policy.

Given the changing landscape of parental leave in state laws and courtrooms, now may be a good time for your agency to review how you address parental leave and make changes to your policies you deem necessary.

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Register for the Small Agency Conference: Get Practical Strategies to Evolve Your Business

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IIAT’s Small Agency Conference, Sept. 15-16, in San Marcos, offers sessions and networking programs specifically designed for smaller Texas agencies. We know you’re busy, which is why the conference starts on Sunday afternoon and ends on Monday. The day-and-a-half program is packed with sessions focused on the latest industry trends, insurance coverages, management best practices for small agencies and more. Earn CE, network with peers and make new business connections at the RISExpo.

The conference offers a handful of sessions focused on proven strategies smaller agencies can use to grow and evolve their business. These include:

New Business Drivers: Achieving Organic Growth and Retention
In this session, a panel of agents will share their best-practices and success stories on how their agencies have achieved new business growth.

Compensation Models to Attract and Retain Talent 
Learn how to design a dynamic compensation plan to attract and retain talent. Discover how your agency can thrive with a compensation plan that takes into account total compensation, benefits, work-life balance, opportunities for growth, and other critical components.

The Agency of the Future: What It Means to Be a Data-Driven Organization
Data is a key strategic asset for every organization. In the race to win clients and market share, data-driven agencies are increasing the distance between them and their competitors. According to a recent study, data-driven organizations are now 23 times more likely to acquire customers, 6 times as likely to retain customers, and 19 times as likely to be profitable as a result.

In this session, IIAT’s Executive Director Marit Peters will tell you about benchmarking through IIAT and the R.I.S.E. Report. Find out how you can get data-based insights and discover opportunities for growth within your agency.

Learn more about the Small Agency Conference and view the full schedule. Register today!

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TWIA Board Approves No Rate Increase for Annual Filing

Texas Windstorm Insurance Association (TWIA) policyholders will not be subject to a rate increase based on the Association’s annual rate filing for 2020 policies.

The TWIA Board of Directors voted not to increase rates for residential and commercial policies at their August 6, 2019 quarterly meeting. TWIA will submit the 0 percent rate change filing with the Texas Department of Insurance by August 15, 2019, as required by statute.

In making their decision, the TWIA Board considered public comment from Association stakeholders and the 2019 rate adequacy analysis prepared by Association staff and, as required by state law, deliberated the decision publicly before voting to determine the amount of the rate filing.  The Board’s decision was conditioned on reevaluating TWIA rates at a later date when more information is available.

John Polak, General Manager of the Texas Windstorm Insurance Association, said:

“The TWIA Board of Directors takes seriously the impact of rising insurance costs when considering TWIA rate changes.  As coastal communities continue to recover from the effects of Hurricane Harvey, the Board will continue to closely examine those concerns along with the importance of maintaining TWIA’s capacity to pay claims in the event of another storm like Harvey.”

The TWIA Board also voted to file a proposed increase to the Association’s maximum liability limits with the Texas Department of Insurance. State law requires a filing related to these limits, which apply to the maximum amount of coverage a policyholder can purchase from TWIA, by September 30 of each year. This filing does not impact TWIA’s rates and is benchmarked as required by law to match publicly available construction cost index information.

The decision came at a Board of Directors meeting in Galveston.  More than 80 individuals attended the meeting where there was opportunity to provide public comment.  TWIA also received more than 1,000 comments by e-mail on rates and on TWIA’s rate adequacy analysis, which were provided to the Board members for review in advance of their meeting.

 

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ACORD and the Big ‘I’ Announce Partnership for Forms Access

The Big “I” and ACORD, the global standards-setting body for the insurance industry, have announced a joint program to provide qualifying Big “I” members with a complimentary license to use ACORD Forms.

ACORD, a nonprofit industry organization, has provided forms to the insurance industry since 1972. ACORD currently maintains a library of over 850 forms in a variety of formats, widely used throughout the global industry. As part of its ongoing collaboration with ACORD, the Big “I” will now fund ACORD Form end-user licenses for the majority of member agencies, enabling them to claim these licenses free of charge.

“Industry-standard forms are a critical component of an independent agent’s business,” says Bob Rusbuldt, Big “I” president & CEO. “With this licensing program, the Big ‘I’ is helping our members improve their operational effectiveness. We are proud to play a key role in facilitating the delivery of these assets to our members and to further enhance the value of their Big ‘I’ membership.”

All agents and brokers using ACORD Forms are required to obtain licenses from ACORD. Users who are not already members or subscribers of a qualifying ACORD program are able to purchase a standalone End User License from ACORD. Under this agreement, Big “I” members with a group gross revenue of under $50 million will be eligible for a license from ACORD due to their Big “I” membership, with no additional payment necessary. Agents will still access forms via their agency management system workflow as they have previously.

“The Big ‘I’ has been an invaluable partner to ACORD in standards development, industry outreach, and many other activities in service to the insurance industry at large,” says Bill Pieroni, ACORD president & CEO. “By ensuring access to ACORD Forms, the Big ‘I’ has once again affirmed its commitment to enabling success for the independent agent and broker community.”

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ISO Flood Disclosure Notice Form Approved

SB 442 was signed into law by Governor Abbott with an effective date of September 1, 2019. In preparation of the new requirement, ISO has developed the form Texas Flood Insurance Disclosure Notice. This, or a similar notice, is now required to be added to every property policy issued in Texas.

One key part of the notice is the statement “your insurance policy does not cover damage resulting in flood even if hurricane winds and rain caused the flood to occur.” The notice also encourages consumers to contact their agent or company to discuss the need to purchase flood coverage.

IIAT worked closely with the bill authors and are pleased with the passage of this legislation. If you have questions, please contact Lee Loftis at lloftis@iiat.org

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Help Home Businesses Weather the Storm

hbi-header-01Anyone who’s turned on the news in recent months has seen reports of severe weather events occurring around the country. Inland floods and mudslides, windstorms, and fire are becoming more frequent and severe and unfortunately, many who experience them lack valuable coverage. That’s where you come in. You can protect your clients who have home businesses by ensuring that they are covered with a home business policy. Insureds often believe their existing homeowners or apartment-dwellers policy will cover any loss or damage to their business equipment, furniture and supplies in the event of fire, theft or other catastrophe, when in fact, those policies usually explicitly exclude coverage for any business exposures on their premises. Home business policies from RLI have the ability to protect an insured’s loss to business personal property, business income loss, along with extra expense in the event of a covered weather occurrence. Policies can be endorsed if they do not carry the valuable coverage of inland flood if location is eligible.

Popular Business Classes Include:

  • Residential Inspection Services
  • Teacher/Tutors
  • Photographers
  • Accounting Services
  • Bakers
  • Computer Consultants
  • Interior Decorating
  • Jewelry (Costume)
  • Art Gallery / Art Studio
  • Crafts

All classes subject to further underwriting guidelines.


Does your client run a small business out of their home?

IIAT Advantage offers a standard market program through RLI for standalone personal umbrella policies. It is a perfect solution for hard-to-place personal lines accounts. Click below to learn more or contact Lisa Webb at 512.494.2425

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Register Now for the Small Agency Conference RISExpo

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IIAT’s Small Agency Conference RISExpo, Sept. 15-16 at the Embassy Suites San Marcos, is the premier event for agents from smaller Texas insurance agencies. During the day-and-a-half event, you’ll learn about the latest topics and news that matter most to you from leading industry experts, network with other agents and earn CE. Plus, explore new market opportunities with more than 70 top carriers, MGAs and select vendors at the Expo.

Highlights include:

  • Expand Your Agency Mind: Using Data to Evolve Your Business & How IIAT Can Help
  • Industry Trends & Challenges (Filed for 1 CE)
  • Agents-Only Peer-to-Peer Round-tables
  • Experience Rating Modifiers (Filed for 1 CE)
  • Agency 101: Fundamentals for Starting an Agency
  • IIAT Advantage Marketplace Reception
  • New Business Drivers: Achieving Organic Growth and Retention
  • Water Damage Coverage Gaps in the HO Policy (Filed for 1 CE)
  • Compensation Models to Attract and Retain Talent
  • The ISO Cyber Liability Policy (Filed for 1 CE)
  • Expo: Meet with Markets & Select Vendors

Learn more about the Small Agency RISExpo and view the full schedule. Register today!

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The Future is Here: Navigating the Challenges of 21st Century Personal Auto Coverage

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Personal auto insurance has always been more complicated than most policyholders realize. It has always evolved somewhat over time, but with the advent of ride-sharing services leading many individuals to use their personal automobiles for income, the insurance industry has had to react and adapt quickly. These nuances have only become more complicated as the ride-sharing concept expanded to more extensive food delivery options.

And now? Electric scooters available for rent for use on public streets create new questions about whether users are insured and by whom. With the impending transition toward self-driving cars, the questions facing the personal auto insurance industry will only become more complex.

What is an independent agent to do in this rapidly changing area of insurance?

Ride-sharing services like Uber and Lyft have been on the scene for several years, so most agencies selling personal auto coverage should be familiar with how coverage applies when policyholders drive for these services. The ride-sharing services generally provide the drivers using their personal vehicles to transport passengers for a fee with insurance coverage when they are online using the services’ applications. The coverage type and amounts that apply vary and are limited.

When a driver is using the app while waiting for a ride request, but has not yet accepted such a request, the service provides no collision coverage and fairly limited liability coverage, typically $50,000/$100,000/$25,000. Once a ride-sharing driver has accepted a request to pick up a specific customer and while the driver is transporting that customer, the services provide greater liability coverage. Usually $1,000,000 as well as UM/UIM and contingent collision and comprehensive coverage, as long as the driver has his or her own personal auto policy. However, when the driver is using their vehicle for their own personal use, the ride-sharing services provide no coverage and the driver needs to rely on his own personal auto policy for coverage.

In other words, ride-sharing drivers must have their own personal auto policy. But it is also important that their personal auto carrier know that they drive for a ride-sharing service. Of course, most personal auto policies define driving for hire as commercial use and therefore exclude it. Personal auto carriers are also likely to cancel an insured’s policy if they learn after an accident that the insured had been performing ride-sharing services but did not disclose it during the application process. Getting cancelled can cause problems for the policyholder, including higher premiums when securing replacement coverage.

Some personal auto carriers will refuse to provide a policy to a driver who works for a ride-sharing service and it is important to know that before any accidents occur. Some carriers provide rideshare insurance, typically as an endorsement to a personal auto policy, but sometimes as a replacement hybrid policy. Hybrid policies provide coverage for the driver’s personal use as well as the period when the driver is using the app looking for a passenger. If such a hybrid policy is unavailable, a commercial policy may be necessary.

Ride-sharing is not the only recent change in how people use their personal vehicles. Food delivery services like Uber Eats and Postmates are expanding the number of people using their personal vehicles to deliver food well beyond traditional pizza delivery. Even online retailers like Amazon are hiring people to deliver packages in their own vehicles. Similar to ride-sharing, this use of a personal vehicle for commercial purposes is likely excluded under a personal auto policy. While these services often provide some coverage to their drivers while using their app or while making deliveries, coverage may only be on an excess basis and there may be gaps in coverage. There is also the issue of the personal auto insurer cancelling the policy if it learns after an accident that the policyholder was making deliveries.

Most recently, dockless electric scooters have popped up in many cities. The scooters can be parked just about anywhere and riders can unlock them using an app, pay for their ride, and leave them at their destination. They are to be driven on streets, often at speeds up to 15 miles per hour, so riders on these scooters can cause accidents with vehicles. When such accidents occur, does the rider have liability coverage? The scooter companies do not appear to be providing liability coverage to users, though some cities are looking to require that they do. This is likely because most personal auto policies exclude two-wheel vehicles. But do many of the people using these scooters realize that they may have no liability coverage if they cause an accident?

As complicated as some of these questions are, they may pale in comparison to the ones that may be coming. Who is liable if a self-driving car causes an accident? Widespread use of fully autonomous vehicles is years away, but it is coming. Perhaps liability for motor vehicle accidents will shift primarily to self-driving car manufacturers for technical failures, but if the individual user has some autonomy, such as choosing to use the vehicle in unsafe weather conditions, will they still have some liability? How will the personal auto industry handle those issues?

We may not need to provide answers for several years but such questions are already upon us. Personal auto use is changing rapidly and independent insurance agents need to stay up to date and discuss these changes with their customers. Perhaps the most important consideration is to ask customers whether they use their vehicles for anything other than personal use and inform them of potential gaps in coverage. While agents in most states do not have a duty to recommend coverage types or limits, many customers may not be sophisticated enough to know that performing commercial work with their personal vehicles can expose them to coverage gaps. Addressing these questions and reviewing possible gaps could prevent bigger problems down the road.

The good news?  Well, at least flying cars are not here. Not yet.


John Nesbitt is an assistant vice president, claims specialist with Swiss Re Corporate Solutions and works out of the office in Kansas City, Missouri. Insurance products underwritten by Westport Insurance Corporation, Kansas City, Missouri, a member of Swiss Re Corporate Solutions.

This article is intended to be used for general informational purposes only and is not to be relied upon or used for any particular purpose.  Swiss Re shall not be held responsible in any way for, and specifically disclaims any liability arising out of or in any way connected to, reliance on or use of any of the information contained or referenced in this article.  The information contained or referenced in this article is not intended to constitute and should not be considered legal, accounting or professional advice, nor shall it serve as a substitute for the recipient obtaining such advice.

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Insurcon Presentations Available to Download

Did you miss Insurcon or did you attend a session you think your colleagues will want to hear? Audio recordings of the presentations from Insurcon 2019, including Kelly Donahue-Piro’s “Five New Agency Challenges and their Solutions,” Andrew Mellen’s keynote  “Unstuff Your Agency” and Tai Jenkin’s “Classifying a Risk: Get It Right Before Things Go Left,” are now available to download on iiat.org for free. Click below to access them.

recordings-available

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