Risk Management Insurance

Risk Management Insurance
Protecting Your Family Business

Risk management insurance offers protection against a broad spectrum of litigation threats. Unfortunately, many family businesses have a false sense of security about liability litigation - a problem that would likely not befall them. A common thought amongst many family business owners is that litigation/lawsuits are something that happens to other businesses…

The reality, however, is that even when the family business owner is “right”, defending against lawsuits can wreck years of hard work building a family business, endanger the family’s wealth and destroy the financial security of the family business owner.

“Risk management insurance is a smart strategy for family businesses,” says leading family business expert Don Schwerzler. “As a family business grows, so does their exposure to litigation. Gaining an understanding of the many ways a family business can be hurt by litigation should be considered as part of the risk managment plan for every family business.”

Schwerzler has been studying and advising family business entrepreneurs for more than 40 years and he is the founder of the Family Business Institute and the web organization Family Business Experts, both of which are headquartered in Atlanta Ga.

One of the best books on risk management insurance Executive Liability Insurance: From the Basics to an Advanced Approach was written by Richard Clarke (CIC, CPCU, RPLU CITRMS) and is now in its 5th edition.

Clarke’s skills as a writer match his expertise in executive liability insurance and E&O subjects. His book is easy to read and easy to understand even when you are not an insurance broker or underwriter. Published by The National Alliance Research Academy and is available for purchase on their web site www.TheNationalAlliance.com

Three areas of risk management insurance addressed in Clarke’s book:

Directors & Officers Liability (D&O) – deals with risk management issues that arise from allegations of mismanagement brought against the directors and officers of a business by individual affected parties and government regulators. In a non-technical way, D&O liability insurance could be described as “managerial malpractice” or “governance malpractice” insurance.

Employment Practices Liability (EPL) – In a non-technical way, Employment Practices Liability insurance could be referred to as “Human Resources” malpractice insurance. But EPL insurance also recognizes the increasing risks with third party extension to EPL insurance, where litigation from customers may be more likely than litigation from employees. “Entities likely to have the most difficulty obtaining full third party coverage will be hospitality, real estate, medical, banking and other ‘meet the public’ businesses.”

Fiduciary Liability – deals with the risk management issues that result from health care reform and the increased responsibilities for employee benefit plan decision-making by management.

“The increase in risk management insurance issues associated with the growth and success of a family business are compounded by the huge increases in the growth of government as our country moves away from a free market economy and slides into the abyss of socialism,” observes Schwerzler.

One of the "attention grabbers" in Clarke's book is a list of federal legislation that a family buisness owner needs to consider when thinking about risk management insurance - the many different federal laws that can impact a family business:

Employment Practices and Liability Exposure: Major Federal Legislation and Impact upon Employers

EQUAL PAY ACT OF 1963

Prohibited gender discrimination relating to pay for skill, effort and responsibility.

Applies to employers with 2 or more employees of different genders.

CIVIL RIGHTS ACT OF 1964 (TITLE VII)

Racial discrimination in employment banned.

Applies to employers with 15 or more employees.

AGE DISCRIMINATION IN EMPLOYMENT ACT OF 1967 (ADEA)

Banned forced retirement before age 65 – increased to age 70 by amendment in 1978, extended to employees over 40 by 1986 amendment. A 1990 amendment says workers cannot waive the right to sue under this act unless the waiver is “knowing and voluntary.”

Applies to employers with 20 or more employees.

EMPLOYEE RETIREMENT INCOME SECURITY ACT OF 1974 (ERISA)
(Established liability for welfare benefit plans for employees and mandated employee dishonesty insurance in minimum and maximum amounts. Has been amended numerous times.) Applies to employers with 100 or more employees.

UNIFORM GUIDELINES ON EMPLOYEE SELECTION OF 1978

Banned discrimination in the selection/placement of job applicants, unless justifiable by business necessity.

Applies to employers with 15 or more employees.

CONSOLIDATED OMNIBUS BUDGET RECONCILIATION ACT OF 1985 (COBRA)

Effective 6/30/96, banned terminating an employee’s pension because of age – this federal legislation also incorporated mandatory health insurance for terminated employees/dependents.

Applies to employers with 20 or more employees.

IMMIGRATION REFORM AND CONTROL ACT OF 1986 (IRCA)

Banned hiring illegal immigrants, but established an offense for refusal to hire a person who turns out not to be an illegal immigrant.

Applies to employers with 4 or more employees.

WORKER ADJUSTMENT AND RETRAINING NOTIFICATION ACT OF 1988 (WARN)

Requires 60 days prior written notice of large-scale lay-offs and plant closings.

Applies to employers with 50 or more employees.

AMERICANS WITH DISABILITIES ACT OF 1990 (ADA [See also the ADA Amendments Act of 2008]

Banned employment discrimination on the basis of a “disability” –the term is vaguely defined, as well as mandatory premises access for persons with disabilities. Employers must provide “reasonable accommodations.”

Applies to employers with 15 or more employees.

OLDER WORKERS BENEFIT PROTENTION ACT OF 1990

Effective 4/91, brought employee benefits/pensions/early retirement incentives under ADEA.

Applies to employers with 20 or more employees.

CIVIL RIGHTS AMENDMENTS OF 1991

Further illegality for additional types of discrimination, including “sexual harassment” as described.

Applies to employers with 15 or more employees.

FAMILY MEDICAL LEAVE ACT OF 1993 (FMLA)

Mandates 12 workweeks leave for wife or husband upon birth/adoption of child or family sickness or illness.)

Applies to employers with 50 or more employees within a 75 mile radius.

UNIFORMED SERVICES EMPLOYMENT AND REEMPLOYMENT RIGHTS ACT OF 1994 (USERRA)

Provides for job security – and in some cases – related employee benefits security – for military personnel, such as a call to active duty for reservists.

Applies to employers of all sizes.

HEALTH INSURANCE PORTABILITY AND ACCOUNTABILITY ACT OF 1996 (HIPAA)

Designed to eliminate employee discrimination on the basis of pre-existing health conditions of employee or dependent spouses/children. Affects COBRA and addresses long term care, corporate owned life insurance, accelerated death benefits, health insurer reform aspects, medical savings accounts, and health care fraud and abuse and other related and unrelated issues. Some aspects were effective 1/1/97, and other aspects for plan years beginning on or after 7/1/97.)

HIPAA was significantly modified in 2010, with 2/18/2010 effective date for “HI-TECH”, placing additional responsibility on employers and health care/medical organizations for data security breach notification.

Applies to employers with 2 or more employees enrolled in any group health plan.

NEWBORNS’ AND MOTHERS’ HEALTH PROTECTION ACT OF 1996 (NMHPA)

Effective for group insurance plan years beginning on or after 1/1/98. Mandates that group plans and HMOs, which provide coverage for childbirth, must offer minimum required inpatient hospital stays; also has other provisions addressing several aspects of care for newborns and their mothers.

Applies to employers with 2 or more employees.

MENTAL HEALTH PARITY ACT OF 1996 (MHPA)

Effective for group insurance plan years beginning on or after 1/1/98, mandates group insurance aggregate lifetime benefit amounts for mental illness benefits be not less than aggregate lifetime benefit amounts for medical/surgical benefits. There are certain specific issues and a limited number of exemptions.

Applies to employers with 50 or more employees.

ECONOMIC GROWTH AND TAX RELIEF RECONCILIATION ACT OF 2001 (EGTRRA)

Deemed the most important piece of retirement plan legislation since the Tax Reform Act of 1986. EGTRRA requires retirement savings plans to be amended effective December 31, 2002, to allow to an increase in the maximum allowable annual contribution; allowing workers over age 50 to make “catch up” contributions; allowing easier transfer of assets between different types of plans; tax credits for lower income employees; and additional favorable provisions for employees.

Applies to employers with 100 or more employees.

MEDICARE PRESCRIPTION DRUG IMPROVEMENT AND MODERNIZATION ACT OF 2003 (Medicare Act of 2003)

Although focused upon implementation of the Medicare prescription drug discount program, this is also the legislation which provides for formation of Health Savings Accounts (HSAs) that allow certain individuals to put tax-free money into special accounts and later withdraw that money on a tax-free basis, beginning with a plan year effective date of January 2004. Unlike the money in Flexible Savings Accounts (FSAs), the money is an HSA can be invested and does not have to be used in the year in which it is deposited. An employer may also contribute to an HSA, and the contributions are not included in gross income.

To the extent of available information, it would seem that this legislation applies to employers of all sizes.

NOTE: States with much more liberal than normal statutorily-mandated coverage include: Alaska; District of Columbia; Hawaii; Maine; Michigan; Minnesota; Montana; New Jersey; Oregon; South Dakota; Vermont and Wisconsin.

PENSION PROTECTION ACT of 2006 (“PPA”)

Many aspects of pension plans, 401(k) plans and IRAs are affected and amended, as well as non-qualified deferred compensation plans, and other plans.) Effectively, actuarial assumptions are tightened; deficit reduction contributions are more closely tied to corporate bond interest rates; mortality assumptions are tightened; and EGTRRA expiration dates are eliminated. There are so many changes covered by this particular legislation, and so many potential liabilities clarified and defined, that the overall impact upon fiduciary liability exposure is deepened and magnified. One important change brought by this legislation is the increase in the maximum limit for “ERISA Bonding” for benefit plans containing employer stock; with the new legislation, and effective January 1, 2008, benefit plans containing employer stock, either as an investment option or as a “match”, must carry a limit of $1,000,000, up from the prior required limit of $500,000.

Applies to employers with 100 or more employees.

GENETIC INFORMATION NON-DISCRIMINATION ACT of 2008 (“GINA”)

Effective November 21, 2009, this amendment of Title VII of the Civil Rights Act of 1964 imposes some significant restrictions on employers relating to the collection, use and disclosure of genetic information relating to employment situations. [As of mid-2008, about 40 states already prohibit genetic discrimination in health insurance situations, and more than 30 states prohibit genetic discrimination in the workplace. Additionally, federal employees have protections relating to genetic testing and use of information in employment situations.] Under GINA, employers are not allowed to discriminate in employment situations based upon genetic information; retaliation against an employee who opposes genetic discrimination is prohibited; and, employers may not collect genetic information on employees, or families, from third parties. Confidentiality aspects are strongly imposed with regard to information in employers’ files relating to employee genetic information, as well.

Applies to employers with 15 or more employees.

ADA AMENDMENTS ACT of 2008

This legislation was signed in 2008, with a targeted effective date of January 1, 2009, and is designed to amend the Americans with Disabilities Act of 1990. Essentially, this legislation makes claiming a disability easier through expanded definitions and makes qualifying as being disabled easier than in the past.

Applies to employers with 15 or more employees.

LILLY LEDBETTER FAIR PAY ACT

In one of his first presidential acts, Barack Obama, signed into law this federal legislation which is effective retroactively to May 16, 2007 (one day before the US Supreme Court had ruled against Ms. Ledbetter). The new law broadens the types of actions which can brought involving worker compensation based upon gender matters, and broadens the time frame within which a person who believes he/she has been discriminated against, can make the allegation.

Applies to employers with 100 or more employees.

HEALTH INFORMATION TECHNOLOGY FOR ECONOMIC AND CLINICAL HEALTH ACT (“HI-TECH”)

Tucked into the American Recovery and Investment Act (ARRA) – otherwise known as the “stimulus package” of February, 2009 – was new legislation which was designed to greatly expand the HIPAA legislation to (among other things) mandate notification by First Class Mail, of data security breaches of unsecured protected health information of health plan participants. If more than 500 such persons of a given state are involved in a single data security breach involving health insurance information, then public notice (news media) is necessary, and must be made within sixty (60) days of discovery. If a lesser number of individuals are affected, then just an annual report to the respective State Attorneys general is required. There was also expansion of COBRA benefits under this legislation. [This provision of HIPPA was effective 2/18/2010.]

Applies to 2 or more employees enrolled in any health insurance plan.

PATIENT PROTECTION AND AFFORDABLE CARE ACT of 2010

President Obama signed this landmark legislation into law effective March 23, 2010, and it represents the most sweeping change ever effected, with respect to health care legislation. Among the major aspects of the comprehensive new law, is the requirement that most individuals MUST have health insurance, beginning in 2014, either through an employer, or a “health Insurance Exchange”, with cost-sharing provisions; potential penalties for employers, relating to denying insurance coverage to employees; an expansion of the Medicaid program for persons under age 65. The goal of the legislation was stated to be reducing the number of insured individuals in the USA, while still reducing the federal deficit through aspects of the legislation. Since the legislation was signed into law, there have been several legal challenges against it, and as of September 1, 2011, the future of the longevity of the legislation remains in doubt.

Potentially, the legislation applies to “everyone”, including employers of all sizes, who do not receive exemptions officially granted by federal agencies.

Last Update: 9/1/2011 Executive Liability Insurance By Richard Clarke

“Actually seeing a list of laws that could provoke litigation that could impact a family-owned business is beyond scary,” notes Schwerzler.

As a family business owner considers their risk management planning, insurance expert Clarke offers some worthwhile tips.

SOME BASIC EPL RISK CONTROL/PREVENTION SUGGESTIONS

1. Review recruiting-related materials, and application for employment forms to avoid language which could be construed to constitute a fixed term of employment; implied “permanence” of employment, or employment based upon satisfactory work performance alone. Make sure employment is stated to be “at will”, in accordance with statutory law (effective “disclaimer” verbiage can also be beneficial in this regard). Effective labor law attorney guidance is well worth the cost in this regard;

2. Utilize progressive feedback and discipline, where appropriate. Annual reviews of performance are great for documentation in this regard, whether or not the employee is granted a salary increase or decrease;

3. It is very important to periodically review the Employee Handbook, to make certain that appropriate verbiage, in accordance with legal precedent, is included. Legal counsel review of the Employee Handbook should probably be done at least every other year, in order to be effective;

4. Train supervisors to promptly record individual employee performance. A form with specific space for making notes (electronically or in hard copy) is critical for documentation of specific incidents, or goals/objectives for individual employees, which can be referenced at a later date for achievement;

5. If termination becomes necessary, consider specific legal counsel consultation (it may cost some money, but could be extremely beneficial in the long run). Specific reasons for termination, with appropriate documentation is important here. These must the same reasons later used to respond to challenges from EEOC, or plaintiff attorney.

6. Document discharge process and meetings, and consider having one or more “witnesses”, if possible;

7. Be consistent in applying discipline and termination procedures;

8. Use “exit interviews” and checklists for proper activities (sign off of computers; returning access keys/cards; accompaniment for cleaning out cubicles or offices, etc.). It is of the utmost importance to show sympathy for employee feelings, emotions and concerns in this regard;

9. Discuss terminations with others only on a “need to know” basis. The less aid and communicated to others is usually better. Avoid negative comments about the person or situation;

10. Have only one source for responding to reference check requests;

11. Have senior management reinforce appropriate values and company policies by example;

12. Seek workforce diversity in terms of age, gender, race, physical limitations, national origin, religious beliefs and sexual orientation;

13. Monitor employer sponsored or endorsed social media sites to determine if employees are making derogatory remarks about other past, present or prospective employees. Any such statements could have implications for the employer, if the employer has any opportunity to correct or delete such statements and does not have this done.

Executive Liability Insurance By Richard Clarke




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