Commercial Insurance Blog

The Workers' Compensation Audit - Why Bother?

Posted by Geoffrey Gordon on Wed, Feb 10, 2016 @ 12:39 PM

Workers’ Compensation is a kind of insurance to protect employees from the cost of medical care and lost income if they are hurt at work.

The cost of Workers' Compensation is directly related to payroll.   Different types of work (based on chances of injury) use different classifications, each of which carry specific rates.   While rates do differ from state to state because of differing loss expereince, rates within a state are the same.   So the rate for any given classification will be different in Massachusetts than it is in Connecticut or New Hampshire for example.

An important factor in getting the pricing correct is the policy year-end audit. The purpose is to reconcile the estimated payroll from the beginning of a policy year with the actual payroll at the end of the year.  For example, if you estimated your payroll would be $1,000,000 in the forthcoming year (and paid premiums based on that payoll), but payroll was actually $1,200,000, the company makes a retroactive adjustment, in this case for insurance based on an additional $200,000 of payroll.

There are three different kinds of audits, broadly speaking.

  1. The first is the self audit where the business owner, treasurer or bookkeeper lists employees, confirms what they do (to determine which class they belong in) and provides documentation from tax forms (quarterly 941s).
  2. Another type is the telephone audit where an auditor calls the book keeper or accountant and asks for the numbers over the phone. The classification and payroll assignment is done by the phone auditor. Tax forms and other documentation may follow by email, fax, or snail mail.
  3. The third format of audit is on-site, commonly used with larger companies and more complicated payroll. For on-site audits the auditor spends time going through the forms and collecting copies to confirm that tax forms match disclosed payroll records.

Once the payroll is known and classifications assigned, raters or underwriters calculate the corrected premium for the previous policy year. If the original estimate was high, then the company buying the Workers' Compensation (the policyholder) gets money back. If, on the other hand, the payroll estimated was low, then the premium for the additional payroll charge is assessed.  It is also payable and due immediately, since it is a charge from a prior year policy.

 What happens if the audit is not completed?

 Insurance companies really want you to complete that audit, tedious and painful as that process can be.

They have a more painful process for not completing the audit.

Here's how it goes down:

  1. If an audit is not received within a reasonable amount of time, (generally 60 days after the policy term ends), the carrier issues an “estimated audit”, increasing the payroll from the prior policy term by 50%.
  2. As with a real audit, the premium is due and payable immediately. When the invoice for half of your Workers’ Compensation is presented to the treasurer, owner or controller, it gets everyone's attention, which is the idea.   Because it is due right away, there is little time after the estimated audit is issued to have the real audit completed before a cancellation notice is issued for non-payment.   
  3. Remember, any premium due for an audit was for a prior policy year, so financing is seldom an option either. More often you need to pay the estimated audit, and perform a real audit to get an overpayment back.  It’s brutal.   
  4. Don’t ignore the cancellation notice, or it gets worse.  If the Insurance is canceled, the state Department of Industrial Accidents (DIA) is notified.  These guys are the ‘insurance police’ for Worker's Compensation compliance.   
  5. Because Workers’ Comp is required by law, the DIA can issue a stop work order at your place of business and literally shut your business down, since failure to have Workers' Comp for your employees is illegal. Once this happens the solution is to pay the previous carrier all money it is owed, and purchase a new policy.  To avoid delays (and continued stop-work order), the quickest solution is to go to Boston to get policy reissued by paying the estimated premium and applying for replacement insurance right at the Workers’ Compensation Assigned Risk Board.     

We have seen this clip a few times; it is not worth the aggravation.

For more about Workers’ Compensation and managing costs associated with this line of business, contact us here at Gordon insurance.

 

Tags: workers compensation, employee, insurance, audit

When to Call your Insurance Agent

Posted by Jane Logan on Thu, Jan 21, 2016 @ 05:35 PM

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Notifying your insurance agent of changes prevents suffering an uninsured loss. Any changes that could affect your insurance policy or coverage should be discussed with your agent, examples of changes that you should report immediately include:

 

  • Location change

  • Mailing address change

  • Additional locations

  • Expanding operations into new States

  • Changes in operations , products or services offered to your customers or clients

  • FEIN change

  • Legal change in entity type (Sole Proprietor to Corporation, LLC, PC etc.)

  • New vehicle – esp. if leasing in a State other than Massachusetts where evidence of insurance isn’t required to take delivery of a vehicle

  • New equipment or other business property

  • Signing a contract or lease - if a transaction involves signing documents there’s no doubt you need to review your insurance coverages

Calling your agent in advance could save you time and money; for example, moving to a new location less than a mile from the ocean will significantly increase the cost for property insurance, restrict coverage options and may require flood insurance.  A call to your agent before signing a lease could prevent additional expense or if the location costs more to insure than you expected, you may be able to negotiate a lease with better terms and rent.

 

Your agent should be able to tell you with just one quick phone call if the change you’re planning means you need to update your coverage – it’s worth a call to make sure!

Tags: Risk Changes, When to Call your Agent, Insurance Agent, Insurance Policy Changes

The timing, purpose, and reply to an Insurance Inspection

Posted by Geoffrey Gordon on Fri, Jan 15, 2016 @ 05:13 PM

When you insure a building with a new insurance company, the company will send an inspector to inspect the property.   This inspection is done by company safety engineers, or hired contractors, and happens soon after the insurance takes effect.  The purpose is to identify ‘hazards”, or conditions which increase the chance of a loss, insured or not.  

These can be valuable: your insurance company is your risk partner for the property, writing the checks when things go wrong.  And all losses, insured or not, are distracting to the core business operations (and income stream) of the property.  

Timing of the inspection:

Most insurance inspections occur within 30 days of the new policy.  Many inspections need to view the interior of the residence as well.  The company will usually contact you and arrange for the inspection, but conduct unannounced inspections on occasion.

Bear in mind that inspectors are paid to perform inspections, not to try to get an appointment with you.  Failure to agree on a date or delaying an inspection more than once will set into motion non-compliance complications that will make insuring the property more expensive and difficult for the future.  Our advice: just get it over with.

The inspection typically takes anywhere from 30 minutes to a couple hours, depending on the size and nature of the property.  Commercial properties take longer than habitational.  The owner or an authorized person with full access is often needed to be on-site for the inspection.   

Additional Purposes of an inspection:

Rebuild cost

The first objective is to make sure the building is insured properly: that the policy's coverage reflects the cost to rebuild in the event of a total loss.  When we first prepare a property for shopping the insurance we often use replacement value software to determine the rebuild value. The software is good, but every property is unique, and public records are limited.   The most accurate way to validate the cost to rebuild for you is via an on-site inspection.

Identify hazards

Hazards are conditions which may lead to a loss - insured or not. To identify conditions where a loss might occur: safety items we see commonly in habitational (apartment) buildings include a deck with no handrails, or potholes (trip and fall hazards) in the sidewalk, or other susceptibility to loss, most commonly water.

What will be inspected?

Expect that the inspector will ask to see each room including the basement and all mechanicals: HVAC systems, sprinkler and other plumbing, roof, and so forth.  They will take pictures from both inside and out to help tell the story to an underwriter.  Underwriters are sponges for risk-based information, and the inspection fills in what the submitting agent or broker had not disclosed.

The inspector will usually measure the property to validate dimensions information.  If dogs are permitted in a habitational property (rented house or apartments), they will ask about written rules for tenants.  Dogs account for about 30% of personal liability claims payments, so this is one example where clear and enforced tenant rules matter.

They’ll inspect the roof condition, and inspect gutters and downspouts for flow and connections.  Trees or bushes over the roof will degrade the roof before its time, and roofs are important: they keep buildings dry.  

Here’s a tip before the inspector arrives: Debris in the yard or in common areas is a sure sign of lax property management. The little things matter.  Keep the property as clean and tidy as possible.

Avoiding surprises

If you are buying a new property, disclose everything to your insurance agent or broker up front, particularly if you are planning any construction beyond cosmetic improvement.  The pricing of the risk is very different for a functioning and rented habitational or commercial building than a vacant building or an active construction site.  Underwriters don’t like surprises, and have the right – within limited time frame – to get off a policy if conditions are not what were presented for initial pricing.  Both situations can be addressed by our agency but it is always best to disclose these plans when setting up the policy. The insurance company’s contractual right to cancel a policy for misrepresentation gives them all the leverage.

Benefits

One benefit of a home insurance inspection can be that discounts or credits are identified by the inspector that the customer was not aware. For example, some properties with central fire and burglar alarms do not realize their system also has a low temperature sensors.

The other benefit of course is that a risk professional has examined the property and identified areas most likely to lead to a loss.  As the party with the financial interest in preventing losses, carriers will ask for some changes, and demand others, depending on the perceived risk severity.

What happens after the inspection?

When the inspection is complete, a written report goes to the insurance company. They review and confirm the coverage amount and outline concerns (called recommendations’).    As mentioned above, some recommendations are just that; many are requirements: for example: if a sprinkler system has not been tested within its required cycle, or if a roof leaks.   They’ll forward the report to you or through the agent or broker.   As agent / brokers, we are adept at communications between the underwriter and property owners.  The most important part is opening up a dialogue with the insurance company.   We are experienced with these and will assist with crafting an agreeable action plan.

Keeping costs down – for you, for everyone

Having your property inspected keeps the cost of your insurance down in several ways.  It begins with reinsurance, the insurance that companies buy to protect the company from large catastrophic losses.  Companies that conduct the most rigorous inspections get deeper discounts on reinsurance, a cost passed along to the customers.  Companies that identify and prevent losses will have lower costs before using their reinsurance and continue to offer the better prices.

If you are thinking about buying a property and need a great risk partner to help you navigate this part, contact the experts at Gordon Insurance.

 

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Tags: commercial insurance, Hazards, Insurance Inspections, Inspections, Property Inspections, Apartment Inspections, Inspection Recommendations

Voluntary Parting - When theft isn't covered for small business

Posted by Geoffrey Gordon on Fri, Oct 30, 2015 @ 11:12 AM

 

Today, many small businesses sell their products online. An order comes in, you run the cutomer's credit card, payment is approved, and you ship the item.  To this point everything appears to be in order.  But then, when your bank reverses the deposit, and takes the money out of your account, maybe a day, a week, a month or even several months later, you find out that you paid with a stolen credit card.  You think, isn’t this be the bank's responsibility to make sure the card is good?  From cases we've seen, it is not.   And insurance won't help you either, for an exclusion known as "voluntary parting".

We assisted a customer of ours who had a payment denied for a large order shipped six months earlier. Evidently the owner of the card was someone who didn’t pay close attention to her purchases, and hadn’t notice the charge for over six months. Finally, she noticed that a 5-figure charge was made to her card a half year earlier and contacted her bank. Indeed the charge was bogus, and the bank credited her account accordingly.  That's when our customer noticed the same amount withdrawn from their corporate checking account. What was not a particularly noteworthy transaction for the woman whose card was charged, it was a big number for this business. They called the bank whose representative referred them to the bank agreement.  The agreement was written by the bank, by well qualified attorneys, to protect the bank's interests for any acts of fraud.  How well it protected the bank was remarkable: the bank indeed had the expressly stated right to withdraw, without notice, the full amount of the transaction made on the stolen card.  Naturally, our customer hoped she had insurance for this loss.  But insurance was no help either. This transaction is what insurance companies refer to as "voluntary parting".

Remember back to when you were ready to buy a car, and the salesman would give you the keys and say, “Take her for a spin”? Those days are long gone. Why? Because some people would take the car for a spin, and never return.  Because the salesperson voluntarily gave up the keys, the car was not stolen: no theft, no insurance coverage.  Being duped for sending product to a location far away falls onto this same category, the product was not stolen; no insurance coverage.

This scam has become more common lately. The bank accepts a card, the product is shipped, and at some point later on, the bank takes the money back. The banks and insurance companies want nothing to do with absorbing this loss, and write their contracts accordingly.

A tragic after-story to the first customer described here: several months after having the money taken from their bank account, they got another order from the same company at the same address in California.  They had already contacted the police in California when the scam first happened, and neither the local or state police said they could do anything about it, as it was probably a fake business or address.  But now they had the same company, operating from the same address, trying to take another shot at scamming our customer. They called the local and state police again and were told they had to elevate to the FBI, since this was an interstate commerce fraud. When they contacted the FBI, they were told that the FBI only got involved with scams over $200,000. I also spoke separately with a friend who is an FBI agent and he confirmed that they only have resources for the big fraud cases. 

The small business takes the hit from the fraudsters, and can’t get help from big financial companies or their government.  Further research suggests that one solution is Pay Pal. We have found that more and more small businesses selling and shipping property prefer the small fee that PayPal charges is well worth it.   We use our Pay Pal account for some of the few services we buy non-locally.

 Bottom line, be ever watchful when you take your first order from a big customer who is in a rush.  It could wellbe a scam where there's no insurance to back you up.

Tags: voluntary parting, credit card fraud, stolen credit cards, small business fraud

Technology Errors and Omissions Liability

Posted by Geoffrey Gordon on Fri, Oct 02, 2015 @ 10:14 AM

Cyber_Lock

Technology Errors and Omissions (Tech E&O) provides protection for the professional services provided by technology companies. Cyber Liability refers most often to a breach in private records held by a company. Where the two coverages intersect is when a cyber liability event happens, resulting in stolen customer records, and the breach may be attributed to the failure of the technology company in providing adequate professional services.

 

For example, in our office we buy Cyber Liability Insurance in case hackers from a Foreign government, a crime organization, or a high school student next door breaks into our server and steals our customers' private information. The Cyber Liability Insurance will provide notification, life-lock type security for all of the customers affected, and third-party coverage in case the break results in actual losses to our customers. This insurance also includes Forensic Investigations. The Forensic Investigation is not just an academic exercise that asks ‘Wonder who stole all that information?’, the insurance company has an ulterior motive; they want to know how the data was hacked. Let's assume the forensic investigation uncovered that our IT partner had left a vulnerability in our firewall, and that the breach was a direct result of this negligence. The insurance company that paid our claim will look to the Tech E&O coverage of our IT partner provider.  Errors and Omissions Insurance coverage provides protection to professionals, including doctors, lawyers, insurance agents, consultants, and ...IT providers. If the tech who was programming our firewall left a huge vulnerability that was discovered by a robot or human hacker, this represents an error in the professional services expected.

 

Tech E&O and Cyber Liability are not always exclusive coverages. The two intersect when a tech company provides co-location services or services such as Platform as a Service (PaaS) where they not only maintain the security aspect, but actually hold the information that is stolen.  Professional Errors and Omission insurance must always be reviewed carefully for specific exclusions. Be on the lookout particularly for exclusions for unauthorized access, mechanical or electrical failure, delay in delivery, or deliberate acts by rogue employees.  What this protects against is the unknown Edward Snowden working in his cubicle causing tremendous damage to a company. If an executive officer of the company creates similar acts, including intentional acts, no insurance policy will protect against that.

 

Some professional liability policies provide limited coverages where only specific services defined in the policy are included for coverage. Underwriters always prefer to know exactly what kind of services are provided in order to quantify the cost of professional liability insurance. Because the functions performed by most tech companies are varied and evolve with available technology, we prefer Enterprise coverage when it is available. This means that all professional activities are protected, even those that the underwriter never even knew about, because they are new or because they are one-offs.

 

A type of liability that has been somewhat dormant over the past 20 to 30 years has been fully resurrected with the advent of the Internet.  This is Advertising Liability, and today can include what is known as Media Liability. When advertisements were mostly in printed form, or on the radio or TV, the publishing newspaper or controlling radio or television would often vet the contents of ads in production, so that aggressive companies could not spread lies about their competition and get everybody in trouble. With Websites there is no such third-party protection; companies often just put up online whatever they feel like. Web hosting sites and web development Service companies are the new TV and radio platform. While most web hosting and social media service companies have terms of service that limit liability on specific comments or statements, they are immune from advertising liability claims.



 

Tags: commercial insurance, cyber, reinsurance, liability, errors, technology, omissions

Employment Practices Liability

Posted by Geoffrey Gordon on Wed, May 27, 2015 @ 03:09 PM

Employment_practices_liability_business_insurance_Andrew_G_Gordon_IncEmployment practices liability is the chance of being sued if you fail to observe and practice certain employment practices regulations. Here’s a guide to keep from getting sued, and what to do if / when you are.

First, the good news: Many states, including Massachusetts, permit an arrangement known as “at-will” employment. This means employment continues as long as employer and employee decide things are OK. The key is that it’s a 2-way street, both for the employer and by the employee. The employee may quit to pursue better opportunities, or just to stop working for a while, without giving a reason. Similarly, the employer may terminate employment without a specific cause or reason: if business changes or other reasons such as when things just aren't working out.  Every employer (where permitted) should actively state that employment is “at-will”: in the employment application, in the employee handbook, and at termination.

Employers are still held to a very high standard, in spite of the “at-will” doctrine, so don’t get complacent. The past year has seen a broad array of new state and Federal regulations, including the Massachusetts Paid Sick Leave law and new federal regulations on accommodating pregnant employees and changes to FMLA and ADA.

There are many new laws and regulations that apply to the three stages of employment; it's hard to keep up.  A good HR department or outsourced partner is critical*.  The timeline of employment risk runs across these three areas: 

  1. Pre-employment, including the application process and interviewing:
  2. During employment:
  3. Termination

There are other steps to be taken at each part of this process. For example, the employment application and the employee handbook should state clearly that employer does not permit discrimination by gender, race, religion, age, sexual orientation, and other characteristics. Not only is this good business practice, it's the law. Tolerating a rogue employee’s discrimination towards any co-worker  member of these protected categories makes the employer complicit in discriminatory practices. And your company can face fines from regulators and get sued for the rogue employee's behavior. Non-discrimination should be part of any business’s culture. 

That troublesome employee - what to do?

When the employer decides that an employee just isn't working out, there are steps that can be taken to mitigate the risk of being sued for wrongful termination.  Performance or misbehavior needs to prompt quick action, but these are more often terminations for cause, always more defendable.  For others, If termination can happen deliberately, over a period of time where documentation can be gathered, that’s safer. Lots of documentation is always better.  Imagine you're in front of a judge or jury in a year: Give your defense team something to work with!

In Massachusetts, employment regulations require that the employee must be notified whenever a negative review is placed in an employee’s file. Unfortunately, the effect of this is often conflict avoidance: a friendly manager may avoid a negative review, since asking the employee to sign the review to place in the employees file can be so uncomfortable. Too often, no note is added to the file, as though everything is just fine. When the time comes to give the termination notice, the file is empty, sometimes because of the notification regulation, so on paper a perfectly reasonable termination appears to be a thoughtless decision by a capricious employer. The employee feels unfairly treated, and hires an attorney to pursue his or her rights. 

When the letter from the lawyer comes in, it will allege all kinds of allegations that are certain to make the employer's blood boil, and escalate tensions. After all, the plaintiff’s attorney has heard only one side. Additionally the attorneys are skilled at exaggerating and fanning the flames. This is where employment practices liability insurance (EPLI) can be valuable. Employment practices liability insurance (EPLI) provides money for legal defense, and usually includes consultation with claims adjusters (many of whom are attorneys)  to de-escalate the situation and take stock of the merits of the case. Insurance allows businesses to out-source the cost and many of the headaches, skill sets that are seldom part of a business's core competencies. 

But nobody wants a claim. It’s better to provide employees with training and opportunities to develop in a position. But people are people, and you never know.  

Our own experience offers these suggestions:

  • Make sure your employment manual is up to date. Regulators love to cite employers for not providing up to date employment rights information to their employees.  Don't let them play "Gotcha"
  • If you are sure that you are going to let somebody go, it's a good idea to talk to a labor attorney* first.  The attorney’s fee may seem an un-necessary expense, but the conversation itself will be valuable for future situations as well as protect you for the immediate need.  (We network extensively and can refer you to a labor attorney)
  • Document, document, document.
  • Don't tolerate poor performance, but address it in written format.  This can be difficult but is an easier solution than being sued, as well as being fairer to the employee. Every employee should know their value to the organization, as well as ways to enhance that value, and avopid self-sabotage.

Check out our business pages at www.agordon.com/biz for more resources and feel free to contact us with any commercial insurance questions.

* Geoff Gordon neworks broadly with other professionals and can refer qualified HR specialists, labor attorneys, and others throughout southeastern Masssachusetts. 

Geoff

Drones and Insurance

Posted by Geoffrey Gordon on Fri, May 15, 2015 @ 04:12 PM

Drone_usage_in_commercial_insurance_Andrew_G_Gordon_IncDrones will soon fill the skies, and be used for many applications, commercial and personal,this blog will provide an update with a focus on the risk and insurance angle.

Note: coincidentally, just a few days after posting this, the Boston Globe ran an artcle 'Don't be that guy - learn to fly your drone' that we link here: http://www.betaboston.com/news/2015/05/27/dont-be-that-guy-learn-to-fly-your-drone/  The article recommends getting lessons, a very good idea before sending your new toy up above your neighborhood,

Drones are expected to be used with the ruling from the Federal Aviation Administration (FAA) on the use of unmanned aircraft systems (UAS) in U.S. skies. The United States has the most complex and busy skies anywhere in the world, so the regulations are highly anticipated. Clearly, many large business interests are angling for broad commercial use, and the FAA is working on regulations now.

There are already some regulations in place, but these regulations really are in place to limit the use of drones commercially. For civil operations, which include business use, there are two ways to operate a drone:

  1. The first is to obtain a Special Airworthiness Certificate (SAC). This certificate provides information about design, airworthiness, operating software, quality control and so forth.
  2. Section 333 is an exemption to the certificate. 289 have been granted in the whole country.

Thus, commercial use of drones is in a holding pattern until the FAA completes its new regulations. Both commercial and recreational use have great latent demand, and federal regulations are late to the show.  17 States have already passed their own regulations, but is airspace best regulated individually by the states and municipalities? This approach seems unnecessarily complicated.

Model and hobby use is permitted currently, but this is changing rapidly. Police logs will show that complaints are soaring, frequently for privacy concerns, but occasionally for damage. Traditionally, the FAA has not regulated airspace below 500 feet, meaning you own your airspace up to 500 feet. Under proposed regulations, the FAA is regulating down to the ground. These regulations include:

  1. Keep under 500 feet altitude;
  2. Conduct pre-flight checklists for safety and reliability;
  3. Keep in visual sight at all times;
  4. Keep away from people and stadiums;
  5. Keep clear of manned aircraft (including no flying within 5 miles of any airport);
  6. Weigh less than 55 lbs.

The FAA has a summary list of its proposed regulations for Small Unmanned Aircraft here:  http://www.faa.gov/regulations_policies/rulemaking/media/021515_sUAS_Summary.pdf

Drone use clearly creates risks that the insurance industry is trying to quantify. Pricing for commercial use is difficult given the lack of loss experience, so this will develop over time, particularly once commercial use regulations have been promulgated.  In the meantime, because the general liability policy is so broad, early commercial use may be covered until the industry excludes drone exposures to price buy-back coverage. On the personal recreational use side, we have not yet had a drone related claim here in our South Shore office, but they’re easy to imagine:

  1. A drone falls from the sky and damages someone else’s house, car or other property;
  2. A drone falls and hurts someone physically;
  3. Invasion of privacy. This is the one that bothers many of us the most. 

Commercial use will be highly regulated, especially with a higher expectation of safety, privacy and predictability. Different industries have different reasons for wanting full access to drone use. Amazon has said it would like to deliver packages to your door by drone, and surely drone deliveries will play a large role in consumer product delivery. In addition, some jobs are more safely handled by drones than by humans; for example, inspections of high places, like high wire or antenna inspections.

The insurance industry has its own benefits planned for drone use. For underwriting, a visual view of insured properties will be less expensive and less intrusive than a human inspector. Working with security firms, physical security and early response to claims will be a benefit that should drive down the cost of risk to covered properties.  

The biggest benefit for the insurance industry will be for claims, and particularly post-disaster assessment and response time. Today, insurance companies respond to disasters by bringing in teams from other regions, folks who do not necessarily know the local roads or resources. Prioritizing claims by severity is an inexact science at best: subjective claims descriptions vary tremendously. Insurers already know the physical concentration of their “rooftops”; sending drones in right after a big event will provide valuable information to prioritize claims and assign to the most qualified staff.

Contact us for more commercial insurance info!

Get Quote

Geoff

Commercial Insurance Audits

Posted by Jane Logan on Thu, Feb 05, 2015 @ 02:30 PM

Commercial_insurance_audit_tips_from_Andrew_G_Gordon_IncInsurance Audits

A Commercial Insurance premium is based on the how much activity a business has; the more activity, the more exposure to loss and the higher the premium.  At the beginning of the policy term, the exposure (payroll, gross income, admission, gallons, etc.) is estimated.  At the end of the policy term the insurance company conducts an audit to determine the actual exposure. Audits ensure that your insurance premium is based on your individual level of activity.

The three most common measures of exposure are:

  • Gross Payroll – Includes wages or salary, commission, bonuses, overtime, holiday, sick and vacation pay as well as the value of housing if provided for employees. Overtime is adjusted back to straight time if records total overtime paid by job type / rating class code. Tips are deducted from payroll as are dismissal or severance pay. 
  • Gross Sales – Includes income for all goods and services provided.  Deductions include Sales Tax, the value of merchandise returned and freight charges - if freight is a separate item on your customer invoices.
  • Subcontract Labor Cost – Total cost of all labor, materials and equipment furnished and used to produce your product or service.

 

 Tips for preparing for your audit:

  • Have the auditor send you a list of all information required for the audit.
  • Prepare records to take advantage of allowable deductions.
  • If you hire subcontractors have Certificates of Insurance for each subcontractor with policy term dates that cover your entire policy term – you may need at least two Certificates on each subcontractor.
  • Restaurants and retail stores should always report gross sales of food and alcohol separately.
  • Lottery Sales – only commission is included.

 

Tips for the audit appointment:

  • If you prefer an exact appointment time and not an appointment “window of time” ask for the first appointment of the day.  Being the first appointment means you won’t be kept waiting because the audit before you took longer than expected.
  • Provide the auditor with an area to work with enough space for your records and a laptop computer.  Providing a good work area reduces the time it takes to conduct the audit and reduces the risk of errors.
  • Auditors may ask questions that don’t appear to be relevant such as gross income on an audit based on payroll.  Insurance companies use gross income to judge if the payroll is credible, so even though the policy is rated on payroll, they may ask for gross income.
  • If the auditor asks you to sign an authorization to release the audit worksheets to your agent sign the form, it will expedite the process if you dispute the audit.
  • Finally, auditors are paid to audit-not try to audit; their income is based on the number of audits they conduct.  Time spent by an auditor making multiple calls to schedule the audit or waiting for records during the audit takes time which the auditor could use to identify and apply credits you’re due to reduce your premium.  The same auditor may conduct your audit year after year, and building a good relationship with an auditor could save you money!

Contact us with any questions about commercial insurance! Check out this other blog on insurance audits and workers' comp!

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Jane_Logan

Terrorism Risk Insurance Act – TRIA – Expired December 31, 2014, reauthorized

Posted by Geoffrey Gordon on Tue, Dec 30, 2014 @ 05:27 PM

The Terrorism Risk Insurance Act (TRIA )was conceived in the aftermath of the terrorist attacks on September 11, 2001.  The damage caused by those attacks exceeded $40 billion in insured losses, the worst example of intentional destruction on American soil since December 7, 1941 when the Japanese bombed Pearl Harbor.

Acts of terrorism had never been addressed by insurance before September 11, however the unpredictable nature of acts of terrorism are impossible for the insurance industry to quantify.  Insurance companies are in the businesss of quantifying rrisks, so this created immediate problems for the industry.  Reinsurers, the large financial behemoths who provide insurance to the insurance industry, exited the market for terrorism coverage after paying out the vast majority of the claims in New York, Washington DC, and Pennsylvania.  With no financial backing to cover such unpredictable losses, retail insurance companies that provide 

NYC_9-11

In November 2002 Congress authorized the Terrorism Risk Insurance Act (TRIA) which provided the badly needed backstop to the insurance industry.  The forms that many business owners are familiar with today where they must accept or reject terrorism coverage, are manifestations of this law.  But most importantly, coverage was available for businesses and building owners in urban areas thought most vunerable to future attacks.insurance to businesses began to add exclusions to avoid this risk to their own financial stability. 

The conditions for an act of terrorism are certified by the Secretary of the Treasury along with the Secretary of State and Attorney General.    However one of the features of the law is the requirement that at least $5 million in damage.  Thus, the act perpetrated at the Boston Marathon bombing never was certified as an act of terrorism because damaged never rached that $5,000,000 threshold, even though the attack was called terrorism by most Americans including President  Obama.

Fast forward to December 2014. In the final “Cromnibus Act” passed in December 2014 by a partly lame-duck Congress, the terrorism risk insurance act was not reauthorized.  This failure to continue the reinsurance through the federal government was not expected by most experts in the insurance industry.  Fortunately the hiatus was temporary:  One of the first acts of the new 114th Congress was to reauthorize the Act. 

For more on TRIA’s history and features, visit http://en.wikipedia.org/wiki/Terrorism_Risk_Insurance_Act

We update this blog periodically as situations in Washington change.

Independent contractors and the IRS, insurance companies, and MA DoR

Posted by Geoffrey Gordon on Wed, Sep 24, 2014 @ 05:25 PM

Independent contractors, or subcontractors, are treated differently by insurance companies, the IRS and by the Massachusetts Department of Revenue.  The purpose of this blog will be to highlight the differences and to outline why the Massachusetts definitions are so important to so many businesses.

Independent contractors (ICs)perform a variety of functions, often which are not part of the core work of the hiring company.  The determination as to whether a worker should be classified as independent versus an employee comes down to several factors.  Every business wants to know how subs and insurance interact, but how governmental agencies view these relationships is important as well.  Consider the spectrum below to get a sense of where different authorities fall:  To the left side, a company has an owner and no employees: all work is done by independent contractors.  To the right, all workers performing work are employees.   Massachusetts has the broadest definition to classify workers as employees; the IRS is somewhat further down the spectrum.  Insurance rules and regulations fall somewhere between these two, depending upon the industry, the kind of insurance and the way insurance costs - particularly general liability adnworkers comp - are quantified.

spectrum_of_IC_classification

In the past, it was simple: if someone was an employee they got a W-2, and ICs use the reporting form 1099.  Employers are responsible for collecting payroll taxes and income taxes from W-2 employees, but subcontractors are on their own to report their income and pay taxes.  Employee employer collection of taxes is more predictable, effective and enforceable, so tax collectors prefer workers to be classified as W-2 employees.

As more employers began using subs to manage labor costs and reduce insurance costs, the incidence of insurance fraud, below market wages, unfair competition, and tax compliance grew, and State officials worked to change that.

In 2004 Massachusetts passed a law intended to classify more independent subs as employees. This law established a three part definition: "...an individual performing any servce shall be an employee unless:

  • The worker must be free from control and direction in performance of service; and
  • The work performed is outside the usual course of business of the employer, and 
  • The individual is customarily engaged in an independently established trade. occupation, profession or business of the same nature as that involves in the service performed.
Failure to comply can result in taxes, simple fines, and criminal offenses.  Principles of corporations or members of LLCs (the people who are the employers) can be held personally liable for violations. 

Because of the large fines and potential for triple damages and huge legal fees, this wage act has been characterized by some as the new ‘tobacco’ for prosecuting attorneys.   Businesses beware.

Insurance companies want to collect premiums wherever a risk of loss exists.  The basis for developing an insurance cost can be broken down by payroll to employees and expenses paid to subs.  If the subcontractors have their own insurance (see certificates) the charge is a fraction of the charge for direct labor.  But when subcontractors do not have their own insurance, the employer pays the same wage as they would for their own direct labor.  This is why collecting insurance certificates, and being named as additional insureds, can be such an important cost consideration for businesses that use independent contractors.

Real Estate agents as independent contractors have long been an exception to the broad categorization of contractors as direct (W-2) workers.  A specific law (G.L. c. 112.§87 RR) protects this carve-out classification, but that law was recently challenged by a group of real estate agents who argued they should be classifies as employees.   A Superior Court judge ruled last year that the real estate law still holds, but attorneys we’ve consulted believe this decision will be challenged in the Appeals Court, and will probably end up in the Supreme Judicial Court.

As experts in risk we recommend careful collection of certificates of insurance to keep your own risk and insurance costs low.  The wage law can be a greater threat for which no insurance is available: consult with other professionals including legal and accounting counsel for more detail on how the 2004 Massachusetts wage law affects your business specifically.

This blog was inspired by a seminar developed by Thomas Marks, an attorney in Mansfield specializing in business law, contracts, civil litigation and estate planning. Visit http://thomasjmarks.com/ for more.

Tags: insependent contractors, Subcontractors and IRS<, subcontractors

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