I still recall vividly the events unfolding in Cairo's Tahrir Square a couple years ago as Hosni Mubarak was counting his final days in power. I remember these events because I was at home on the couch paralyzed with back pain, stuck flipping between CNN, ABC, and Fox. Going to work was out of the question - a rarity for me. It took about a half an hour to get from the couch to the car and another half hour to get from the parked car to the doctor’s office, every step in excruciating pain (I should have called 911). I was in my mid 50’s and felt like an old man. My body was broken.
Fast-forward three years. I am pain free, never miss work, sleep better, have an incredible energy level, and am a better skier, snowboarder, tennis player, and surfer than I was five, ten, even twenty years ago: (full disclosure, I only recently took up surfing). What's my secret? Actually no secret; the solution is well-known: diet and exercise. But there’s more to this than the same chorus you've heard before.
My personal epiphany came in a book entitled Younger Next Year. The subtitle got my attention: “A guide to living like 50 until you're 80 and beyond”. The book encourages people in their 50’s to get plenty of exercise, watch what they eat, and stay focused and committed in the mind. At this same time a couple friends invited me to a morning “Boot Camp” training regimen that sounded like a fun, social way to rebuild my broken body. I figured I could give it a try until I healed myself. So while I was getting stronger at Boot Camp, I also began watching my food intake, for better performance. Today I wouldn't dream of stopping my regular exercise routine. There's too much on the line.
My story is not unique. Developments in the sciences of the body, including our genetic makeup and technology, have converged to make measurable progress in energy and fitness a reality for millions. We understand better for example how muscle deteriorates at roughly 1% per year (10% per decade) after about age 40. Our grandparents may have known this subconsciously, but didn't know it quantitatively. Today we can measure exactly how our bodies are performing.
Another development is better training. Trainers today have tremendous resources at their disposal for getting the most out of people. Research starts at the high end; when any professional athlete is hurt, a lot of money is at risk, so research on getting them healthy and in top performance as efficiently as possible is well funded. That expertise filters down to the rest of the training community, and is available through providers such as Trainer MD (full disclosure, Trainer MD is also a customer). A good trainer, whether individually or with a group (I prefer the latter for its social benefits), is part motivator, part coach, part friend.
One important caveat: talk to your doctor before embarking on a fitness program. What we don't know we don't know can really hurt us. With our health, always talk to an expert first.
In business, we track a lot of numbers to help us make a variety of decisions. Technology, such as the Garmin watch which monitors blood pressure and heart speed, has made tracking your physical progress much easier. But if this becomes a task, ditch it. (Personally I don’t use these, but most high performers quanfity a lot of fitness indicators carefully).
A few observations and my personal testimonial on the food we eat. We understand better today how the consumption of processed foods that taste so good going down can be so harmful to us. The average American consumes approximately 110 pounds of processed sugar (mostly high fructose corn syrup) per year; our grandparents consumed less than 10% of that amount including cane sugar. While soda pop consumption is declining, sports drinks are mostly just sugar water. Being just a little disciplined with our eating habits can make a world of difference.
Reasonable people can argue whether genetically modified foods have contributed to the spike in allergies to peanuts, milk (lactose), and wheat (gluten) in so many of our children, and other new maladies, but if the skeptics are right, doesn't it make sense to err on the side of caution? Eating as our forebears did, consuming more unprocessed (real) food, rather than food that has been processed for taste and marketability. Want proof? Google a list of 10 successful diet programs, and notice the most common theme: the absence of processed foods, substituting instead real fruit and vegetables, real meat or other protein, and a small dose of complex carbohydrates.
More good news is that our healthcare system is beginning to focus more on wellness than just fixing people who are already broken. A development in the health-insurance industry is that many medical providers are now compensated for keeping people out of their offices, rather than billing them only when they come in. Many employer sponsored insurance plans now pay for joining Weight Watchers, health clubs or other wellness organizations too. No secret here: weight loss and regular exercise mean fewer health problems.
The authors of Younger Next Year cite that some 70% of diseases today are lifestyle related, and that 50% of the maladies associated with old age can be eliminated altogether through diet and exercise. Lifestyle (diet and exercise) have a direct impact on the cost of healthcare, and now there’s money – lots of it - in keeping people fit. So this won't be the last you'll hear of this health evolution.
Here's the best news of all. I still indulge myself: I love steak, I love pizza, I enjoy having a beer with friends. But too much of any of these makes me feel less than fit, so it's easier to self-regulate than to be motivated by guilt. For me, staying fit means staying with skiers 30 years younger, getting to a ball that nobody expects me to reach; it means showing up at work with energy and purpose, and it also means creating active memories with my family in fun and interesting places. It means not being stuck on the couch watching Egypt on TV in paralyzing pain. It means… life is good.
Every so often, we receive inquiries from our commercial auto clients regarding Massachusetts commercial vehicle inspection requirements, procedures and Department of Transportation (D.O.T.) requirements. Recently, I brought my personal auto to a commercial inspection station, DelCorp Mass State Inspection, Whitman, MA (they also inspect private passenger vehicles). They gave me some very useful information and provided the following website, Massvehiclecheck.com. http://massvehiclecheck.state.ma.us. This website provides useful Massachusetts information for all vehicle types. For commercial information, refer to their section: Commercial Inspection Program.
Massachusetts Vehicle Check is a joint program of the Department of Environmental Protection (MassDEP) and the Registry of Motor Vehicles (RMV).
The website states that “All commercial vehicles, trailers and converter dollies are subject to the Massachusetts Commercial Vehicle Inspection. The Federal Motor Carrier Safety Administration (FMCSA) approved the Massachusetts Commercial Vehicle Inspection as equivalent to the annual FMCSA or "DOT" inspection. If your commercial vehicle/trailer receives a state safety inspection, you are not required to obtain a separate FMCSA or "DOT" inspection”. The website also advises that “The Vehicle Inspection Report (VIR) issued by the Commonwealth of Massachusetts that is signed by the licensed vehicle inspector is proof of compliance with FMCSA inspection requirements, not the windshield sticker on the vehicle. RMV recommends that the VIR is maintained inside the vehicle at all times”.
This website provides a state listing of Massachusetts commercial inspection stations, as well as information regarding Federal DOT Regulations.
“Effective on October 22, 2008, the Federal Motor Carrier Safety Administration (FMCSA), added the Commonwealth of Massachusetts’ annual safety inspection program for commercial motor vehicles to their list of Programs which have been determined to be comparable to, or as effective as, the Federal Periodic Inspection requirements contained in the Federal Motor Carrier Safety Regulations (FMCSRs). Click here to download the Federal Register notice.”
(All information provided is from Massvehiclecheck.com)
If you haven't heard of the Work Force Training Fund, you're not alone. This is one of the best kept open secrets in Massachusetts. Part of the unemployment compensation tax every employer in Massachusetts pays goes directly into the Workforce Training Fund programs (with the unfortunate acronym: the WTF Program). The money in this trust fund - averaging about $21 million per year - is not available to legislators for other civic uses, and often runs a surplus. The program provides matching money to employers for employee training. If your business is committed to continuing education and workplace skills development, this fund will reimburse you for half your expenses. It's a great way to enhance employee productivity, and about as close to free money for Massachusetts employers as you'll see anywhere.
There are several versions, but if you're reading about this for the first time, consider the easiest program, called the Express Program. This is for employers with less than 100 employees; there are over 2000 training programs to choose from. The overview page is linked here. To see if you qualify in general, click the qualifications page located here. Most small business employers will qualify. Next, select a course that's appropriate for your business needs. All courses listed have been approved by the state, so must meet certain minimum requirements. Naturally checking references and performing other due diligence on the trainer is just as important as with any other vendor selection, but the state has vetted this list already. The training course search allows you to search according to location, industry, cost, and other useful criteria. This search function is helpful in narrowing down what might be useful in your business from the over 2000 courses available.
The Express program took us about a month of fairly tedious forms submission and follow ups, but well worth the effort. For example, one step asks for your DUA number as though it's your Social Security number or Federal Tax ID number. (It's your unemployment insurance number - on your unemployment insurance notices). The second time around goes more smoothly because you know what to expect. This blog should help you understand the program and save you some time exploring its use for your business.
Once you select a training course, apply for official acceptance: the fun part referenced above. You will schedule and pay for the program in full per the terms of the training sponsor selected; the WTF program will reimburse you its half upon completion of the course. This ensures that you have some skin in the game and are committed to the course’s completion. In our office, we have enrolled more than half our total staff, including five customer service reps and our manager, in a client development training program: this program focuses on listening skills, understanding personality styles, and other skills useful for any front line service staff. Dedicated sales people are continuing with a follow-up program which focuses on the latter stages of the sales process. We are committed to engaging more staff in additional programs later in the year. The returns in productivity and customer satisfaction from the first program, at this writing only half completed, are already noticeable.
Other employers we network or do business with have successfully taken courses in time management, customer service, team building, and other courses where small businesses generally don’t have the resources to create, plan and execute internally. Consider it outsourcing non-core, but useful business skills....with your unemployment tax paying for half. It's a pretty good deal.
The General Program is for the big dogs, larger companies which can dedicate resources to complete the more lengthy and complicated grant approval process, and who are looking for much larger payoffs. While the general program provides full reimbursement for the training costs, companies must demonstrate that they are kicking in 50% of the overall cost, which may include labor, fringe benefits and other expenses borne by the employer.
The staff at the Department of Workforce Development tells you that this process takes about 60 days, but given the complexity of what's required, plan for more time, or engage a professional. The General Program requires that you calculate and show the return on investment, and document how the company's own resources match the grant amount. You may include wages of all participants plus 20% for fringe benefits while participating in training, the time cost writing the grant, and so forth. But even though it is not as easy as the program folks may tell you, many companies are awarded high 5- and 6-figure grants. If the training program is a good match for your company's needs, showing a return on investment, of other people’s money, should be attractive.
Finally there is a Hiring Incentive grant: hire someone who was unemployed, and receive up to $5000. We have not used this program yet, so will not comment further here.
Overall, this is state assistance, paid for already through your unemployment taxes, with a broad range of training propgrams to enhance your company's human capital. After all, Human Capital is often the greatest asset of a businesses. Reduce the risk to your human capital (such as turnover or stagnation) by investing it its improvement. Why would you NOT take advantage of developing it for shared employer - employee success?
Workers Compensation rates might be going up in Massachusetts, news that’s just about as popular as taxes going up. Business owners know workers comp costs affect the bottom line directly.
If approved, rates will increase on average across the state by 7.7 percent. A hearing is was held January 30th, and more hearings are scheduled for March and into the spring.
Update: April 2, 2014: The 7.7% overall rate increase was rejected by the Division of Insurance. While rates within a specific class, or grouping of employees, may change from year to year, the overall rates will not change in 2014.
Rates are recommended by a state approved rating board known as the Workers’ Compensation Rating and Inspection Bureau of Massachusetts (WCRIB), and changed only after approval by the Division of Insurance with input from a variety of other governmental offices and consumer and business groups. It’s a political process as much as an economic process.
In December, WCRIBMA submitted a rate filing with the Division requesting an average increase of 7.7 percent in the rates for industrial classes statewide. The proposed effective date was January 1, 2014.
While an increase in any element of labor costs is never good news, it may be better for companies in the long run due to the nature of the market today. The existing workers compensation market is unhealthy and uncompetitive. This would be the first rate hike in Massachusetts workers copensation rates in over 10 years. Because rates have been suppressed for so long, more and more companies are declining business. When no insurance companies want to insure an employer, the employer buys coverage through the “pool”. Market health can be accurately gauged by the number of accounts that ends up in the assigned risk pool. Today roughly one in four accounts is in the pool, one of the highest rates of 'pool' market share in the country.
Holding rates can’t go on much longer, no matter the political will. Consider the trends of workers compensation rates against health insurance rates over the past decade. Economic forces are pushing hard for higher pricing.
The firms providing the workers compensation services have little incentive to put service resources toward their accounts in assigned risk pools. Assume an insurance company has a 10% market share; they will be assigned 10% of the market. But for every dollar they invest toward worker safety programs, careful claims management, support for back-to-work programs and other cost saving initiatives, they’ll only reap 10% (their market share) of the returns. As with any private company, investments are made with an eye on the returns to the company, not to its competitors. Claims management, innovation and overall service suffer.
Service for pooled accounts is indistinguishable; carriers are allowed a specific fee to administer claims, and the lowest common denominator for service standards rules. A modest increase today would bring more choice and competition back to the market, providing important incentives to carriers to continue to invest in loss control and claims management that ultimately lowers costs, making for lower premiums in the long term.
In the meantime, employers stuck in the pool can influence their future rates by taking step to minimize the chance of workers compensation losses. Workers compensation is highly experience sensitive, though there is a long lag time for converting claims expenses to rates costs. Here’s what you can do in your business to control what you can control:
- Keep a safe workplace; enforce your industry’s safety best practices. Healthy employees are not only good for business, but also good for morale and productivity.
- Offer a light duty back to work program for employees who are injured (subject to doctors’ limitations of course).
- Pre-screen new employees carefully to avoid becoming a piggy bank for scam artists.
- Review your claims history each year to spot trends or threats within your own organization.
As a result of 9/11, the Terrorism Risk Insurance Act, also known as TRIA, was created for certain types of business policies. The purpose of this program is to spread the risk of catastrophic losses from certain acts of terrorism between insurance companies and the federal government. Business policies are excluded from terrorism acts. However, this act requires insurance companies to offer coverage for any loss that occurs within the United States. Coverage is available for an additional premium. Prior to 2007, TRIA coverage only covered acts a result from foreign terrorism. Since 2007, coverage now includes terrorism from domestic acts. Coverage is only for “certified acts of terrorism”.
What constitutes a certified act of terrorism? Any terrorist act that is certified by the Secretary of the Treasury, in conjunction with the Secretary of State and the Attorney General of the United States. The act states that “It must be a violent act that is dangerous to human life, property or infrastructure. It must be committed by an individual or individuals as part of an effort to coerce the civilian population of the United States or to influence the policy or affect the conduct of the United Sates Government by coercion”.
I am told at the time of this writing that the Boston Marathon bombings have not been declared a terrorist act. That means the building damage, for example, would be paid under the peril of explosion on one’s business policy.
When applying for business coverage, you must either accept or reject TRIA coverage and sign an acceptance or rejection form. Premiums vary between insurance companies and policy types. The additional premium usually ranges from 3-5% of the base premium, with a minimum premium of $100 for this coverage.
If you have other questions, feel free to contact us.
Condominium insurance is a unique kind of insurance that integrates the interests of a condominium association with the interests of the individual unit owners. Even though each unit owner has a proportional interest in the Association, unit owners do have distinct and separate interests of their own.
The structure of the insurance policy is important, and this structure is normally defined in the Master Deed. One of the most important initial details is where association vs. unit ownership begins and ends… because insurance usually follows ownership. Ownership is defined in the Master Deed. (When buying a condo unit, always get a copy of the Master Deed, as well as association by-laws).
The condominium structure commonly known as "All-in" includes everything right to the interior coat of paint inside the condominium units. This “All-in” approach typically will include additions or alterations that a unit owner makes, such as adding new cabinets, alarm system, chandelier, and so forth, provided the unit owner alerts the association to these additional values. The association is then responsible for providing insurance for everything that is permanently attached within the condominium structure. A simple way of visualizing this concept is to imagine turning the building upside down and shaking it; everything that falls out, such as furniture and other personal property, is the responsibility of the unit owner. Everything else that stays attached to the structure is insured by the association policy.
The “bare walls” approach means the bare walls of the building, and leaves a greater responsibility on individual unit owners to insure their owned portion of the “structure”, building, or “real property”. In the Master Deed, the “bare walls” approach uses wording such as “on the plane of the interior studs”, or “the plane of the lower side of the roof rafters”, or ”the top surface of the sub-flooring”. All these means is that the unit owner owns all the drywall, wallpaper, paint, flooring, etc. and is therefore responsible for insuring these items personally. Even bathtubs, toilets, sinks, kitchen cabinets and counter-tops would not be covered. Remember, insurance usually follows ownership. The condominium association insures only the shell structure plus common mechanicals such as heating systems, common plumbing, and common electrical; the rest is the unit owner’s responsibility.
Master deeds aren't always written on a 100% "All-in" vs 100% "Bare-walls" basis. Often there are shades of gray. Some master deeds with an All-in basis exclude betterments & improvements (e.g., upgraded lighting fixtures or cabinetry would not be covered).
Biggest Possible Problems where the association policy intersects with personal policies:
The biggest condominium insurance problems occur when there is a master deed and insurance program that calls for "bare walls" insurance, but unit owners do not know that it is their responsibility to ensure their portion of the building individually. When this happens and there is damage to interior walls, such as water damage from storms or plumbing problems in upper floors, there is no insurance in either policy for the interior walls. Depending upon the size and build within individual units, this can be significant value that unit owners self-insure by default, and without even knowing.
The second big problem can occur if a condominium association insures its building based on a “bare walls” replacement estimate, but the deed calls for “All-in” coverage; the result is a severely under insured property. Valuations for “bare walls” condominium buildings typically run 30 to 40% less than valuations for similar sized all in policies because of the cost of finish work and interior walls. Imagine if you were handed the keys to your newly rebuilt unit, only to find rough plywood floors, studs for walls, and only joists for a ceiling. Lesson: review your master deed for ownership specifics. (Or work with a broker like Gordon who understands these things.)
The management of a condominium association can directly affect the cost of insurance, as attention to general conditions and safety concerns affects potential losses. Because every association is managed uniquely, and because attention to these details does affect losses over the long run, insurance underwriters pay close attention to loss history with condominiums. There is also the natural tendency for unit owners to prefer to have an association assume condominium losses, rather than file their own claims. So, even though insurance generally follows ownership, it is understandable that there is pressure to have associations assume losses where possible. However, this is a shortsighted strategy for the association.
Because of these issues, we usually recommend associations use high deductibles, and self-insure smaller losses to avoid these losses from affecting insurance claims experience. When associations have more skin in the game, attention to loss prevention is heightened, lowering the long term cost of risk. With condo associations greater than four units, insurance companies usually will want to review condominium association financials to ensure the ability to pay for these smaller claims.
Even when claims experience is good, insurance company initial inspection is rigorous. Talk to us about conditions honestly. The most attractive pricing is reserved for the best-maintained (perfect) places.
See our other blogs and whiteboard videos for more on how individual unit owners can address their interests as they may deviate from association interests and association management’s lack of understanding of some of these nuances.
If you have any further questions, contact us by clicking the buttons below.
If you are an owner of several rental properties, keeping your insurance program organized is very important. If you are like many owners, as you acquired each new multi-family property you purchased an individual policy just ahead of the closing to have protection for the building and liability associated with that property. Now, you may have several different insurance policies in place all with different renewal dates, different payment dates, with different companies, and possibly different liability limits.
There is a better way. You can simplify the insurance for all of the properties by placing them all on one policy, with one payment, and with one renewal date. Equally important, the policy’s liability coverage will extend over all of the properties. This will consolidate your coverage, eliminate duplicate coverage, and simplify the management of the properties.
Let us look at a common structure: You own several rental properties, and the current insurance program looks like:
- Building #1- $560,000 in building coverage, $500,000 in liability, rental loss coverage, with a $500 deductible. Policy renewal on June 25th. Billed monthly.
- Building #2- $720,000 in building coverage, $1M in liability, no rental loss coverage, with a $2,500 deductible. Policy Renewal on April 11th. Billed quarterly.
- Building #3- $330,000 in building coverage, $500,000 in liability, rental loss coverage, with a $5,000 deductible. Policy renewal on August 13th. Paid in full.
- Building #4- $910,000 in building coverage, $2M in liability, rental loss coverage, with a $10,000 deductible. Policy renewal on November 2nd. Billed monthly.
Placing these four properties, and their insurance programs, under one policy would simplify the billing, standardize the coverage for all of the properties, and eliminate the hassle of separate renewals each year.
The new insurance policy would look like:
- Buildings #1-4 Scheduled with their total building coverage of $2,520,000. Using a “blanket limit” provides a rating discount, typically 10%. Rental loss coverage for every building. Plenty of liability coverage spanning all buildings: $1M - $20M. One set deductible for any claims on the policy. Special form coverage for all of the buildings. One renewal date. One monthly bill. One insurance company. One claims department. One agent: Andrew G Gordon, Inc.
The insurance program you have in place for your properties is extremely important. Each building is a sizable financial asset. Each building also represents a potential liability exposure. It is essential to have the proper insurance program in place in order to sleep easy at night, knowing the buildings and your liability is efficiently well-protected.
If you want to investigate this option even further, simply contact us.
My son is hiking the Appalachian Trail this spring, so I decided to join him for a week while I’m old enough to appreciate it, but still young enough to keep up. While the mountains of western North Carolina and eastern Tennessee are a different world from the business environment where I spend most weekdays, there are similarities that span all these places where we spend our lives. This blog will list a few.
When preparing for a week in the woods, great deliberation helps to minimize weight and maximize comfort. All people, and all organisms, strive to maximize return on minimal effort. When I left home, my pack, which included a sleeping bag, tent, clothes for all possible weather and other necessities weighed about 24 pounds. 2 Liters of water (daily minimum consumption), and a week of food brought my pack weight into the low 30s. 15 to 20 years ago weights for the same trip would be in the low to mid 40s; less today due to advances in clothing technology. Similarly business tools including PowerPoint, iPads, and other technological progress make presentations more efficient today. Preparation, however, still means the difference at the margins. The success of any business presentation is always greatly affected by the level of preparation by the presenter. One day, I met a hiker who was carrying a 50 lb pack, and quickly advanced out in front of him in spite of his 30 year younger legs. Similarly, a good business presentation with deliberate and diligent preparation will outpace a poorly prepared message any day.
The old expression "All work and no play makes Johnny a dull boy" is as true on the trail as it is at work. My business coach reminds me to be sure that my work, personal, and spiritual lives are in balance. Similarly, on the trail, our bodies need a break every once in a while. One afternoon, after hiking the highest mountain along our trip, we decided to continue with a night hike to double our mileage for a 21+ day. The next day we took a "Near-0", (some “take a Zero”), hiking just five and half miles out to Erwin Tennessee. We so enjoyed that brief interlude of camping, instead of hiking, that morning with time for a campfire and a hot cup of coffee after all the hikers left for the trail. And my feet healed a little.
Similarly, in business, a day of rest makes sense to recharge ourselves from time to time, especially following a difficult or especially lengthy day.
In business we know that setting SMART goals which challenge us sets an important path to success. Challenges on the trail are equally important. Fellow hikers (substitute “workers”) may push us to accept challenges that we rise up to meet. But it is equally important to reject those challenges where you are bound to fail. Failure on the trail can be life threatening so especially when the risk of failure is severe, pay heed. On the other hand, the ability to rise up and meet those challenges that must be met fosters perseverance, fortitude and discipline. These make us better at whatever we do.
Give and Take
Stephen Covey wrote that win-win situations should be pursued in business as well as in life. On the trail the level of generosity is tempered by shared resource limitations (there's only so much food in reserve). But the happiest hikers seemed to be those willing to help others. The evening of our first day of hiking, G surprised us by breaking out a six-pack of PBR Talls. This gesture of generosity added approximately 20% to the weight she carried that day, but the satisfaction of presenting these to her friends was worth the hurt. Mentors in business find deep satisfaction in helping others. Give to receive.
One big difference – hospitality vs. generosity
As a child I was taught about self-reliance, and never been comfortable accepting charity; but am always pleased to accept hospitality. But when you are tired and cold and thirsty and weak after a difficult day’s hike, accepting Gatorade, a slot in the shelter (we routinely exceeded stated capacity), and other forms of charity are accepted without hesitation. Thus, I offer a message to those who are kind enough to donate or offer charity in their lives: the recipients of your largesse may feel better about your generosity if it is offered in the spirit of hospitality, not just out of charity. They may also be too desperate to make the distinction.
Risk: frequency and severity
When climbing on ice covered rocks in a steep incline, a misstep can be disastrous and even life threatening. Whenever I return to towns lined with sidewalks and curb cuts and warning signs saying to "watch your step," I am amazed by how safe public ways are. It’s good that we can walk around without fear of falling into a ravine. Safe walkways prevent injuries, and allow us to focus on other matters. But a sterile environment also dulls our senses. I believe that it is healthy for all of us to step away from the sterile and predictable environment we work in, to experience the high sensitivity required by unpredictable (risky) terrain, if only to feel the rush of focus and fear. Taking a measure of risk in our lives and then dealing with it appropriately keeps us alert and makes us better.
This hike was one of the hardest things I've ever done, but wouldn't trade the experience for anything. Stepping out of our comfort zone into unpredictable new areas forces us to be better, to grow, and if we’re lucky, to forge new relationships. While living in great discomfort for a week is not for everyone, I urge anyone to step into an environment where sensitivities are sharpest and life explodes before us.
As you can see, business is a lot like hiking. To keep up with what's going on with the insurance of the business world, feel free to check out the rest of our commerical blog. For a free quote on your business, simply click the button below.
An insurance audit is when an insurance company checks on the payroll or revenues of a customer or policyholder, to ensure that the policy reflects accurate rating information. Audits are common with all Worker's Compensation policies, many general liability policies, as well as some marine policies and other kinds of insurance.
Why are Insurance Audits Important?
Here's why audits are important: insurance policies are rated based on many different metrics, many of which we just do not know at the beginning of a policy term. For example, if a rating metric for a development is the number of acres in the development, that number won't change. If the grading metric is gross revenues or gross payrolls, we don't know the true revenue or payroll until after the policy is over. The audit helps the insurance company to rate insurance policies most accurately.
Imagine you have a business that typically generates $1 million in revenues. If you tell your broker that your business does only a half million dollars in revenues you may get a one year break in your insurance costs. The audit, however, is the mechanism insurance companies use to keep you honest.
The rating metric that drives Worker's Compensation costs is payroll. This makes sense: the more employees working at a place, the higher the payroll; this ties to the greater the exposure for somebody to file a claim.
Underestimating Payroll or Gross Revenues
Underestimating payroll or revenues for an insurance program carries some risks. Suppose a business does $1 million in sales and the general liability is based on that rating metric. To save money the business owner tells the insurance company their sales are only $500,000. Let's say the insurance costs $5,000 under these assumptions; you'd think the business saved $5,000. But when the audit uncovers the fact that the business does $1 million in sales, last year's policy cost is adjusted retroactively by $5,000 to get up to $10,000 in this example. (The additional $5,000 is due right away, because it's for last year's policy.) Further, the insurance company has seen this tactic once or twice before. In the interest of collecting a proper amount of premium for the new year, the insurance company will also update the estimated sales for that policy year to $1 million resulting in an additional $5,000 charge. This is the double whammy scenario: the insurance company collects the retroactive premium, as well as adjusts the current policy to reflect the reality: in this case resulting in a total $10,000 additional charge on what was budgeted as a $5,000 insurance cost. This isn't good for cash flow or for relationships between risk partners. Underwriters don’t have a great sense of humor when it comes to mis-reported rating metrics.
We counsel our customers to be as accurate as possible or slightly underestimate projections so that audit adjustments are minimized, and premiums are paid as revenues and payroll's are accounted for.
A new trend in workers compensation is rendering these audits nearly obsolete. Worker's Compensation charged through a payroll service company allows Worker's Compensation expenses to tie almost exactly 2 labor expenses. Visit our dedicated page on payroll deduction Worker's Compensation for more on this subject.
The Good that Comes from Audits
Not all is bad about audits. When sales come in below true expectations, most policies provide for return premiums under these circumstances. Some surplus and excess policies do not make such allowances, however, so it is important to discuss projected revenues and payroll with your professional agent or broker.
The audit exercise is typically a simple process of providing evidence of sales (income statement or tax reports) or payroll (941s and similar tax forms). However, we know it isn’t something anybody wakes up in the morning looking forward to doing. Thus, occasionsionally businesses don't get around to completing audits for their insurance company partners right away. The standard recourse is effective, but a nuisance: when an audit is not completed they generate an "assumed audit". Here the insurance company simply assumes that your payroll or revenues increased by 50% or more, generating a huge bill for the retroactive policy as well as a huge bill for the new policy. When an audit is not completed in a timely fashion the insurance companies leverage is often this giant bill. This is when the accounts payable folks get over to the bookkeeper to get that audit done. We work with our customers on expediting such events, but encourage prompt completion of any audit to avoid such unpleasantries.
In the contracting environment where a general contractor engages several types of subcontractors, the auditor will charge for costs of uninsured subcontractors much differently from insured subcontractors. When an uninsured contractor causes a loss, the general contractor's insurance may be responsible for covering a loss, therefore the attendant charge will be included for his policy. Certificates of insurance properly organize and document insurance of subcontractors to reduce the effects of an audit on the general contractors insurance program. See our separate blog on certificates of insurance.
Don't let an audit surprise you or catch you off guard. Here at Gordon Insurance we try to advise you in a way that results in the best possible insurance program while protecting your cash flow and budget. Don't hesitate to call or contact us if we can assist with achieving these common business objectives.
(If yiou prefer, see our short whiteboard video on this subject-Certificate of Liability)
A certificate of insurance is a single page usually document that lists insurance policies for a business's insurance program. Certificates of insurance are typically required when one business engages the services of another, and wants to know whether that business has liability insurance. It is the default document to convey to an interested party what kind of insurance and what amounts of insurance another business has.
A standard certificate will list the general liability, the automobile liability, excess liability, and Worker's Compensation policies. They also provide the name of the insurance company and policy effective and expiration dates. The latter is most important particularly if the expiration of an insurance policy straddles the time that a job is being done. Thus, it lets the certificate "holder", or the company engaging another company, when the subcontractors insurance runs out. It is a great management tool for verifying insurance of others in business.
In the construction field, certificates of insurance are provided for important cost reasons. If an uninsured subcontractor causes damage at a job site resulting in a loss, the general contractors insurance may end up paying a claim for the subcontractor's negligence. Thus, when a general contractor engages the services of a subcontractor who has no insurance, the general contractor's insurance company will usually make a premium charge for the uninsured subcontractor when they learn this at audit at the end of the year. The certificate, therefore, is an important document for preventing such a charge from landing on the general contractors insurance.
Certificates also convey other important information that may be present between working parties. One of the most common is what is known as the additional insured. The additional insured status is another step toward requiring subcontractors to assume full responsibility for their actions on a job site, and the certificate of insurance can confirm this particular status. Another common additional insured scenario is with landlords and tenants, or service providers such as landscapers.
Another policy feature that may be required when different businesses collaborate on a project, is the waiver of subrogation agreement. The certificate likewise provides a checkbox to acknowledge whether waiver of subrogation exists between parties.
Certificates are requested in many other business relationships. A landlord should require all tenants to have liability insurance so that a lawsuit from a tenant's actions do not come back to the landlord. The certificate of insurance may be used to document compliance in this arrangement.
Another important insurance consideration disclosed on a certificate is relates to Worker's Compensation insurance. In Massachusetts, business owners may opt out from having Worker's Compensation coverage in order to eliminate the cost of including Worker's Compensation for themselves. A certificate of insurance can disclose whether the owner has opted out or not.
When a business such as a bank wants to confirm whether there is insurance on a business's property, the certificate of liability insurance is not the correct document, but rather either an insurance binder, or the evidence of property insurance form. These look very similar to noninsurance people but there is an important distinction: These other forms typically do not address liability insurance.
Businesses that collect many certificates of insurance often organize these certificates by expiration date of their subcontractors insurance. Thus, they will know when the insurance of the subcontractor ends in order to know when to request a replacement certificate.
One important caveat: a certificate only shows insurance in place on a given day. There is no specific obligation by the insurer or by the agent or broker to notify a certificate holder if the subcontractor lets their insurance cancel. Generally speaking, when old claims make their way back to a general contractor, the subcontractors insurance often has expired.
Download a sample certificate where we have highlighted some of the more important aspects of this cryptic looking insurance form.
Some businesses enjoy the option of producing their own certificates rather than waiting to speak to their agent or broker. Here at Gordon insurance we provide online account access so that busy business owners and contractors can generate and print or email certificates whenever they want. For contractors especially who do paperwork from home at night, this is a convenient time saver.
For more on certificates, visit our page http://www.agordon.com/certs with samples and a video on how to use certificates to your advantage.
Call or contact us for details.