Managing the Cost of Risk, What the CEO Needs to Know

Jeff Cavignac, CPCU, RPLU, ARM

A CEO has a number of responsibilities.  At the most basic level however the CEO is responsible for the results of their company.  While the companies results are affected by a number of factors, a large uninsured loss is possibly one of the most devastating.  So what does a CEO need to know to effectively manage risk for their company?

We work with hundreds of business owners on their risk management and insurance programs.  Most of our clients don’t want to be insurance experts, but they want to know enough about it to effectively manage the process and protect their company.

The purpose of insurance is to protect the Insured from the financial consequences of a fortuitous loss.  The first step in the process is identifying exposures which could cause such losses.  This requires a systematic evaluation of a companies operations.  This should be conducted by an experienced insurance broker or consultant familiar with the business in question.  It will likely involve interviews with not only the CEO and CFO but the companies Risk Manager and other Department Heads or Operational Managers involved with the day to day activities of the company.

Once the exposures have been identified, the second step is to determine what can be done to lower the frequency or severity of those exposures.  Risk Control, as this step is called, is critical to managing the cost of risk.*  A Risk Control survey should be conducted with your broker and the brokers risk control team.  This would include personnel specializing in safety, HR and claims management.  It would also include representatives from the Insurance Companies Loss Control Department as well as appropriate representatives from your team.  The purpose is to create a Schedule of Risk Control Strategies and come to agreement on who will be responsible for what and when it will be done.

Once steps 1 & 2 have been completed it is time to determine what risks you want to insure and what risks you want to retain.  Every company has a different risk tolerance.  We have clients that want coverage on nearly every exposure with the lowest possible deductible (retention).  Other clients only want to finance the low frequency, high hazard risks themselves by using a substantial deductible or retention.  An experienced insurance broker will be able to determine a companies risk tolerance and provide appropriate insurance options for consideration.  It is important to point out that just because an exposure exists, doesn’t mean it should necessarily be insured.  It is however better to be aware of the exposure so it can be managed, as opposed to finding out at the time of a loss that you have no coverage.

The Risk Management Process doesn’t end.  Once the exposures have been evaluated, the Risk Control Strategies agreed on and the insurance placed, you still need to stay on top of your companies exposures.  It is always better to discuss a change in your business that may have insurance implications with your broker prior to a loss, than calling up to find out whether or not you are covered, after a loss.

CEO’s rely on a number of different professionals to help them guide and manage their companies.  Business Consultants, Attorneys, Accountants, Bankers and others are all critical.  Insurance Brokers are no different.  While it is easy to get an insurance license, all insurance brokers are not the same.  In order to effectively manage risk the proactive CEO will align themselves with the right insurance professional, who can analyze their risks, develop strategies to lower the frequency and severity of their loss exposures and negotiate favorable insurance terms with the right insurance company, at the lowest realistic cost.


*Insurance premiums are only one component to the Total Cost of Risk.  Other factors such as dealing with claims, funding retentions or uncovered losses, and providing loss control and safety training can often exceed the cost of insurance.

Coronavirus – How to Manage Premiums

Preston Cavignac, CPCU, CIC, CRM

 

There has been no shortage of content summarizing different acts/orders from state and local governments and public agencies. This post focuses on three things all business should do as it pertains to their insurance policies:

1 – Amend current payroll and revenue

Insurance policies are rated off an “exposure basis.” The two most common are payroll and revenue. If you have not amended your payroll and revenue on your Insurance policies this year, you should do so. This could lower your monthly payments and total premiums.

2 – Change class codes if allowed

The WCIRB has proposed a special regulatory filing whereby class codes can be changed or eliminated if employees were on paid leave or engaged exclusively in clerical office activities. Depending on the original work being performed, this could lower overall premiums

3 – Underestimate projections for the coming year

As mentioned above two common rating bases are payroll and revenue. It would be prudent to provide the insurance company with a low estimate for the coming year. This would lower your monthly payments, overall premium and it would lower the probability of any “minimum earned premium” conditions from coming into play. If actual payroll or revenue is higher than estimated, the additional premium can be picked up at audit or amended mid-year.

Right now it is important for all employers to manage cash flow. These tips will help employers hold on to cash so they can better operate their business.

Cal/OSHA Urges Employers to Follow the State’s Guidance on Protecting Workers from COVID-19

Existing regulations require employers to identify hazards in the workplace and implement effective control measures to protect employees. These include recognized health hazards such as COVID-19.

Employers in businesses that interact with the public must follow public health orders to ensure a safe workspace for all. In accordance with the latest public health order, workers and customers should use face coverings at all times.

If employers are moving worksites outdoors, they must also account for observed and predictable hazards associated with outdoor environments. Examples of these include heat illness, moving vehicles, and the need for proper illumination for those working at night.

Complaints about workplace safety and health hazards can be filed confidentially with Cal/OSHA district offices. Employees with work-related questions or complaints may contact DIR’s Call Center in English or Spanish at 844-LABOR-DIR (844-522-6734).

Mandatory Shutdown Order of Certain California Businesses

Tuesday, July 13th, Governor Gavin Newsom announced new restrictions for counties in the state’s watchlist. Effective immediately, all counties must close indoor operations in the following sectors: dine-in restaurants, wineries and tasting rooms; movie theaters; family entertainment centers; zoos and museums; and cardrooms. Bars, breweries, and pubs must close all operations—both indoor and outdoor— across the state. Additionally, Governor Gavin Newsom mandated the following industries shut down unless they can be modified to operate outside or by pick-up: fitness centers; worship services; protests; offices for non-essential sectors; personal care services; hair salons and barbershops; and malls. To see more information and counties impacted, click here.

CDC Adds Three New Symptoms of COVID-19

The Centers for Disease Control (CDC) have added three new coronavirus symptoms to the growing list.

  • Congestion or runny nose
  • Nausea
  • Diarrhea

Symptoms may appear 2-14 days after exposure to the virus and symptoms may vary from mild to severe.

To see the full list of symptoms visit the CDC website. As more is learned about coronavirus, the CDC will continue to update this list.

Commissioner Issues Decision on July 1, 2020 Special Regulatory Filing

On June 17th, 2020, the California Insurance Commissioner issued a Decision regarding the Workers’ Compensation Insurance Rating Bureau of California’s (WCIRB’s) July 1, 2020 Special Regulatory Filing, which contained proposals to address the coronavirus disease 2019 (COVID-19) pandemic and was submitted by the WCIRB to the California Department of Insurance (CDI) on April 20, 2020. In the Decision, the Commissioner approved all of the WCIRB’s proposed changes to the California Workers’ Compensation Uniform Statistical Reporting Plan—1995 (USRP) and California Workers’ Compensation Experience Rating Plan—1995 (ERP). These changes are effective July 1, 2020 and include the following:

Exclude Payments to Employees Who Continue to Be Paid While Not Working

Part 4, Section IV, Exposure Information, Rule 1, Classification Code, and Rule 4, Exposure Amount, were amended to report payments excluded from remuneration pursuant to new Rule 7, Coronavirus Disease 2019 (COVID-19). Payments made to an employee while the employee is performing no duties of any kind in service of the employer are to be excluded from payroll when the payments are equal to or less than the employee’s regular rate of pay.

Allow Assignment of Classification 8810 for Temporary Change in Duties

Part 3, Section III, General Classification Procedures, was amended to add Rule 7, Coronavirus Disease 2019 (COVID-19), to permit during a statewide California COVID-19 stay-at-home order the following: The division of an employee’s payroll between Classification 8810, Clerical Office Employees, and a non-standard exception classification when the employee’s work is exclusively clerical in nature and the non-standard exception classification does not include Clerical Office Employees

Exclude COVID-19 Claims from Experience Rating

Section VI, Rating Procedure, Rule 2, Actual Losses and Actual Primary (Ap) Losses, was amended to specify that all claims directly arising from a diagnosis of Coronavirus Disease 2019 (COVID-19) shall not be reflected in the computation of an experience modification.

The WCIRB is currently updating the USRP and ERP. Once complete, these documents will be posted to the Filings and Plans section of the WCIRB website. In the interim, the WCIRB has prepared the July 1, 2020 USRP and ERP Changes Quick Reference Guide, summarizing the approved changes to the Commissioner’s regulations.

The Decision pertains only to the WCIRB’s Special Regulatory Filing. The WCIRB will submit its annual Regulatory Filing in June 2020 and its annual Pure Premium Rate Filing in August 2020, each of which will take effect January 1, 2021.

Departing a Law Firm

Paul Broussard, CIC, SBCS, PWCA, cyRM

When an attorney departs a small law firm, they should consider purchasing an individual extend reporting period. An Extended Reporting Period (ERP), or “tail,” is a designated time period that gives the insured the ability to report claims to the insurer after a claims-made policy expires (or an attorney departs the firm) for a negligent act, error, or omission that occurred prior to policy expiration (or attorney termination). This is an important consideration because the departing attorney may not have confidence that their prior firm will:

  1. Maintain the same policy limits
  2. Maintain the same policy terms and conditions
  3. Stay in business, and if not, they may not purchase an ERP
    1. For the firm
    2. That is long enough to address the applicable state statute of limitations (SOL) or any applicable SOL extenders

Attorneys departing large law firms may not have these same concerns, especially since the vast majority of lawyer professional liability policy forms consider former attorneys as ‘insureds’ for the legal services performed prior to their termination, but that policy language only assures coverage for the former attorneys as long as the policy or an ERP is in place at the time the claim is reported. That being said, attorneys departing small firms may not have a crystal ball to predict the law firm’s future actions so they have the option to purchase extended time to report claims for their wrongful acts while performing legal services on behalf of their prior law firm.

As such, the departing attorneys essentially have two options:

  1. Option #1: To purchase an Individual ERP for their acts performed while employed by the firm.
  2. Option #2: Do nothing. The individual attorney takes the risk of their prior firm going uninsured, decreasing limits, changing policy forms that affirmatively cover former attorneys as insureds, or dissolving and not purchasing extended reporting period for the firm. For reference, below is an example of a law firm’s professional liability policy’s ERP options that are provided in the policy language—the premium due is a percentage of the current policy’s annual premium.

Additional Extended Reporting Period (ERP) Options % of Annual Premium

Twelve (12) Months 100%
Twenty-four (24) Months 150%
Thirty-six (36) Months 175%
Forty-eight (48) Months 185%
Sixty (60) Months 200%
Seventy-two (72) Months 250%
Unlimited Reporting Period 300%

As you can imagine, if the expiring premium is significant, purchasing an ERP option may be an overwhelming expense for a dissolving firm. If the law firm decides to close their doors shortly after an attorney’s departure for any reason, the firm has the option, but is not required, to purchase an ERP. If no ERP option is purchased by the firm, there may only be an automatic ERP of 30 days built into the policy form that applies, but after that period ends, there will be no coverage for claims reported involving the wrongful acts of any insured. Departing attorneys are not required to purchase an ERP; however, if they do not purchase ERP, and the firm later dissolves, they will not have an option to retroactively purchase a tail as they may only have 30 days after departure to elect an ERP option.

It is important to note that individual ERP options are rarely embedded in the policy language, and some insurers may not be willing to offer individual ERP to departing attorneys. Insurers that will offer individual ERPs may rate individual ERPs based on several different factors such as length of employment, areas of practice, or on a per attorney basis. As an indication of pricing, below is a sample of an individual ERP offered to a departing attorney:

Individual Extended Reporting Period Options Premium

Twelve (12) Months $2,242
Twenty-four (24) Months $3,363
Thirty-six (36) Months $3,924
Forty-eight (48) Months $4,148
Sixty (60) Months $4,484
Seventy-two (72) Months $5,605
Unlimited Reporting Period $6,726

In this particular example, the individual ERP offer is rated on a per attorney basis, so for a law firm with six (6) attorneys, the individual ERP premium is roughly one-sixth (1/6) of the firm’s current annual premium applied to the firm’s extended reporting period percentages that are embedded in the policy language.

As a departing attorney, it is important to do your due diligence prior to departing a firm in order to make this decision. As an employer, it is prudent to make your departing attorneys aware of the options available to them, especially if the firm may dissolve in the near future or you do not plan to purchase an ERP for the firm. Regardless, you will want to involve your insurance broker regarding the pricing of all ERP options available.

Returning to Business – Navigating a Safe and Compliant Reopening Webinar

The Coronavirus pandemic has had an unprecedented impact on businesses in the US and around the globe. Companies have needed to respond to circumstances they’ve never dealt with before. Now, as businesses reopen their offices and workplaces, employers have many questions regarding their responsibility to prepare their workplaces for the safe return of employees.

Cavignac & Associates partnered with Employment Labor Attorneys Iris Kristoff and Bradley Lebow from Dunn, DeSantis, Walt & Kendrick LLP on Tuesday, June 9th to present an informative webinar answering the many questions on employers’ minds regarding Safe Reopening compliance. Topics included required employee communication and education, temperature checks, safety protocols,  responding to employees with positive tests, worker’s compensation claims, calling back furlough or laid-off workers, and PPP loan forgiveness. Our presenters also addressed HR compliance considerations such as wage and hour, employee privacy, teleworking, reasonable accommodations, policy updates.

Due to technical difficulties, the live presentation ended prior to the Q&A portion of the webinar. Because of this, we have recorded Part 2 of the webinar to answer your specific questions and have included it here for you to review.

As a result of the webinar, the following resources are also available:

Health screening application reference – emocha Health
Dunn DeSantis Walt and Kendrick LLP COVID-19 and PPP Loan Resource Page

COVID-19 Sample PowerPoint Presentations

COVID-19 Employee Training Presentation – California: This presentation is designed to educate employees on the signs and symptoms  of COVID-19, and when to seek medical attention. It also details how COVID-19 spreads, and ways employees can protect themselves and others. Furthermore, it includes placeholders employers can use to educate employees on workplace procedures related to personal hygiene, social distancing,  sanitization, and similar precautionary measures.

Employer Presentation – Returning to Work Post-COVID-19: Employers can use this presentation to educate employees on their post-coronavirus return to work action plan. Note: This presentation requires customization before use.

Posted date : 06/10/2020

An Overview of the Paycheck Protection Program Flexibility Act of 2020

The President signed the Paycheck Protection Program Flexibility Act of 2020 on June 5th. This Act covers important changes to the requirements for forgiveness under Paycheck Protection Program (“PPP”) Loan, and offers further clarification on eligible expenses and FTE employee reduction to your loan forgiveness. The below overview is an update to our previous resource pages; SBA Paycheck Protection Program (PPP) Loans – Clarity, Relief & A Surety’s Perspective, which includes the previous clarification on the PPP loan forgiveness along with a perspective from the Surety industry.

Key changes under the Paycheck Protection Program Flexibility Act of 2020;

  • Current PPP borrowers can choose a 24-week period, rather than an 8-week period to spend PPP funds.
  • New PPP borrowers will have a 24-week covered period which cannot extend beyond December 31, 2020.
  • The payroll expenditure requirement is now 60%, rather than 75%. If at least 60% of loan proceeds are not spent on payroll costs, there is no loan forgiveness.
    • Note that technical modifications in the future could restore partial forgiveness for loans that do not meet the 60% threshold.
  • The June 30th deadline to restore workforce levels and wages is extended to December 31st.
  • There are two new alternatives for a borrower to restore a potential reduction in forgiveness:
    • An inability to find qualified employees to replace those let go; and,
    • An inability to restore the business operations to February 15, 2020 levels due to COVID-19-related operating restrictions.
  • The PPP loan term is extended from two years to five years. An updated loan agreement with the bank may be required. (Borrowers should reach out to bankers regarding loan modifications.)
  • Companies that participate in the Payroll Protection Program Loan program will be eligible to defer the company portion of payroll taxes throughout 2020. This is a change from being eligible for the payroll tax deferral only through the date a company receives loan forgiveness.

Changes to eligible forgiveness expenses and clarification on FTE employee reduction to your loan forgiveness:

Please note, with regards to eligible expense, some language under the new act lends itself to interpretation and further clarification is anticipated.

Payroll Related Expenses:

  • Wages – Eligible payroll costs include payroll costs paid and incurred during the covered period, which is the 24-week (or previously 8–week) period commencing on the date the business receives PPP funds from a financial institution. Payroll costs are considered incurred on the day an employee’s pay is earned. In addition, payroll costs incurred during the 24-week period and paid on or before the next regular payroll date are eligible for forgiveness. This means that each payroll paid during the 24-week period counts toward forgiveness, as do payroll costs incurred during the last pay period of the 24-week period that are paid in the first regular payroll period following the 24-week period.
    • Borrowers who pay their employees biweekly or more frequently also have the option to elect an Alternate Covered Period. This period starts with the first day of the employee’s pay period, following the date the loan proceeds are received.
  • Health Insurance – Eligible costs include costs paid or incurred during the 24-week (or previously 8–week) period. These costs include self-insurance programs and employer-sponsored group health plans, reduced by employee contributions. It appears that accrued costs paid during the 24-week period will count toward forgiveness.
  • Retirement – Eligible costs include costs paid or incurred during the 24-week period. There do not appear to be any limitations on retirement contributions, including accrued costs, paid during this period. This may be an opportunity for companies to pay 2019 accrued retirement; we recommend discussing this option with your CPA and Plan Administrator for further guidance.
  • Employer-Level State Taxes – Eligible costs include amounts assessed on employee compensation and paid by the borrower. This appears to include state-level employer taxes paid by the borrower through a payroll company, rather than only taxes paid directly to the state agency. State withholding taxes are not included.

Non-Payroll Related Expenses:

  • Rent – Eligible costs include rent or lease payments pursuant to an obligation in force before February 15, 2020, for real or personal property. Vehicle and equipment leases will count.
  • Mortgage Interest – Eligible costs include interest on any business mortgage obligation in place before February 15, 2020, for real or personal property. Vehicles and equipment will count.
  • Utilities – Eligible costs include electricity, gas, water, telephone, internet, and transportation costs where service began before February 15, 2020. There is still no guidance regarding what costs are included in “transportation,” other than gas for business vehicles which was indicated in previous guidance.

Reductions in FTE Employees Clarification;

  • The amount of loan forgiveness will be determined without regard to a proportional reduction in the number of full-time equivalent employees if, in good faith, you are able to document an inability to return to the same level of business activity you were operating at before February 15, 2020, due to compliance with requirements established or guidance issued by the Secretary of Health and Human Services, the Director of the Centers for Disease Control and Prevention, or the Occupational Safety and Health Administration from March 1, 2020 to December 31, 2020, related to the maintenance of standards for sanitation, social distancing, or any other worker or customer safety requirement related to COVID-19.

As always we are here to help and welcome any questions you may have. However, if you have specific questions on your PPP loan and the forgiveness application process, we also recommend that you consult with your CPA, Banker and Attorney.

You may view the new Act here.