Commercial Insurance Update – Coverages to Consider – What You Don’t Insure Can Hurt You

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February 2006

Coverages to Consider What You Don’t Insure Can Hurt You

By Jeffrey W. Cavignac, CPCU, RPLU, CRIS

Our objective as risk managers and insurance brokers is to identify exposures to loss and figure out ways to eliminate, manage, control, or transfer those exposures. The most common risk transfer method is insurance.

Literally hundreds of different exposures can be insured. We do not recommend that our clients buy insurance for all, or even most of them. We recommend that they be aware (1) that the exposure exists and (2) what the cost would be if they chose to insure it. In the absence of insurance, they may choose to self-insure the loss and/or figure out ways to manage, control, or eliminate the risk.

In this article we’ll examine some of the more common exposures that many businesses have, which for any number of reasons tend to be underpurchased.

Employment Practices Liability

Employment Practices Liability Insurance (EPLI) provides liability coverage to employers for certain employment practices that can lead to allegations of wrongful termination, discrimination, and harassment (usually sexual). Employment practices coverage is excluded in standard commercial general liability, excess liability, employers liability, workers compensation, and directors and officers liability policies.

Employment practices liability is a critical coverage. The number of employment-related lawsuits are at an all-time countrywide high, and are steadily increasing. In 2004 alone the equal Employment Opportunity Commission handled over 80,000 charges. When you consider that hundreds of thousands of employment claims are filed with state and local agencies, the numbers are truly staggering. Even if you have excellent employment practices, you can still be sued. The cost of defense against employment litigation claims can be huge.

It is not uncommon for legal fees associated with winning an employment lawsuit to be in excess of $250,000.

Employment practices liability should be considered by most businesses, especially those with 25 or more employees. The cost for $1 million limit of coverage is generally in the range of $100 to $200 dollars per employee per year.

If you do nothing else, you should complete a comprehensive employment practices liability application. The process will serve as a self-audit on your existing employment practices, and provide insight as to how you might improve those practices.

There is also no substitute for a well-written and followed –Employee Handbook.

Director & Officers Liability

Directors & Officers (D&O) liability insurance protects directors and officers from damage related to wrongful acts made while acting in their individual or collective capacities as directors or officers. Insurance is generally divided into two separate parts. One coverage reimburses the corporation for payments made to directors or officers for losses incurred because of wrongful acts. The other coverage pays on behalf of the directors or officers themselves.

Although D&O coverage is usually a requirement of publicly-held companies, privately-held companies also have such an exposure. This includes risks associated with various security laws, shareholder-derived suits, and claims of business interference and breach of fiduciary duty.

While statistics show that shareholders and employees are the most likely groups to sue private companies, suits can also come from a number of other sources, including competitors, customers, suppliers, vendors, banks, other creditors, and governmental and regulatory agencies. Allegations can include breach of duty, fraud, unfair business practices, interference with prospective economic advantage, infringement of trade secrets, and many other wrongful acts.

Regardless of the number of shareholders, the personal assets of a private company’s directors and officers are exposed to claims of breach of fiduciary duty to the corporation as well as claims from vendors, customer, competitors, and employees.

Even if the decision is made not to purchase D&O liability insurance, your exposure should be evaluated.

Fiduciary Liability

The Employee Retirement Income Security Act (ERISA) was passed in 1974 to ensure that employees who participated in pension and benefit plans would receive the benefits promised by such programs. As a result, the law created numerous fiduciary liability exposures for employers that offered these plans. In response, fiduciary liability insurance coverage was born.

According to ERISA provisions, persons working within business organizations that design, administer, and manage pension employee benefit plans are fiduciaries. Fiduciaries have a broad scope of obligations and can never fully insulate themselves from liability under ERISA. Even with a participant-directed 401(k) plan, fiduciaries can be held liable for a variety of reasons, including the selection of the plan and investment options, monitoring those investments, and failure to educate employees.

You should not confuse fiduciary liability with a fidelity bond. By law, employers must carry a fidelity bond in an amount equal to 10% of the assets in their employee benefit program. However, a fidelity bond only covers theft of assets from the plan.

Nor should you confuse fiduciary liability with employee benefits liability. While employee benefits liability is primarily designed to provide limited coverage for administrative errors and omissions on benefit programs, fiduciary liability is designed to provide coverage for fiduciaries for liability underERISA stemming from a variety of wrongful acts, including breach of fiduciary duty.

The cost of fiduciary liability coverage is usually fairly modest.

Employee Dishonesty

It can’t happen to me or I can’t believe it happened to me are the comments we usually hear from clients who either choose not to purchase employee dishonesty coverage or who have, in fact, suffered an employee dishonesty loss.

Employee dishonesty coverage basically covers theft of an employer’s assets by an employee. Note that this is specifically excluded under a standard property policy.

Statistics, however, are daunting. In the year 2002 alone, 6% of business revenues were lost as a result of occupational abuse. When applied to the US gross domestic product, this translated into nearly $600 billion or about $4,500 per employee.

Unfortunately, even small businesses are targets they are actually more vulnerable to occupational fraud and abuse. The average theft in a small business causes $127,500 in losses, which is enough to put many of these companies out of business.

Internal controls can greatly lower your exposure to loss. Unfortunately, many schemes go for years without being detected, which shows that internal controls are anything but fail-safe.

Employee dishonesty coverage is generally inexpensive, and this insurance should be evaluated by nearly every business.

Professional Liability

People in the legal, design, accounting, or insurance business have an obvious professional liability exposure. After all, they’re in the business of giving advice. But what about other businesses? If your business provides a service, you are potentially unprotected from lawsuits that claim you made errors or omissions. Put another way, if people rely on your advice and guidance and it’s wrong, thereby causing them damages or costing them money, then you have a professional liability exposure.

But I have general liability, you might say. Unfortunately, general liability only responds to your legal liability that results in either bodily injury or property damage, and does not extend to the economic damage someone else could sustain that arises from the services you provide.

Most businesses should at least determine what their professional liability exposures are. If an exposure exists, a quotation should be obtained to determine what the cost would be to insure that exposure.


As mentioned earlier every business has hundreds of exposures to loss. These are just a few that businesses have that are commonly overlooked. $

Jeff Cavignac is President and Principal of Cavignac & Associates, and heads the agency’s Professional Liability Department.

Disclaimer: This article is written from an insurance perspective and is meant to be used for informational purposes only. It is not the intent of this article to provide legal advice, or advice for any specific fact, situation or circumstance. Contact legal counsel for specific advice.

Things to Do for a Safer Workplace

By Stuart Nakutin, CSM, AIC, PHR, WCCP, CPDM

% Offer employees a share of insurance premium reductions that result from a reduced number of accidents.

% Match the applicant carefully to the job. Test their skills and physical abilities.

% Install alarm systems for theft, entry and fire purposes.

% Make sure that all threats of violence are reported and investigated immediately.

% Maintain a first aid cabinet, post first aid information including fire, police, and ambulance numbers — and display a poster on how to perform mouth-to-mouth mouth resuscitation.

% Comply with all Federal and State OSHA Injury Illness Prevention Program(IIPP) requirements.

% Comply with all hazardous materials|reporting requirements, including identification of hazardous substances.

% Clearly mark and keep clear all your exits, aisles, and passages. Provide stairs with slip-resistant surfaces, handrails and proper lighting.

% Make sure your equipment contains safety guards, electrical grounding, readily available and easily identifiable power shut off switches and emergency stop buttons.

% When appropriate, provide your employees with, and require them to wear, protective clothing including: safety glasses, gloves, hard hats, steel toed boots, headphones, hearing protective equipment, wrist braces, back support belts, and the like.

% Do not allow productivity pressures to compromise safety.

% Make sure the furniture and equipment you use at the work is ergonomically designed. This includes chairs, computer keyboards, computer screens, as well as other equipment involving repetitive physical use.

% Address indoor pollution problems through proper ventilation and inspection.

% Regularly inspect your equipment for functionality and safety purposes.

Stuart Nakutin is Director of Safety, Claims and Human Resources for Cavignac & Associates.

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2006 Seminars

Cavignac & Associates’ Training Room Bank of America Plaza 450 B Street, 18th Floor, San Diego, CA

# OSHA 10-Hour Course — Part 1

Friday, February 24th, 2006 — 8:00 AM — 1 PM

(see OSHA 10-Hour Part 2 for OSHA Card information)

# How to Run an Effective Safety Meeting and Make Your Toolbox Talks Fun

Friday, March 10th, 2006 — 9:00 — 11:00AM

# OSHA 10-Hour Course—Part 2

Thursday, March 23, 2006—8:00 AM—1:00 PM

(Attendees receive Certificates of Completion for each part; OSHA will provide 10-Hour Card after ALL sessions have been completed)

# Sexual Harassment (AB1825 Compliant)

Friday, March 31, 2006— 9:00—11:00 AM

All training sessions available to our clients Reserve early / seating is limited!

For more information about upcoming seminars:

# Visit our Web site at

# Contact STUART NAKUTIN by e-mail or by phone at 619-744-0589.

Additional Exposures You May Want to Consider

These are areas in which you may have an exposure to loss for which you may or may not currently have coverage. If you have questions about these or would like to learn more about them, let us know.

# Note: This is not intended to be an all-inclusive list of every conceivable coverage.

Inland Marine

# Accounts Receivable

# Contractors Equipment Floater

# Exhibition Floater

# Fine Arts

# Installation Floater

# Ocean Marine

# Transit

# Valuable Papers and Records

General Liability

# Cyber Liability

# Foreign Liability

# Liquor Liability

# Non-Owned / Owned Aircraft

# Non-Owned / Owned Watercraft

# Patent Enforcement

# Patent Infringement Liability

# Pollution Liability

Business Automobile Liability

# Drive Other Car Coverage

# Foreign Auto Coverage

# Garage Liability

# Hired Auto Physical Damage

# Lease Gap Coverage

# Loss of Use Rental Vehicles

# Mexico Extension

# Pollution Liability

# Rental Reimbursement

# Towing $

Commercial Property

# Brands & Labels

# Bridges, Roadways or Other Paved Surfaces

# Building Ordinance or Law Coverage

# Building Ordinance or Law Increased Period of

Restoration – Business Income

# Business Income from Dependent Properties

# Earthquake

# Employees Property

# Extended Period of Indemnity – Business Income

# Fences, Retaining Walls

# Flood

# Foreign Property

# Foundations and Excavations

# Increased Cost of Construction

# Outdoor Trees, Shrubs and Plants

# Pollutant Clean-Up & Removal

# Property of Others

# Research and Development Expenses

# Rental Income

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