|
This month we will focus on one rising cost on your P & L – insurance. To assist in this discussion, I asked Jack Harper, one of my law firm partners with extensive experience in the insurance industry, to provide insight and practical advice to help you plan for and manage your insurance costs
It is certainly the goal of successful franchise operations to provide a safe, nondiscriminatory and harassment free environment for its patrons and employees. Despite the positive efforts undertaken, most franchise businesses experience, at some point, claims. Whether the claim is for sexual harassment, discrimination, food-borne illness or otherwise, it is one of significant concern, expense and distraction, and at worst financially crippling. The usual response to these claims is to submit them to the insurance carrier with the belief and understanding that the carrier, to whom you have been dutifully paying premiums, will cover all of the costs and expenses of defending the claim and bear the burden of ultimate liability, if any, less your deductible. It is the usual response from the franchise owner that, distasteful as the claim may be, it is covered by insurance and once the claim is tendered, it is “out of sight, out of mind.” Unfortunately, the submission of the claim to the carrier is but the beginning of the odyssey.
Insurance (whether general liability, worker’s compensation, employment practices, etc.) is an indispensable requirement and an increasingly expensive part of the business. However, there is much more to protecting your franchise business than simply acquiring insurance coverage at a competitive price.
All insurance companies and coverages are not created equal. Before selecting an insurance company and acquiring coverages, we recommend a careful analysis of the types of coverages sought and a proactive discussion with your counsel, risk manager or commercial insurance broker regarding such matters as consent and designation to defense counsel, claim management, coverage for public relations, image restoration, etc.
How many business owners do you know who have encountered the following situation?
A process server comes to your place of business and hands you a Summons and Complaint. The claim is for discrimination, sexual harassment, or injuries allegedly suffered by a patron who claims to have acquired a food-borne illness while eating at your establishment. The initial response is one of anger, indignation, disappointment; but that is why you have insurance; right? You believe you simply need to tender the claim to the insurance company who will handle everything. Most often, the insurance company accepts the claim, appoints counsel of its choosing (which may be its own in-house counsel) to defend the lawsuit and your business. More often than not, the insurance appointed defense counsel is not counsel with whom you are familiar and certainly not one who knows your business. However, the assumption is that the counsel is competent and will be able to deal with the claim, resolve it and you and your business will be unaffected (except for the payment of your deductible). What occurs, unfortunately, is frequently something quite different.
While many insurance company appointed counsel are competent (particularly in the areas of worker’s compensation and general liability claims, such as slip-and-falls and employment practices), these counsel are appointed and paid for by the insurance company. Further, the objective of defense counsel and the insurance company may well prove to be different than the business owner in important respects. In the case of such specialties as food-borne illness claims, it is possible, if not likely, that defense counsel may have limited to no experience in defending these types of claims.
Whether experienced or inexperienced in the subject matter of the lawsuit, it is frequently the case where the insurance company’s objectives and motivation to resolve the claim are different than their business owner insureds. For instance, insurance company decisions are made based on potential liability and the extent of damages. In other words, the insurance company (in conjunction with defense counsel) evaluates the claim, determines if it is defensible, establishes a reserve for what it estimates the claim will cost to defend and resolve and ultimately engages in claim resolution and settlement through the litigation process. On the other hand, the business owner is considering the following:
1. The merits and demerits of the claim.
2. What impact will the claim have on its employees?
3. What impact will the claim have on its business?
4. To what extent could the claim have negative publicity?
5. Will the claim cause business interruption?
6. What does the opportunity cost for defending the claim (i.e., how much time will the business owners and employees need to invest in the litigation process)?
For the most part, the insurance company’s interest overlaps with business owners as it relates to the merits and demerits of the claim, but the other items are non-factors for the insurance company in its matrix of whether the claim should be settled, for how much and when. As most business owners appreciate, it is the other factors which frequently have a far greater economic and non-economic impact on their operations.
If you can relate to the above scenario, we recommend the following:
1. Be proactive in obtaining the right insurance from the right company. Insurance products are not generic. They can be crafted in such a way as to protect all of your interests. The additional protection may well come in the form of an increased premium; but in the end, it will be money well spent. To this end, we recommend a pro-active discussion with your attorney, risk manager or broker to be sure that he or she understands your needs and can select the appropriate insurance company and insurance coverages. As part of the “bid” process a business owner, broker and/or risk manager should request that the business owner have input into the selection of defense counsel (particularly as it relates to unique claims such as food-borne illness, shareholder disputes, and director and officer liability). The ability to work with counsel of your choosing will not only enhance your comfort level in dealing with the claim, but provide you the opportunity to work with counsel who knows your business, your needs and have an appreciation and expertise in dealing with the non-economic business factors identified above.
2. The business owner, risk manager or insurance broker should explore the economics of obtaining a business interruption, lost profits and other similar coverage, as well as public relations and image restoration coverage.
3. Align your coverages so they allow you an active role and participation in the management and settlement of the claim. There are situations that can only be resolved by trial (e.g., the plaintiff is unreasonable in his or her damage expectations, there are significant issues of liability or simply the parties are unable to reach an amicable resolution). However, the vast majority of cases are settled before trial and many, if managed properly, can be settled before a lawsuit is filed. The business owner’s ability to have input and deciding vote in this claim management process is vital. For instance, envision a sexual harassment or food-borne illness case which could have a significant negative impact on your business (particularly if the facts of the claim are publically disseminated). It is in these settings that an insurance carrier’s interest may well not be aligned with yours. As a result, it is imperative the business owner have the ability to have an active, if not deciding voice, in the claim resolution process and for the insurance company to not only consider, but protect the business owner’s total interest by resolving the claim.
You cannot predict when the process server will knock on your door with the next lawsuit. Claims against your business are a reality in today’s world. However, there is more to resolving these claims and lawsuits than simply tendering them to the insurance company. The proactive process begins with: (i) negotiations with the insurance company of the appropriate coverages (which will allow the business owner to actively participate in the designation of counsel); (ii) the management of the claim; (iii) the selection of experts; and (iv) ultimately, the resolution of a claim based on both economic and non-economic factors that are important to the business owner.
Remember, the insurance industry is competitive. They want your business, and you have leverage to negotiate the protection you need into your insurance coverage. If these additional protections result in slightly higher premiums, consider it is money well spent.
Next month’s column will feature our annual tax savings article.
|
