Risky Business

Insuring Against Claims Brought Under the Fair Labor Standards Act

Setnor Byer Insurance & RIsk

 

Employers face numerous federal laws that govern the employment relationship. These laws, such as Title VII of the Civil Rights Act, the Family and Medical Leave Act, and the Americans with Disabilities Act, impose requirements on employers regarding the manner in which they interact with their employees. If these requirements are overlooked, employers can expect to be called upon to pay a potentially substantial damage award to the aggrieved employee. While avoiding a violation of all applicable employment laws is the goal of every organization, there is one law which employers should be concerned about above the others—the Fair Labor Standards Act.

 

The Fair Labor Standards Act (FLSA) is the federal law that establishes the minimum wage and that governs the payment of overtime compensation. Its broad applicability, the manner in which it was drafted, and its complex and highly technical requirements, make it one of the most feared federal employment laws. The significance of potential FLSA violations has only increased since the economy began taking a turn for the worse because the ever-increasing number of laid-off employees has served to increase the number of potential plaintiffs.

 

The FLSA has been described as the perfect plaintiff’s law. Consider that in most cases, the FLSA’s attorney’s fee provision operates to only benefit the employee. Under the FLSA, an employer who successfully defends an employee’s claim is typically not entitled to an award of attorney’s fees. The FLSA also allows a single employee to file a lawsuit on behalf of all similarly situated employees. Under the FLSA’s collective action provision, the burden a plaintiff must satisfy before being authorized to notify all potential class members is relatively low. This means that an employer may be faced with the prospect of defending a collective action involving dozens, or even hundreds, of current and former employees.

 

In addition to the procedural benefits afforded employees under the FLSA, the complexity of the law itself serves to increase the level of concern faced by employers. Unlike laws that prohibit discrimination or harassment, which are relatively easy to understand, the FLSA is replete with complex and technical provisions which, in many cases, are counterintuitive. For example, when does the amount of time an employee spends on a break constitute hours worked? If an employee is compensated at two or more different rates, how is the overtime calculated? When can an employer make salary deductions without jeopardizing the employee’s exempt status? If an employee violates company policy and works overtime without permission, does the employer have to pay the employee overtime? In many cases, the answers to these questions cannot be obtained by relying on common sense. So, in addition to being relatively plaintiff-friendly from a procedural standpoint, the FLSA’s complex and highly technical nature increases the likelihood of a violation.

 

Given the confluence of these factors, it should not be surprising to discover that literally thousands of lawyers and law firms have developed a niche practice involving nothing more than filing lawsuits under the FLSA. These firms seek out recently laid-off employees for the purpose of putting their former employer’s compensation practices under a microscope. And in most cases, the employer’s attorney will likely recommend settling the lawsuit as soon as possible.

 

Electing to settle the lawsuit early is virtually predetermined by the FLSA itself. In most cases, the employee will be entitled to a relatively small amount of unpaid wages. The real evil lurking behind the lawsuit is the attorney’s fees. Almost immediately after filing the lawsuit, the amount of attorney’s fees that the employee will be entitled to receive from the defendant-employer likely dwarfs the amount that may have been due the employee under the FLSA. This amount does not include the amount the employer will have to pay its own attorney. From a purely economic standpoint, it makes more sense to settle the case early for $10,000 and be done with it, than it does to litigate the case by paying at least twice that amount for the employer’s own attorney, and still face the prospect of having to pay the employee's damages plus the employee’s attorney’s fees. Thus, the most common course of action is to settle the lawsuit, even if the employer has a valid defense to the employee’s allegations.

 

These reasons, coupled with the surge in lawsuits brought under the FLSA, compelled many insurance companies to exclude claims brought under the FLSA from standard employment practices liability insurance (EPLI) policies. Since the numbers simply did not support insuring against FLSA claims, FLSA exclusions found their way into virtually every EPLI policy.

 

However, some insurance companies are beginning to offer defense coverage for FLSA claims in their EPLI policies once again. Although the coverage may be subject to a sub-limit, some coverage is being provided nonetheless, oftentimes at very reasonable premium rates. By purchasing this coverage, employers no longer need to be held hostage by the plaintiff-friendly FLSA. The existence of such coverage gives employers, through their insurance company, the option of actually defending against such claims rather than being forced by the economies to settle. In the current economy, no amount of money is considered disposable, and by obtaining an EPLI policy that offers coverage for FLSA claims, employers no longer have to feel compelled to buy their way out of a lawsuit brought under the FLSA.

 

If you would like to learn more about obtaining an employment practices liability insurance policy to insure against FLSA claims, contact us.

Did You Know...Employee Dishonesty

By: Tiffany Luongo, Esq.
Risk Management Group, Setnor Byer Insurance & Risk

Did you know that eight out of ten crimes against businesses are carried out by employees? Workplace fraud and employee theft are more prevalent than ever: It is estimated that the average American business loses six percent of its total annual revenues due to some form of employee fraud. Small businesses are particularly vulnerable to occupational fraud and abuse because they usually cannot afford extensive safeguards against these risks, nor can small firms easily absorb the large losses to which employee fraud and theft can lead.

Most business owners prefer to think of their employees as loyal, trustworthy and honest, and are unwilling to accept the reality that those whom they regard as “family” might be stealing from them. But there are many reasons why an employee may be tempted to defraud an employer, not the least of which is financial pressure on the employee. Also, a dishonest employee may attempt to rationalize a crime with such excuses as “The company will never miss this money” or “This isn’t really stealing because I’m not being compensated as I deserve.” 

Typically, losses attributable to employee fraud can range from relatively small, one-time thefts to long-term schemes that go undetected for years. Statistics indicate that the average length of time that an employee fraud goes undetected is eighteen months, during which time an employer can lose enormous sums of money. That’s why early detection of employee fraud is vital. To protect against this ever-present risk, companies would be wise to establish loss prevention programs that include training in fraud prevention and detection for all managers.
Additionally, sound controls must be in place to prevent employee fraud, with thorough reviews of these loss control practices occurring regularly. 

But no loss prevention program is foolproof, which is why all companies ought to obtain separate employee dishonesty insurance coverage.  Under virtually all commercial property policies, employee dishonesty coverage, also known as employee theft coverage, is a standard exclusion. But employee dishonesty insurance is specifically designed to protect an employer from financial loss due to the fraudulent activities of an employee or group of employees, including such employee-driven crimes as embezzlement and internal theft. No business owner wants to believe that employee dishonesty insurance is necessary, yet without such coverage, a business is severely exposed to potentially devastating losses. That’s why no business insurance program is complete without appropriate employee theft coverage. 

To learn more about how you can protect your business from employee dishonesty, contact us.

The Downside and Economic Risk of Email, Web and Other Digital Communications

The ease with which a brick and mortar business can transform into an e-commerce operation, at least to some degree, can be startling. What was once accomplished face-to-face is now done virtually. What was once kept in a filing cabinet is now stored on electronic databases. Pens and stamps have been replaced by PIN’s and clicks. In the blink of an eye, even those who swore they would never do business in the cyber-world are now making considerable efforts to expand their business by establishing a virtual presence.

Even those who do not consider their business to be a typical online operation are finding that more and more of their processes are being done electronically. Those who would readily dismiss the suggestion that their operation is technology-based routinely rely on the Internet, email, computers, networks, databases, online storefronts, and even their own websites to conduct and expand their business.

Since such a transformation in business practices often leads to new liability and damage exposures that were previously nonexistent, it is not uncommon for businesses to find that they have outgrown their insurance coverage. This is understandable since those charged with managing risk typically focus on the traditional exposures ordinarily covered by an organization’s general property and liability insurance policies. Unfortunately, in the context of risks associated with the use of technology in commerce, these policies do not offer the protection required to keep pace with developing business practices.

The risks associated with the use of technology in commerce can be significant, and if they are not properly mitigated and insured against, the consequences may be devastating. Thus, it is important for every business to conduct an audit of potential risk exposures stemming from the use of technology.

A business may be exposed to unique risks if it:

• generates revenue online;
• advertises online; 
• maintains a website;
• deals with clients, customers, suppliers, partners, etc, online;
• relies on computers and networks to conduct business;
• stores and uses valuable or confidential personal information on internal or external networks or servers;
• outfits its sales or support staff with portable devices, such as laptops or PDA’s; or
• uses a computer network to control production, inventory, delivery, etc.

Perhaps the most surprising part of this list is that an operation does not need to conform to the stereotypical dot.com image in order to be exposed to traditional dot.com-like risks. The nearly universal integration of technology into the business world means that virtually every organization faces at least some technology-based exposures.

These exposures can be broadly categorized as first-party and third-party risks. First-party risks include liabilities involving data recovery, business income, denial of service, virus or hacker sabotage, and theft of system resources. Third-party risks include liabilities involving theft or disclosure of data, damage or loss to someone else’s data, media liability for website content, privacy liability, network security, malicious sabotage, malicious virus, and administrative errors.

If one of these risks comes to pass, it can be an extremely expensive. For example, many states, including Florida, New York, and California have enacted laws requiring businesses to notify their customers in the event of a breach of security involving computerized personal information, such as names, social security numbers, driver’s license numbers, and account or credit card numbers. A business that stores such information electronically is at risk of having to comply with these statutes even if the business has absolutely no online retail components. The loss of a salesperson’s laptop computer containing such information may require a business to initiate the required notice protocols, the expense of which may be debilitating.

While businesses can take steps to minimize exposures, it is unlikely that any efforts will operate to completely insulate an organization from the possibility of loss. Therefore, businesses should obtain insurance that is specially designed to meet specific operations and risks. There are many insurance products which can be tailored to match exposures to coverages. Given the scope of the risk exposure, good business judgment demands that an organization look into updating their insurance coverage to cover all of their risks, not just the traditional ones.

If you would like to learn more about how we can help you obtain the necessary insurance to cover your business, please contact us.

Did You Know...

By: Tiffany Luongo, Esq.
Risk Management Group, Setnor Byer Insurance & Risk

Business owners commonly agree to accept the liability of another party, in a practice known as "risk transfer.”  Contractual risk transfer is a non-insurance contract between two parties whereby one agrees to indemnify and hold another party harmless for specified actions, inactions, injuries, or damages. The ideal use and true purpose of contractual risk transfer is to place the financial burden of a loss on the party best able to control or prevent the incident leading to injury or damage.  However, in practice, some parties attempt to contractually absolve themselves of responsibility for injury or damages they are solely liable for. 

When entering into a contract with another company or a government entity, business owners often find themselves agreeing to insurance terms that may not be supported by their current insurance program.  In business contract situations, it is common for the parties with the most bargaining power, such as large general contractors, corporations, and government entities, to demand onerous insurance requirements from the other party to the contract. A few examples:

• requiring outdated additional insured endorsement language in the contract;
• demanding that the commercial general liability policy continue in force, with no specific termination date, even after all work has been completed;
• forbidding any exclusionary language for risks such as pollution, mold, or earth movement;
• asking for omnibus wording that essentially requires anyone and everyone be listed as additional insureds; and
• requiring that language in the standard certificate of insurance form be modified or deleted.

Typically, most insureds expect their commercial general liability policies to support all of the risk transfers outlined in a contract, but this is not always the case.  In fact, the coverages sought for those risks may be unavailable from the current insurance carrier or generally unavailable in the insurance marketplace as a whole. The result is that the risk is ineffectively transferred or not transferred at all, contrary to the expectations of all parties.  So, if one party to the contract does not fulfill its obligations by failing to provide additional insured status or to obtain proper coverage, litigation may result in the form of a breach of contract action. That’s why it’s essential for business owners to understand insurance requirements before agreeing to meet them. Be sure to consult your insurance agent to assist you with this analysis. 

For more information about properly insuring against contractual risk transfers, contact us.

 

Alternative Group Benefits: Another Option for Employers Coping with Rising Healthcare Costs

By Jessica Morgan, Benefits Consultant

Every American is painfully aware of the impact of skyrocketing health insurance costs. Rising premiums, higher deductibles, larger co-pays, reduced benefits—both employers and employees are feeling the pinch as they look for plans that are affordable for everyone.

That’s why HRAs—Health Reimbursement Arrangements—are a welcome addition to the range of options that employers can offer their workforce. HRAs allow employers to give tax-free dollars to their employees, who then can use the money to purchase their own health insurance as well as pay for other eligible medical expenses. While HRA plans may not be the panacea for all the “ills” of the health insurance dilemma, they represent significant progress from the point where we were even just a few years ago when I first began to tackle this problem.

Then, in January 2002, fresh out of college, I was hired to administer a group health plan for my parents’ company. Though I knew little about health insurance, I learned quickly that the premiums we were paying were too expensive for both the company and our employees. After doing extensive research and reading numerous Internal Revenue Service (IRS) publications relating to health care, I uncovered one solution for the family business: a High Deductible Health Care (HDHC) plan. The high deductible encourages employees to make healthier lifestyle choices and spend their medical dollars more prudently while also allowing them to save for future medical expenses in their Health Savings Account (HSA), funds that they can take with them if they change jobs. The HDHC is good for employers also: Under the plan, our premiums were reduced by about half.

Not stopping there, we also began to offer HRAs as an alternative to our HDHC Group plan. Our hybrid benefits package gave employees a choice: Those who felt more comfortable remaining on the traditional HDHC group plan did so, while employees who wanted greater economy, portability, and freedom of choice opted for the HRA. We structured the packages so that employees choosing either plan received the same amount in benefits. The plans’ common denominator is that both increase employees’ awareness of how they spend their health dollars, thus encouraging them to live a healthier lifestyle because, quite simply, it saves them money to do so.

In 2007 The Wall Street Journal took note of our success and wrote a cover story on our creative benefits packages. Increasingly, employers asked me to assist them in designing an HRA or a hybrid plan for their businesses, even though I was not then an insurance agent. But after years of administering (and participating in) an HRA/Group Plan hybrid, I decided to change my career path and obtained a health insurance license, allowing me to use what I had learned to assist other small businesses.

However, finding an agency that provided both group and individual health insurance and that was sufficiently forward-thinking to consider these newer options was more difficult than I had anticipated. Surprisingly, I found that many agents in the mainstream insurance industry know little about HRAs, particularly those plans in which employees can access a broad range of products from different providers.

After pitching dozens of insurance agencies on employer-based hybrid health care plans, I finally found an agency willing and able to offer these cutting-edge health insurance solutions: Setnor Byer Insurance & Risk, which recognized the advantages of hybrid plans and was excited about offering their clients and prospects an even fuller range of cost-saving options.

Setnor Byer, with almost 30 years of experience in the insurance industry, can help employers expand their benefits offerings, promote wellness in their workforce, and reduce health insurance costs for both the company and its employees. With dozens of plan structures available, Setnor Byer’s insurance professionals will help you choose the right one so that your employees— and your business—remain healthy.

Here’s to wellness.

For more information about these and other types of healthcare insurance policies, contact the professionals at Setnor Byer Insurance & Risk by calling 954.382.4350 or visiting www.setnorbyer.com.

Dangerous Shallows: Using Credit Insurance to Protect Your Assets

By: Tiffany Luongo, Esq.
Risk Management Group, Setnor Byer Insurance & Risk

John F. Kennedy once said that “a rising tide lifts all boats” to illustrate the idea that everyone benefits from a strong economy.  Although the accuracy of this macroeconomic view may be challenged, its optimism cannot.  However, if this premise is correct, then the opposite must also hold true—a falling tide lowers all boats.  Unfortunately, since the economy appears to be in the midst of the lowest tide in distant memory, this could prove disastrous for many businesses.

During difficult economic times—low tides, if you will—many consumers shift into survival mode by cutting costs to the absolute minimum and stretching dollars to the absolute maximum.  Despite their best efforts, however, many are left insolvent and unable to pay their bills.  If one of these commercial consumer's bills happens to be one of your accounts receivable, then you may find your boat sinking along with the rest; a victim of the falling tide.

The importance of protecting commercial accounts receivable during a struggling economy cannot be overstated.  An account receivable is money owed by a customer for products or services that were provided on credit.  It represents dollars a company does not have at its disposal to pay its obligations, reinvest in inventory, or finance growth.  And, since accounts receivable are treated as a current asset on a balance sheet, the loss of receivables can jeopardize a company’s financial stability on multiple levels, from making payroll to obtaining financing.

The most effective method of protecting accounts receivable is to only do business with financially strong commercial customers.  Unfortunately, the increasing difficulty of locating such customers has left many businesses considering the option of eliminating the practice of providing goods or services on credit, thereby foregoing the maintenance of accounts receivable altogether.  However, the extent to which sales on credit are embedded as an ordinary business-to-business practice in many industries renders this option unrealistic.

Yet, there is another way businesses can protect their accounts receivable—credit insurance.  Credit insurance, sometimes called accounts receivable insurance, provides protection against the commercial risk created by customers who fail to pay, or delay in paying, their open accounts.  For instance, credit insurance can protect against the loss created by a customer with an open account who files bankruptcy, struggles with cash flow issues, or lacks sufficient insurance to withstand an adverse liability judgment.

Credit insurance is not new (it has generally been available in some form for over 100 years), but the ever-increasing number of customers defaulting on their open accounts has recently brought more attention to this risk management product.  Hence, more and more businesses are considering whether credit insurance is for them.

Other than the obvious benefit of satisfying a defaulting customer’s open account, credit insurance may offer other benefits as well, including the reduction of collection costs, the reduction of bad-debt reserves, and an overall strengthening of the balance sheet.  Moreover, credit insurance may serve to enhance a company’s financing relationships since insured accounts receivable are considered stronger collateral than non-insured or mature receivables.  Lending institutions may consider the insured receivables when calculating a business’s borrowing base, thereby allowing the business to achieve more favorable financing to fund growth.  By strengthening the balance sheet, credit insurance may also serve to increase the value of the business in the eyes of prospective purchasers.

Although credit insurance may not be necessary for every business, those sharing certain characteristics may want to consider giving the prospect of purchasing such coverage a closer look.  If the following statements represent your business, then you may be a good candidate for credit insurance:

• Does your company provide commercial goods or services on credit?
• Would the non-payment of one or more of your large commercial accounts jeopardize your company's ability to continue as a going concern?
• Does a small percentage of your commercial customer base make up a significant portion of your accounts receivable?

There is an additional factor that should be considered—sales in foreign markets.  Several credit insurance products also protect against foreign political risks that may prevent or delay payment, such as a war in the customer’s country, cancellation of a contract by the government of the customer’s country, or adverse regulations imposed by the government of customer’s country which prevent or restrict consummation of the transaction.

During any time, but especially during difficult economic times, risk-free ventures are virtually impossible to come by.  However, as with any insurance product, the goal is to reduce the risk to a manageable level so the focus can optimistically remain on the upside potential of a business venture rather than the debilitating downside. 

So, if one or more of these conditions apply to your business, raising the option of obtaining credit insurance may not be a bad idea.  Let us knowif you would like to discuss your risk management options.

 

Did You Know?

Did you know that in the event of a disaster, business interruption insurance can be just as vital to the survival of your business as coverage for your building and its contents?

While many business owners are concerned about property damage and the accompanying financial loss that can result from a disaster, they often neglect to protect themselves against the impact such damage could have on their revenue stream. That’s why they should consider acquiring business interruption insurance, which covers reductions in net income and provides an organization with the funds needed to pay normal operating expenses. Remember that a forced temporary closure of your business does not mean that your expenses stop. Payroll, mortgage/rent payments, money owed to suppliers, taxes, and even your own salary draw are all necessary expenses that you must meet. Business interruption insurance will keep needed capital flowing when you need it the most.

Extra expense insurance is also available to cover those expenses over and above normal operating costs that your company may incur as a result of maintaining operations during the repair/reconstruction period. Extra expenses are those that would not have been incurred had there been no loss or damage to your property, including the costs associated with relocating your business, such as renting space in a temporary location, advertising the new location, and obtaining additional equipment and supplies to sustain operations.

You have worked hard to establish your business and make it profitable. Being forced to suspend operations because of a fire, hurricane, or any other disaster has the potential to cause severe financial hardship. Adding business interruption coverage to your current insurance program is a prudent measure that can ensure that your company remains operational in the most difficult of circumstances—the times when the value of having the right insurance coverage becomes immeasurable.

Ordinance and Law Coverage

Did you know that, following a major disaster, some of your rebuilding expenses may not be covered by your property insurance? The costs of demolishing an undamaged portion of a building or of improving a structure to bring it up to code are specifically excluded under most property policies.  Yet often, building codes and ordinances require that such measures be taken to bring a building into compliance with current law. Buildings are constructed to meet or exceed the codes in effect at the time of their construction.  But as buildings age, those codes often become obsolete as construction standards change in an ongoing effort to improve the fire safety, structural integrity, and energy efficiency of buildings. Enforcement of these new standards is triggered when an insured building experiences a covered loss, such as a fire or hurricane, and the structure must be rebuilt according to current, and stricter, codes. So how do you protect yourself from the burden of financing the additional costs of bringing your structure up to code? By adding Ordinance and Law Coverage to your current property insurance. Ordinance and Law insurance consists of three separate coverages: 1) loss to the undamaged portion of the building; 2) increased demolition costs; and 3) increased costs of construction. To learn more about Ordinance and Law Coverage and the benefits of adding this valuable coverage to your current property policy, please contact our office.