The final section of this blog series focuses on insuring your assets from the potential impact of costly lawsuits. When evaluating insurance, whether it is property and casualty; directors and officers; the various liability policies; worker’s compensation; or others, there are three primary considerations:
- Premiums
- Payouts for deductibles
- Appropriate coverage
For policies with deductibles, it can be said that premiums and deductibles go hand-in-hand; some liability policies have no deductible. Industry experts report a frequent misconception is a high deductible will be justified by premium savings. Although there is never an equal reduction in premium to the deductible amount, some key factors are the frequency and severity of claims. Other factors that affect deductibles are type of coverage, financial size of the corporation, and evaluations of the underwriters. Ultimately, the deciding factor is the insured’s appetite based on underwriter approval. If an insured’s past history shows a low frequency, a higher deductible may make sense. However, in some of these cases, the insurance company may also require a Letter of Credit. Typically, it takes an average of two or three claims to erase premium savings.
There are four primary insurance forms to choose from, they are:
- Traditional Insurance
- Captive Insurance Company
- Self-Insurance – Individual
- Self-Insurance – Group Trust Fund
Traditional Insurance:
This is coverage placed through insurance companies without having to make a capital contribution up front or maintain trust assets in excess of liabilities. As to the different approaches to insurance, the marketplace usually dictates, by cost, as to what an insured can or will do. In a hard market, high cost, alternative ways to traditional insurance are more likely to be explored. In a soft market, traditional insurance may prove more attractive, as coverage becomes less expensive so higher limits become more affordable. Driven by ever-increasing costs, providers will continue to evaluate approaches to insurance other than the traditional insurance forms such as the captive and self-insurance programs outlined below.
Captive Insurance Company:
- Owned/capitalized by the businesses they insure; ownership is unlimited
- Can be a single-parent policyholder
- Participants pay in capital to start; $500,000 or less depending on domicile
- Can be used for any line of coverage
- Can set up anywhere worldwide where there is a captive law
- Eligible to be rated by an independent rating agency
- Can be fronted by any willing licensed primary insurer
- Have been in existence for more than 100 years
Captive Insurance Company Pros:
- If successful, members can receive dividends
- States may elect not to require using rates or forms published by NCCI or ISO, or be subject to typical insurance regulations
- Do not have to be homogeneous industries that join
- Once established can be certified as a “risk retention group” (which changes some of the above parameters, and pros and cons)
Captive Insurance Company Cons:
- A state may not allow participation in the state Insurer’s Insolvency Pool
- A state may not require participation in Self-Insurers Guaranty Trust Fund
- A state may not require participation in the Assigned Risk Plan
- If not successful, members may lose their capitalization
- To remain solvent, members may be special assessed based on % participation
- Joint and Several Liability, but is capped or limited to a maximum per member
Self-Insurance – Individual:
Typically only feasible if paying over $500,000 in premium since state and other costs require minimum of $500,000 in expenses for:
- Certified feasibility and actuarial studies
- Letters of credit
- Establishment of a claim fund
- Assessments and fees
- Hiring third-party administrator to pay claims
- Possibly purchasing excess insurance
- Hiring defense attorney; as an entity it is its own insurance company and must provide insurance company services
- Usually not approved if combined premium is not over $1,000,0000
Self-Insurance – Individual Pros:
- The primary goal here is to significantly lower cost
Self-Insurance – Individual Cons:
- Initial capital investment
- Maintaining trust assets to fund liabilities
- Finding expertise to start and maintain the program; risk of failure
Self-Insurance – Group Trust Fund:
Provides alternative insurance form through which members of trade associations and other groups can obtain insurance coverage. The legal procedures to establish the group trust are similar to those for Self-Insured – Individual.
- Two or more employers which perform related activities
- Maintain an adequate net worth as specified, usually $1,000,000 or more
Self-Insurance – Group Trust Fund Pros:
- Lower cost
- Benefit of membership in group
- Potential to stabilize costs over time
Self-Insurance – Group Trust Fund Cons:
- Unlimited Joint and Several liability for claims of other members
- Possible assessments to cover excess claims if reserves are inadequate
- No Guaranty Fund if not successful
- Finding organization with expertise to start the fund; high failure rate
In today’s market, the bulk of the lawsuits are employment, general/professional, and Fair Housing claims. Breach of Contract claims regarding “aging in place” is becoming an issue for all levels of care, particularly CCRCs. Furthermore, due to the growth in legislation and technology, the need for cyber and privacy protection is becoming more relevant. The number of claims associated with document loss, and cyber and privacy theft, is growing. Over the next decade, these claims may prove to be the fastest growing trends. Until court tested, the impact of these risks will be difficult to assess.
To simply state that navigating the waters of the world of insurance is extremely complex and confusing, is a gross understatement. To put in place policies with the lowest possible premiums, while minimizing risk with appropriate coverage, requires a great individual and team effort. To ensure success, build a team of professionals, each with significant expertise in the senior living field.
About the Author:
John zumBrunnen is Founder of zumBrunnen, Inc., an independent construction and building consulting firm founded in 1989. zumBrunnen has a BS in mechanical engineering from the University of North Dakota, completed the US Army Corps of Engineers Training Program in 1972, and is a member of LeadingAge and Community Associations Institute on national and state levels. zumBrunnen has 40+ years of experience in construction, property assessment, development, and reserve budgeting. He is the inventor of the FacilityForecast® software system and a respected author and speaker in the industry.
