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Insurance Q & A – Answers from Marjorie Segale

Question 2 – Workers Comp
We have an insured who is a (domestic) employee referral agency. The employee is paid their wages out of a trust account set up by the homeowner using the domestic employee. The employment contract does not specifically require a Certificate of Insurance showing that the employee is covered for workers’ compensation. We are concerned that the referral agency could be considered the employer if the hiring party has no workers’ compensation coverage. We believe they should be asking for a Certificate of Insurance showing workers’ compensation coverage from the employing homeowner.

Answer by Marjorie L. Segale AFIS, CISC, RPLU, CIC, CRIS, ACSR, CISR
Director of Education, Insurance Community Center
I think you are completely correct. Anytime an employee is hurt, the Department of Labor is going to look for any responsible party to pay for the medical treatment and/or lost wages. I think that they should rightfully ask for a Certificate of Insurance (I don’t think that the absence of that requirement in the contract is a big deal). It is very common for people to ask for a COI showing coverage even if there is not a specific obligation to do so in the contract.
More Questions and Answers are on the Homepage of the Insurance Community Center www.insurancecommunitycenter.com

 

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Insurance Q & A – Answers from Insurance Professional

Question 1 – Workers Comp
If an employer no longer has any employees is it necessary to maintain a WC policy if the amount of time they will be without employees is unknown? If so why?

Answer by Casey Roberts, ACSR, AFIS, CIC – Laurus Insurance Consulting
As you have probably figured out by now (even though you say you are a newbie) there are very few “yes” or “no” answers in the business of insurance. Let’s say the insured is a sole proprietor and no longer has any employees. In California I would not have a problem with canceling their Workers’ Compensation policy. Note that I would be 100% CERTAIN that they have no employees. Sometimes employers work with “independent contractors” who may or may not be considered as such should a claim occur. If this is the circumstance then I would be loathe to cancel their policy.

If the insured were a Corporation or similar ownership, I would want to make certain that ALL of the officers that have the ability to select to be covered or not to be have selected to NOT be covered. I would want this in writing from the individuals. Far be it from me to cancel a policy without the knowledge of one of those that could potentially be injured and have a claim.

Another consideration is that oftentimes insurers are willing for a minimum premium charge to continue to carry coverage just in case the insured suddenly and without telling you (trust me, this happens a fair amount of the time) hires a new employee. Consider that your insured just got a job and needs someone for two or three days…are they always going to remember to call you? Unfortunately the insurance agent or broker is not always the first person they think to call.

 

 

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Ethics in the Workplace – Six (6) Points To Consider

1) Define your values – remember this is what you are willing to enforce and live to…so make certain that you

Pavilion Office Building

can and will do just that.

2) If you post it, you MUST practice it – walk the talk and talk the walk

3) Integrate it into your workplace – measure it and incorporate it into your everyday processes

4) Watch for the “slippery slope” – make certain that there is a “line in the sand” aver which NO ONE can step…once beyond that line things tend to get a bit slippery

5) Be above reproach – Stay WAY above your line in the sand. It makes it easier to live with that line every day.

6) Get past your self-protective behavior – you are going to make mistakes. When you do own up to them promptly, it is far better for you, your organization and all of those folks you work with on a regular basis.

Written By:

Casey Roberts, ACSR, AFIS, CIC
Laurus Insurance Consulting
www.laurusinsuranceconsulting.com 

 

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SB 863: The New California Workers Compensation Reform Laws are like “Sausages”

California Statehouse

California Statehouse (Photo credit: queenkv)

There is a saying that has been loosely attributed to Otto von Bismarck that says:  “laws are like sausages; it is better not to see them being made”.  This saying is probably insulting to the sausage industry but spot on when it comes to insurance reform laws.  The point of this saying, regardless of who came up with it, is that while the legislative process can be messy, lengthy and involve many different parties and their opinions, the result should be a well-written law that benefits society.  SB 863 certainly took a long time to come to fruition and is certainly lengthy.  California residents, including the insurance industry, can only hope that the result is beneficial.  The question is for whom:  to the injured worker; the employer; the insurance company or the attorney?  It is unlikely that it will be beneficial for all parties concerned, but perhaps that is too pessimistic. While this is a California law, it will be important not only to California broker/agents but for everyone who writes Workers’ Compensation for risks in California.

Now, before getting into the specifics of this new law, I need to tell you that I have spent the past several weeks reading this law (a nice bottle of Zinfandel may have helped) as well as countless articles, opinion letters, and blogs.  Most of the articles provided an overview with very few specifics about the reform.  So, here’s my warning before you read further:  This is a serious article and one I have tried to include all the necessary detail we will need to work with the reform as it stands at this point. We are also conducting a seminar on the topic through the community on February 13th.  Space will be limited for this very important topic. Here are the facts:

  1. SB 863 was signed into law by Governor Brown on September 18, 2012 to take effect January 1, 2013.
  2. This law was finalized after months of negotiations among representatives of labor unions and several large self-insured employers to create significant reform desperately needed in the California Workers’ Compensation system.
  3. This is the first workers’ compensation regulatory reform in California since the passage of SB 899 in 2004.
  4. Oversight and implementation of the revisions will be handled by the California Department of Industrial Relations and the Division of Worker’s Compensation.

At the core of this new law are two specific goals:

  1. Increase permanent disability benefits
  2. Cost containment for medical treatment, benefits and administration of workers compensation claims

Because the costs of the foregoing have been significantly increasing, employees and employers agreed that in order for benefits to be increased costs would have to be decreased and the process involved with the workers compensation system must be streamlined. In the past two years, the costs of workers’ compensation insurance have raised from $14.8 billion to $19 billion with a projected 12.6% increase above that in the coming months, prior this reform being enacted. Some of the changes that this law requires are fairly straightforward and involve specific dollar amounts for benefits as well as calculations for disability ratings.  Some of the other changes are not as black-and-white so we will discuss the intent along with the specifics in those areas.

PERMANENT DISABILITY

  1. Minimum and maximum weekly benefit amounts will be phased in over the next two years.  At the end of that time, the maximum benefit will be $290 / week.
  2. The permanent disability rating calculations have also been changed.  Prior to January 1, 2013, the rating formula used modifiers that range between 1.1 and one 1.4 depending on the injury.  The modifier is used to take into account the injured workers diminished future earning capacity as a result of the injury.  The rating formula will no longer include the future earning capacity modifier.  All injuries that occur on or after January 1, 2013 will be adjusted by a factor of 1.4.  The rating system also uses the injured workers age and occupation as modifiers.  Those modifiers will continue to be used. Injuries that took place prior to January 1, 2013 will continue to be calculated at the same modifier that was initially used.
  3. Section 4662 of the Labor Code provides specific circumstances under which the injury is soon to be total disability:  (1) loss of both eyes or site (2) loss of both hands or use (3) effective total paralysis (4) brain injury resulting in incurable mental incapacity or insanity.  All other cases are decided in accordance with the facts of the injury.  This section of the Labor Code has not been changed.
  4. Previously, permanent disability awards were available due to sleep disorders or sexual dysfunction resulting from physical injuries.  These circumstances will no longer qualify for permanent disability awards.  Psychiatric injuries resulting from physical injuries will no longer qualify for permanent disability unless the injured worker with either the victim of a violent crime or witnessed a violent crime.
  5. Psychiatric claims involving treatment for sleep problems, sexual dysfunction and or psychological consequences of their injuries will still be compensable under the new law.
  6. The combination of the increase in benefits and the methods used to calculate permanent disability ratings results in approximately $850 million in additional benefits for permanently disabled workers.

JOB DISPLACEMENT VOUCHERS

  1. An injured worker has been eligible to receive this job displacement voucher that could be used to pay for job retraining.  The amount of this voucher was based upon the permanent disability rating and was on a sliding scale that ranged between $4,000 and $ 10,000.  In order to be eligible for this retraining voucher the permanent disability rating had to be fully determined either by a ruling by the Workers’ Compensation Appeals Board or by a settlement agreement between the injured worker and the employer.
  2. The voucher amount is now fixed at $6,000 when the injured worker reaches permanent and stationary status and the treating physician reports on the injured workers abilities and limitations resulting from the injury.

RETURN TO WORK FUND

  1. The Department Of Industrial Relations is responsible for establishing and administering a $120 million asked per year Return to Work Fund.  The reason that this new fund is being established is to take care of the worker when their disability is disproportionately low compared to their earnings.  The new Labor Code Section 139.48 says:

139.48. There shall be in the department a return-to-work program administered by the director, funded by one hundred twenty million dollars ($120,000,000) annually derived from non-General Funds of the Workers’ Compensation Administration Revolving Fund, Eligibility for payments and the amount of payments shall be determined by regulations adopted by the director, based on findings from studies conducted by the director in consultation with the Commission on Health and Safety and Workers’ Compensation. Determinations of the director shall be subject to review at the trial level of the appeals board upon the same grounds as prescribed for petitions for reconsideration.

  1. The term director in this law refers to the director of the DIR.  Where will the money come from?  It will be 100% funded by surcharges on the Workers’ Compensation policies purchased by California employers.  The payment of benefits will not be paid by the insurance companies, but will be determined and administered by the DIR.  Any appeal from a determination of benefit will be made to the Workers’ Compensation Appeals Board.  A number of attorneys have opined that since the law specifically allows review at trial level, that it is implied their fees will be paid from the fund.  There are no current regulations that expressly provide for those payments.  The regulations to comply with this requirement have not yet been written, or at least published.

INDEPENDENT MEDICAL REVIEW

  1. This portion of the new law is designed to create a significant change in resolving medical treatment disputes.  As of January 1, 2013 for injuries occurring on or after that date and as of July 1, 2013 for all injury dates, an Independent Medical Review will be used to decide these types of disputes.
  2. Currently it can often take 12 months to resolve a dispute and requires specific steps that must be taken.  The process involves (1) negotiating the selection of a medical evaluator (2) obtaining a listing of state-certified medical evaluators (if an agreement is not reached) (3) negotiating over the selection of the state-certified medical evaluator (4) making the appointment (5) examination (6) obtaining the evaluator’s report (7) obtaining a hearing date with the judge if there is a disagreement on the evaluation (8) waiting for the judge’s decision.  In addition, the treating physician can rebut a request clarity from the medical evaluator and the evaluator may be required to submit supplemental reports.
  3. The law does proscribe the process for an injured worker to appeal an IMR determination and again, that will go to the trial level of the WCAB.  The basis for the appeal is either fraud, conflict of interest or a mistake of fact.  The IMR is only available if there is a dispute over the requested medical treatment.  It is not available to resolve other types of dispute, such as the injury itself.

MEDICAL PROVIDER NETWORKS

Due to the prevalence of complaints involving MPNs, such as including doctors who do not accept workers compensation patients and the lack of availability of care and specialty areas the bill includes several modifications of the MPN system.

  1. Removal of the current requirement that 25 percent of doctors within the Network practice in areas other than occupational medicine.
  2. Physicians must affirmatively confirm participation in a network.
  3. Each Network will have to provide medical access assistants who will help the injured worker find an appropriate doctor for treatment.
  4. The Division of Workers’ Compensation must perform continuous and random reviews.  The DWC has been provided the authority to impose penalties if the Network fails to properly address and correct access problems.
  5. Disputes regarding whether or not an injured worker is subject to utilizing a Network will now be resolved at the time of the dispute, rather than holding resolution over until the end of a claim.
  6. Treatment from a non-Network provider without authorization from the insurance company or a judge’s order will no longer be paid by the insurance company or the employer.
  7. If the injured worker obtains treatment from an unauthorized provider that is either unsuccessful or worsens the injury, those medical costs will not be paid by the insurance company or the employer.
  8. Medical reports submitted by a non-Network provider can no longer be the sole basis for a compensation award.  These types of reports must be reviewed by the authorized physician and a qualified or agreed medical evaluator.

INDEPENDENT BILL REVIEW

  1. This is a new process that is being established to resolved medical billing disputes.  This portion of the law also contains new requirements for submitting a bill and how insurance companies or employers must communicate their payment decisions to the medical providers.

LIENS

This is one of the most significant modifications to the workers’ compensation system in California.  A lien is a direct claim against the defendant typically submitted by medical providers or other service providers that the employer was required to provide.  The medical provider uses a lien to contest the employer’s determination of the amount payable for the medical services.

This legal tool is relatively unique to California and has resulted in a significant number of liens to be filed through the court system.  In 2010 there were approximately 350,000 liens filed and in 2011 approximately 450,000.  The result of this is an expense incurred by insurance companies and employers alike of approximately $200,000,000 a year.  Because of the sheer volume of filed liens the courts encouraged settlement of these liens and as a result many unjustifiable claims were paid.

  1. The bill requires that a lien filing contain certain declarations made under penalty of perjury.  The filer will also have to pay a filing fee of $150.00.  All fees collected will be deposited into the Workers’ Compensation Administration Revolving Fund.    There are also provisions for dismissal of liens after January 1, 2014 as well as a statute of limitations (18 months) for filing liens for services rendered after July 1, 2013.  Another statute of limitations (3 years) applies for services provided prior to that date.
  2. The bill also requires the employer to pay for interpreter services.
  3. The specific language in the bill relative to the subject of liens is contained in many, many pages of the bill.  Undoubtedly the wording and intent will be clarified over the course of the next several years as to the legislative intent and the various loopholes will be found by the courts, whether favorable to the employer, the injured worker or the service provider.
  4. A schedule of maximum service provider fees are to be developed and implemented.  The Official Medical Fee Schedule will be updated and will incorporate Medicare’s Resource Based Relative Value Scale.

SELF-INSURED EMPLOYERS

  1. Required to pay deposits to ensure that their responsibilities to pay losses will be to be issued by December 31stannually.
  2. The bill also precludes Professional Employer Organizations (PEOs), temporary employment agencies and employee leasing organizations from being a self-insured employer.  The bill also tightens the restrictions that could allow an illegally uninsured employer from claiming self-insured status.  The employer must receive approval from the Self-Insurers’ Security Fund.
  3. Self-insured public entities’ annual reporting requirements have also been strengthened and a required study of the self-insured public entity programs must be performed by the Commission on Health and Safety and Workers’ Compensation and a report completed with preliminary recommendation for improvement of the program by October 1, 2013.

As a conclusion to this lengthy article, this law has been touted by many different groups as a streamlining, cost-saving reform that will also include significant increase in benefits, particularly for those persons deemed permanently disabled.  The funding of the increase in benefits is supposed to be funded by the streamlining of the compensation claim process and the other procedures identified above.  Well, there is no doubt that the scope of this reform bill will have significant impact on the entire workers’ compensation system in California for years to come.  One can hope that the employers will actually see cost-savings relief and that those seriously injured workers get the help they deserve.  There is little doubt that the legal jousting will begin and continue for some time.  Thanks to all of you who have actually reached the end of this article and hope to see you in class on February 13th.Sign up on site at www.insurancecommunitycenter.com

Written by:

Marjorie Segale AFIS, CISC, RPLU, CIC, CRIS, ACSR, CISR
Director of Education, Insurance Community Center & President, Segale Consulting Services, LLC
 

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Stranger Things Have Possibly Happened

An Australia government employee was injured in a motel room while on a business trip and she wasn’t playing canasta.  While the lower court there ruled that this was not arising out of employment, that decision was overruled by the Australian Federal Court.  Now, if you think that type of claim could never happen here, consider the following:

  • Housekeeper files for benefits under domestic Workers’ Compensation claiming carpal tunnel syndrome from regularly, shall we say, servicing the “master” of the house.  The Workers’ Compensation insurance company paid loss of wages, medical and rehabilitation expenses.  Retraining was apparently not required.  As a side note, this claim was reported by the wife.

On to some other strange and just weird claims:

  • A woman working out of her house, tripped over the family dog, breaking her wrist.  The Appeals Board asserted that since the home was her work environment and she was injured while working, the claim would be covered under the Workers’ Compensation policy.
  • This claim occurred in a monopolistic state.  A number of employees were roughhousing during a mandatory team building event.  A group of them were in a canoe, saw a coworker standing on the riverbank and tried to pull him into the river.  One of the male employees grabbed him, threw him to the ground and caused a neck injury.  The Court of Appeals upheld the lower court’s decision since this was a mandatory business event.  Horseplay doesn’t necessarily remove a claim from the Workers’ Compensation system.
  •  Apparently in at least one state, smoking a little weed doesn’t mean that an injury can’t be covered under Workers’ Compensation.  A man mauled by a wild animal at a tourist park claimed employee status.  The employer argued that he was a volunteer and he had smoked marijuana that day.  The state’s Supreme Court states that he received compensation for his duties and that his habit was not the major cause of his injury and ruled in favor of the employee.
  • A group of employees were sent to a two-day training conference.  At the end of the first day, a group of the employees first attended a company
    dinner, then visited three bars over a four hour period.  After going back to their hotel, three of the employees decided they should climb out of a bathroom window onto the roof of their second-story hotel.  One of them leaned against a rail which gave way and the employee sustained injuries due to the fall.  The appellate court ruled that benefits should be denied stating that the employee’s conduct was unreasonable under the circumstances.
  • A man, working as a maintenance worker at a trailer park was asked to go into a trailer to investigate a very bad smell.  He found the decomposing body of an opossum and suffered a heart attack.  Although he had a pre-existing heart condition, the jury ruled that the injury was work related and, therefore, covered under the Workers’ Compensation policy.
  • Then there was the injury of a 21-year old man who gave a vending machine at his employer’s place of business a push to dislodge a bag of chips for a female coworker.  He suffered a displaced fracture in his neck and was awarded benefits by the state Appellate Court.
  • A co-worker’s perfume was found to have aggravated an employee’s pre-existing COPD.  The Appellate Court found that was a compensable injury as it arose out of employment.
  • An employee was off the job due to an employment-related injury when he was arrested and incarcerated for solicitation of murder (of his wife).  This was deemed to be involuntary removal from employment.  His benefits were to be continued.
  • An employee was injured while working at a fast-food establishment.  Part of the insulation of an electrical wire to a microwave oven had been removed and the employee sustained electrical burns.  The act of removal did not rise to the level of intentional tort liability, although clearly injuries arising out of and in the course of employment.

So, what is the moral of this collection?  Sometimes the employer is held responsible, even when, at first glance, it sounds absurd.  But then, humans can act in absurd and strange ways and cause themselves or others harm in the process.

Although I cannot confirm the veracity of the following, I couldn’t resist including these  claimant statements that I found at http://www.funny2.com (no – everything found on the internet is not true!).  Sometimes, it is all how you phrase it!

  • My head injuries have created a permanent increase in libido which has led to two affairs and has ruined my marriage.
  • I got my right hand first finger in the saw while helping Mike and staying out of his way. My finger bled and it affected my mind.
  • I chipped my tooth on a cookie while visiting a customer.
  • While on duty, I was hit in the face by a hand. My glasses were broke and something hit my eye. No one believes I was hit but it hurt!
  • Hot grease splashed on me and fried my thumb.
  • I was working on my job and got a pain at the end of the week.
  • Accident unnecessarily occurred on account of a misjudgment.
  • I ran down the steps and when I got to the end, my feet wouldn’t stop.
  • I had my hand in the machine while the air was off. Someone turned on switches and folded my hand.
  • I was assaulted and attacked by a vicious employee because he didn’t like me and I know it.
  • The patient was going to fall for me. I could not let this happen. In so preventing this, I caused myself damage to my knee.
  • This is for the cut on my hand, but I took the stitches out myself. However, I am filing on account of the watchdog biting me and on account of a hurt I got in a fall in the paint shop.
  • In performing the job of which I am capable, I didn’t know the machine was on and was showing my new helper what not to do and did.
  • I was proving that I could carry an air compressor and I strained my back.
  • I looked into the hose to see why the water did not come out. It came.
  • I sprained my ankle the same way I sprained my ankle before.
  • I hit my arm against the hopper, and got flea bites.
  • That night I done something I shouldn’t-a done and now my back hurts.
  • A gate hit my foot while my back was turned, closing the other side.
  • Customer thought she needed the brakes adjusted. She drove the car into the station, could not stop the car, came through the door and pinned claimant against the cash register.
  • I was removing a blouse for a customer and which time I injured my back.
  • I inherited this occupational disease.
  • Acting on behalf of my employer, I hit another automobile.
  • In order to avoid a person, Betty lost her balance and fell down. In one hand she had a ketchup bottle which broke on impact, cutting her hand. In the other hand she had her thumb.
  • I over asserted myself and got a hernia.
  • The doctor gave me a disease for my occupation and said I must change jobs.
  • Gears smashed thumb while holding air cleaner, while putting nipple on with right hand, while balancing air cleaner with left hand, while holding end with left hand away from right hand. Gears were not covered.
  • I didn’t know water was where I fell.
  • I fell down in the Fotomat booth while dislocating my knee.
  • Sustained back injury due to car accident which is part of his job.
  • Falling off the truck, I dislocated my pelvis and other male organs.
  • I slipped and fell and hurt everything in me.
  • I dropped my head on my foot when someone pushed their guts across the table without calling out (from a slaughterhouse employee).
  • The fumes were so bad I was taken by them and went to bed with the doctor.
  • The guy I work with went ape s4%t. He hauled off and punched me in the jaw and then tried to rip my throat out.
  • Carrying roll roofing, I caught my toe on a piece of tin that was froze in the ground. The tin flipped against me causing me to trip, letting the roofing fall into the bucket of tar. Tar splashed out, burning my arm, and causing me to jump back into the ladder which fell against me, knocking me into the building, breaking my tooth. Thus I burned, bumped, and broke me.

 

  • Written by:
  • Marjorie Segale AFIS, CISC, RPLU, CIC, CRIS, ACSR, CISR
    Director of Education, Insurance Community Center
    & President, Segale Consulting Services, LLC
 

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Producer Contract Fundamentals

Contracts

One of the amazing things that occurs in some agencies, even successful ones, is that often the producers have not signed contracts.

There are three main reasons for the lack of contracts.

The most common is that the agency owner and the producer has a verbal agreement. Usually the owner is reluctant to put the agreement in writing for fear that the producer will not sign one any way and might leave if forced to sign.

The second reason is that the owner just did not take the time to draft an agreement or did not know were to start. The third most common reason is that the owner feels contracts are a waste of time and money. They believe that if a producer wants to leave and violate the contract they will.

The last reason does have a bit of truth to it. However, if a producer does violate a contract, at least the owner does have a means of recourse. This is especially true if the agreement is fair.

Those who feel a verbal agreement will suffice or fail to take the time to write an agreement are playing with fire, and will get burnt. Without a contract, any dispute must rely on verbal agreements, implied agreements and common practices. The results of such disputes are up in the air. At least with a contract both sides have a common starting point in which to resolve their disagreements.

One of the biggest reasons to have a contract with a producer is to clearly state who owns the business. Producers often feel that since they generated the business they own it. Whereas many owners feel that since they own the agency, they also own all of the business. The conflict arises when these two opposites do business together.

The time and money it takes to put a contract together seems trivial when a producer with a $250,000 commission book of business walks away. Sometimes the ownership issues pop up only when the agency owner is retiring, only to find out their agency is worth a lot less because they do not own the producer’s book of business.

The Starting Point
There are many boilerplate or do it yourself contracts out there. Some of these are quite well written. They can be used as the starting point for negotiations between the parties. Or, you may choose to start with a plain language Letter of Intent that outlines all the terms agreed to by all parties.

The next step is important. HAVE A COMPETANT LEGAL ADVISOR REVIEW AND APPROVE ALL YOUR CONTRACTS. Boilerplates are fine to an extent, but laws change and vary from state to state, so never do all the contract work without an attorney who has experience with producer contracts. If you start with a Letter of Intent, the attorney can use it as the raw material for a contract.

So what are the key elements that make up a good contract? The first thing to consider is that each agency and producer is unique and that a contract can and should vary based on the circumstances. There are, however, some basic components that each contract should contain. The most common elements are:

Parties to the Agreement and Recital – State the name of all parties (individuals and entities) that are entering into the agreement. The recital provides a brief overview of the background and why the agreement is being written.

Term of Employment or Contract – State how long this agreement will run. It can be open-ended, if so desired.

Responsibilities of the Producer – Describe the duties expected from the producer. Always add a line that duties include any reasonable task requested or assigned to him/her by the employer. This is a good “catch-all” phrase.

Obligations of the Employee – Explain what the employer will provide the producer to enable them to perform their work.

Compensation and Benefits – Outline the compensation plan and any benefits provided.

Exclusive Nature of Employment – State that the employee is to devote their full-time and efforts exclusively for the benefits of the business. This section should not be included in a contract with an independent contractor.

Termination of Agreement – Describe what the rules will be for termination of employment.

Death and Disability Issues – Many contracts omit this valuable section. Make sure it is understood how the death or disability of the producer will impact the agreement.

Non-Disclosure and Non Piracy – Clearly state the importance of non-disclosure and non-piracy of the agency materials. If included in the contract, it is most likely to hold up in court.

Ownership of Accounts, Expiration Lists and Renewals – Describe how the ownership of the accounts will be handled.

Injunctive Relief and Damages – Spell out the ramification of any violations of the agreement.

Assignment of Agreement – Allow for the assignment of the contract to a third-party, such as a buyer of the agency.

Invalidity of Specific Sections – This section allows for the rest of the agreement to remain intact, if a specific section becomes invalid for some reason.

In addition to these sections, there will be additional sections related to common legal practices in a contractual agreement, such as Applicable Law, Binding Effects, Amendments, Waivers, Arbitration and Complete Agreement.

Is it Negotiable?
Some of these sections are negotiable, such as Compensation and Obligation of the Employee. It is important, however, that the agency owner not negotiate on other sections such as Non Disclosure, Assignment of Agreement and Termination of Agreement.

The sections that tend to be the most important to the owner and the producer revolve around compensation and ownership issues. The approach towards these two issues needs to be customized based on the needs, expectations and position of the parties.

Insights on how to handle producer compensation was addressed in a prior article (VVVVV). The bottom line on compensation is that it needs to be rewarding and motivating for the producer, affordable to the owner and fair to both parties.

Ownership of Accounts
There is a wide range in how account ownership is handled, or mishandled, by many contracts today. Some agreements have the producer owning it all, some have the agency own it all and some fall in between.

The problem is that sometimes account ownership has been used as the vehicle for a vesting agreement or deferred compensation plan. It is important to keep the concept of account ownership separate from the concept of a vesting agreement or deferred compensation plan.

The ownership of the accounts, renewals and expiration lists should always remain with the agency. The contract should clearly state this fact. This will prevent any misunderstanding about who owns the accounts. The vested interest, if allowed, should be strictly a financial benefit to the producer, not an ownership interest in the accounts.

If the two parties agree to some sort of vesting or deferred compensation, that should be spelled out separately from account ownership. In a vesting agreement, the producer has a vested interest in some portion of the renewal commissions generated by the accounts, while the ownership still remains with the agency. This agreement can be part of the employment contract or it can be its own agreement.

A deferred compensation plan can be effectively the same as a vesting agreement. It is probably less confusing to use the deferred compensation terminology rather than the vesting terminology, since the latter may be confused with an ownership of the accounts.

Keep in mind that a deferred compensation plan can be unrelated to the producer’s book of business. For example, the employee may earn $10,000 in deferred compensation per year of employment.

The terms of the deferred compensation or the vesting agreement needs to be clearly stated. Why bother saying that a producer is 50% vested in their accounts without describing how the value will be determined? Failure to state how the value is determined will only cause more problems.

A “rule of thumb” multiple for value is the most common approach. The main problem with a rule of thumb, such as one times commission, is that it may not reflect the fair value of that particular book of business. It makes sense to include the option for a professional appraisal if a dispute arises.

The contract can also allow the producer to buy the accounts from the agency. This makes the agreement bilateral and may help the agreement to be construed as fair in the courts. The agency, however, should always reserve the right to sell (or not).

Summary
Good producers are hard to find. For an agency owner to spend a lot of time and money finding and developing a good producer, it only makes sense to have a clear understanding of what their agreement is. When both parties know what the terms are and agree to them in writing, it tends to keep both sides honest and more likely to follow the terms.

The legal world is not perfect and valid contracts sometimes don’t hold up for one reason or another. An agency’s clients are better off with the proper insurance then no insurance at all. In a similar fashion, an agency and producer are better off with a written contract then no contract. A well-written producer contract is a form of assurance to a good relationship between the agency and the employee.

About the Authors.

Bill Schoeffler and Catherine Oak are partners in the international consulting firm, Oak & Associates, based in Northern California. The firm specializes in financial and management consulting for national and international insurance agencies, including valuations, mergers acquisitions, clusters, sales and marketing planning as well as perpetuation planning. They can be reached at (707) 936-6565 or by e-mail at catoak@sonic.net. print

 

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Being “Nice” To Your Kids Can Get You in a Lot of Trouble

Family Portrait - Montreal 1963

 

The kids finally turned 18, out of the house off to school or their first real job and you have done what you have waited to do for years—re-decorate their room! But, this economy has changed that dream in a lot of different ways.  The kids are back, or if not physically moving back into “your” home they are back on the household payroll.  The good news is you talk to them more…th

 

 

e bad news is that they are calling for a transfer into their account.

 

I hear these stories all the time, and I, too, have become much closer to my kids! This economically driven dependence has created some very interesting insurance questions. The fact is that as the helpful parent we are creating some serious personal liability and taking insurance risk.  Here are a couple of true examples (fictitious names are used to save my friendships):

 

“Can you lease a car for me—I cannot qualify with my credit rating”

 

Sandy is a 40 year old who not a member of his mother’s household and needs to lease a new car.   He cannot qualify for the lease, so he asks his mother to lease the car in her name.

 

They have considered two ways to handle the insurance on the leased vehicle:

 

I.    Mom insures the car on her personal auto policy; give the car to him to drive; and, he will reimburse her for the payments and monthly insurance bill.  

 

When mom called her insurance agent, the agent told her that she could insure “Sandy’s Car” since she is the registered owner and the only person on the lease. The problem here is that it is just not right to do this. It is misrepresentation to the insurance company. While a small claim may not highlight this fraud to the company—when Sandy gets into a significant accident the truth will come out. The insurance company has the right to rescind coverage under such circumstances and their agent will face the consequences of bad advice. Even if they do get away with it, many insurance carriers have restrictive language in their policies regarding permissive use.

In particular, California law generally requires that automobile insurance policies cover permissive drivers under the owner’s liability policy [Insurance Code§11580.1(b)(4)] but the insurer can limit permissive user coverage by use of clear and conspicuous language to $15,000/$30,000/$5,000 [Vehicle Code §16056; Haynes v. Farmers Insurance Exchange (2004) 32 Cal.4th 1198, 1205 (finding that to be enforceable, a limitation of limits for permissive use must be conspicuous, plain and clear)].

However, if a motor vehicle owner gives express or implied permission to a person to use a motor vehicle, and that driver wrongfully (negligently or intentionally) causes injury or death to a person or damage to property, the vehicle owner is also vicariously liable [Vehicle Code §17150 ]. In fact, Owner liability under Vehicle Code §17150 generally has a maximum dollar limit of $15,000 per injured person but $30,000 per occurrence even if more than two people are injured, and $5,000 for property damage [Vehicle Code §17151; see also Vehicle Code§17155].

The permissive use statute does not limit the liability amount owed by the owner based on another viable legal theory (other than permissive use) such as, for examples, negligent entrustment to an “incompetent, reckless, or inexperienced driver” (Syah v. Johnson (1966) 247 Cal.App.2d 534, 538), and failure to properly maintain brakes (Fremont Compensation Ins. Co. v. Hartnett (1993) 19 Cal.App.4th 669). As such, an injured or damaged party will file suit against both the owner and driver for the permissive use statutes to apply [Vehicle Code§17152].

If we strictly interpret the PAP, we know that anyone can drive our vehicle with our permission and there is no time frame for the permissive use. The PAP does not say it MUST be garaged at the owner’s home although that was the address the insurance company used for rating purposes as well as the mom’s driving record.

So the first question to answer is if Sandy gets into an accident, will Mom’s policy provide her coverage for the occurrence?

Mom’s AAA policy (insuring agreement) provides that the insurer “will pay damages for which any person insured is legally liable because of bodily injury or property damage caused by an occurrence arising out of the ownership, maintenance or use of an automobile…”

Further, Mom’s policy includes as an insured, “any person using an insured automobile with your permission…” So far, so good. Based upon the insuring agreement alone, it appears that Mom and Sandy will be covered. However, the policy also requires Mom to notify the carrier if there is a change in driver. The policy provides:
“You agree to pay the premium…resulting from changes made during the policy period. Changes include, but are not limited to…(c) a change in drivers…”

The policy also contains a “Misrepresentation or Fraud” section, which provides:
“This entire policy shall be void from its inception if any person insured has misrepresented or omitted any fact or circumstance which was material to our issuance or renewal of this policy. Any statements in the application or in any documents provided to us by any insured in connection with the issuance of renewal of the policy shall be deemed material to the acceptance of the risk assumed by us under this policy, and this policy is issued in reliance upon the truth of such representations. If any person insured intentionally makes a false statement or conceals or misrepresents a material fact or circumstance that relates to an accident, occurrence or loss, or to our investigation thereof, we may elect not to provide coverage for that accident, occurrence or loss. We also may elect to cancel or nonrenewal the entire policy as permitted by law.”

Based upon the initial and continued misrepresentation as to “who” is driving the car, the insurer has a clear basis to void Mom’s ENTIRE policy from its inception. Thereby jeopardizing not only coverage for “Sandy’s Car”, but for any other vehicles insured on the policy in question.

Assuming the insurer does not find out about the misrepresentation or agrees not to void the policy upon making that determination, the next question becomes:

Does Mom’s policy cover Sandy, if Sandy gets into an accident?
To qualify as an insured under the policy, with respect to an insured vehicle, a relative must be a resident of the same household in which the named insured resides. So, should Sandy get into an accident, he will not qualify as an insured on Mom’s policy.
If Sandy has his own auto policy of insurance (say for a different auto) will Mom’s car be considered an “Additional Insured Automobile”? To be an additional insured automobile, Sandy cannot own the car (check) and it cannot be “available for regular use” by Sandy. Under the strict definition, Sandy’s own policy won’t cover him.

II. Sandy is going to insure the car on his personal auto policy.

This approach is even worse than the first scheme. Mom may think this gets her off the hook but she, and she alone, is the registered owner and subject to liability as the owner. Mom has no insurance on the car because she did not add it to her policy.

Further, Sandy has no insurable interest in the car; he is neither the lessee nor co-lessee. There would be no coverage under his auto policy or her policy for the leased vehicle.

 

Advice to Mom
1. Have your 40 year old kid move back home because he will then be a member of the household and the PAP would have a better chance of extending coverage.
2. Do not lease a car for your children in your name whether they live at home or not but especially if they are not in residence.
3. Have them get a jalopy or take the bus.

Footnote [1] “Every owner of a motor vehicle is liable and responsible for death or injury to person or property resulting from a negligent or wrongful act or omission in the operation of the motor vehicle, in the business of the owner or otherwise, by any person using or operating the same with the permission, express or implied, of the owner.” California Vehicle Code § 17150.

Next case

 

I am moving home (with the kids) so that I can start my own business

Your perfect home, since you kicked out your husband has been infiltrated by your son, wife and two children under the age of 8.  We have some significant issues to resolve and I am not talking about the play dough in the carpeting here, which is a given. The bigger concern is the fact that your son is going to start his own internet company.  He was the victim of layoffs in the industry and is striking out on his own.

 

The Homeowners is clear in its definition that an “insured” means You and residents of your household who are your relatives…  Good so far, the family is all covered on the mom’s Homeowners Liability Policy.

 

The business takes a while to get going and as soon as the big break is becoming a reality, the son decides to file a DBA and form an LLC.  He has to buy a substantial amount of computer equipment through his new company all of which is kept in the home or more often in the detached garage.

 

The insurance problems are now mounting.  We have a business operating out of the home; the business is operating in a name other than the resident relative on the policy; and a lot of expensive equipment owned by the company maintained in residence.  Hopefully you are saying to yourself NO coverage or at best very limited coverage.  Mom’s Homeowners Liability policy had problems before the son formed a company—specifically all of the business exclusions.  When he formed the company, even the limited coverage that was part of the policy was removed.  In terms of all the computer equipment, it too is not owned by the relative in residence—it is owned now by his company.  Even if you could put a claim in for loss under the Homeowners policy it would be limited for both coverage on and off the premises.  The fact that it is stored primarily in the garage brings up the very strong language that a detached garage cannot be used in whole or in part of business purposes.

 

Advice to Mom:

 

1.    While you are now the proud mother of a budding entrepreneur, have him buy a business policy to cover his liability and property.
2.    Remove the play dough with hot water and salt

 

 

 

Written By:
Laurie Infantino AFIS, CISC, CIC, CRIS, ACSR, CISR
President, Insurance Community Center, Insight Insurance Consulting

 

 

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