Insurance and Hiring a Domestic Employee

Many people have turned to hiring a nanny or part time maid as both parents have obligations on their time and their days get over scheduled. Often, people wonder if they need new insurance coverage. I know this is a small departure from my usual writings on commercial insurance, but I think you may find it helpful.

There are a few things to consider for insurance after you have decided to hire a domestic employee. The easiest is workers compensation. This paragraph is specific to Illinois, and each state has separate requirements that basically fall into three categories. The first category is that usually domestic employees are not required to be covered under workers compensation. The second is that full time employees are required to be covered and the third is that even part time employees are required to be covered. In Illinois, Any worker or workers employed for a total of 40 or more hours per week for a period of 13 or more weeks during a calendar year by any household or residence must be provided workers compensation insurance. However, if the position is part time (35 hours) it is not required. Workers compensation for a domestic employee ends up costing about $600, so it's nice to avoid when possible.

As far as liability insurance, your homeowners insurance will extend coverage automatically. At renewal, you should make them aware you have a regular domestic employee. This would be true of a nanny or any other domestic employee. Your homeowner's insurance covers any bodily injury they may cause to a non-household member and any property damage they may cause in the course of their work outside the home.

Homeowners insurance would also apply as normal (with the deductible) to any theft of your property committed by your employee.

The household's auto insurance also extends to your employee driving your vehicle. So you can have your employee drive your auto without additional coverage. No notification of the carrier is required. Despite what a personal lines agent may tell you, the employee would not be considered a household member and should not be rated on your policy.

Following the above conditions, you should not require any additional coverage.

Workers Compensation Audits

You may or may not be aware, that your workers compensation premium is just an estimate. Sure, you faithfully paid your bills all year, even renewed your policy. Months after your policy expires, the insurance company can send you a bill for thousands of dollars. And can even send your business to collections, because you owe. So how does this happen?

Workers compensation policies are issued on payroll forecasts, but payment is due on actual payroll. And if you admit you can't document one of your subcontractors workers compensation polices, you could owe for them as well. So how do you avoid this? Be informed and document! First - be honest with your broker and help them write an accurate policy. Give them accurate payrolls based on history and expectation. Break out payroll by job duties and help your broker assign good class codes. This helps a good estimate be used for your policy and minimize audit premiums. If you over estimate, you can earn a refund - you will get your money back.

So what happens at the end of the year? You will either get a paper audit form or a "physical audit" where someone comes to examine your records. Do not staff out the audit. Call your broker first for advice. The auditor is looking for ways to grab your money - keep it! If you have employees with split responsibilities - you need to keep payroll records by job duty. In the office 4 days answering the phone and one day making deliveries? Document! There is no form for this, make your own. It will pay off.

Second, the auditor wants to see source documents. Quarterly and annual payroll tax records, payroll records. Know what you have - and know what can be verified. Most payroll reports are generated by employer internal reports. What you can document is the truth. Don't contradict yourself, and you will come out with a no surprises audit. Let your broker be your advocate, and they will tell you what your options are. Don't trust your broker that much? Call me.

My business doesn’t own a car, why do I need auto insurance?

Many business owners think just because they don’t own a vehicle, they don’t have any exposure to auto liability. Often, even businesses that do not own a vehicle need auto insurance, specifically hired and non-owned auto insurance.

Any time an employee is driving a vehicle, even their own, on “company time” or for a business purpose, the employer is exposed to liability. This is due to vicarious liability, the concept that one can be responsible for the acts of another. This is commonly referred to as the master/servant rule or respondent superior “let the master answer.” Because of this rule, employers are often responsible for the actions of their employees, even when the employer did not direct them to do something. If the employee drives their personal vehicle for a business purpose and is responsible for damage, the business is just as responsible. Cases are even more clear cut if the employee was in a vehicle rented primarily for business. For instance, when the employee is attending a conference and rents a vehicle.

The answer to this is hired and non owned auto insurance. For most small businesses, the insurance carrier writing the package policy or the “BOP” business owner’s policy, is happy to include the coverage. Most of the time, hired and non owned auto liability insurance is only a few hundred dollars per year, and is a worthwhile addition to your insurance program.

Insuring Vacant Buildings

Vacant buildings, especially recently, are a fact of life. There are a few things that everyone should be aware of with insuring vacant buildings, especially going into the winter.

A vacant building is any building, which contains no furniture, fixtures or equipment and is not used on an ongoing basis. It also has not been used for at least 30 days. Vacant buildings are prone different risks than occupied ones. They have higher rates of vandalism and theft of building property. Vacant buildings also have higher rates of frozen pipes because they are frequently not winterized.

There are real consequences for insurance on vacant buildings. If you do not tell the insurance company that the building will be vacant and you have a claim, payouts are often reduced by 15% and there is no coverage for loss by damage in the course of a theft or vandalism. Also, frozen pipe claims are generally excluded when the pipers were not drained or the building was not heated.

If you do tell your insurance company that a building is vacant, they may choose not to renew the policy. If there is a plan to re-occupy or dispose of the property, than the insurance company is likely to grant a "vacancy permit" which gives most coverage back on a vacant building and eliminates the claim payment penalty. If you happen to have a number of buildings, most companies have standards for vacancy percentages. Alternative insurance is available specifically for vacant buildings. These policies are easy to obtain, just ask your current broker.

It's best to have a plan for your vacant property. Even hold for 12 months pending market improvement then list for sale is better than not offering a plan to use the property. And while you hold the property, there are some things that you can do to minimize your risks. If it is a residential property, make it appear occupied. You could put some lights on timers, leave some furniture in the home, or install some "staging furniture" (made entirely from cardboard). At the very least, drop by the property on a weekly basis, keep the lawn mowed, and in the winter drain the pipes if the building will not have heat.

With a little time and effort, you can really minimize the chance that you will take an uninsured loss on a vacant building.

If you just need the insurance - call my office today - 312-566-9700.

Property Insurance Limits in a Declining Real Estate Market

It wasn't that long ago insurance agents were explaining to property owners and mortgage brokers that they didn't need an $800,000 homeowners policy on a 2000 square foot house, even though that was the market value. Property insurance valuations can be done on three valuations, replacement cost (what it would cost to rebuild), actual cash value (replacement cost less depreciation), or agreed value (a fixed number agreed with the underwriter).

The vast majority of property insurance is written on a replacement cost basis. The idea is that if there was ever a total loss to the building, most people would want the ability to rebuild. Replacement cost includes the increased (or decreased) cost of updated building methods and includes the cost of construction to current building codes. Replacement cost is not market value. Market value is what someone is willing to pay for the building and the land in its current state. Replacement cost does not include the value of the land, which can not be destroyed. Just a few years ago, in the booming real estate market, replacement cost was usually less than the market value of the home. Insurance agents were constantly explaining to insureds that just because their house appraised for double purchase price several years prior does not mean that the insurance value needs to be increased. This fight was often lost with the mortgage company with the processor saying over and over again "we need to insure the mortgage value" or "that's not what the appraisal says." Many homes went over insured, and premiums were inflated.

Now most homes have declined in market value. Especially in urban settings, market value of the home is now replacement cost. So what's a homeowner to do? Well, it depends on your objective. If there was a significant loss would you rather rebuild at the same location, or take one of the comparable properties on the market at a lower cost? If you would want to rebuild, you need to make sure the insurance policy limit covers the cost to rebuild. Sometimes that can be found on an appraisal, but most mortgage companies don't require it to fund the loan, so it's often not done. If it wasn't done, your insurance agent can help you determine a replacement cost for you. This number could be higher than the purchase price.

If you would just buy a new home for market value (assuming it's still less than replacement cost), than you would want to insure your home for actual cash value. This is the replacement cost of your home, less depreciation, and is closer to fair market value. The cost per thousand of insurance is slightly higher, but the overall policy cost can be much less. As always, don't let someone else make your choice. Your mortgage broker isn't interested in protecting you and your insurance agent doesn't know what you want. Both replacement cost and actual cash value are good options. In light of deflated home values and foreclosures, evaluate all your options.

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Privacy Liability

If your business stores personal information, you have a responsibility to guard it. More often, we're hearing in the news about stolen, misplaced, or poorly guarded personal information. The employee that had backup tapes stolen out of a car, the misplaced laptop, and even the dreaded "targeted attack." Patient records, student records, credit card information, even employee information is all at risk. '

To make it more challenging, many states now have mandatory disclosure statutes. So after the company becomes aware of circumstances that could have lead to a disclosure (even if it isn't likely) they are required to notify every affected person and may be required to offer free credit monitoring. To make it more cumbersome, these laws are changing rapidly and are not uniform from state to state.

And to top it off, the breaches can be staggering. University of Florida had an incident potentially disclosing information on 107,000 people. The cost of a mailing alone to that group is large.

Privacy liability insurance not only offers some protection against the suits and pays for mandatory disclosures, but the claims team has experience with these incidents. The brain power of a privacy liability claims team is as valuable and faster than hiring a special consultant. The claim team costs are also not counted against the policy limit.

As we move to make more information accessible, safeguarding it becomes even more important. Privacy / network security insurance can offer protection for a quickly and stealthily increasing exposure.

Broker and Insurance Policy Value

People are always talking about the commoditization of insurance and the future of independent brokers. I believe that brokers will always play a role in certain insurance. However, brokers add cost to insurance, so clients have to see value. Some do see value, some will never see value (or perhaps there isn't much) and some are in the middle and can be pushed either way.

It's always tempting to compete on price. Everyone understands money in their pocket, and it doesn't take much expertise as an agent or broker to do it. And if you compete on pure price and nothing else, the broker will eventually get squeezed out of the transaction.

Those that have moved to buy their insurance online believe that they don't need professional help to buy insurance. And, in some cases that's true. The people who buy state minimum auto insurance for their 20 year old junker car don't care about claim service or higher policy limits.

And I think for low claims frequency accounts this will always be an uphill battle. People are bad at preparing for the 100 year flood, but much better at preparing for the storms that come every year. If you have an insurance policy that you haven't had a claim on in at least five years, it feels more like protecting against something that will never happen. You're apt to keep buying it at bottom dollar, if at all.

However, the larger accounts that have a few claims every year, tend to care about more than price. They know they need a broker to help navigate the waters. Perhaps even risk management consulting. For them, the cost of the policy isn't the only cost. It's also the dollars they recover from first party claims, minimizing third party claim payments, claims reps that care, nuanced coverage that fits unique exposures, choice of council and 100 other things.

It's easy for me to sell value and knowledge to my clients that have the storms. The challenge comes to show value to the smaller clients. And that's why those clients end up with policies that don't cover everything or an agent that doesn't understand the exposures....they want bottom dollar. For these clients, until they have a claim, the policy is a commodity.

A good broker takes on clients that have a real need for his services. He adds something to the transaction in exchange for what he is paid. Those are the brokers that understand the coverage available, the difference between carriers, and have the risk management experience. There will always be room for anyone providing a service with real value.