insurance

The Preventive Law Physical: An Important Part of Maintaining Business Health

martin-brosy-758535-unsplash.jpg

“Care is an absolute. Prevention is the ideal.”
 
- Christopher Howson

At its core, Preventive Law is about helping businesses look around corners and anticipate business and legal risks before they materialize. Using the preventive medicine analogy, it’s like a physical for your business during times of health designed to discover and treat areas of potential “disease.” Preventive Lawyers aim to keep their clients healthy . . . here are the top five items they address to ensure long-term business health:

Commercial Contracts

Businesses are often required to enter into numerous agreements with everyone from purchasers and distributors to vendors and suppliers. It’s amazing how many businesses do not have formalized processes for reviewing, negotiating and developing these contracts. Instead, several individuals in several different departments are given free rein to sign anything as a matter of “routine business” without fully understanding the exposure to the company.

Preventive Lawyers are adept at reviewing contracts with key third parties and then helping you understand potential areas of concern warranting further attention. Opportunities for further negotiation or clarification can then be explored with the other side . . . especially if that legalese contract hides unrealistic liabilities or impossible performance items within the fine print!

Prospectively, the Preventive Lawyer can further help your company develop pre-qualification and contracting policies and procedures to minimize being blind-sided, including:

  • Ensuring these third parties have appropriate safety qualifications and insurance levels;

  • Preparing a standard set of contracts favorable to you, which can then be tailored and used in different settings (instead of simply reacting to the other side’s forms); and

  • Identifying and training the appropriate manager(s) to own the contracting process.

Business Governance and Due Diligence

Your business may be a corporation, limited liability company, or some other form of legal entity. Most such entities have formalities that must be followed. If they are not, a whole host of problems can arise, including:

  • Void or voidable business transactions;

  • Potential violations of legal duties owed to other shareholders;

  • The ability of third parties to disregard the business structure and go after you individually; and

  • Government investigations.

Remember, what may seem fair to you is not necessarily what is required under the law. Preventive Lawyers can help you understand the difference, and then take steps to make sure your business is running on all cylinders in accordance with the law.

Speaking of business transactions, appropriate due diligence is a necessary component of entering into significant acquisitions. Sometimes things progress so quickly that important items are missed or overlooked. It is critical that businesses be proactive during these transactions to determine potential exposure to avoidable risks.

For example:

  • If your business is acquiring another business, you should be reviewing and analyzing things like the target’s business records, financials, agreements, insurance policies, compliance policies, intellectual property, licenses/permits, leases, assets, liabilities, claims and litigation (among other things).

  • If you are acquiring real estate, you need to understand potential risks such as title, zoning and environmental concerns, as well as any maintenance or structural issues that could run with the property.

Preventive Lawyers are skilled at analyzing these documents and then identifying issues warranting further investigation so a business decision can be made about whether to gather more information or proceed to closing. And when a project is green-lighted for closing, the Preventive Lawyer can further assist in advocating and negotiating positions when necessary, as well as developing the necessary agreements to take the transaction through closing (hint, see above contract skills!).

Compliance Policies and Training

All businesses are required to adhere to some level of compliance obligations whether legal, regulatory or contractual. It is important to fully understand these obligations and the possible repercussions you could face if the requirements are not met. While I don’t want to be a fearmonger, the importance of being proactive and the possibility of exposure in these scenarios is just too critical. Believe me, I’ve seen it all.

Here are just a handful of examples:

  • Failure to comply with employment laws can lead to EEOC investigations, claims and lawsuits.

  • Failure to comply with product-based regulations could result in sanctions, including removal of your product from the market.

  • Failure to comply with cybersecurity laws could mean sanctions and other losses in the event of a data breach.

  • Failure to comply with contract provisions can lead to withholding of key supplies or even lawsuit.

  • Failure to comply with antitrust or anti-corruption laws could result in a visit from the Department of Justice.

Preventive Lawyers help their clients avoid exposures like these by identifying key compliance issues facing your company, and then working with your company to develop and implement policies to address these issues. This includes training executives and managers to ensure enterprise-wide understanding and acceptance of these policies and procedures.

Insurance and Litigation Management

Oh, insurance . . . the necessary evil. Insurance contracts are mazes of legal mumbo-jumbo, likely filed away somewhere in your office collecting dust. Many businesses purchase these expensive policies without fully understanding the coverage terms and requirements (this is especially true for brands and manufacturers with global supply chains, cybersecurity risks and employment exposures).

Imagine your company suffers a loss you expect to be insured but your claim is denied. You’re left feeling frustrated and helpless, wondering where you went wrong. Perhaps you inadvertently hadn’t selected a particular line of insurance you ultimately needed, or maybe the type of event was listed as an exclusion in the fine print. Maybe it’s denied because of timeliness. Or, perhaps it’s based on the insurer’s interpretation of a particular provision or exclusion that was tucked deep inside that maze. The consequences could be severe but can be avoided.

Now, imagine a case where your claim is accepted but requires litigation. Your insurer will likely assign one of its lawyers to defend you, which is all hunky dory, right? Not so fast. Without proper oversight, the insurer-counsel dynamic can lead to litigation strategies which are not in your best interests. I’ve seen too many scenarios like this throughout my career (and have represented all sides) where the insured’s interests were the last being protected. Unfortunately, this leads to skyrocketing premiums at renewal or worse . . . loss of insurance coverage altogether.

Preventive Lawyers are skilled at managing and negotiating your company’s relations with insurance brokers and carriers so your insurance program is appropriately reacting to your particular business risks. And when the time comes, Preventive Lawyers can further assist in asserting claims and managing those lawyers retained by the insurers to ensure that business-forward, cost-effective legal strategies are being implemented.

Day-to-Day Business and Legal Strategies

Doing my best Cliff Clavin impression, it’s a little-known fact that lawyers undergo a bloodless lobotomy during their three years in law school. This “procedure” results in a unique style of critical thinking that can be of great benefit to your business.

Lawyers are often ridiculed for the frequency they say “NO!” to any business decision-making which involves some level of risk. However, seasoned Preventive Lawyers are business-forward in their approach, seeing risk as an opportunity to negotiate and make better-informed decisions. Their goal is not to be a hindrance, but rather to help you know what you didn’t know before, and then develop more informed business decisions and strategies based on this information. In this methodical way, Preventive Lawyers can be a valuable sounding board when it comes to business dealings and negotiations.

The best Preventive Lawyers further understand that their guidance should be cost-effective, and have developed progressive retainer models fostering improved access. For businesses seeking to be proactive about maintaining their health, but are not interested in traditional billing models of big law firms, Preventive Law practices can be a strong alternative. As always, we’re here to help.

How Preventive Lawyers are Innovating the Legal Supply Chain

ethan-weil-262745-unsplash.jpg

A guy walks into a lawyer’s office and asks, “Can you tell me how much you charge?”
“Of course,” the lawyer replies, “I charge $500 to answer three questions.”
“Don’t you think that’s an awful lot of money to answer three questions?”
“Yes it is,” answers the lawyer, “What’s your third question?”

Though lawyer fees have been fodder for jokes for as long as we can remember, they’re really no laughing matter. Companies routinely pay much more than $500 per hour to answer far fewer than three questions. How did it get to this point? The answer is bloat. Let me give you a peek behind the curtain.

As firms take on more business and begin to grow, they add more attorneys and staff to handle these increasing workloads. With continued growth comes potential for expansion into other states to take advantage of business opportunities there. Growth means expensive nameplates on big buildings and brass, mahogany and marble office spaces to draw larger corporate clients. This also means hiring more attorneys at high salaries, as well as partnership opportunities for those attorneys who are able to bill significant hours and generate business to enrich the firm.

Business development naturally leads to the need for even more attorneys and office space, and in turn more costs and overhead, much of which are passed along to the client in the form of exorbitant hourly rates. In most larger cities, these rates will exceed $500 per hour, which can have a chilling effect on the businesses these attorneys are meant to serve. Voila! You now have a bloated law firm. And guess who gets to pay to keep it afloat? That’s right. You.

DIY Could Mean RIP

What options exist for companies that want top-tier legal advice without the bloat? I can’t speak to all legal specializations, but in the area of Preventive Law, we often see businesses deciding to “go it alone” rather than pay these high law firm rates. While these companies may enjoy not having to pay legal fees, what few realize is that they place themselves at exponentially higher risk. Ironically, such DIY practices can cause even bigger problems:

  • Insurance policies are legalese monstrosities, containing complex language and articles that can later be exploited by insurers. A company that buries its head in the sand, hoping those policies will react in the event of loss, not only ensures the language will be exploited, but further increases the likelihood of gaping coverage holes. 

  • Failing to proactively manage your insured claims and lawsuits can lead to strategies which are not in your best interests, resulting in skyrocketing premiums or even loss of coverage.

  • Relying on non-lawyers such as insurance brokers to help you understand the legalese contracts and claims strategies could limit your recourse (hint, an insurance policy is a contract with your insurer, not your broker or anyone else).

  • Signing vendor and supplier (and other) agreements without fully understanding and negotiating the terms in advance means you may have unwittingly assumed obligations that can blindside your business later.

  • Failing to develop and implement internal policies and procedures can result in significant exposure to business interruption, cyber events, HR risks and regulatory actions.

These are not meant to be scare tactics, but rather highlight issues we see on a regular basis. Understandably, high law firm rates often result in second-guessing whether to enlist attorney assistance to address these concerns.

Escaping from the Rock and Hard Place

The emerging practice of Preventive Law presents a viable option for companies who want peace of mind without paying absurd hourly and retainer fees. Preventive Law develops and implements proactive strategies involving insurance, litigation, human resources, R&D, procurement, real estate, marketing and regulatory compliance. The rewards for companies that implement these strategies include:

  • More informed decision-making;

  • Improved efficiency and reaction time;

  • Lower contract, claim, litigation and regulatory exposure; and

  • Better opportunities to recover significant insurance proceeds when necessary.

These benefits are primary reasons why larger companies hire lawyers to serve as in-house corporate counsel. On-boarding attorneys also improves predictability of corporate legal spend. No longer does the business have to worry about a department head picking up the phone to call an expensive attorney to discuss a business or legal strategy when you have a lawyer on staff.

Of course, adding in-house corporate lawyers means rising costs, and your business may not have the need for full time legal services, let alone resources to afford them. Again, this is where Preventive Law practices can provide value and flexibility, and in a cost-effective manner. Let’s peel back the curtain even further.

Mindless Habitual Behavior is the Enemy of Innovation

How is Preventive Law able to offer top-tier legal support without astronomical fees? Successful Preventive Law practices eliminate billable hours altogether and offer instead a retainer-based, client-facing, value-driven model. Okay, that’s a lot of hyphens, so what does it all mean?

In short, a Preventive Law firm thrives when the client thrives. The preventive legal practitioner’s fee is not calculated using inward-facing attorney billing rates, but rather using on-boarding costs, adjusted to reflect that client’s relative need for preventive legal services on a monthly basis (hint, review glassdoor.com and salary.com for average corporate counsel salaries/benefits in a particular city, and then adjust for the size of the company, type of industry, and potential legal and business risks facing that company). Next, the preventive lawyer determines an appropriate term for engagement, which will again depend on each client’s particular needs. A minimum of four- to six-month engagement is considered optimal to develop institutional knowledge and exposure to different departments and personnel which can provide efficiencies for the client down the road.

Once engaged, the preventive lawyer keeps detailed daily time entries for work performed. “But I thought you said not to bill clients!” you astutely point out because you’ve been paying attention. Here’s where Preventive Law departs from its traditional legal counterpart.

Preventive Law serves the client rather than padding the law firm. This is why time isn’t kept for purposes of billing, but rather to track the effective hourly rate on both a monthly and aggregate basis. These updated time-sheets are made available with each monthly invoice to assist the client in determining the value of services rendered, both subjectively (through perceived quality) and objectively (through the effective hourly rate). If it’s discovered at the end of the term that the effective rate was higher than anticipated, the lawyer offers to reduce the monthly fee for the next term. After all, the mindset is not “winning” in this business relationship, but rather demonstrating a trusted partnership and adding true value.

When done properly, Preventive Law practices offer accessible, cost-effective access to attorneys on the front end, which in turn can enhance business decision-making while minimizing exposure to catastrophic risks. We know this is a new option for some and would enjoy helping you better understand its benefits. We've found that companies are better off paying for quality legal counsel instead of mahogany, brass and marble. If you have any questions about Preventive Law, please reach out. As always, we’re here to help.

YEAR ONE: What We Do

chris-gilbert-659040-unsplash.jpg

What's the one question that always gets asked?

Are you traveling for the holidays?

If so, chances are you're spending some time on airplanes and will end up chatting with the person seated next to you. Inevitably, there’s one question that always gets asked. That’s right: “What do you do?”

Candidly, that’s a great question. While this may be an easy question for some to answer, we must confess that we've found it difficult. To say we’re a boutique legal practice that specializes in insurance law and risk strategy doesn’t typically excite most people, nor does it capture the essence of what we “do”. The truth is, KEEFER is much more than that.

It wasn't that long ago that we turned on the lights in our downtown Portland office. With our desks facing each other, we filled our time with brainstorming sessions, endless research and back-to-back coffee meetings as we set out to invest in this community that we now call home.

Preventive Law?

“So, what you are doing is like preventive medicine," said a colleague during one of our many coffee meetings. And that was it. We had it.

KEEFER is a Preventive Law practice.

According to the American College of Preventive Medicine, the goal of preventive medicine is to “protect, promote and maintain health and well-being of the patient and to prevent disease, disability and death.” It’s much more rewarding to stay ahead of our health than it is to do damage control. We can find dozens of excuses to not exercise or to indulge (especially at this time of year), but have to remind ourselves of how much better we feel and how clear our thoughts are when we put in the work up front.

Like preventive medicine, we are proactive in our approach. With business-forward strategies and pricing structure to match, we work with companies on the front end to minimize exposure in the future. This includes overseeing insurance relations, managing claims and litigation, contract negotiation and development and day-to-day legal and business strategies.

The KEEFER Client

We’re building momentum and continue to serve clients we feel fortunate to work with. We’ve been deliberate in defining the type of businesses we best serve which include proactive decision makers who have a genuine desire to learn. These leaders have integrity and transparency which have allowed for a mutual trust between us.

Here are some highlights from 2018:

  • We worked with a client to recover several million dollars in insurance proceeds it would have otherwise missed.

  • We guided a medical device manufacturer with regard to federal and European compliance issues.

  • We helped a national product manufacturer manage and resolve a series of litigation matters, which had spiraled out of control over several years, resulting in significantly lower legal spend and exposure. 

  • We collaborated with a regional shipping company on strategic planning for an intermodal development project. 

  • Most recently, a client came to us for contract management and found it was not properly protected in its agreements. We helped to restructure contracts and put a strategy into place that should protect this company for years to come!  

As we reflect on how we've helped our clients over the past year, we can see why our friend compared what we do to preventive medicine. It’s exciting to be on the front end of things, working with like-minded businesses to anticipate and respond to risks before they materialize. And when we travel south for the New Year holiday, we'll be able to confidently answer the question, "What do you do?"

We’ve enjoyed another Christmas with Santa and our young boys and are looking forward to quality time in the sunshine with family. We’re hopeful for what 2019 will bring and until then, we wish you a holiday season filled with peace and joy. Taking the time to revel in the moment, which I’m certain falls in line with “promoting well-being”, truly fills our cups.

We sincerely thank you for your trust and are grateful for your continued support. May your cups be full as we wrap up a wonderful 2018.

Cheers!  

Garetta & Chris

Preventive Law: An Origin Story

rawpixel-623459-unsplash.jpg

“Prevention is better than cure.”
- Desiderius Erasmus

We’ve received some attention following the Portland Business Journal’s feature, as well as inquiries about the origin of our Preventive Law practice and how it works.

It all began a few years back while serving as in-house counsel for a global product manufacturer. We retained a large law firm to represent the company in a lawsuit involving a recalled product. The lawyers weren’t cheap, with the partner charging over $500 per hour and the associate charging nearly $400 per hour.

Less than a year into the lawsuit, in which we had already spent over $75,000 in lawyer fees, my assistant forwarded the partner a brief list of questions from our insurance broker about the case to assist with upcoming renewals. A week later, we received a multi-page formal report on firm letterhead followed by a $3,000 invoice for this work. 

Frustrated by what I deemed to be an unnecessary report and excessive invoice, I called the partner and requested these entries be removed. I viewed them as a value-added service, reminding him of the amounts already paid. I also questioned the business sense in spending several hours on a formal report given its limited purpose. The partner wouldn’t bend, arguing the value of his firm’s time and how it needed to be compensated per the terms of the retainer agreement.

Where was the concern for our value?

Sometimes You Need to Distance Yourself to See Things Clearly

Prior to joining this company, I had been an associate with a private law firm for several years, so I was well-versed in billing hours for my work. My firm, like many other firms, had a strict rule that associates were required to bill at least 2,000 hours per year. Year-end bonuses and opportunities for advancement were largely tied to hitting this figure. Performance was largely inward-focused.

After managing a corporate practice, I finally noticed and began to appreciate the other side of the coin. It felt as though outside firms had been preying on our need for their services, as opposed to focusing outward toward our business success. 

After this epiphany, I began reaching out to other in-house colleagues and managers to determine whether they were facing the same struggles with outside law firms. I wasn’t surprised with what I uncovered:

  • Growing distrust with outside law firms, at times wondering whether services provided were always in the best interests of the company;

  • Frustration with having to pay increasing hourly rates due to firm bloat and rising overhead, especially when attempting to manage legal spend;

  • Perception of law firms as not cost-effective on day-to-day inquiries given fears of receiving a large invoice for even minor requests; and

  • Confusion as to why law firms were only interested in reacting to client problems, as opposed to being proactive with preventive strategies to stay ahead of exposure. 

It was clear the traditional law firm model of reactive services and billing hours was not client-facing, and it certainly was not business-forward in its approach.

The Ounce of Prevention

Having practiced on both sides of the fence, this was truly a problem in need of a solution. Fortunately, more nimble legal practices (not anchored by bloat and overhead) were already beginning to disrupt the legal industry by offering specialized services and flexible fee arrangements. This disruption extended to practices dedicated to helping businesses minimize their exposure to risks.

These Preventive Law practices specialize in anticipating and reacting to risks before they materialize, providing cost-effective guidance with long-term benefits. When done properly, these practices can assist businesses with:

  • Improved understanding of risk exposure along primary and support activities;

  • Developing and implementing proactive strategies to prevent exposure;

  • Better informed decision-making;

  • Improved efficiency and reaction time, as well as consistency in application;

  • Lower contract, claim, litigation and regulatory exposure; and

  • Better opportunities to recover significant insurance proceeds when necessary.

Like preventive medicine, Preventive Law practices help companies stay healthy up front in order to minimize likelihood of “disease” later.

It Works, It Really Works!

Shortly after starting our practice, we were approached by a product manufacturer that had no in-house counsel and a significant annual legal spend. They were in the middle of several lawsuits and couldn’t see a light at the end of the tunnel. They wanted a plan to get out from under the litigation and what seemed like endless invoicing by lawyers and legal strategies they did not fully understand or trust. Because of the competitive market, profit margins were already razor-thin and cash flow was closely monitored.

We sat down with the executive team to explain how a Preventive Law practice could be of benefit. For a fixed monthly fee, we would manage all company claims and litigation as well as relations with insurers, help review and prepare enterprise-wide contracts, and further assist with developing and implementing strategies from supply chain operations to human resources to labor relations to procurement. We took the position that no project would be outside the scope of work, and that employees should feel free to call us with any matter. Our primary goal was to be an accessible, business-forward resource.

Ultimately, the manufacturer signed with us. The increasing number of calls and expanded projects since then demonstrate that we’ve become a trusted resource. Cases are being closely managed, keeping litigation budgets within reason. We’ve also helped the company recover millions of dollars in insurance proceeds that may have otherwise been missed due to lack of awareness and strategy.

We include updated time-sheets with our monthly invoices to provide a comparison against the old hourly rates paid, as well on-boarding costs (since we’re really competing with that possibility as well). So far, so good. We’re nearing a year together and it’s safe to say both parties are looking forward to renewal.

Preventive Law won’t work for everyone. Many established law firms are too hesitant to adopt more outward-facing models. At KEEFER, we’re fully embracing this new world order. As always, we’re here to help.    

If You Have Operations in the Hail Belt, Beware the 5th Circuit's Recent Ruling

josep-castells-523198-unsplash.jpg

“The time to repair the roof is when the sun is shining.”
John F. Kennedy

If you have business operations in the Hail Belt regions of the United States, pay close attention to the 5th Circuit’s decision earlier this month in Certain Underwriters at Lloyd’s of London v. Lowen Valley View, L.L.C. In that case, a hotel filed a lawsuit against its insurer in the U.S. District Court for the Northern District of Texas for refusing to cover hail-related roof damage under a commercial property insurance policy.

The District Court agreed with the insurer’s argument that: (1) several hail storms had struck the vicinity of the hotel in the years preceding its claim; (2) only one of those storms fell within the relevant coverage period; and (3) the record lacked reliable evidence permitting a jury to determine which of those storms, alone or in combination, damaged the hotel. The 5th Circuit affirmed the ruling, determining the hotel’s engineering report—opining that the subject storm was the “most likely” cause of the damage—was not sufficient.

So Where (or When) Do We Begin?

Many commercial property policies contain provisions that any lawsuit against an insurer must be filed within one year following the “inception of loss,” otherwise it is barred. In other words, the “inception of loss” date starts the one-year clock ticking. The question then becomes, when exactly is that date?

The Wisconsin Supreme Court hit this issue head-on in the case of Borgen v. Economy Preferred Ins. Co. In its 1993 opinion, the Court determined that the phrase “inception of loss” in the context of hail damage rules out an interpretation which could postpone the starting point to the time when the insured discovered or should have discovered the loss. In other words, “inception of loss” means “the date of the specific hail storm,” not “the date I discovered the hail damage.”

There are only a handful of federal and state cases addressing this issue, with the majority of them either Borgen or its Wisconsin progeny. See also Des Longchamps v. Allstate Prop. & Cas. Ins. Co. (“Des Longchamps does not (and, indeed, cannot) deny that the loss to his property began on June 29, 2012 when the derecho’s winds and rain hit Washington D.C. This means that his claimed October hurricane damages are irrelevant (contractually speaking) to the timeliness question.”).

Practical Effect of These Cases Read Together

Let’s say you operate a business in Plano, Texas, and have a commercial property policy with a January 1 renewal date. You’ve noticed some recent leaks over the last week in your eight-year-old roof. Based on this discovery, you enlist a roofing contractor to investigate further. You're advised the roof needs to be replaced due to the existence of hail damage, so you submit a claim to your insurance carrier. Now, consider Plano has had at least 14 significant hail strikes since your roof was installed:               

      Storm Date                      Min. Hail Size Range (Max)

      6/6/2018                           1.00”

      4/6/2018                           1.50” (up to 2.00”)

      4/21/2017                         1.75”

      4/11/2016                         1.50” (up to 2.50”)

      3/23/2016                         1.25” (up to 2.00”)

      4/27/2014                         1.25”

      4/3/2014                           1.75”

      8/17/2012                         1.00” (up to 1.50”)

      6/13/2012                         1.75” (up to 3.00”)

      4/3/2012                           1.25”

      9/18/2011                         1.00”

      5/20/2011                         1.25”

      4/19/2011                         1.25”

      4/14/2011                         1.00”

Based on Borgen, the relevant “inception of loss” date would be the most recent June 6, 2018 hail storm and each specific storm prior to that. This would mean any claims potentially implicating the April 21, 2017 storm and earlier events could be time-barred (assuming your prior insurance policies contain that pesky one-year filing limitation mentioned above). To make matters worse, given the number of equivalent hail strikes over the course of years, you will likely have an uphill battle under Lowen Valley View in attributing the recent 2018 storms to a loss under your current policy.

Even if it were somehow possible to assign each item of roof damage to a particular hailstorm—and further that statute of limitations issues would not limit recovery almost entirely—the number of storms create another problem. With 14 storms occurring over the life of your roof, the insurer could argue in favor of 14 separate occurrences, which in turn would mean having to go through 14 separate deductibles before you ever saw a single dollar of insurance proceeds. Depending on the amount of your deductible, this could mean you won't recover any insurance proceeds even if the claim was somehow covered in principle.

So Now What?

These rulings, read together, put the onus on business owners in the Hail Belt to conduct at least annual roof inspections to determine the existence of any roof damage potentially attributable to a particular insurance policy. It further puts the onus on business owners to understand the claim process, and to absolutely know the deadline for filing a lawsuit.

If you do have a claim and are running up on the deadline, seek an agreement from the insurer to toll (or extend) the deadline while trying to resolve the claim amicably. They shouldn’t have any problem with this, and make sure the agreement is documented (hint: now would be a good time to have discussed the claim and strategies with coverage counsel).

Long story short, be proactive with your property insurance as opposed to reactive. As always, we’re here to help.

Why You Need to Manage Those Lawyers the Insurer Just Assigned to You

hamza-el-falah-367644-unsplash.jpg

"Let's take extra care to follow the instructions or you'll be put to sleep."
- President Business, The LEGO Movie

Let’s say your company makes products and is sued by a group of individuals claiming they were injured by one of those products.

If you’re like most companies, you would notify your insurance carrier and then hope you have insurance coverage for those lawsuits. Assuming you do, you get a letter from a law firm the insurance company hires for you and then periodically provide information and documents when asked . . . you may even give a deposition if you’re lucky! Otherwise, you stay out of the mix and let this lawyer represent your company’s interests until a letter comes notifying you the case has been settled. No worries, right? WRONG!

Behind the scenes, the insurer is paying the fees for your lawyer (known as “panel counsel” since they are chosen from a panel list acceptable to the insurer). The insurer is also controlling the defense strategy for your company, including when and how to settle the case. Your insurance policy permits the insurer to do this, and also requires your cooperation, so this is perfectly normal. However, if you are not managing this panel counsel, you could find yourself blindsided with higher premiums than expected at renewal.

A Brief Case Study

Let me give you an example based on a matter I recently concluded for a manufacturing client. This company was one of several defendants which had been sued by the estate of an individual who was killed in an accident. Fortunately, this company was insured, so it forwarded the lawsuit to the insurance carrier, which in turn assigned panel counsel to defend the company. So far, so good.

A couple months into the lawsuit, I was called by the head of the company after he received a copy of a 20-page status letter prepared by the panel counsel to the insurer. He was confused since his company had an agreement with a third party supplier, requiring that supplier to accept full responsibility for defense and any damages to the extent of any defect claims involving my client’s products. Given my background and experience with insurers and managing claims and litigation, he wanted me to review and provide guidance.

Here’s where it got dicey . . . panel counsel acknowledged the supply agreement in the report but buried it low in the list of “to-do” action items, recommending instead extensive discovery, at least 20 depositions, retaining and deposing multiple experts and then preparing and filing a couple motions for good measure. To make matters worse, panel counsel opined in the report that our mutual client could be found 15% – 25% liable for the death at trial, and that damages could well exceed $5 million.

Your Panel Counsel Can Adversely Affect Your Premiums

Let me tell you a little bit about how insurance adjusters generally set reserves. When a lawsuit comes in, the adjuster will set defense cost reserves (e.g., attorney fees, discovery costs, experts) based on panel counsel’s recommended strategy. The adjuster will also set loss reserves based on the anticipated settlement or trial value at different mile-markers in the case. Of course, the adjuster relies on panel counsel’s periodic status letters to determine these reserves.

In my client’s case, a reasonable adjuster could have reviewed panel counsel’s 20-page letter and, based on the suggested strategy and exposure, set initial defense cost reserves of at least $50,000 with another $250,000 to $500,000 in loss reserves. This, of course, in addition to the $10,000+ already spent in the initial review and preparation of that 20-page status letter. This was my client’s first claim related to an alleged product defect. Had the adjuster in fact reserved this way, my client’s insurance premiums could have skyrocketed for the upcoming renewal period.

Effectively Managing Panel Counsel

After reviewing the status letter, followed by a brief outburst of expletives, I calmed down and called panel counsel to introduce myself as managing counsel for the case on behalf of the company. We discussed the current strategy and exposure assessment in light of the exculpatory supply agreement. After explaining the harm that could potentially be done to our mutual client at renewal, panel counsel ultimately agreed that the best course would be to immediately tender defense to the third party supplier, performing only necessary discovery items afterward. In the event the supplier balked, it would be sued and we would seek summary judgment given the clear and unambiguous language of the contract.

Having agreed to this new strategy, I requested panel counsel forward the insurance adjuster a status letter downgrading anticipated loss exposure to $0 given indemnity. All of this was set in motion within 24 hours of that phone call, the case was tendered to the third party which was later brought into the case. As a “happily ever after,” the case settled at mediation with nothing paid by my client and minimal defense costs incurred in the interim. At renewal, the insurance premium increased only nominally as a result of the claim . . . things could have been a lot worse.

It's a Team Effort

Don’t get me wrong, the insurer’s relationship with panel counsel is important and necessary, as insurers need to be able to predict outcomes of lawsuits as much as possible in order to make business decisions on behalf of their insured businesses (and themselves!). However, if these lawsuits are not also managed by counsel solely representing the insured’s interests, this dynamic can lead to excessive defense costs, exposure to unnecessary strategies and improper liability and damages assessments.  All of this can lead to adverse reserving by the claims adjuster and, ultimately, skyrocketing premiums or worse . . . loss of insurance coverage altogether.

Long story short, don’t simply hand off your case to the insurer and then forget about it. Review status letters before they are sent to the insurer. Understand the litigation strategies being developed and implemented, as well as potential loss exposure. Don't be afraid to question how these things could affect your existing insurance coverage. In sum, manage the case with a critical eye and, if commercially feasible, retain a lawyer looking solely out for your company’s best interests to assist. As always, we’re here to help.

It Takes a Village: Developing Your Cyber Insurance Program

freestocks-org-485685-unsplash.jpg

 “On board were the Twelve: the poet, the physician, the farmer, the scientist, the magician and other so-called gods of our legends.”
- "Atlantis" by Donovan

It is no surprise that companies are aggressively mobilizing to address and combat risks of cyberattack and data breach. According to The Global State of Information Security Survey 2018 from PwC, at least 56% of responding global executives reported having some form of overall information security strategy in place. In a referenced report, PwC highlights the importance of making sure diverse stakeholders are involved in developing and implementing those strategies, including “business, technology and risk management leaders—as well as the CEO and CFO.”

This “it takes a village” perspective not only applies to mitigating internal cyber risks but should also be applied to transferring cyber risks to insurance carriers. This begs the question, “Who should be part of your corporate cyber insurance team?” Here are a few suggestions to help you get the ball rolling:

1.     IT/OT

At least one information technology (IT) representative with knowledge of the enterprise-wide systems used, data storage practices and technology vendors is obviously critical. Such a representative should be able to estimate the number of confidential records being stored that are subject to potential breach and access, which in turn can assist in determining how much insurance you should purchase. This information can also help assess the number of records which could be subject to potential coverage sub-limits which could blindside you if unprepared.

You will want make sure this individual also has a strong grasp of the company’s operational technology (OT) issues as well, especially to the extent of supply chain, logistics and other physical processes vital to corporate success. For example, consider a cyberattack which results in delayed delivery of important production planning information to your primary factory. Along those lines, the IT/OT team member can provide valuable guidance toward insurance considerations such as acceptable business interruption limits and length of waiting periods, further assisting with harmonizing insurance procurement with existing enterprise-wide business continuity strategies (hint, your company should have these in place).

2.     CFO/COO

As PwC astutely reports, there is something to be said for including a C-suite representative on the team. The CFO (or perhaps COO) should provide sufficient project visibility and accountability, as well as access to departments and representatives ensuring a thorough investigation prior to pulling the trigger on an insurance carrier and coverage. And the CFO likely has control of the company purse strings, so it's probably a good idea to get this person engaged early for budgeting purposes . . . especially if there could be glaring holes in your cyber insurance program.

Your CFO/COO team member can also be helpful in providing an overview of contracting practices within the company. Keep in mind your company likely has enterprise-wide contracts with suppliers, vendors, distributors, customers and/or clients. Your company may have unwittingly (or wittingly) assumed certain liabilities under these contracts, including liability for losses to these third parties in the event of a cyberattack or data breach involving your system. You need to know what is in these contracts in order to identify and select appropriate cyber insurance carriers, and then tailor your insurance limits, sub-limits and coverage appropriately.

3.     Cyber Insurance Broker

A brokerage firm with a well-developed cyber practice should be able to provide effective access to this insurance market. With 60+ cyber insurance carriers offering stand-alone policies, and the cyber landscape still largely underdeveloped with varying policies, there are ample opportunities to identify brokers who can work with your company to access appropriately-capitalized insurers.

A firm with an established cyber presence should also have relationships with underwriters who can provide guidance on opportunities to reduce costly premiums across multiple prospective carriers. For example, if you were one of the 56% of responding executives mentioned above, there should be some level of premium savings for such efforts.

4.     Legal

Last, but certainly not least (I’m sure there’s a lawyer joke in there somewhere), you should include on your team sophisticated counsel who can review and analyze your company’s complex contracts and insurance policies to identify and triage potential gaps in your cyber coverage. Counsel can further assist to the extent of any vague and ambiguous language in the insurance policy needing clarification (hint, you’ll want to do this before your sign on the dotted line and pay premium).

Counsel should be able to effectively synthesize the information provided by your company as part of the initial audit (via IT/OT, CFO, COO and other company representatives) and then work with your broker representative to identify, negotiate and then select the appropriate cyber insurance carrier and policy language tailored to your risk profile as much as possible.

Best practice involves utilizing your team all year, evaluating and adapting, as the cyber landscape is continually changing. This should include regular attention to your insurance coverage . . . so don't wait until renewals or make this a once-a-year conversation! As always, we’re here to help.

Your Contracts, Your Cyber Insurance and You

park-troopers-221402-unsplash.jpg

 “Don’t talk to me about contracts, Wonka, I use them myself.”
- “Square Deal” Sam Beauregarde

If you are a product brand, you’ve probably been required to enter into many agreements with everyone from manufacturers to distributors, payment processors to financial institutions and vendors of all shapes and sizes. Hopefully you’ve had the opportunity to review and understand these contracts, as landmines may exist within that labyrinth of legalese mumbo-jumbo which can affect the insurance you have purchased for your business. In this article, we’ll look at a few of these, particularly in the context of your cyber insurance policy.

BLT, Hold the Mayo

First, these contracts may require that you add another business to your insurance policy, otherwise known as an “additional insured.” This means that your new partner is able to enjoy coverage under your insurance policy, and at your cost (hint, insurers typically require additional premium for adding insureds to a policy).

Second, these contracts may also require that you hold certain minimum levels, or limits, of coverage. Beware these contracts may have varying minimum limits, which could affect the levels of insurance you purchase in order to stay compliant across all contracts.

Third, your contracts may also require different types of coverage. For example, one vendor may require that you carry commercial general liability and worker’s compensation insurance. Another may require you to carry cyber insurance. Yet another may require commercial auto liability coverage. Make sure you have all appropriate lines of coverage in place in order to stay compliant with your business partners.

Something About Making an Ass of U and Me . . .

In addition to adding businesses to your policy, as well as keeping minimum levels and types of coverage, these agreements may also require you to assume certain liabilities of your new business partners. This is especially true if you sell products online and will be taking confidential customer data and payment card information which could be stolen by bad guys.

To the extent your business partners could be blamed for such an event by their customers, clients or investigators, they may incorporate “tender of defense and indemnification” provisions into the contracts, effectively passing this responsibility to you. More specifically, if they are sued by their customers or clients or are investigated as a result of a cyberattack or data breach involving your system, they may be able to contractually force you to pay their costs of defense such as lawyer fees, settlements and judgments.

But what does this mean, and how does it affect you? Hopefully you have a cyber insurance program in place with first- and third-party coverage for cyberattacks or data breaches. As we discussed back in December, first-party cyber insurance can help with costs for recovering lost or damaged data, notifying customers, credit monitoring services and public relations, as well as lost business income from network interruption. Third-party cyber insurance covers legal defense costs in the event of lawsuits against your company for data breach, settlements and judgments, and regulatory fines and penalties. Things can change, however, if those legal defense costs come from your business partner tendering defense or requesting indemnification under the contract.

Cyber insurance policies generally exclude from coverage (i.e., insurers will not pay) liabilities assumed by contract, including those contracts you enter into with vendors and other business partners. Let’s say your company is the victim of cyberattack or data breach occurs and numerous records are compromised. A series of claims, lawsuits and investigations ensues. Several of your vendors wind up being sued and subsequently tender their defense and investigation costs to you under the respective contracts.

Under this scenario, you should be covered to the extent you undertake crisis response measures to minimize reputational harm to you and your vendors as a result of the cyber event. You should also be covered for lawsuits and investigations aimed directly at you. However, you may not be covered to the extent of your vendors’ tender of defense and indemnification costs, since those are assumed liabilities which are excluded under your cyber policy.

Make sure you review your contracts to determine what cyber-related liabilities you are assuming. To the extent possible, negotiate those contract provisions in advance with your business partners. Of course, success on this front may be dependent on bargaining leverage given the relative size of your company compared to your partner. In the alternative, consider having your insurance carrier create carve-outs for these contracts. There may be some additional premium paid, as the insurer will not want to undertake those risks without some cost for doing so. Then take a look at the adequacy of your limits and sub-limits of your full cyber coverage program, given the potentially catastrophic consequences of a cyber event.

Long story short, read and understand the agreements with your business partners, understand the liabilities you are assuming in those contracts, and then assess and react to the effects of those liabilities on your insurance program. As always, we're here to help

3 WAYS TO MINIMIZE EXPOSURE TO THE TOP BUSINESS RISKS OF 2018

nordwood-themes-467442.jpg

"By failing to prepare, you are preparing to fail."                                                       - Benjamin Franklin

It's here. Allianz has released its 2018 Risk Barometer, identifying the top global business risks facing companies according to 1,911 risk experts from 80 countries. Not surprisingly, business interruption/supply chain disruptions, cyber events and natural catastrophes took the top three spots (these were numbers 1, 3 and 4, respectively, in both 2016 and 2017). In order to ring in the new year on the right foot, here are three things you can do internally to minimize your company's exposure to some of these business risks:

1.     Develop and implement cross-functional policies and procedures

Consider developing and implementing policies and procedures across your primary and support activities. You can work with cross-functional departments to establish robust controls involving factory performance, regulatory and trade compliance, sales and marketing practices, market corrective actions and recalls, workplace behavior, cyber hygiene, litigation readiness and record retention. Then take the next step of educating your workforce and managers on a regular basis to ensure these tailored best practices are indeed being practiced. For example:

  • Business interruptions along your supply chain: consider quality, cost, accuracy, delivery and sustainability controls to determine performance of your factories and logistics vendors against certain benchmarks, as well as implementing business continuity procedures in the event one of your factories, suppliers or distributors goes down.

  • Cyber events: consider implementing enterprise-wide cyber hygiene practices to minimize exposure to cyberattacks and data breaches.

  • Employment practices: consider developing and implementing an anti-discrimination, bullying and harassment policy, a return to work policy for injured employees to minimize instances of malingering, as well as succession planning procedures in the event of the departure of a manager or executive.

  • Marketing and sales practices: consider implementing a process where draft print and online materials are first routed cross-functionally to ensure the appropriateness of claims as well as regulatory compliance.

Of course, this is just a small handful of examples, and there may be many others applicable to your particular business.

2.     Work with your CFO and Risk Department to determine appropriate risk transfer levels

Your insurance carrier may tell you that it is willing to insure you at a certain level. For example, it may tell you that it will provide $10 million in coverage subject to a $250,000 deductible. That means the insurer’s obligation doesn’t trigger until your company has paid the first $250,000 in losses related to a particular insurable event. In other words, the insurance company is dictating to you what your risk transfer point should be.

Consider instead working with your CFO and Risk Department to determine a transfer point that is more in line with your specific risk appetite and organizational goals. Among other things, determine what percentage impact to financial metrics such as earnings before income tax and depreciation, operating cash flow, or shareholder equity would be considered “material events”. Review your loss history and determine which losses occur with regularity and are predictable (hint, they aren’t really risks if they happen regularly). Then look at losses that could be reasonably likely but expensive to insure, at which point you may have to determine the cost trade-off. Finally, look at catastrophic exposures across your company which you absolutely must insure, unless your company has a riverboat gambler mentality (in which case, may the odds be ever in your favor).

By being proactive in determining your risk appetite and transfer points, you should be better able to understand your risk profile for purposes of business decision-making. Understanding your risk profile, as opposed to blindly transferring all of your risks to an insurer, can put you in a better position to reduce exposure across your business functions. This can also have the added benefit of reducing costs. Using the example above, a financial study of your risk appetite may conclude that a $1 million deductible would be more in line with your specific risk appetite and organizational goals. The premium cost of a $1 million attachment point is much less than one with a $250,000 attachment point.

3.     Understand your insurance policies from a big picture perspective

I’m always amazed by the number of companies who do not know what is in their insurance policies and simply hope they are covered in the event something happens. I’ve seen many other companies who have had losses and didn’t realize those losses could have been covered by their policies. In fairness, insurance contracts are often legalese beasts that are decipherable primarily by sophisticated lawyers. You need to make sure the policies you purchase align with your specific business functions and needs. Enlisting counsel to analyze, select and negotiate your insurance program within the framework of your specific operations can be that ounce of prevention worth a metric ton of cure.

I recently worked with a product manufacturer with its primary factory based in the Philippines and suppliers based in two other Asian countries. The company shipped product from the factory to its U.S.-based warehouse via ocean cargo. However, a review of their insurance policy revealed that it only covered events in the United States and territories, as well as Canada. This meant if their factory shut down, they could not recover lost business income resulting from the delayed production. Even if the coverage territory included this factory, there were exclusions for earthquakes, tsunamis, floods and labor/strike issues, effectively eliminating a large number of risks that could occur in the Philippines. Moreover, the policy only covered the company’s “direct suppliers,” which would likely have excluded disruptions at the material suppliers. To top it all off, there was no marine cargo policy in place, so shipments lost at sea (the only way they transported product from the factory to their warehouse) would not be covered.

The importance of having a big picture understanding of your insurance policies cannot be understated. Where are your manufacturing operations, and to what extent does your policy respond to natural disasters and geo-political/labor risks that may arise in such locations? How sophisticated are your supply chain, logistics and distribution networks, and is your business interruption coverage protecting them? Does your cyber insurance policy adequately address the number of electronic data records you are storing, including customer data and credit card information taken as part of direct-to-consumer sales? Do you have cyber-terrorism coverage in place given the rise in state-sponsored cyberattacks? What exclusions could disrupt coverage you expected? Is your policy occurrence-based or claims-made, triggering specific claim notification obligations? Do you have overlapping coverage in more than one policy that could trigger sticky “other insurance” clauses? Again, these are just a handful of questions that should serve as a starting point. There may be many inquiries applicable to your particular business.

It is always important to begin a new fiscal year on the right foot. Taking these three steps should provide sustainable opportunity to navigate the top business risks of 2018 (and beyond) with more confidence. As always, we’re here to help.