By Maurie Cashman
Insurance risks are a class of risk unto themselves that are often very technical and difficult to identify. Identifying risk in business has been a theme I have been working with in the past couple of weeks. Last week we discussed Employee Risks and how to mitigate them. I want to build upon this by talking about hidden insurance risks that you may think you have covered, or may never have even considered may exist. These risks may significantly de-value your business or, if identified and managed correctly, add value.
â€œYoung men are as apt to think themselves wise enough, as drunken men are to think themselves sober enough.”
–Philip Dormer Stanhope,
4th earl of Chesterfield
This week weâ€™ll look at three insurance risks, health, discontinued business, and life as items that must be managed correctly to build and protect the value of your business.
Health Insurance Risk
Do you understand your health insurance coverage? When is the last time you did an in-depth review with your insurer and your legal counsel? Do you understand your obligations?
Here is a question I asked a dozen senior managers and business owners this week. If you offer group health insurance in the state of Iowa and you terminate your policy for any reason, do you have to provide COBRA notice to your employees? The obvious answer is yes.
That answer would be incorrect. For plans under a certain size (please consult insurance and legal counsel) you do not have a federal COBRA notification. You do have a notification obligation under Iowaâ€™s mini-COBRA statute. You need to notify employees who are currently covered under your plan (including yourself) that coverage is terminating and the date on which it terminates. This notice needs to be given at least 10 days prior to the date of termination of coverage.
This is not commonly understood, even by the most sophisticated law firms (and by this author until this week). It can seriously impact how you need to structure the transition of ownership in your business, and even the value of the business if key employees are affected.
Discontinued Business Coverage
When you decide to transition ownership of your business, the new ownership is likely going to require you to make certain representations and warranties about the business. In some case they may want these representations and warranties further backed up by you as the former owner. These can take several forms, including seller financing, offsets against seller financing, escrows (sometimes called baskets), earn-outs, and occasionally discontinued business insurance.
Most general and product liabilities do not cover discontinued business operations. What I am talking about here is the following: if you transfer ownership of your company to another owner, that owner wants to be protected from what you may have done in the past, whether you know that a problem exits or not. Discontinued business insurance provides coverage for you after you have transferred ownership of your business against most types of liabilities, including product liability, liability for installation, and even terrorism if you elect to include it. Here is the kicker: the new owner will want to be named as an additional insured on the policy, which is generally not a big problem IF you have this insurance in place.
So whatâ€™s the big deal? Most insurance policies do not provide coverage for Discontinued Operations unless you specifically ask for it and it may be capped. If you do not have it, most insurance companies will not offer it to you at any price. No insurance â€“ no sale (or possibly a dramatically reduced price). Your successor owner does not know what you may or may not have done in the past or who may be considering suing you.
In some high-risk industries, you may not be able to acquire this coverage. In this case you only alternative would be to escrow a large amount of the purchase price, if the price is high enough, to provide the new owner with enough comfort to complete the transaction.
This seems like a no-brainer but it often is not properly managed. If you own a business and are the key to its success, you need to have yourself insured adequately.
But I have no debt, you say, so why should I carry insurance. Here is why: if you attempt to transition ownership the new ownership is going to want to keep you with the company for a period of time to insure that relationships with employees, suppliers and customers is maintained. If something happens to you that takes you away, they want to know that the financial damage that will cause is covered.
Well I am healthy so I can just get a policy you say. Possibly. But what happens if you take the physical that will inevitably be required by any life insurer and find that you have cancer or Parkinsonâ€™s disease (or a host of other things that life insurers screen for)? No policy and no coverage for the successor owner. Also, no transition of ownership AND you are going to become incapacitated as a business owner. Bad day!
These are a few examples I have personally witnessed in the past year. I could go on but you get the idea. There are risks that need to be managed and they are often not the ones you, your attorney, or your insurance provider are looking for.
Think carefully through your risk management plan and be sure you have insured appropriately.