Doug Houser: From Rea & Associates studios, this is unsuitable a management & financial services podcast for entrepreneurs, tenured business leaders and others who are ready to look beyond the suit and tie culture and meaningful measurable results. I’m Doug Houser.
Are you wondering how to create a business that’s better, faster and stronger than the competition? Joe Urquhart, vice president of Overmeyer Hall Associates, chartered property casualty underwriter, and a construction risk insurance specialist says the answer’s pretty simple. Just limit your company’s exposure to risky situations.
On today’s show, Joe will zero in on four business faux pas you should correct immediately if your goal is to build a better business. Welcome Joe.
Joe Urquhart: Doug, thank you for the invite. I’m looking forward to this.
Doug: Yeah, absolutely. So you’ve done some radio before spots?
Joe: Maybe just a few spots.
Doug: All right.
Joe: Very few. I’m not a professional.
Doug: Well, you’re all about risks. So let’s, let’s talk about risks.
Joe: Yes, thank you.
Doug: Let’s talk about that. Now you’ve got four key areas in today’s world that business owners should be keenly aware of and look out for. Can you talk a little bit about about what you think those are?
Joe: Yes. When you asked me to do this I came up with my top three or four and narrowed it down to where we’re seeing a lot of claims and a lot of problems in the marketplace for businesses. The number one would be cyber liability. Number two would be probably the whole employment practices liability area. Number three is distracted driving distracted worker and how that is affecting auto results and claims in our business operations.
Joe: Oh yes, yes. Big, big issues with that situation.
And lastly and more specific is construction contracts and risk transfer.
Joe: And what we’re starting to see as it’s being transferred from owners to GCs, GCs down to subcontractors, a lot of risk in that area.
Doug: Gotcha. So when I think about cyber today, you know, I’ve got, I’ve got three daughters, early twenties you know, teenagers, they’re all over this stuff, you know, they know a thousand times more about all this kind of stuff than I do. And they’re constantly telling me to be on the lookout and that I’m at risk. …. So talk to me about the perspective of a business owner and where they’re most at risk in terms of cyber.
Joe: Sure. In the insurance world it’s referred to as cyber liability. A lot of businesses hear that, and you can kind of see the gloss go over their eyes and they aren’t wanting to talk about it. The only response I get from a lot of my clients and the people I speak with is: “Aw Joe, they’re not after us little businesses, they’re only going after big financial firms or you know, banks and hospitals and things like that.” And that’s just not true. And that gives you a false sense of security.
Where we’re particularly seeing a lot of claims and activity and where it’s costing middle businesses or small businesses money is what we refer to as cybercrime. That falls into a couple of different buckets. First, it’s wire transfer fraud, in insurance we call it social engineering, where someone tricks you through an email to transfer money to them. We’re seeing a lot of claims
Doug: There was a case there earlier this year, right? I saw in Cleveland – Marooz brothers, I believe, was the contractor, and then it was actually the diocese that that was defrauded?
Joe: Yes. I’m not familiar with that particular situation on the details. I’ve heard of it. I think it was public information, public knowledge. You can fill in the names, right? Where they transferred a significant amount of money, the owner transferred it to the, supposedly a contractor for this job. I believe it was six figures and they were responding to a fake email from a hacker who’d actually … the way it works is the hacker was in the contractor’s computer system and jumped into a conversation and then told them to transfer this money that they were owed to this routing number to this bank and that’s what was false. Once you transfer that money you will not get it back.
Doug: So there’s no help from the bank or the insurance coverage at that point.
Joe: Typically if they’ve done that, it’s typically not from the bank. That’s one of the insurance items you should have, a specific coverage called social engineering coverage that you need to make sure you have on your insurance policy. It’s a crime coverage.
The issue right now in the insurance industry is they’re not offering a lot of limits on that particular type of coverage. So maybe a business might only have $50,000, $100,000 … the maximum that we’ve seen maybe $250,000, but when you’re transferring a six figure amount, or it doesn’t even have to be that large, it can be have a financial impact on your business. So as a business, you want to make sure you have that coverage and just double check the limit that you have.
Doug: But regardless, that’s outside of somebody’s typical general liability or umbrella policy that’s not covered by general liability.
Joe: It’s a crime coverage. And the industry has reacted to this new type of crime by coming up with this particular coverage against social engineering. Coverage to react to what they’re seeing in the marketplace.
Doug: That’s scary. Now is the coverage costly from a business owner’s perspective?
Joe: No. Very in expensive. You just want to make sure you have it. And it’s evolving all the time.
The other, the other two coverages though that kind of go along with that. That is probably the most frequent that we see. The other ones are called computer fraud and electronic funds transfer fraud are very similar. That’s where a hacker gets into your computer system and transfers money by manipulating and malware in your computer system. So they’ll transfer it out. And that’s also a very frequent occurrence and you need to have special coverage for that called computer fraud coverage to cover that type of situation.
Doug: Now when I’m out there talking to clients and you talk to people they say: “Oh, I’ve a great insurance guy. You know, I’ve been dealing with them for 20 years,” but a lot of times we see it’s a, it’s a typical maybe small town independent agent and you know, they’re, they’re just filtering that up the food chain and that individual, themselves, isn’t very certain as to what they do or don’t have. How do you deal with situations like that where there’s a seeming lack of expertise?
Joe: Right. Excellent question. In the old days, that didn’t matter so much. In the more and more complex world that we live in, you really need to find somebody that specializes in a commercial insurance – number one – depending on the size of the business. A scope of size of business. You want to kind of ask those questions. Based on industry I think is very important. You need to do business with somebody that specializes in your industry to understand the risks, coverages, things that you’re coming across. And that is something they as a business, you really need to do due diligence and find the right fit.
Doug: Now let’s jump to a distracted driving a little bit. I mean, you hear that all the time, obviously with, with teenagers. I went through that with cell phones and all that becoming more prevalent. So how does that filter into the business though? I mean, you hear about that personally and individually, but I wasn’t aware of the impact from a business owner’s …
Joe: Yeah, it’s huge. It’s particularly starting to affect businesses. I would say this year, in 2019, we started to see some of it at the end of 2018, but really now in 2019 has been going on unfortunately for a while and it’s just catching up to the insurance industry. I’ll say it that way.
And it’s more than just distracted driving. I refer to it as distracted worker. Because we’re seeing more and more claims. One on the road: rear ends, people swerving, going left to center causing significant injuries or damage. But also at the job site or at in the factory or wherever you are. People are always on their phones, always texting. So we’re seeing an increase frequency of workers’ comp claims, you know, people falling in a hole, running into other side of a building, getting injured. So that’s driving work comp claims.
But coming back to your question on the auto though, it’s definitely more auto-driven. So what we’re seeing is the auto the insurance industry is now seeing results in their auto line. That is the loss ratios are really going up. I mean, they’re losing money, significant money. So they’re starting to look at why is that?
A couple of different reasons. One of them is distracted driving. The frequency of claims are going up and the severity of claims are going up. So that is driving the loss ratios to go up. So a lot of the underwriters re-underwriting or underwriting the auto line a little bit more, strictly a little tighter, asking a lot more questions. So when you go out to a business, they want to know, do you have a distracted driving policy? Do you have a fleet driver program? What kind of training do you have? And they’re also focusing on large trucks, which are a part of the problem. So if you want a large fleet or if you have a large fleet of large heavy trucks, you can anticipate rate increase. Sometimes significant depending on the losses that you’ve had, but definitely rate increase. And the other thing that we’re starting to see in the industry is umbrella capacity is being affected by the size of your auto fleet, particularly if you have a lot of large vehicles. A lot of the insurance companies do not want to put up large umbrella limits. So let’s say you had a $10 million umbrella last year and you have a very large fleet, a lot of large trucks, certain insurance companies are saying now we only want to do maybe a 2 million or $3 million umbrella, and that’s creating some increased costs and some increased issues.
Doug: So what, so what’s the solution if I’m a business owner? Can I outsource my fleet management? Is that a way to deal with it? Hey, my business is whatever, distribution, construction, I don’t want to be in the business of fleet management. So are there ways to deal with that can take that off the plate?
Joe: Sure. That’s a great question. You have to be proactive. You have to be in front of the questions in front of the curve here. When you got to control your losses is number one, right? You got to have good loss history and that puts you in a better position. But two, if you do have good loss history but you have just have a large fleet, no matter what type of business that you’re in, if it’s large fleet, large trucks, you need to be able, when you go out to market, when you talk to underwriters, you need to demonstrate we have a written safety policy, fleet safety policy. We have a written distracted driver policy. We have training and we enforce it. You also have to have, and a lot of underwriters are starting to ask, about your motor vehicle report policies and procedures. So when you’re a driver, you have a motor vehicle report. So the insurance companies want to know that you’re tracking your drivers, making sure they’re good, safe drivers.
Doug: So is that big brother watching them?
Joe: Yes, it is. Okay. They want to know who’s behind the wheel of that big truck. Do you know of any unknown violations? Did you get a DUI over the weekend? Whatever. So they want to see somebody that’s proactive in checking motor vehicle reports so they know what’s going on behind the wheel.
The other thing that really helps companies is you can get GPS now to track the vehicles, see how they’re being driven. Are they being driven on safely or too fast? I have several clients that have big trucks that get video cameras on the outside of their trucks.
Doug: No kidding
Joe: To help them, and it’s been a very effective tool to help in claims. And you can also get veto video cameras inside the cab to see what’s going on inside the cab. So those are very progressive-type policies, but they pay dividends. It really does help.
Doug: That’s a little scary though from the employee perspective. I mean, it’s obviously a good thing, I understand, from a safety perspective, but you start to think about it you’re essentially on the watch all the time, you know?
Joe: It’s a training. It’s how you present what you’re doing to them. It’s a safety issue for the company. The have huge assets at risk, financial risk. They have to be able to protect themselves and know what’s going on.
Doug: And I guess, you know, you’ve gotta build the culture within your company, right? Make sure that, hey, if we’re all safer then the company’s gonna benefit, we’re all going to benefit.
Joe: And really what insurance companies are looking for, they just don’t want companies that talk safety or say they are safety. They want to see safety and be able to touch it, feel it and see it that you’re actually doing what you say you do.
Doug: So now you’re talking my language because, you know, we’re auditors at heart. So that, makes me think, well, how do the insurers monitor that? Do they come in and sort of audit your practices and procedures?
Joe: Yes. A lot more companies have been significantly investing in loss control services. So they will come out, they want to spend time with your drivers, spend time in your plant or your facilities and they want to see these written policies. They want copies. And again, they want to make sure that you’re implementing them, not, you know, that you have some manual up on the shelf and that you gotta dust it off once a year. They want to see that you’re actually using it, implementing it.
Doug: Were you the guy that, then, who sort of works with the ultimate insurer to, to sort of manage that client relationship help the client understand what they need to do?
Joe: Yes. That is one of our roles as an insurance advisor consultant is to go between the client and insurance company and help them: implement these policies; to help them in the long run prevent claims, prevent frequency, the severity; and to be able to put a good demonstration in front of the underwriters to get them the best coverage at the best price.
Doug: Now talk to me about the third thing you mentioned – employment practice liability. What does that mean exactly?
Joe: Yeah, that’s a great question. And I put it on there because a lot of people, when I bring this up to them, they look shocked sometimes because the unemployment rate is, you know, like 3.8% or 3.5%. Everybody that wants a job can get one. Are you kidding? Right. And now there’s been a change in the environment with the “me too” movement and other things with social media, just everything can be, you know, I’ll use an old term, “videotaped,” … my kids will kill me for saying that … but everything is available. So there’s a sense that, and I think this is a good thing, that attitudes are changing. So we have seen definitely some frequency in employment practices claims.
So those fall under a bucket of any type of action from an employee claiming wrongful termination, any type of discrimination, civil rights, harassment that either happens at your facility and for a lot of contractors that happens out at the job site or if you have satellite offices that can happen there. And we have seen a definitely uptick in those type of claims because of this awareness.
Doug: I guess that’s not a bad thing at the end of the day if the culture certainly improves for everybody. It’s just sometimes jumping from zero to a hundred for certain companies is a bit of a bit of a struggle I’m sure.
Joe: Coming back, you also ask to see that the term employment practices liability, it is a separate policy similar to the cyber. So a separate policy that you need to get. It’s part of your executive risk type coverage – ties into your crime fiduciary, those kinds of things – but employment practices, you just want to make sure you’re with a good company that understands EPL, that can defend you if you do have a situation and many of the companies have very good risk management websites that you are able to get in and get policies, training, articles on those types of things. It’s a valuable resource for businesses.
Doug: Now what’s going on in the world of construction contracts? There’s so many, there was a big case obviously in the Ohio Supreme Court last year and had major impact. So what else is there?
Joe: Doug, we probably don’t have enough time right now to talk about everything in construction as far as risks. But a couple of big things. I think with the amount of work, particularly in central Ohio, there’s just tremendous risks for contractors right now. And a lot of it is contract driven. So we’re seeing more owners revising and beefing up their contract. So what GCs and CMS are signing, there’s just a lot more risk being transferred to them. And I’m just going to talk about the indemnification insurance requirements, right? I’m not talking about payment issues and all the lien issues and those kinds of things. Those are for attorneys.
Doug: So just to be clear, you’re talking about the project owner transferring that risk to the general contractors who are then probably what, pushing that down the food chains?
Joe: Yes. They’re turning around and transferring that risk onto the subs. And one of the other, I think developments because of the great market that we’re in right now, the great city that we live in, is there’s a lot of out of town contractors coming here and a lot of people aren’t familiar with them, so there might be new contracts, new terminology, so you have to be very careful in reviewing, again, identification and insurance requirements and seeing who’s responsible for what. And my number one recommendation for anywhere you are on that food chain is to take those insurance requirements, make sure you’re sending them to your insurance advisor for them to review and make sure you’re matching the contract to what you’re, what you’re signing.
If you don’t have the right coverage, the right limits, you need to get a quote, get the cost for it so you can put it into your bid, but you want to make sure you’re particularly covered for those risks.
Doug: Yeah, I know, and you’re probably seeing this as well, we’re having a lot of conversations with contractors that are growing quite a bit. Yes, they’re moving up market and to that point, dealing with folks they haven’t dealt with in the past or maybe at a higher level of expertise if they haven’t been accustomed to. So that’s, that’s always a challenge.
Joe: I totally agree with what you said. We’re seeing that. The other problem that you add on in addition to that is the labor market. Scheduling the size of the projects, in many cases, more sophisticated projects which all add risk that you have to account for.
One of the other areas in contract risk that I always talk to people about is in these contracts, particularly on a lot of these projects is make sure you know who’s carrying the builder’s risk. You have to follow through and you have to ask that question and document who has the builder’s risk. A lot of these are significant large projects. A lot of them are wood frame projects because of the apartments and multifamily. You want to know who has the builders risk, who’s responsible for it, who’s got the deductible, how does that, how is that treated in the contract. Those are important risk issues.
Doug: Absolutely. And obviously a big difference between commercial and residential.
Joe: Oh my gosh, yes.
Doug: I start think about what’s happened at the new hospital in Grove City for example. Legionnaires’ outbreak. So, I think, you know, obviously awful for those effected, but you know as a construction guy, my thought goes to: “alright, who built it and what kind of liability could they have for something like that?” It’s frightening.
Joe: You see that type of situation at Mount Carmel or even in another sense what’s referred to as just construction defect claims, whether it’s a legion Harris type claim or just faulty workmanship, right. Those can drag on for years. There’s there’s a lot of litigation. Typically what happens is everybody gets named, right? And you just want to make sure you got the right coverage lined up with the appropriate limits to defend your organization.
Doug: Yeah. So you need the right expertise. You need, as you said, a trusted advisor to sort of review all of this with you and visit with you and make sure you understand where your risks lie.
Joe: Yes. Again, coming back to what we said before, the industry, the environment, business environment is not getting less risky is getting more. And you really need to be with somebody who would be CPA, legal firm, insurance firm that understands your particular industry and those unique risks involved in that.
Doug: And the worst risks are the ones you don’t know about, right? So speaking of things, I don’t know about you’re a big blue jackets fan and I don’t know how their off season has gone. So what, what grade do you give them here for the off season?
Joe: I can’t even believe we’re going to end on that. We still have time here. We still have some time. I knew we were probably gonna lose our are our three big names. Even though I was really hoping maybe we could keep Panarin, but it wasn’t meant to be. I’m still hoping they make some moves and get maybe one or two more offensive players to help our scoring. But that doesn’t matter, I’ll still be at the games and still cheering them on. Go jackets.
Doug: They sorta went all in this past year.
Joe: It was lot of fun. I was there for a lot of those games and it was worth the fun. Worth the risk.
Doug: Well thanks Joe.
Joe: No, thank you Doug for this opportunity. Appreciate it.
Doug: Absolutely. And if you want more tips and insight that will help you avoid risky business practices or to hear previous episodes of unsuitable, visit our podcast page at www.reacpa.com/podcast thanks for listening to this week show. You can subscribe to unsuitable on iTunes or wherever you would like to get your podcasts, including YouTube. And while you’re there, please leave us a review. You can also write to us at email@example.com.
I’m Doug Houser. Join us next week for another unsuitable interview from an industry professional.
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