Fiduciary Liability

Fiduciary liability insurance has, up until recently, been one of those small, inexpensive and easily overlooked policies you buy that gets little thought or attention. Designed to cover liabilities created by the Employee Retirement Income Security Act (ERISA), including the personal liability of plan fiduciaries, it’s basically sleep at night insurance for anyone with fiduciary responsibility, as defined by ERISA, for their company’s employee benefit plans. Many if not most of our readers fall into that category.

Premiums for these policies have always been quite low, in large part because of a perceived lack of serious exposure, especially when the benefit plans in question were defined contribution type plans such as 401(k) plans. Unlike with defined benefit plans, in defined contribution plans investment choices are made by individual participants (albeit from a list of pre-approved options selected by plan sponsors) rather than by the plan sponsors themselves, so it was thought there was relatively little risk to plan sponsors from complaints from participants about investment returns or results.

To a degree, that’s still true, but there have recently been several factors combining to create new risks for plan sponsors. The first is the reported tendency of often unsophisticated individual 401(k) plan participants to choose relatively safe, conservative investment vehicles for their plans, such as money market or bond funds. The second is the prolonged recent history of very low interest rates and investment returns for these more conservative investment options. The third is the fees that are charged by the investment funds offered by 401(k) plans that are part of any investment option. In an era of low interest rates and investment returns such fees, even if comparatively low, can eat into

net returns to the investor, reducing plan asset growth and, ultimately, the retirement benefits available to plan participants.

As we have reported in the past, the plaintiff’s bar has been testing the waters for almost a decade now with fiduciary liability lawsuits promoting a variety of theories of liability, most of which are tied to the idea that plan participants saw their investment returns on funds in company sponsored retirement plans reduced by excessive fees built into investment options, and over which participants had no control. Initially these types of fee based suits were directed at very large plans, such as those offered by Verizon, American Airlines, Chevron, Oracle and such, all plans with assets measured in ten figures or more. Fiduciaries and plan sponsors had some early success in defending these suits, but there have been cracks in that dam as some high profile settlements have been reported.

Even more worrisome recently is what appears to be a trend toward legal attacks against much smaller plans. Plaintiffs seem to be lowering their sights, with claims reported against plans with assets measured in millions, not billions of dollars. Recently a Minnesota auto body repair company with barely 100 participants and less than $10 million in assets was subjected to a fiduciary liability suit based on the same theory of excessive fees in their plan.

As a legal strategy for a hungry and ambitious lawyer this could make sense. Industry sources report there are nearly 75,000 401(k) plans nationally with assets totaling $25 million or less, with more than 4.2 million workers (an average of 56 workers per plan) participating in these plans. Smaller employers might not be as diligent in managing their plans as larger ones, and in fact research shows that smaller plans typically do have higher fees than larger plans (who can presumably use their size as leverage to negotiate better deals). With less staff and resources

than $55 million all together. For the mathematicallyinclined, that’s an average penalty of over $90,000,which would increase to over $160,000 with the newlegislation. Bear in mind, many of these are initialpenalties, not all are final, and employers can choose to contest them.

That could well happen more frequently in the future. Some employment attorneys think businesses may belikely to view higher fines as a change by OSHA to an emphasis on penalizing, rather than cooperating with,employers to abate unsafe working conditions. In anyevent, with fines being increased so much employersmay be more likely to fight a citation rather than goalong with a reduced fine, and OSHA could find that it will be spending a lot more time in hearings. And so could you. Word to the wise.

2015 Changes to Crime Policy Forms

As we have noted in the past the Insurance ServicesOffice (ISO), the organization that drafts standard policyforms used by much of the property and liability insuranceindustry, revises its forms periodically. ISO introduced

some changes to standard crime policy forms in November,2015.We talked last issue about social engineering fraud losses, where employees were induced to transfer funds to bad guysemploying ruses or impersonating a person in authority.Insurance companies have been denying those claims sincethey did not fall within the scope of coveragein crime policies up to that point. ISO has now introduceda new Fraudulent Impersonation Endorsement, whichcovers losses resulting from an employee being deceived by an imposter into transferring money, securities, or otherproperty. It comes in two flavors, Fraudulent Impersonationof Employees and Fraudulent Impersonation of Customersand Vendors. In both cases, an option for verifyingtransfer instructions must be included on the endorsement. Verification can be required for all transfer instructionsor only for transfer instructions in excess of the amountshown on the schedule. There is also an option that does not require verification of transfer instructions.

This is a worthwhile coverage enhancement, and cost for itshould be modest. It does need to be tailored a bit; give us acall and we’ll sit down and review this important coveragewith you to make sure all your bases are covered.

THE INSURANCE NEWSLETTER

(203) 284-3252JBelek@SRFM.com

35 Thorpe Ave., Suite 200Wallingford, CT 06492

The information, suggestions and techniques contained in this newsletter are believed to be accurate but are ofno warranty of any kind, whether expressed or implied, as to t purpose.

(plan oversight typically being a part time job for someone) and less meticulous oversight and documentation, smaller employers and plans may be quite vulnerable to lawsuits claiming excessive fees, and could be a target rich environment for attorneys with mortgages and college tuitions to pay for.

There are common sense things you can do to better manage your 401(k) and minimize the risk of litigation, and now is a good time to think about doing them. You might also want to review the coverage in your fiduciary liability policy to be sure you are properly covered for claims like these. Remember, personal assets of plan fiduciaries could be at risk. We’ll be happy to review all this with you, give us a call.

Commercial Auto Claim Trends

One of the toughest lines of commercial insurance is that written on heavy, long haul tractors and trailers. A fully loaded eighteen wheeler traveling at highway speed has tremendous amounts of potential energy and enormous power to kill or maim, or cause massive amounts of property damage, and serious accidents and large claims occur regularly.

Until a few years ago insurance companies and large self-insured fleet operators had a pretty good handle on commercial auto claims and costs arising from such heavy vehicle accidents. Claim frequency was pretty steady and predictable, and calculating damages and costs from bodily injuries was a fairly straightforward process. This made insurance for this type of exposure possible and profitable; insurers are not afraid of severe exposures as long as claim experience is predictable and allows for setting premium rates sufficient to pay claims and still make a profit. The past few years, however, have seen a series of very large and unexpected judgements that have upended old calculations, and which are having a negative impact on the heavy commercial auto insurance market.

A large part of the reason for recent disruptive changes in the commercial auto insurance segment is attributable to changing strategies by attorneys representing folks injured in big rig accidents. Up until recently damages from such accidents were mostly in the form of (relatively) easy to calculate compensatory damages, such as payments for lost wages, medical bills, pain and suffering, etc. More recently, suits include allegations that companies operating these vehicles violate or fail to enforce safety regulations, improperly maintain their vehicles, overload trucks and

marijuana use. If that’s going to happen it will likelyhappen first in those states that have legalized it forrecreational use, but even there, so far, so good. Itssomething we are keeping an eye on.

These issues, and others arising out of legal use ofmarijuana are just now beginning to be considered. Itwill be many years before answers are known, and new questions not yet contemplated are sure to arise.

Wage & Hour Lawsuits Hit Record Levels

Continuing with employment practices liability risks,wage and hour litigation has been a persistent andworsening problem for employers all over the country, and the news is getting worse. According to data from the Federal Judicial Center, the research and education agency of the federal judicial system, workers fileda record number of wage and hour lawsuits underprovisions of the Fair Labor Standards Act (FLSA)during the federal fiscal year that ended Sept 30. Thedata indicates that employers are more likely to facewage and hour claims in federal court than any otherform of employment related litigation. During the past decade these claims have increased in eight out of ten years; since 2000, wage and hour federal court filings has gone up by more than 450%.

What’s driving this increase? There are a number ofseparate factors all combining to drive this type oflitigation, but the root of the problem goes to the FLSAitself. Originally passed in 1938, its an old Depression-era statute created for a time when smokestack industrieswere characterized by work shifts that started and endedwith the sounding of a whistle. As written the law isantiquated and ill suited to the modern workplacewhich is characterized by independent contractorclassifications, joint employer relationships, stay-at-home and telecommuting jobs and other moderninnovations, where application of the Act’s mandates,grounded in a different time and reality, is oftenconfusing and difficult.

And wage & hour claims are expensive. Most oftenthey are class actions or multiple plaintiff suits, which drives up the cost. Actual damages per employee may bemodest; legal fees and defense costs are usually the mostcostly thing about these claims. In addition to your ownlegal costs you may also have to cover your employees’legal fees because of attorney-fee-shifting provisionsin wage and hour laws. The FLSA and many state laws

also require employers in violation to pay “liquidated” damages and interest as well as the unpaid wages. Underthe FLSA, liquidated damages are an additional 100percent of the unpaid wages.

A cottage industry of litigation has sprung up here, with many plaintiffs attorneys actively client shopping. Strongenforcement of federal wage and hour laws, the potentialfor class action status and large damage awards havemade wage and hour violations an attractive target for litigation. This is not good news for employers because, unlike with marijuana related employment litigation,most employment practices liability insurance policies either totally exclude wage and hour claims, or if they docover them have only some very low sublimit, perhaps $50,000 or $100,000, and for defense costs only. Some limited niche products may be available, but when they can be found terms are restrictive and premiums are veryexpensive.

Bottom line, these types of claims are frequent, veryexpensive, and probably not covered by your EPL policy.This is an area where the best defense is to take a close look at your own policies and procedures to be sure you are in compliance with the law. If you’re not, you could find yourself writing some big checks.

OSHA Fines to Increase in 2016

In another employment related development, OSHAfines are set to increase in 2016 for the first time in 25 years. A provision that allows OSHA to hike maximum penalties for violations by about 78 percent was added by Congress to the budget bill signed by PresidentObama on November 2. It also indexes fines to the rate of inflation, allowing for future growth. This change willbe effective August, 2016.

Penalty money collected by OSHA goes to a generalTreasury Department fund, not directly to OSHA, so theyhave no direct incentive to fine employers. Nevertheless,OSHA has long argued that fines have not been largeenough to serve as an incentive for compliance andactually effect change in employer behavior, and thatmany employers just treated them as a cost of doingbusiness.

OSHA publishes information on fines on their website. As of December 1, 2015, there had been 607 cases year to date nationwide that resulted in total initial penalties of$40,000 or more, with total penalties adding up to more

similar such allegations.

A suit that succeeds in proving such allegations opens up the possibility for millions of dollars of additional punitive damages on top of any compensatory damages directly attributable to the accident that might be awarded. Punitive damages can be a real wild card, with the sky the limit. News headlines about serious truck accidents don’t help either. Comedian Tracy Morgan was in a vehicle hit by a Wal-Mart truck in 2014, only one of several high profile accidents recently. That accident and others have resulted in a burst of eight and nine figure judgements in the past few years. The Wall Street Journal ran an article last October reporting on the increase in what it called “nuclear” verdicts, judgements of tens or even hundreds of millions of dollars.

The result has been a contraction in the insurance market for heavy trucking risks, with a couple of major insurance companies completely withdrawing from this space. So far the reported impact has been felt mostly by for-hire carriers, trucking companies in the business of hauling goods for others, and not by companies transporting their own goods on their own vehicles. The potential for a severe claim obviously exists wherever heavy vehicles are operated, though, so those types of companies should not think they are immune to the types of claims driving this market contraction, or their effect on insurance rates.

We are keeping an eye on these trends, but if you operate heavy commercial over the road equipment, be aware of what’s going on with claim trends and insurance costs. Now would be a good time to review your vehicle maintenance and fleet safety program.

Insuring Key People

We have written often about the need for properly written property insurance to insure such physical assets as buildings, machines or equipment, stock, inventory and so forth, upon which the continued operations and profitability of an enterprise depends. Aside from such tangible physical assets, though, many businesses, especially smaller businesses with fewer employees and/or thinner management ranks, may depend on a single person or a few key individuals for their success. If a key person, vital to the success of an enterprise, suddenly and unexpectedly passes away or becomes disabled

laws are broader than others, with the medical conditionsthat qualify for treatment varying from state to state. If all this is not already confusing enough, many citiesand local governments have passed their own versionsof laws or ordinances that decriminalize the possessionof small amounts of marijuana held for personal use,or treat it at minimum as a misdemeanor that will earn a violator nothing more than a ticket. The direction of this trend throughout the country is pretty clear; expect to see more easing of marijuana laws as time goes on.Yet marijuana is not legal according to federal law. Its classified as a Schedule I drug because it is considered to have no “accepted medical use”. No producer ofmarijuana medicines in the 23 states that legalizedthe drug for medical use has sought or received FDAapproval of its products. Doctors cannot prescribe itand pharmacies cannot sell it.

This creates some big headaches for employers. Here’s ashort list of some of the most troublesome issues raised by increasing acceptance of marijuana use.

First, consider that marijuana is not like alcohol. Alcoholmetabolizes relatively rapidly; except for seriousabusers, a day after consumption alcohol’s effects aremostly gone, except for a possible headache. Workers in safety sensitive jobs can party on Saturday nightand show up Monday morning ready and able to work safely. Marijuana’s effects linger much longer. Thescience is not settled but what research has been done suggests that the active ingredients only dissipate from the system slowly, and build up over time in the systemsof habitual users. There is not much research on what lingering effect it has on users, but there appears to be evidence that some degree of impairment can linger for a period of time, resulting in measurable impairment andraising real concerns about the safety of such workers, and coworkers and members of the public around them.

Because of the way marijuana lingers in the systemtesting for it creates other issues. While alcoholcan be tested for easily and reliably and degrees ofimpairment determined with some credibility, marijuanaposes different problems. Unlike alcohol, no scientific measure of marijuana impairment has been established.Tests available will readily detect it, but can’t tell how recently it was used or if the user is impaired, or to whatdegree. A current or prospective employee that testspositive for marijuana could claim they used it legally (whether medicinally or recreationally) on their owntime, and claim discrimination if you enforce any policy

prohibiting it’s use.

Consider another complication: as mentioned, manystate laws allow for marijuana use with a doctor’s order.Federal law, however, prohibits doctors from prescribingmarijuana. Doctors can only write a recommendation formedical marijuana, which is different than a prescription.What does this mean? How can, and must, employersaccommodate medical marijuana use? Do you have to make reasonable accommodation? Must employers pay for employee’s medical marijuana if they are injured on the job? How can an employee claim to be legally usinga drug he doesn’t have a prescription for?

More questions: Can employers fire employees forengaging in legal activities off the clock? Can employeesuse legal marijuana off the clock even if they may beimpaired the next day? What if courts hold that failing a pre-employment drug test is no longer a valid reason to deny employment to applicants? Must employers payunemployment compensation to employees fired forfailing a marijuana drug test? If drug testing only revealsuse of the drug but not degree of impairment, how can employers whose businesses involve driving or othersafety-sensitive positions protect their workers and the public from injuries and deaths cause by stoned drivers?How can employers in legalization states comply with federal law that maintains marijuana is illegal no matter what states say? These questions, and others, are all stillunsettled, and answers can vary from state to state.

So, what will all this cost employers? There are twosets of problems for employers, increased marijuana useand all the costs this brings to employers in the form of accidents, absenteeism, poor job performance and lost productivity, and uncertainty and costs from litigationarising from the questions raised above and others issuesyet to emerge.

For the first, in jurisdictions where marijuana use hasbeen legalized, managers will need to be educatedin safety, job performance and productivity issues todeal with the first set of problems. Even where legal,employees are still required to show up for work on timeand be fit and ready to work.

In terms of the litigation exposure, a well writtenemployment practices liability insurance policy willbe more important than ever. So far there has been no noticeable movement in the insurance industry to addany exclusions in these policies for claims arising from

and unable to work the enterprise could suffer significant financial losses in many ways. Unfortunately, businesses often overlook the need to insure their important human resources.

Who are such key people? That answer will be different for every business, but in general anyone who directly contributes to a company’s top or bottom line, is fundamental to its success and could not be easily or quickly replaced should be considered a key person. Examples might include:

• C-Suite executives, especially a CEO or COO.

• Top sales personnel.

• Heads of product development.

• Engineers or other such highly skilled and difficult to replace technical personnel.

Take a look around your own organization. Chances are there are some folks you could pinpoint as being important to the continued success of the business, and who would be difficult to replace if they were to suddenly be gone. Loss of revenue or new sales, disruption to or inefficiencies in manufacturing or business processes, loss of important technical expertise or business contacts, the negative impact on a business from sudden loss of the services of such a key person can take many forms.

Key person insurance can cushion the impact on an operation from the sudden loss of key people, make up for lost revenue, enable a business to continue paying its bills and fund the search for a new employee to replace the lost key individual. In a worst case scenario where a business simply cannot continue without the key employee, the funds from key person insurance can be used to pay severance to employees, distribute funds to investors and wind down the business in an orderly manner.

There are two basic types of key person insurance:

Key Person Life Insurance. This is life insurance covering individuals in a business who are vital to a company’s operations and success. As beneficiary the business receives an immediate infusion of cash if an insured key employee dies, whether work related or not, and regardless of cause or place of death. These funds can help compensate for revenue lost as a result of the death of the key person, or for any other legitimate business purpose.

Key person life insurance can be purchased as permanent insurance or as term insurance lasting for a specific period of time. Another option for key person life insurance is to cover a group of executives together on a “first-to-die” policy that covers just the first of the group who passes away. Once the policy is used to cover the loss from the first key person to die, other members of the group become eligible for coverage. The insurance continues for remaining members of the leadership group, but premiums should reflect the fact that only one life is being covered at a time.

Key Person Disability Insurance. This provides funds to a business if an insured key employee becomes disabled and unable to work. Standard disability insurance covers an employee’s lost salary and income, but a business owned key person disability policy makes the business the beneficiary, providing funding to make up for revenue lost or expenses increased by the key person’s disability and absence.

Key person insurance is usually owned by the business; the business pays the premiums and is the beneficiary. In addition to the common sense need for such protection, this coverage may also be a requirement of banks or lenders when applying for financing or credit. This type of insurance can also be a useful tool when it comes to succession planning for your business.

Like other disability and life insurance policies, the cost of premiums for key person insurance depends on the age and health of the key employee, as well as pursuits the employee may undertake in their personal life. A CEO who races stock cars or sky dives on weekends will cost more to insure than one who collects stamps.

You insure your physical assets, but give some thought to your valuable human resources; you have an insurable interest in them, too.

Oakland Warehouse Fire

You may have seen the headlines about the recent fire at a warehouse in Oakland, California. While designed and built for use as a warehouse, the tenant renting the building had reportedly converted it to use as an artist’s collective and dwelling units. A second floor space, accessed by only two stairways (one of which was reportedly a makeshift affair constructed out of wooden pallets), was also used for musical and other

Here’s a year-end wrap up of some significantdevelopments that all businesses and employers should be aware of.

Wacky Weather

Florida passed a milestone this year as the 2015hurricane season ended…it was the tenth year in a row without a major hurricane striking the state. The rest of the country has not been so fortunate; 2015 has been a busy year for extreme weather events.

Insurance industry sources report that insured lossesfrom natural disasters in the United States in just thefirst half of 2015 totaled $12.6 billion, well above the average in the first halves of the years from 2000 to2014. Through November 23, here’s the 2015 scorecard:

• Hurricanes: Atlantic storms, 11 named storms,4 hurricanes (none in Florida);

• Severe thunderstorms: 38 events, 66 reported fatalities;

• Hailstorms: 5,358 total hailstorm incidents, peaking in June with 1,324 reported;

• Tornadoes: 1,166 total reported, 414 in May alone, 101 fatalities;

• Floods; numerous regional and localized in events plus two major events, May in Oklahoma and Texas, October in the Carolinas, 71 killed;

• Snow/freeze events: 11 winter storms and cold waves, Massachusetts with 3 feet of snow in places , February the coldest month of the year; winter weather the third largest cause of catastrophe losses for the year.

While not a specific weather event, climate warmingtrends have made the U.S. considerably drier. Resultingwildfires have been severe this past year, with 55,636

total fires reported and 9.8 million total acres burned,equal to the entire states of Massachusetts, Connecticut,Rhode Island and part of New Hampshire going up in flames. This means 2015 is closing in on the recordas the worst wildfire season ever, since such statisticshave been kept; three of the worst wildfire seasons ever recorded have occurred in the past five years. Someplaces usually prone to these events escaped them this year, with Arizona, New Mexico, Texas, Colorado and even southern California avoiding catastrophic fires.Northern California, Washington, Oregon and Idaho, allaffected by record drought, were hit hard. Two big fires were still being fought in December in Kentucky.

On a positive note, earthquake activity was low, awelcome note in an otherwise gloomy year for natural disasters. No locusts were sighted, either.

What lessons to take from this? There is no state in the U.S. that has avoided catastrophic natural events likethose described above. Wherever you are, you’re atrisk for what seem to be increasingly unpredictable and severe natural events. And most are insurable.

Winter and Spring are busy times for many of thesetypes of events. Give us a call if you would like to sit down and review your insurance program to make sure it will respond if something like these were to happen to you.

Marijuana in the Workplace

What a can of worms this is.

Twenty three states and the District of Columbiacurrently have laws legalizing marijuana for “medicinal”use; four states and DC have completely legalizedmarijuana for recreational use. Some medical marijuana

performances, one of which was underway when the fire broke out. The interior space was reportedly cluttered with makeshift dwelling units and artist work spaces, and packed with combustible furniture, art, and supplies. There were only two exits from the building, both far from the stairways to the second level and with no clear path to them. The building was reportedly not sprinklered, and no smoke alarms were found.

Thirty-six people died in the fire, making it the largest such mass fire casualty event since 2003. Tragic as that is, that’s not the real news. What is notable is how infrequent and unusual events like these have become over the past century, due primarily to the development and enforcement of modern fire codes.

The Triangle Shirtwaist factory fire on March 25, 1911 in New York City was probably the most infamous such event, killing 146 young garment workers working on the upper floors of the building. Occurring over a century ago, it had much in common with the recent Oakland fire: overcrowding, inadequate exits, highly combustible occupancy, no fire protection, etc. While not the largest such mass fire event of that era the Triangle fire captured the imagination of the public due to the youth of most victims, and the fact that they were mostly young women at work in a space where they should have been safe. It gave an impetus to the development of modern fire codes and fire safety standards.

We take these for granted these days. If you are at your desk as you read this take a look around you. You are likely in an office building constructed to modern fire safety standards and codes, out of noncombustible or fire retardant materials, and equipped with sprinklers and smoke or fire alarms. Look around and you’ll see several clearly marked fire exits with paths to them clear and unobstructed. These, and other standards less visible (electrical codes, occupancy limits, etc.) minimize the likelihood of an event like Triangle, or Oakland.

It’s human nature to not think too much about things like fire risk, and it’s clear the operator of the Oakland warehouse gave fire safety little thought. It has also been reported that municipal authorities responsible for enforcing local codes may have failed in their jobs as well, with no records of recent inspections of the building despite complaints by neighbors. Had the building been inspected and codes enforced the outcome of this fire might arguably have been much different.

Code enforcement can certainly be an irritation and a headache, and if you have ever dealt with a building inspector focused on nit-picking details it might be easy to lose sight of the overall goals of the codes he’s enforcing. The Oakland fire is a good reminder of the reasons for such rules, what results can be expected by failure to follow them, and the benefit we derive, individually and as a society, from them.

THE INSURANCE NEWSLETTER

(203) 284-3252JBelek@SRFM.com

35 Thorpe Ave., Suite 200Wallingford, CT 06492

The information, suggestions and techniques contained in this newsletter are believed to be accurate but are ofno warranty of any kind, whether expressed or implied, as to t purpose.