As Wildfire Risks Increase, Insuring Businesses More Difficult

home wildfire

Business property coverage is getting more difficult to come by for operations located in areas that are susceptible to wildfires.

The devastating wildfires of the last few years, along with the thousands of homes and businesses that have been burned or damaged due to these events, has resulted in insurers becoming more selective about the properties they are willing to cover. This intense period of yearly wildfires has led to a record $12.8 billion in insurance claims.

As a result, some insurers have started non-renewing commercial property coverage in these high-risk areas – and others have just stopped writing new policies altogether. We are seeing renewals in wildfire-prone areas on a scale we’ve never seen before.

Companies that receive a notification that their insurer plans to non-renew their policies are faced with shopping in a market that is more selective and with insurers requiring that they take certain steps to better safeguard their properties.

What’s going on

More and more homes and businesses in areas susceptible to wildfires are at risk than ever before. The fires are becoming more frequent, hotter and more widespread. Insurers have had to pay out record amounts in fire claims during the last few years, which has taken its toll on many of them.

Some insurers are non-renewing property policies of all sizes in high-risk areas, and the practice has become widespread.

Typically, insurance companies are applying three metrics in evaluating exposure to fire:

  1. Brush mapping – This is a map of the tinder and brush, nearby trees and other natural items that could contribute to your building(s) catching fire. The insurer will use the mapping to see if you are keeping up your property by removing combustible materials from the perimeter and limiting the amount of shrubbery and trees.
  2. The nearby wildland-urban interface – The closer that a building is to wildlands (open spaces with combustible materials), the more likely it is that insurers will balk at writing the policy. A wildland-urban interface is defined by the Forest Services as a place where “humans and their development meet or intermix with wildland fuel.” Communities that are within a half a mile of the zone are included.
  3. Concentration of other properties an insurer covers in your area – If your insurance company already writes policies for many other businesses and homes in your area and they feel they have too much risk concentrated in that zone, they may opt to non-renew policies in order to reduce their exposure.

While we can sometimes work with an insurer to have the property owner clear brush and take measures that would reduce the chances of their property catching fire to satisfy the brush-mapping metric, it’s more difficult to negotiate about numbers two and three.

The options

If you have a business in a wildfire area and your insurer plans not to renew your coverage, and if other companies are not willing to underwrite your policy, we can help you find new coverage. If no admitted insurers (those that are licensed and regulated in California) are willing to cover your building, we have two options:

The non-admitted market – These insurers are not licensed to do business in California, but we can still use them to write policies for businesses. These insurers, which includes Lloyd’s of London, are usually willing to write buildings in higher-risk areas, but they too have increased their underwriting criteria.

The California FAIR Plan – If we are unable to find an insurer in the admitted or non-admitted market, the last choice is FAIR Plan, which is the state-run market of last resort for homeowners and commercial property owners that cannot get coverage in the regular market. Commercial policies are available for:

  • Buildings with five or more habitational units (e.g. apartment buildings, hotels, motels, or home-sharing services such as Airbnb)
  • Retail mercantile
  • Manufacturing risks
  • Office buildings
  • Residential or commercial buildings under course of construction.

Policies cover losses from fire, lightning, and explosion only. Also, policies are limited in what they will pay out, so if you have millions of dollars tied up in equipment and/or inventory, the policy may not be enough to cover all the damage you incur from a wildfire.

The maximum limit for commercial properties is $3 million for structures and $1.5 million for all other coverages, for a combined $4.5 million limit for all commercial properties at one location. But there are some exceptions.

What we can do if you go to the FAIR Plan

If the FAIR Plan coverage is not enough coverage or falls short, we can find another insurer that provides excess coverage that would kick in at a certain dollar amount of damage.

And for the aforementioned risks that are not covered, we would have to also find you a “differences in conditions” policy. Combined with FAIR Plan coverage, adding such a policy can nearly mimic the coverage of a commercial or homeowner’s policy.

CALIFORNIA: Bureau Recommends Workers’ Comp Rates Drop 5.4%

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Workers’ compensation insurance rates will likely continue sliding in 2020 after California’s rating agency submitted its recommendation that the state insurance commissioner reduce the average benchmark rates by 5.4%.

If the recommendation is approved, it will be the ninth consecutive rate decrease since 2015 (some years had two decreases), which have resulted in the average benchmark rate for all of California’s class codes falling a combined 45% since then.

The Workers’ Compensation Insurance Rating Bureau, which made the filing, said that average claims costs continue falling due to the effects of reforms that took effect in 2014. Rates are still declining because:

  • Claims cost development continues falling.
  • Claims are being settled more quickly.
  • Average pharmaceutical costs continue falling sharply.
  • The number of liens on claims continues dropping.

Offsetting those positive trends are:

  • Increases in cumulative trauma claims (particularly in Southern California).
  • Rising individual claim costs.
  • The cost of adjusting claims is increasing.

The Rating Bureau tracks workers’ comp costs in the state and makes the recommendations for changing the benchmark rates, which insurers use to price their policies. Every class code gets its own rate, which will change depending on the trends in claims costs and numbers for that class code.

Insurers use the benchmark rates as guideposts for pricing their own policies, but in the end, they can price the policies as they wish.

After using the benchmark rate, insurers will add surcharges for various classes or regions, and add on administrative costs to arrive at their own rates. Also, rates will not fall for all employers.

Rates depend on a number of factors, including an employer’s claims history and region. Policies in Southern California, for instance, are often surcharged because of the amount of cumulative trauma claims filed in the region.

The Rating Bureau will review accident-year experience valued as of June 30 once it has the figures, and it could amend the rate filing later. The state insurance commissioner will hold a hearing on the rate filing in September or October, and then make a final decision on the rate change.

What to do

Just because rates have been falling, employers should not waver in their focus on safety.

Here are some mistakes to avoid:

Becoming complacent – Falling rates act as blinders for many employers. When the cost of your workers’ comp policy continues declining, it’s easy to shift focus away from workplace safety, injury management and cost containment to other business matters. This is a mistake and can cost you in additional workplace injuries.

Focusing on just workers’ comp premiums – Premiums are only part of the cost of workplace injuries. Indirect costs – including overtime, temporary labor, increased training, supervisor time, production delays, unhappy customers, increased stress, and property or equipment damage – represent several times the direct cost of the injury.

Expecting rates to stay low forever – Workers’ comp rates always follow a cycle of increases and decreases. As rates fall, employers reap the benefits in lower costs, but their attention to workplace safety may wither and then overall claims numbers and costs start increasing and/or reforms erode, starting a cycle of increasing rates. The key is to ride the low rates for as long as you can through unwavering attention to workplace safety and claims management.

Chasing low rates – One benefit you have from working with us is continuity, and jumping ship to another broker just to save a few thousand dollars on your premium is not always a smart choice, particularly if the new brokerage is not involved in helping you keep claims costs low.

A Lesson in Timely Claims Reporting

file claims

A recent appeals decision denied coverage to a company on its directors and officers (D&O) liability insurance policies for taking too long to file the claim.

In this case, the 5th U.S. Circuit Court of Appeals in New Orleans sided with an insurer that had denied a claim a company had made after being sued for failing to pay overtime wages to nonexempt employees.

The insurance company had denied the claim because the first employees’ claim was made in August 2014, but the company failed to inform the insurer of that and subsequent claims until September 2015.

This case illustrates the importance of filing claims in a timely manner.

When the employer actually got around to filing the claim it had an in-force D&O policy with the insurer, although there was an earlier policy in force when it had received the first claim of failing to pay overtime.

Under the policy in force at the time of the first claim, the insurer would have been obligated to pay all claims made against the company under the policy.

“That earlier policy would have provided coverage except that the insured failed to comply in 2014 with a notice provision. We conclude the district court was correct to rely on this difference,” the three-judge panel in the appellate court wrote in an opinion that upheld a lower court’s ruling.

Timeliness

One of the critical obligations of an insured is the duty to timely report claims or circumstances that may give rise to a claim. Failure to report a claim in accordance with the policy requirements can result in a claim being denied, or worse, having the entire policy voided.

D&O policies are “claims made” policies, meaning that coverage exists only for claims made during the time period the policy is in effect. Claims made while no policy or extended reporting period are in effect are not covered.

Claims-made policies also have retroactive dates. Ideally, the retroactive date is the day the insured started business, but it can also be the day that it first purchased professional liability coverage.

Assuming the retroactive date has not been advanced, the policy in force when a claim is made is the policy that will respond, regardless of when the negligent act, error or omission took place.

However, there is one important qualifier. This insurance applies to claims that took place after the retroactive date, but prior to the end of the policy period, provided that the insured had no knowledge of the claims prior to the effective date shown in the declarations.

In other words, if you knew of a claim prior to the time you renewed your claims-made policy but did not report it, and if a claim is subsequently made, the insurance company can deny coverage. It doesn’t matter whether or not it’s been continuously renewed by one insurance company, the policy excludes it.

This underscores the importance of timely reporting of all claims prior to renewal each year.

Discipline Should Be Part of Your Safety Program

discipline red card

Does your injury and illness prevention program spell out the disciplinary action your company will pursue if its safety rules are not adhered to?

Addressing disciplinary issues can be a very sensitive and stressful process for most managers, supervisors and employees. However, if disciplinary issues are avoided or handled poorly, it can lead to serious consequences such as property damage, injury or even fatality.

Looking at discipline not as a form of punishment but as a rule or system of rules governing conduct or activity in order to eliminate unsafe circumstances, might ease the stress for the owner, manager and employee.

Education is the key to establishing proper disciplinary procedures and holding employees accountable to the company’s health and safety policy and program, as well as to applicable regulatory requirements.

The main objective of a disciplinary program is to ensure that rules and safe work practices are taken seriously by all employees and that they are followed. When disciplinary action is deemed appropriate, it should be conducted in a timely manner. Trying to conduct unsafe behavior by waiting only allows a habit to become more ingrained.

Discipline should be positive, not punitive or negative. The goal is to correct the problem, action or behavior. The type of discipline should fit the severity of the misconduct and be conducted in private.

Five-step Disciplinary Program Process

  • Reviewing policy and procedures (managers and supervisors)
  • Investigation of accusations and infractions (supervisors and safety & health reps)
  • Determining and reviewing disciplinary action (supervisors and safety & health reps)
  • Documenting disciplinary actions and program enforcement (supervisors and safety & health reps)
  • Conducting disciplinary meetings and promoting safe work practices and compliance to regulatory requirements (supervisors and safety & health reps)

If your company hires subcontractors, they should also be required to comply with your health and safety policy.

Sample disciplinary action

You should make it clear that the company reserves the right to discipline employees who knowingly violate company safety rules or policies. Disciplinary measures will include, but not be limited to:

  • Verbal warning (documented) for minor offenses.
  • Written warning for more severe or repeated violations.
  • Suspension, if verbal and written warnings do not prove to be sufficient.

If none of the above measures achieve satisfactory, corrective results, and no other acceptable solution can be found, the company will have no choice but to terminate employment for those who continue to jeopardize their own safety and the safety of others.

Non-punitive discipline

The first step of formal non-punitive discipline is to issue an “oral reminder,” with the manager’s primary goal being to gain the employee’s agreement to solve the problem.

Should the problem continue, the manager moves to the second step – the “written reminder.” Together, the manager and the employee create an action plan to eliminate the gap between actual and desired performance.

If disciplinary discussions have failed to produce the desired changes, management then places the individual on a paid, one-day “decision-making leave.” Tenure with the organization is conditional on the individual’s decision to solve the immediate problem and make a “total performance commitment” to good performance on the job.

The employee is instructed to return on the day following the leave with a decision either to change and stay or quit and find more satisfying work elsewhere. Thus, the purpose of the disciplinary transaction has changed from a punishment method to a process that requires individuals to accept responsibility for their own behavior, performance and continued participation in the enterprise.

New Law Bars Hairstyle Discrimination

woman with curly hair

California Gov. Gavin Newsom has signed legislation that will make it illegal for employers to discriminate against employees and job applicants based on their hairstyle if it is part of their racial makeup.

The law, known as the CROWN Act (Create a Respectful and Open Workplace for Natural Hair),

amends the state Education and Government Code to define race or ethnicity as “inclusive of traits historically associated with race, including, but not limited to hair texture and protective hairstyles like braids, locks and twists.”

This broader definition of race means that natural hair traits fall under the context of racial discrimination in housing, employment and school matters.

The law could apply to anyone, but as legislation it was specifically introduced to stop instances of discrimination against black employees over their natural hairstyles. There have been a number of high-profile incidents over the past few years where employees and students were discriminated against based on their hair:

  • A sixth-grade Louisiana girl was expelled because her hair violated school policy.
  • In October 2018, a wrestling official in New Jersey ordered a black wrestler to cut his dreadlocks if he wanted to compete.
  • An Alabama woman sued her employer for discrimination after the organization had rescinded a promotion to another position because she had dreadlocks.

The new law “protects the right of Black Californians to choose to wear their hair in its natural form, without pressure to conform to Eurocentric norms,” said Sen. Holly Mitchell (D-Los Angeles), who introduced the legislation.

The takeaway

The law means that it will be illegal for employers to discriminate against someone because of their hairstyle if it’s tied to their ethnicity and race. Employees that fall into this category can sue their employer for discrimination based on race under California’s Fair Employment and Housing Act.

You should update your employee handbook to include this definition of race in the employment discrimination section, and also train your managers and supervisors in the change.

Remember, discrimination cases can be costly, even if the employer wins in the end. There are legal fees, costs of witnesses and damage to reputation to contend with.

The best prevention for discrimination is to have rock-solid policies in place. It’s also wise to secure an employment practices liability insurance policy. That’s a smart move for any business, particularly as the number of discrimination cases is on the rise nationwide, alongside higher jury awards for employees.