Pull Up the Coverages

April 1, 2012
Having a good insurance policy is like having your rental business tucked in safe and sound under the covers. If prepared well, insurance policies can

An increase in wrongful termination and cyber liability claims may be cause for rental businesses to re-evaluate their insurance policies.

Having a good insurance policy is like having your rental business tucked in safe and sound under the covers. If prepared well, insurance policies can protect a rental business from devastating and costly financial losses as well as from liability and other types of lawsuits. Some new trends in insurance coverage such as Employee Practices Liability Insurance (EPLI) and Cyber Liability may be worth adding to your policy if you don't already have them.

Employment Practices Liability is an area of the law that deals with wrongful termination, sexual harassment, discrimination, invasion of privacy, false imprisonment, breach of contract, emotional distress, and wage and hour law violations. EPLI is growing in popularity among insurers in part because of the instability of the economy in recent years. Many rental businesses have had to lay off employees to cut expenses, making them more susceptible to wrongful termination and discrimination lawsuits. EPLI has garnered a lot more interest as a result.

EPLI can also help protect a rental business from third-party violations, according to Jeff McGeary, executive vice president - sales for Pittsburgh-based Allied Insurance Brokers. For example, if a customer with a shaky hand comes into your rental business to rent a chain saw, and you don't rent him the tool, he can come back and sue your business citing the Americans with Disabilities Act. “That's another exposure that, if written correctly, EPLI can cover and unfortunately, it's one of the hottest areas of coverage growth we've seen,” McGeary says.

Matthew Davis, a regional manager for National Insurance Specialists in Columbus, Ohio, also points to EPLI as the current hot topic among insurers to the rental industry, noting that some of the large rental companies are now requesting to add it to their policies. Davis notes that The Hartford, which is the company he represents through NIS, estimates the cost for a business to defend itself against an EPL lawsuit between $150,000 and $200,000. And yet it costs nothing to the employee, or former employee, as the case may be, to file a claim.

“I don't know what's prompting a spike or an increase in that area, but it can be quite an expensive situation if you don't have coverage,” says Gerry Cecil, programs practice leader for Portsmouth, N.H.-based Willis Programs, the global insurance broker for Rent-ItGuard, a new business insurance program for the rental industry. “More importantly, every organization should have a protocol in place in order to manage the risk in the first place. You have to minimize the possibility of a claim occurring and mitigate the impact if indeed one should take place.”

Cecil recommends that a rental business have a proper training program instituted and maintain a record of the training that has been provided to all employees. Should a claim be brought against the rental business alleging discrimination or a hostile work environment, that record showing the individual accused has had the discrimination training will help mitigate the impact of the claim and put the business owner in a better position to defend him or herself. It will also help the insurance carrier to properly defend the business against the claim.

“It's like any exposure that any business has — you have to be proactive — you have to put programs into place and a policy into place that says, ‘We're a zero-tolerance, no-harassment organization,’” Cecil adds.

New in the past few years are cyber liability and network security policies. These are designed to protect a business if customer or employee data is compromised. For example, many rental businesses maintain a lot of credit card or general credit and bank information in their databases for customer account management. With today's technology being so Internet based, this data can be accessed using any wireless device from any location, which puts the information at risk of being hacked and stolen. In addition, employees who have access to this information are potentially a risk for stealing the information. No one wants to think that their employees would ever do such a thing, but with that access comes inherent risk to the rental company and its customers. Cyber liability policies protect the rental business in the event of an exposure, recovering the money lost and helping with contacting customers to inform them about what happened and next steps for them to follow.

“You don't necessarily have to do business online to have a cyber liability exposure,” explains McGeary. “You just have to have the ability for your employees to access that online data to have a cyber liability exposure. One of the largest expenses to a company when their data is breached is customer notification, which is required by law. On average, it will cost a company $250 per customer to notify their customers of a breach, or even a possible breach, of the company's database.”

With the expansion of privacy laws in recent years, cyber liability can also protect a business if employee data that is stored electronically is compromised. As the popularity and use of tablet devices such as the iPad grows, McGeary expects cyber liability policies to become the norm rather than the exception.

You have a duty to protect that information and make sure that no one can get to or get access to that information from outside the organization or without authority,” says Cecil. “My recommendation is to carefully evaluate the coverages that are available, entertain proposals and put risk management practices into place that enable them to manage their exposure regardless of whether they insure it or not. And if they have the appropriate risk management program in place, arguably, it will reduce their cost of insurance because they will minimize the likelihood of having a claim.”

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are current costs covered?

Rental companies should check in with their insurance providers to find out if there are any additions or recent enhancements to their current policies. Competition among insurers has brought some new features to standard coverage.

“The Hartford over the last couple of years has been adding a lot of bells and whistles to the policy,” explains Davis. “They're really trying to beef up. I don't believe that insureds have ever gotten as much coverage as they're getting right now at the lowest prices that we've ever seen because it's such a tough market out there.”

A good example of this is the coverage of building replacement. The cost of building materials has risen sharply in the past few years, causing the expense of building replacement to increase dramatically.

“A lot of people don't take a look at the valuations of their building and they don't update them,” says McGeary. “So, in other words, people have a building valuation from 10 years ago and then they have a loss and they don't have enough coverage because the building costs a lot more now to replace than it did the last time it was valued.”

Many insurance carriers have computer models to help their customers evaluate their building for replacement costs. While these evaluations are not meant to be a replacement for a third-party appraisal, they can help the business owner determine whether that appraisal is necessary. “Nine times out of 10 that computer model is a much higher value than what the current coverage entails, especially if the customer has not reviewed the building replacement cost for five to 10 years because of the rise in cost of building materials.”

Another factor to keep in mind when reviewing the coverage of your building and property each year is whether the city has changed any ordinances that pertain to structures. For example, if the current building is a wood frame structure and the updated city ordinance requires newly built structures to be stone, the insurance policy should be revised to include building replacement coverage that brings the new structure up to current city code.

An annual review of the rental contract and its hold harmless clause is a best practice for rental businesses. Reaching out to their insurance agent on an annual basis will keep rental business owners up to date on any changes to the contractual wording that they should in turn ask their attorney to review.

“Those hold harmless clauses probably change ever two to three years and vary by state,” says McGeary. “For example, wording in Florida for hold harmless clauses is different than the wording in California, so it's very important that a rental company seek out the up-to-date rental contract wording. The rental company should always have its own attorney review it, but the insurance agent can provide the wording and ideas of how they should be updating the hold harmless and damage waiver clauses.”

Insurers suggest that rental business owners re-evaluate their coverage on an annual basis: Is your business at risk for a cyber liability claim? Are you covered against Employment Practices Liability? Is the structure that houses your rental business fully covered for replacement? These trends in insurance coverage may be worth adding to your rental business' current policy.