by
Steven John Fellman
NATO Washington Counsel
Did
you ever think of how many different insurance policies
your company purchases during the course of the year? You
have a general liability policy. You carry fire insurance.
You have workers compensation insurance. You have directors
and officers liability insurance. You have automobile liability
insurance on your company cars. You may provide employees
with health insurance, long- term disability income insurance,
home health insurance, life insurance, dental insurance,
and other insured employee benefits. Smaller businesses
may have “key man” insurance on their top executives.
Your employees who handle money must be bonded.
The
insurance coverages listed above are just some of the typical
coverages included in the insurance portfolio of the average
business.
For
the medium-sized or smaller exhibitor, insurance coverages
are a means of protecting a business against risks that
can be enormous. Once your insurance broker convinces you
that a certain type of coverage is good for your business,
you buy the policy and then each year you get a renewal
notice. Most exhibitors pay the renewal notice and don’t
take the time to go back and do an analysis of the policy.
In a typical situation, the operator of a small or medium-sized
circuit may know that his or her company has insurance coverage
but may not have any idea as to the amount of coverage,
the terms of the coverage, or whether the policies that
they have renewed on an annual basis for the past 15 years
are still competitive not only in terms of rates, but also
in terms of coverage offered.
Every
exhibitor should do a periodic reassessment of every insurance
policy that it purchases. Policies should be shopped for
price, scope of coverage, claims experience, right to use
one’s own counsel, and related matters. Too often,
the only time these policies are reviewed is when a claim
is made. By that time, it is too late to correct any deficiencies.
| Remember,
if you wait until you have a claim in order to find
out whether your coverage is sufficient, you may have
a big disappointment. |
Let’s
look at an example. A company we represent was sued by a
former employee. The employee charged that she had been
wrongfully discharged and that the company had discriminated
against her because of her race. The employer advised us
that it had insurance that would protect it against these
types of claims. We reviewed the company’s insurance
coverage. They had a special rider on their general liability
policy that covered wrongful discharge and discrimination
claims. However, the total amount of coverage for said claims
was $100,000. Does that seem like a problem? It became more
of a problem when we further reviewed the policy and found
that that $100,000 was the total that the insurance company
would pay for not only the claim but also for the attorney’s
fees. Does that mean that the policy would provide an amount
of $50,000 to pay the claim and an amount of $50,000 to
pay attorney’s fees? Not so. When reading a little
further we found that the policy had a $25,000 deductible
for each claim. Thus the total amount available for attorneys
fees and damages was a total of $75,000. For a relatively
reasonable amount, the company could have increased its
coverage from $100,000 per occurrence to $300,000 per occurrence
or $500,000 per occurrence. The policy had been renewed
by the company each year for a 5-year period without even
looking at the scope of the coverage. By the time the claim
was filed, it was too late to make the change.
We were
visiting with another client and the client explained that
it provided all of its executives with a significant long-term
disability policy that would protect the executive in the
event that a medical disaster occurred. The language in
the policy was crafted to define disability very specifically.
Under the policy, a person was disabled if he or she could
not do the job that he or she was currently doing for a
period of two years and further if he or she could not do
any job thereafter. We read this language and went back
to our client. We explained that although this policy had
relatively good protection for the first two years of a
total disability, the protection for the remaining years
was inadequate. If the individual involved could do any
type of work whatsoever, including menial work, the insurance
company would claim that the individual was not disabled.
Is this the type of coverage you want to have for your top
executives?
We then
looked at another feature of this long-term disability program.
The company explained that it was providing a definite benefit
to its executive employees by purchasing the policies for
these employees. There was no cost to the employee for the
policies. It was part of their compensation package. Assuming
that the premium on the policy was $1,000 every year, the
company claimed that the employees were getting essentially
a tax free $1,000 benefit each year. That certainly is true,
but you have to look at the other end of the story.
If the
employer pays the total premium of disability insurance
and if the employee ever becomes disabled, the income from
the long-term disability insurance is taxable. Let’s
assume that the same policy that had a $1,000 premium paid
a disability benefit of $100,000 per year. If the employer
had given the employee $1,000 for the premium and the employee
had to pay tax on that $1,000, if the employee was at a
32 percent tax bracket with a 5 percent state tax, the employee
would have had to pay $370 taxes on the $1,000 premium.
In the event the employee became disabled, he would receive
disability income of $100,000 per year – tax free!
On the other hand, if the employer paid the total premium
in non-tax dollars, and the employee was disabled for one
year, the employee would receive disability income of $100,000
which would be fully taxable. He would have to pay $37,000
in taxes on the $100,000 of disability income paid under
the policy. By saving the employee $370 in annual premiums,
the employer was about to cause the employee to lose $37,000
a year in benefits. While the employee was working, the
$370 in taxes per year was probably not a significant amount.
If the employee ever became disabled, the $37,000 in taxes
per year might be a disaster.
Periodically,
new insurance products come on the market. You should evaluate
these products along with your existing insurance policies
to determine if your current policies still best meet your
needs. There are many examples, in addition to the example
set out above, that show how exhibitors who think that they
have adequate insurance coverage in reality have coverage
that is not adequate. It is essential that every motion
picture exhibitor conduct a periodic and in-depth analysis
of all of its insurance policies. Remember, if you wait
until you have a claim in order to find out whether your
coverage is sufficient, you may have a big disappointment.
