CONTRACT may be the most important word for a security company.
The contract explains the exact services the security company provides to a client. It may also be a device to transfer liability from the client to the security company. These contracts are often signed without being read and completely understood, meaning that the security company may have agreed to assume liability for which it is not insured.
This month, security industry insurance specialists discuss the problems with contracts, exclusions, and the need for open and honest communication in order to prevent significant gaps in coverage.
GROWING SECURITY MARKET PROVIDES AGENT, BROKER OPPORTUNITIES
Opportunities feature new technology and new exposures
By Dave Willis
Security guard businesses are enjoying increased business, thanks to an improved economy and a growing demand for services. "The industry is recovering from the recent economic downturn," explains Bruce Brownyard, president of Brownyard Programs, Ltd. "We're seeing staffing levels, payrolls and revenues rising."
But even as operating conditions improve, guard firms face a number of issues-some specific to their industry and others shared with the broader business community. Agents and brokers who understand these issues and their implications can better serve existing security clients and attract new ones.
"A primary concern for security guard companies right now is the Affordable Care Act," says Karen Izzo, president of Izzo Insurance Services. "Many security companies don't have the profit margins to absorb the additional costs for health care."
She points out that some contracts between guard companies and their clients prevent the guard company from raising billing rates to cover additional costs. "Other contracts may provide the ability to pass through costs," Izzo notes, "but guard companies are afraid the increase may cause clients to shop for lower rates or reduce the number of hours purchased."
Contracts continue to be a major area of concern for security guard firms. "When guard firms take on new clients, they're anxious to sign the contract and close the deal as quickly as possible," explains Tory Brownyard, CPCU, president of Brownyard Group. "But they need to take a close look at what they're signing."
He adds, "They need to pay careful attention to the wording, especially regarding responsibilities in the case of an incident or a lawsuit. A lot of firms are signing contracts that are way too one-sided in favor of the clients they're protecting."
Several years ago, he recalls, an employee of a manufacturing firm was driving a forklift recklessly and ran into and seriously injured a security guard. "By contract, the guard firm was responsible for claims involving the guard force; there was no wording that the guard firm had to be negligent," Tory Brownyard says. "It was a high six-figure claim that fell on the guard firm. Adding insult to injury, there was no coverage because the guard firm's policy only provided coverage if it was negligent-and it wasn't."
According to Bruce Brownyard, some segments of the security guard business are seeing more growth than others. "There certainly is a call for more armed guards in schools and in the workplace," he says. "If it's appropriate, we don't see a problem with this, as long as the guards are properly trained for where and how they'll be working. There are some situations an unarmed guard can't prevent."
Increased domestic terror threats also are affecting the industry. "We expect the possibility of ISIS-related activity coming to the United States to boost demand for more armed guards," he says. "I don't know if all carriers insuring security companies will be willing to provide terrorism coverage, but in the major cities, at least, you have to have terrorism coverage. No question about it."
Technology is affecting the security guard business in a positive way as well. "Many companies are adding video technology to the services they provide," Izzo says. "The alarm and technology exposures necessitate coverage changes. Brokers need to make certain they are aware of operation changes by their guard clients to assure proper coverage is provided."
She says the evolving technology aspect should lead security companies to amend contracts between them and their clients. "Contracts need to include the same limitation of liability, liquidated damages, exculpatory and third-party indemnification provisions included in most standard alarm contracts for the protection of the security contractor," Izzo says.
Bruce Brownyard adds, "The next big thing on the horizon is cyber liability." His firm is preparing to introduce a cyber liability endorsement for its general professional liability policy.
Eye on the market
"We're seeing some rate stabilization," says Tory Brownyard. "We tend to write more of the lower-profile guard firms, which generally have very good loss experience. We are seeing modest-maybe 5%-rate increases as insurers try to recoup what they've been giving away for 10 years."
Firms that handle higher-profile jobs-those doing armed work or even unarmed work at stadiums and malls-are seeing double-digit rate increases, coverage restrictions, and even non-renewals. "Restrictions include limitations on armed work, some client restrictions, and third-party over exclusions, which address employer liability in the event a guard is injured on the client job site," he says.
Bruce Brownyard says guard companies are seeing increases in the 5% to 10% range. "Coming into 2015, unless there's some major event, I think rates will be relatively flat," he remarks. "Workers comp continues to be a big issue-something we'll be addressing January 1 with a group captive for some of the larger regional high-quality, low-risk security guard companies."
He says comp often is a security guard firm's biggest insurance cost-sometimes up to three to four times the cost of liability coverage. "Many comp claims involve traditional slip-and-falls," he explains. "But companies doing armored car work, those with bouncers in bars and restaurants, firms operating in convenience stores after midnight and those in public housing generate more serious comp claims, as do those doing crowd control."
Coverage gaps
According to Izzo, new technology operations, which often are initially provided by independent contractors, sometimes leave guard firms exposed. "We often see security companies hire subcontractors using a purchase order and not a good independent contractor agreement," she says. "Brokers need to examine policies to see if they only respond as contractual liability coverage if there is a signed contract with the contractor."
She says policies should be endorsed to provide coverage for operations performed by independent contractors, regardless of whether a signed contract is in place at the time of loss. "Brokers also should educate their clients with respect to the importance of good subcontractor agreements," Izzo adds.
Vicarious liability is another area where gaps occur. "Most firms today are willing to provide vicarious liability for assault and battery, but things like arson, malicious mischief, bomb threats, rape, sexual molestation and other intentional or criminal acts often are excluded," Bruce Brownyard notes. "Many policies cover intentional assault and battery, but unfortunately there are a number of acts guards commit. Agents need to understand the coverage and communicate restrictions to clients."
The same holds true for firearms. "A number of companies exclude coverage if guards aren't licensed or authorized to use a firearm," he says. "Guards sometimes take personal guns to worksites for their protection. It's important to understand any exclusion relative to the use of firearms."
Some carriers exclude certain kinds of work a guard firm might perform or clients it might serve. "We've seen policies excluding security consulting operations, but more commonly they exclude certain client types, such as low-income housing," Tory Brownyard notes. "Agents should work with clients and their attorneys to make sure they understand language before signing a contract. It's also important to address post orders that define guard firm responsibilities so there's no question about what they're protecting, when, and with how many people."
A recent situation he encountered points to another kind of exclusion. "I had a call recently from a broker whose guard client works for a large investment firm in the city," he explains. "A principal of the investment company was holding a fundraiser at his home on Long Island and asked the guard firm to provide security." The insured called the broker, who recalled that at renewal, exclusions had been put in the policy that involved special events and any situation where alcohol was being served to a large group of people.
"Fortunately the broker remembered this and called me," Tory Brownyard says. "We hadn't written the policy but found replacement coverage. If the broker hadn't learned of the event or didn't remember the exclusion, the insured would not have been covered for any claims and the broker could have had a huge E&O exposure. The lessons from this are: Look for the broadest coverage possible, avoid exclusions, and touch base with clients periodically to see what's new." Another area where he sees gaps is in employee dishonesty or crime coverage. "Firms don't look for this unless they're bidding a contract requiring it or if a claim occurs," he says. "While some GL policies provide limited crime coverage, we believe guard firms should have separate policies addressing first-party and, more important, third-party dishonesty."
Bruce Brownyard points out that umbrellas don't always follow a guard firm's primary policy. "It's wrong to assume the umbrella covers everything the primary does," he asserts. "Many don't cover vicarious liability, firearms, some very basic intentional acts, and care, custody and control. People may not even know gaps exist if they don't have a claim that penetrates the umbrella. If it does, there's a major problem."
Market opportunities
"With exposures associated with the Affordable Care Act, brokers should review general liability policies to make certain employee benefits liability coverage is provided," Izzo explains. "They also should remind clients about the importance of employment practices liability insurance."
According to Bruce Brownyard, the growth of electronic security alarms, access control and video monitoring provides opportunities for agents to grow their business. "As time goes on, we'll see less stand-alone physical security and more electronic security-everything from drones to video monitoring to facial recognition," he notes.
"Even small alarm companies have access to these sophisticated tools," he adds. "They use facial recognition in conjunction with access control systems, and video monitoring allows them to see by individuals' actual body movements-just from the way they walk-whether they are an employee or a third-party interloper."
Tory Brownyard says demand for increased electronic security is coming from clients looking to reduce their overall security costs. "There's an initial investment in setting up these systems, but they lower costs down the road because they reduce the need for as much physical security," he explains. "Instead of having 10 or 15 guards patrolling a property, you may have someone sitting in a video monitoring room watching a number of locations. We don't foresee physical security ever being eliminated, but a hybrid approach can provide economies of scale."
He points to the security consultant market as another growth area. "This growth is driven in part by people setting up their own firms after, for example, being let go by public sector entities such as police departments and federal law enforcement," he says. "But the larger increase comes from increased cybercrime and data breaches, which is creating a whole new breed of consultant who goes in and analyzes a client's firm, its systems and its website to make sure adequate safeguards are in place."
Bruce Brownyard encourages agents also to look at difficult-to-place risks, like security companies at rock concerts, stadiums, arenas and public housing. "The low-hanging fruit really is the higher-risk business and it's hard to find a place for it, but there are markets available for it," he says. "Look at risks everybody else is turning down and find a home for them."
The author
Dave Willis is a New Hampshire-based freelance insurance writer and regular Rough Notes magazine contributor.
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