Security and Healthcare
We present something old and something new this month.
The old is the need for security. We have been willing to pay others in order to secure our protection since almost the beginning of time. Security companies provide varying types of services for their customers. There are specialty brokers who can help agents provide the insurance for those exposures.
The new is a product born out the rapid changes currently taking place in the health care industry. It addresses three specific types of liability. The first arises from the False Claims Act (FCA), the second from antitrust laws and increased merger and acquisition activity, and the third from credentialing and peer review. A major part of the new coverage is defense.
Protecting security firms
Opportunity knocks for agents who do their homework
By Dave Willis
In the aftermath of the Newtown school shooting late last year, demand for increased security, especially armed guards, went through the roof. "In the weeks and months following the incident, I was getting two or three calls a day from guard firms who were being asked to provide armed guards for schools," says Tory Brownyard, CPCU, president of W.H. Brownyard Corporation. Brownyard is a national program administrator and a leading provider of insurance for security firms.
"That created a challenge for those who insure the security industry. The market is very small, particularly for those who want to cover armed guards for schools," he adds. His staff counseled brokers and clients that providing a well-trained and screened unarmed guard may provide the same protection as an armed guard.
"Many feel that when someone is so intent on causing harm, a security officer—armed or unarmed—has very little chance of stopping him," Brownyard explains. "As horrific as it was, it was still an isolated incident, and the chance of its happening somewhere else is slim. Putting an armed guard at a school every day may actually increase the hazard." The September 2013 Washington, D.C., Navy Yard shooting created another spike in calls, he says.
Economic factors continue to affect the security business. "As law enforcement budgets continue to remain low or get cut further, police departments are being trimmed," Brownyard notes. "Laid-off officers are starting security consulting, private investigative or security guard firms, and they are filling the gaps where they were laid off. This is fueling increased demand."
Marc Katz, a principal of The Mechanic Group, a national specialty program administrator, says risk transfer via written contract continues to be a major issue affecting the security business. "It's very easy for security providers to be drawn into just about any kind of litigation that occurs at a client location," he explains. "To limit a security firm's liability and avoid unnecessary litigation, it is critical to have a soundly written standard client contract, along with stated post orders."
He says the contract or service agreement, appropriately executed, can allow for early dismissal of liability. "Some larger clients of security firms may enforce their own written contracts, which include broad, unfavorable indemnity and hold-harmless language," Katz notes. "But small tweaks can be made to these contracts."
For the most part, these adjustments will be acceptable to larger clients, he says. "By changing words such as 'gross negligence' to 'contributory or direct negligence,' security firms can potentially save hundreds of thousands of dollars in damaging litigation.
"By helping security firms with contract management, an agent or broker can provide meaningful, added-value service to these clients," Katz adds. The Mechanic Group offers complimentary contract reviews for clients and prospects of its insured security firms.
Bruce Brownyard, president of Brownyard Programs, also points to the importance of contract issues. "One of the biggest things heating up the security guard industry is third-party-over suits," he explains. "They're horrendous." These suits come about when, for example, a guard injured on the client's premises sues the client for an unsafe work condition and then the client calls on the guard firm to defend and indemnify it under a hold-harmless agreement.
"The law firm that handles all of our litigation nationally has come up with a strategy to address this," Bruce explains. "They recommend that, as a consideration for employment, guard firm employees agree to arbitrate and not to litigate when they are suing the guard company's client."
He says this approach has worked in other industries. "It has been upheld by the courts," Bruce observes, "and we think it could have a dramatic impact on the third-party-over suits that bedevil the private security guard industry." Such an approach also can be used with employment practices liability claims.
"We are suggesting in all of our renewals that insureds review with their attorneys the sample language our counsel has recommended," Bruce says. "This could really have a positive impact on the loss experience of the private security industry."
A look at the market
Rates are hardening for security firms much as they are in many other industries. "For the first time in 10 years, we're seeing pretty much across-the-board rate increases," explains Tory Brownyard. "Many private security businesses are seeing 5% to 10% rate increases on the GL side." Workers comp is hardening a little more quickly, he adds.
Bruce Brownyard concurs. "Rates for general and professional liability, umbrella liability, workers comp and crime have been rising since early 2012," he comments. "We've seen increases of more than 10% both this year and last. Rate increases spurred by deteriorating loss experience are playing out, particularly in workers comp, which started to go through the roof this year. We've also seen other changes, including the lowering of the financial strength ratings of some carriers."
"Ten years of falling rates and losses are catching up with carriers," Tory adds. "The security industry has a bit of a tail, and it's fairly common for losses not to develop for four or five years. Carriers that got into the class in the last five or six years and thought they were doing well are getting the brunt of the results now. Some markets are exiting. I wouldn't be surprised to see a little more shakeout." He expects to see more rate increases in 2014, coupled with coverage restrictions and lower limits.
Karen Izzo, president of Izzo Insurance Services, a wholesale brokerage for security industry risks, says, "As competing markets withdraw from the marketplace, they're being replaced with policy forms with more restrictive coverage. Carriers are more closely reviewing all aspects of accounts in their underwriting process." She says the markets she works with appreciate profitable business and look for ways to expand coverage options rather than restrict them.
"The security companies that provide service to lower-hazard clients are seeing the benefits of stricter underwriting," Izzo adds. "Security companies with higher-hazard accounts may need to look for alternatives, which can result in higher premiums."
Katz reports that The Mechanic Group is seeing an exposure basis increase for security firms and an uptick in rates. "This is particularly true for what might be considered the more distressed risks," he comments.
According to Izzo, "Professionally run security entities with good training, screening, supervision and low-hazard clients will continue to flourish. They are being rewarded from both a liability and workers compensation premium standpoint."
Advice for retailers
Retail agents and brokers who pursue security industry clients should keep a number of things in mind. "There are critical coverage issues that some markets don't address," Bruce Brownyard remarks. "One is vicarious liability for all intentional criminal acts. While you can't insure criminal acts, you can insure the employer's vicarious liability for the criminal acts of his employees."
Bruce says that some markets provide very limited vicarious liability coverage. "If a guard company employee damages a client's property—perhaps by malicious mischief or arson—they wouldn't cover it," he explains. "Most markets exclude employee dishonesty under the liability cover." His firm offers the coverage to firms that carry a $100,000 third-party crime bond.
Tory Brownyard says agents and brokers need to educate clients on contract language to make sure they're not picking up liability for their clients' sole negligence. "Clients may try to push all liability onto the security guard firm," he explains. "Most policies won't provide coverage if the guard firm is picking up contractual liability for its client's sole negligence. The security firm must have contributory negligence for coverage to apply," he adds. "Brokers should review contracts or at least educate clients on what their attorneys should look for when drafting or executing client contracts."
Risk management issues also are important. "While most insureds are primarily interested in price savings, another way to provide value is through risk management consulting," explains Katz. "There are many risk management and safety topics a broker or agent can address to help a security guard firm control its overall insurance costs."
He notes that "slip, trip and fall" accidents account for the majority of workers compensation claims and occupational injuries his firm sees. "One way to help prevent or reduce these types of claims is with slip- resistant shoes," Katz points out. "The Mechanic Group's exclusive workers comp program carrier, The Hartford, has partnered with Shoes for Crews to offer security guard insureds a significant discount on quality slip-resistant shoes.
"Not only can this help security firms reduce claims, it also can help reduce apparel costs," he notes. "This is the kind of value-added, out-of-the box thinking that helps agents and brokers build and sustain relationships with insureds."
Other worksite advice can yield positive results. "Workers comp experience shows that if you encourage employees to work for more than five consecutive hours without respite, the percentage of workplace errors and injuries will increase exponentially," explains Izzo. "These mistakes can be quite costly to security companies. Agents and brokers should make sure clients understand this."
Employment practices liability issues also should be addressed. "There has been a drastic increase—more than 300% in some states—in the number of class action suits brought against security companies for wage and hour benefits," Izzo notes. "Brokers should encourage security companies to be vigilant in complying with their respective state laws regarding lunch and breaks.
"They also should be recommending employment practices liability insurance with a wage and hour defense endorsement," she adds. "Security companies without this coverage can see of tens or hundreds of thousands of dollars in uninsured legal defense expense."
Izzo also encourages agents and brokers to discuss with clients their health care costs and their effect on security firm contracts. "Some contracts presented to the security industry contain multi-year rate guarantees that don't allow the security company to change or increase rates beyond a specified amount," she explains. "Contracts should be amended to allow rate increases based on state or federally mandated wage or benefit changes."
Tory Brownyard points out that not many brokers specialize in this class. "Retail agents and brokers getting into it should align themselves with a program administrator who has a good grasp of the business and can walk them through the ins and outs of it," he asserts. "They can describe characteristics that make a desirable guard firm and point out shortcomings in a prospect's current policy. Agents also should keep abreast of the client's business and make sure it isn't picking up exposures not adequately covered under the program."
"Coverage checklists are essential in reviewing policy forms for the security industry," Izzo notes. "Brokers should be keenly aware when reviewing the titles of endorsements in security industry policies. They may look the same but could be vastly different. Specific endorsement forms must be carefully reviewed."
Finding prospects
To build a book of security firm business, agents and brokers have a range of options. "This might sound counterintuitive, but I'd suggest they consider going after the high-risk business," Bruce Brownyard says. "The high-risk businesses often have much higher retentions—usually starting at $25,000—and the premiums across the board are much higher. It's the low-hanging fruit, and surprisingly few firms want to touch it."
Katz encourages retailers to follow the digital revolution. "During the past few years, we have seen fewer physical security guard company exhibitors and more electronic security exhibitors at the largest international security association's annual meeting," he comments. "These range from security cameras and access control systems to alarm installation and monitoring firms.
"With prices falling for high-end components, continuing technological advances and healthy profit margins, the electronic security industry has been a growing segment of the security industry," Katz adds. "Real opportunity exists for forward-looking agents and brokers to service these companies."
Finally, Tory Brownyard says, don't overlook consulting firms. "We're seeing healthy double-digit increases on the security consultant side," he explains. "There's an increased supply of security consultants thanks to budget cuts, and there's increased demand, especially in the cyber-liability arena, where consultants are being asked to review clients' systems to make sure they're protected and safeguarded."
Dave Willis is a New Hampshire-based insurance freelance writer and regular Rough Notes magazine contributor.
Health care: New reality, new risks
In designing coverage, ACE takes a comprehensive look at changing exposures
By Dave Willis
The health care industry today is facing heightened scrutiny. Legislative and regulatory actions designed to combat misconduct have brought about a dramatic increase in liability for health care organizations. A whitepaper produced by ACE Insurance, in conjunction with outside counsel, explores key issues these organizations face and points out the importance of a proactive risk management strategy that includes a properly structured management liability insurance program.
The report, The Rising Tide of Risk for the Health Care Industry, is the first in a series and focuses largely on three topics: The United States False Claims Act, antitrust activity related to mergers and acquisitions, and liability resulting from peer review and credentialing.
False Claims Act
The False Claims Act (FCA) is the government's primary tool for combating waste, fraud and abuse by government contractors, including health care providers participating in federal health care programs. The ACE report points out that the act contains "qui tam"/whistleblower provisions that let private parties—referred to as relators—file suits seeking recovery under the act on behalf of the United States. Relators file qui tam actions under seal to let the United States investigate the allegations. After the investigation, the government decides whether to intervene in the case and litigate it in court.
Scott Williams, assistant vice president, ACE USA Professional Risk, points out that the act has been around for quite a long time. "It originated in England, which is where the term 'qui tam' comes from," he explains. "In the United States, it sometimes is referred to as Lincoln's Law. He signed it during the Civil War. Its intent then was to make sure goods and products the military bought were sold at a fair price and would be delivered." The act has expanded significantly since then. Over the last few years, health care—specifically overbilling for medical services—has been a key focus.
In 2012, roughly $5 billion was recovered under the act, according to the Office of Inspector General (OIG), which works in conjunction with the Department of Justice to investigate and prosecute these matters. More than $3 billion of that was in health care. "A recent OIG mid-year report to Congress estimates that in 2014, almost $4 billion will be collected from providers of health care services," Williams explains.
Health care organizations need to understand the act and its potential impact. As the report explains, the act "imposes liability on anyone who knowingly submits or causes the submission of a false or fraudulent claim to the United States for payment. Damages and penalties under the FCA can be significant, as the FCA provides for the possibility of treble (3x) damages and per-claim penalties of between $5,500 and $11,000."
Williams explains, "In the broader sense, the act goes after fraud and abuse. When you really dig down, though, we're dealing with billing mistakes or coding errors. Perhaps there was an emergency and a doctor performed a certain procedure, but, in hindsight—and in the eyes of someone analyzing the case—perhaps something else should have been done instead. So it's not necessarily fraud and abuse."
Williams points out that to crack down on overbilling, Congress and the Centers for Medicare & Medicaid Services (CMS) created various auditing boards, including Recovery Audit Contractors and Zone Program Integrity Contractors. "These individuals comb through medical records, looking for anomalies," he says. "While CMS limits the number of medical records auditors can request, these caps reset every 45 days." Complying with the audit process can be costly for health care organizations, whether or not issues are found.
ACE recently introduced a new product to address the impact of the FCA and other issues affecting health care organizations. "When we were putting the product together, we wanted to dig into the exposures," Williams explains. "We sat down with outside counsel that has spent time prosecuting and defending these matters. We really wanted to understand the process."
The team took that knowledge and created a form, he says, "from the ground up. With a better understanding of the issues, we put the policy together in a clear and concise manner that explains to insureds what they're getting and what they're not." As part of the development process, ACE expanded its product to specifically include defense cost coverage for audits. "It's a trend we don't see going away," he adds. "Outside counsel doesn't see it going away. In fact, the health care organizations don't see it going away."
Antitrust laws
The report notes that health care entities face an increased risk that their activities will run afoul of the federal antitrust laws. "Over the past several years, federal and state enforcement agencies, along with the private bar, have significantly ramped up their efforts to police anticompetitive conduct," it says. "While price-fixing, agreements to allocate markets and monopolization remain staples of antitrust litigation, we have entered a new age of antitrust liability for health care providers."
Health care market participants shouldn't expect antitrust enforcement efforts to let up, the report adds. "Market forces that are driving the tidal wave of consolidation and the struggle for shifting and shrinking reimbursement dollars will be present for the foreseeable future," it says.
Actions can be brought for anything that unreasonably restrains competition. "A lot of these laws have a civil component and a criminal component," Williams explains. "A lot of antitrust lawsuits are on the civil side. The Federal Trade Commission may come in during the early stage of a potential acquisition—one health care provider buying another or perhaps a physicians practice group." Competitors also may bring actions. "If they believe an acquisition or merger will put them at a competitive disadvantage, they can try and challenge it," Williams explains.
Williams points out that mergers and acquisitions are more commonplace these days. "A couple of years ago, when the Patient Protection and Affordable Care Act was passed, many health care organizations realized they needed to make sure they could provide the full gamut of services to their patients," he explains. "They wanted to make sure they were ready for an influx of new patients." So they teamed up with neighboring or distant competitors or bought local physician practices to bolster their capacity.
"Most health care executives still are looking at making acquisitions," Williams notes. "Whether or not they make one is another story, but they're looking to see what makes the most sense for their organizations. Next year, once the act is fully in place, it will be interesting to see what happens—whether they continue the M&A trend or whether they back off and let things settle in."
Credentialing and peer review
The third area of liability involves disputes between hospitals and physicians over credentialing and peer review matters. "Peer review and credentialing have been around for a long time," Williams explains. "Years ago, when towns had a single, small, not-for-profit hospital, there was some form of charitable immunity. Over the years, health care systems have grown and the organizations have become more complex, leading to the repeal of many charitable immunity statutes."
This places a greater burden on these organizations. "They have an increased duty to investigate, select and retain qualified and competent doctors to serve their patients," Williams notes. "As their immunity went away, patients started challenging those decisions—alleging various types of institutional negligence.
"This led to hospitals setting up official credentialing committees to thoroughly review specific doctors' applications," he adds. "These committees might have to recommend to the hospital board whether to hire a specific doctor and what type of privileges to extend to the doctor. It's a complex procedure that hospitals take very seriously."
If a committee decides that a specific doctor is not the right fit, they face a possible suit. "The doctor could allege any of a number of things," Williams explains. "He could say the institution failed to follow its by laws in the review process or didn't allow for adequate appeal. He could say it interfered with his ability to sell his services and make a living."
The report points out that these situations are typically emotionally charged and involve high stakes. "You're dealing with a doctor who is very highly compensated, so they stand to lose a significant amount of money," Williams notes. "Plus, they can afford to hire great attorneys to challenge the decision-making process or outcome."
He adds, "Allegations are endless and they typically pull in the board and the credentialing committee. Suits like these take away from the board's ability to do what it's trying to do: manage the hospital." The report puts it this way: "Win, lose or draw: significant costs and legal fees can be incurred in addition to the risk of liability."
Agent and broker role
Williams says that hospitals need to know their exposures and how to better protect themselves. "It's important for them to understand how important a comprehensive insurance program really is," he explains.
Many of the exposures—the False Claims Act, the antitrust and credentialing—can, at least in part, be addressed through insurance. Agents and brokers need to address these issues and, if the organization didn't have adequate coverage before, make sure they do going forward.
It's most important for agents and brokers to understand that they're not dealing with a commodity," Williams explains. "These are very complex insureds with very complex exposures."
He stresses the value of sitting down with clients and understanding their unique exposures. "Know what services they're providing, the areas in which they operate, and really dig in to the policy language to determine whether their exposures are addressed," he notes.
"As an insurance provider, we get involved in these claims," Williams adds. "We see the importance of having a strong risk management strategy to address the issues. It's important to have everyone involved—the agent or broker, the carrier, in-house counsel, outside counsel, risk managers—to build that comprehensive program and overall strong risk management strategy."
Self audits can be part of the approach. A good insurance program is another. Working with qualified professionals also is important, Williams notes. "Hospitals need to make sure outside counsel they hire has significant expertise in the health care industry and significant experience working with various regulatory bodies involved in these matters. Being able to work through the issues efficiently can save a lot of time, effort and money for the board and its staff."
Anything that can be addressed up front and not in the middle of a dispute has a better outcome, Williams says. "Also, it's important to protect the entity and the individuals," he adds. "At the end of the day, the trustees or board members are exposed. They don't want to have to dig into their own pockets, so there needs to be adequate protection for them, as well."
Williams encourages agents and brokers to tap the carrier for help. "We view our relationships as long-term," he says. "We encourage face-to-face meetings with brokers and insureds because we all get a lot out of them. The organization learns about its risks, and we and the broker learn a lot about the organization and its policies and procedures. And we can assess management's dedication to delivering a better product, documenting files adequately, and ensuring accurate and timely billing practices."
The report concludes, "The challenges faced—from relators looking for the next million dollar pay day to high stakes disputes between competing hospitals—can be met by a proactive risk management strategy that includes a properly structured management liability insurance program. Failure to do so could expose health care organizations to significant risk." Dedicated agents and brokers can help clients reduce these exposures.
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