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Specialty Lines Markets
Protecting security firms
In spite of recession, market fares well
By Dave Willis
To say it’s been an eventful decade for the security business is certainly an understatement. From the 9/11 terrorist attacks to the recent recession, the industry has faced more than its share of challenges.
Interestingly, the recent economic fallout has actually extended a trend that started after 9/11. “As a whole, the industry has been looking for more qualified guards,” says Karen Izzo, president of Izzo Insurance Services in Elmwood, Illinois. “They don’t want Barney Fife any more, and they’re willing to pay to get better guards.”
“In a bad economy, turnover is reduced,” adds Bruce Brownyard, president of Brownyard Programs, Ltd., in East Islip, New York. “And there is a larger pool of available workers.”
Increased awareness following the events of September 2001 has had an impact. “People are more interested now in having security at their events,” says John Bures, senior vice president of Southfield, Michigan-based CoverX. “This has led to increased opportunities.”
Adds Brownyard, “The industry was already growing, but after 9/11 it really took off.”
The good and the bad
The recession has delivered mixed results for security firms and their agents and insurers. “In some cases, we’ve seen a 25% to 30% revenue drop in security businesses,” explains Brian Costanza, vice president-underwriting for Costanza Insurance Agency in Dallas. “Some are finding it harder to get paid. For instance, in California, guard firms are having to accept IOUs from the state government.”
At a recent security industry conference, speakers shared revenue data. In context, it wasn’t all bad. “They said security guard revenues are down about 10%, whereas other industries are seeing considerably greater drops than that,” Brownyard recalls. “In a bad economy, I guess it’s not bad to be down only 10%.”
Some clients—especially manufacturing and industrial concerns—are shutting their doors altogether. But security needs remain. “Many properties that employed two guards are cutting back to one,” says Costanza. “From an insurance perspective—primarily from a general liability standpoint—this creates a unique situation. We’ve seen an increase in property damage claims as a result.”
Some security firms have experienced a double whammy. “Some accounts have gone bankrupt, so the guard firm not only loses a client, but the client has gone away owing them money,” says Izzo.
Some guard firms are trimming their ranks. “We’ve seen deterioration in sales and payroll for some smaller firms,” says Torrence Brownyard, CPCU, president of W.H. Brownyard Corporation in Bay Shore, New York. “Some have reduced their insurance coverage or done away with it because they can’t afford it.”
Startups are surfacing. “With unemployment rates where they are, I’m seeing quite a few new ventures in the private security arena,” says Costanza. “This creates a challenge from an insurance standpoint. Often, the applicant is less experienced. Hiring and training procedures may be lax, which could have serious liability consequences.”
Still, some firms are growing. A number of larger firms, for instance, are seeing revenue growth between 5% and 10%, Torrence Brownyard observes. “They are going strong—diversifying into different areas.”
Costanza has seen the same trend. “Guard firms are moving more into investigative services,” he says. “It’s always been there, but now they’re expanding. We’re seeing more firms working with insurance companies on fraud issues.”
Technology is helping to fuel this expansion. “Even in a bad economy, we’ve seen a nice growth pattern among much of the industry,” says Bob Battaglia, CPCU, ARM-P, AAM, ARe, Philadelphia Insurance Companies underwriting assistant vice president. In some respects, he says, the abundance of new technology makes the security business an emerging industry.
Insurance market factors
Insurance market challenges exist. “We continue to experience a soft market,” says Costanza. “Premium is down and competition is up.”
While his firm traditionally enjoys a 90% retention rate, market forces have pushed that figure down slightly. “But new business is up,” he notes. “Businesses are shopping. Insurance is their second highest expense item, behind payroll.”
Adds Bures, “Our flow of applications is as high as or higher than ever. We’re seeing a lot of start-ups coming in.” At the same time, workforce reduction has reduced premiums. “This is the first time we’ve seen so many policies audit down,” says Izzo.
Some security firms are making good use of lower premiums. “They’re using some of their savings to purchase optional coverage they may not have purchased before,” Torrence Brownyard observes. Izzo sees firms crossing more T’s and dotting more I’s. “They want to make sure that, if something happens, they’re properly protected,” she explains.
In this vein, security firms are paying closer attention to contracts. “Contractually, property owners are trying to transfer all of their liability for the premises to the security company, without including a negligence trigger,” Izzo comments. Her firm works with brokers and security guard companies to address this issue.
“We want them to be sure that, contractually, they only accept liability for what they do wrong, not inherent liability for those premises,” Izzo explains.
Torrence Brownyard’s organization also offers contracts counseling. Today, he notes, more security firms are offering consulting services. “We educate our insureds on the importance of putting recommendations in writing and having clients sign off,” he says. “For instance, if a recommendation calls for 30 guards but economic factors lead the business to only taking 20, we want that in writing.”
Insurance and risk management expertise is welcomed, especially among smaller security firms. “Many of these individuals are excellent technicians who became business owners,” says Bures. “They’re great at the security operations, but the intricacies of running a firm present challenges.”
Advice for retailers
Bures offers advice for retail agents who are interested in serving the security market. “Make sure you understand the types of losses and situations these businesses face,” he says. “Some of the biggest exposures revolve around assault and battery. On the E&O side are failure to perform, personal injury and false arrest. Understand those exposures to avoid getting into an agents E&O situation.”
It’s important to understand the exposures faced by security firms and how the insured or prospect is addressing them. “We see a broad range of coverages out there—some are very, very good and some may be a little bit deficient,” Battaglia remarks. “A good way to approach prospects is to close insurance gaps.”
Often the best way to start is by thoroughly reading policies—incumbent and proposed. “I suspect there are some agents out there who are satisfied to work from a summary proposal,” Izzo says. “It’s important to read the policy forms, terms, conditions and exclusions—really do the homework—before selling it to an insured.”
One deficiency agents might find when reading the policy, according to Battaglia, is in assault and battery coverage. “Because much of the business is excess and surplus, the forms can be very broad,” he notes. “In other situations, they’re not as expansive as they should be.”
Izzo concurs. “Some programs claim to offer assault and battery coverage,” she comments, “but in the policy, assault and battery is not defined as an occurrence. Some policies might say ‘physical force to protect persons or property.’ This is not a very strong argument with someone who was punched. That is truly assault and battery, which our policy defines as an occurrence.”
Bruce Brownyard also sees deficiencies and in some cases, “grossly inadequate coverage.” Addressing these problems effectively can differentiate a retail agent from competitors. “There are great opportunities for agents who understand private security companies’ exposures, who talk to insurance providers that understand them, and who sell coverage rather than price,” he says.
He encourages agents to explore vicarious liability. “For the most part, insurance programs for private security companies don’t address this totally,” he explains. “Most just focus on the vicarious liability of a guard company for assault and battery claims. There are a number of other intentional/criminal acts committed by guards that aren’t universally addressed.”
Izzo says it’s important to understand how contracts address additional insureds. “Some policies offer additional blanket insurance only where required by written contract,” she notes. “But standard contracts drafted by most security companies don’t name the client as an additional insured. Agents think they are issuing certificates indicating that the guard company clients are additional insureds, but unless it’s in the contract, they’re not.”
Beyond policy language, it’s important to consider the entire program. “Agents may want to look at admitted paper, where they can work directly with the carrier,” says Battaglia. “There may be value in carrier claims handling versus a TPA. Some agents may want to have all coverages and services bundled.”
Building business and expertise
Battaglia encourages retail agents interested in the business to review their existing book. “One way for agents to generate activity is to look at their existing list of clients,” he explains. “A number of agents already write warehouses, condo associations or homeowner associations. These operations may contract out the security services. They represent a built-in referral list.”
A consultative approach works well, says Costanza. “Some buyers are not as sophisticated in insurance matters,” he says. “They need help—a counselor, if you will.” The best way for an agent to fulfill this role, he believes, is to “get out and see the business, become familiar with operations, know the ins and outs, as well as the insurance and risk management intricacies.”
One way to build niche expertise, Costanza points out, is through involvement with security industry trade groups. “Spend time with security firms and their trade associations,” he says. “Learn by taking part in local education events. And build a reputation by contributing at these meetings—bringing insurance expertise and other resources to the table.”
Bures recommends tapping online sources. “Some very good security Web sites exist where agents can learn a lot about the business,” he says. These include association sites and those offered by private organizations, including carriers and program managers.
For instance, Bruce Brownyard’s Web site offers a newsletter that features, among other items, a guest column prepared by an insurance defense firm. “A recent article discussed third-party-over suits and how to mitigate the potential liability,” he says. “They recommend including an arbitration clause in employment applications.”
Torrence Brownyard’s site offers a range of sales tools. “Agents can access a library of marketing materials and applications,” he says. “They can download the material and even put their logo on it.”
Another tactic Bures suggests is simply picking up the phone. “I get a lot of calls from people asking questions, looking for advice,” he says. “A 10-minute phone call can go a long way in explaining some things.” Such calls, he adds, would probably be welcomed by any carrier or program administrator that specializes in insuring security firms.
The author
Dave Willis is a New Hampshire-based insurance and business writer and regular Rough Notes contributor.
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