Table of Contents 

Specialty Lines Markets

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."

"By helping security firms with contract management, an agent or broker can roovide meaningful, added-value service to these clients." —BMarc Katz Principal, The Mechanic Group

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.

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