Non-Governmental Unemployment Insurance; Insurance “Gotchas”

An Ideally Insurable Risk: Unemployment Insurance?

A key insurance concept is “ideally insurable risk.” No, that doesn’t mean the old fire insurance chestnut about covering pig iron under water; it refers to the characteristics of a risk that make it suitable for insurance coverage. The characteristics are:

• Large number of similar exposure units
• Loss will be accidental and unintentional
• No catastrophic loss exposure
• Loss is determinable and measurable
• The chance of loss is calculable
• The premium is economically feasible

There is no perfectly insurable risk. All risks have some features that make them less than desirable for insurers. Even a risk like fire, which has been commercially insured for centuries, falls short. For example, arson fires are not accidental and unintentional; conflagration and war pose catastrophic risks, etc. The task facing underwriters is finding ways to make the risk insurable despite the shortcomings. In the case of fire insurance, underwriters insert war risk and arson exclusions to eliminate hard-to-insure risks, and reinsurance to lessen the impact of a catastrophe.

A textbook example of a risk that’s not ideal has always been unemployment. Unemployment has long been regarded as uninsurable due to the catastrophic exposure of mass unemployment during recessions and depressions, and to a lesser extent, intentional loss (insurer-paid vacations). There have been some attempts by insurers in the past to offer the coverage, but none have succeeded. Now, Great American Ins. Co. and Sterling Risk have leapt into the great unknown with “IncomeAssure.”

IncomeAssure (IA) is a supplement to state/federal unemployment insurance (UI). Government UI is designed to provide 50% of the worker’s former earnings. However, it’s capped at relatively low amounts: $420 a week in New York—other states range from a high of $698 in Massachusetts to a low of $240 in Arizona. IA is designed to bring the unemployed employee’s indemnification up to the 50% level.

For example, a worker earning $100,000 a year earns $1923.08 a week. Fifty percent of 1,923.08 is $961.54. For a New York insured, IA provides $541.54 to make the total of governmental and IA payments equal $961.54 per week ($420, the maximum NYS UI benefit, plus $541.54 from IA).

It  is linked to government UI in another way: the benefit period is just 26 weeks. However, it is subject to a two-week waiting period, not the one-week that applies to governmental coverage; IA will provide only 24 weekly payments. Governmental UI is frequently extended during recessions, but IA’s coverage is not.

I know it comes as a surprise to you that IA has exclusions. The most important are:

• Unemployment during the first six months of coverage is excluded—the premiums paid to that point will be refunded.
• There’s no coverage for unemployment unless the employee has been approved by the state’s UI agency to receive state UI benefits.
• The application asks if your employer has “announced or implemented a plan or program of job reduction, reduction in force, or departmental or company restructuring.” An affirmative answers leads to rejection of the application. A false answer will trigger a claim denial.

Since it is linked to UI, it won’t work for freelancers and others who are not covered by unemployment insurance.

A shortcoming of the IA coverage is that it’s an annual policy renewable at the rates in effect at the time of renewal. Furthermore, the insurer can non-renew the coverage if it ceases issuing coverage to persons in the state in the same occupational classification as the insured. A 2008-like recession would undoubtedly lead to a sizable increase in premiums or discontinuance of coverage for many or all insureds.

Nevertheless, there is a need for protection against losing a job. Even with unemployment at an eight-year low, millions of people lose their jobs each year. There’s been a steady increase in the number of jobs in total, but those who fill the new jobs are not necessarily those who lost the old ones.

If you have a sufficiently large rainy-day fund, you can do without the short-term coverage provided by IA. Most experts recommend a fund amount equal to at least nine-months’ salary.[1] For someone with an annual salary of $100,000, that would be $75,000. Clearly there’s a market for this coverage.

Premiums vary depending on income, occupation, and state. A New York employee earning $100,000 a year in the “financial activities” classification—that’s us—would pay $57.55 a month. For a NY construction worker, it would be $181.29 a month. The maximum payment in NY is $12,996.96 (24×541.54).

The premiums also vary by location. A construction worker in California would pay $224.15 a month.  IA has a premium calculator online at https://www.incomeassure.com/.

It’s worth letting insureds know about it, but let them know its shortcomings, too.

Insurance Gotchas

Searching for something I thought I’d seen online, I stumbled on “100 Insurance Gotchas” by Kenneth Hale.[2] Ken’s posting provides concise insurance advice in an interesting format. I’d like to expand on a few of them. (The Q&As are from his list.)

WC Gotcha—Out-of-State Worker

Q: I had an employee living in another state who was injured in an auto accident and made a workers’ compensation claim that has been denied.

A: If an employed sales rep, for example, works from home in another state, there is no coverage for an injury to the employee, such as an auto accident on the job, unless that state is listed on the workers’ compensation policy.

There is a solution to this loophole for salespersons for New York employers: NYSIF endorsement #70 (“Salesmen Outside of N.Y.S.”). It can provide coverage for claims of this type. Here’s the endorsement wording:

The policy covers bodily injury to your salespersons who work in states other than New York, regardless of the state in which they are domiciled, if your principal place of business is in the state of New York and such salespersons report to and are paid, controlled and directed from the state of New York. We will pay benefits either under the New York workers compensation law or the workers compensation law of any state in which the bodily injury occurs if benefits are awarded in that state, if the premium basis of the policy includes the remuneration of such salespersons.  (NYSIF Endorsement #70)

Notice the conditions required to trigger coverage:

• The insured’s principal place of business is in New York State,
• The salespersons are paid, controlled and directed from New York,
• The payroll of the employees is included in the premium basis for the salespersons.

This endorsement plugs a major gap. Many states provide workers compensation benefits that are in some cases superior to New York’s. This endorsement provides coverage for New York salespeople working out of state.

What about employees other than sales people, such as installers for an alarm company located in New York who are working on installing fire and burglar alarms in a shopping center in Connecticut? The textbook answer is to add Connecticut as a covered state on the firm’s WC (workers compensation) policy. Covered states are those listed in item 3A of the insured’s workers compensation insurance policy. Other coverage is provided for states listed in item 3C. If the insured begins work in any of the 3C states after the effective date of the policy and is not insured or self-insured for such work, all provisions of the policy will apply as though that state were listed in item 3A.[3]

Even if the policy doesn’t list a state in either 3A or 3C, “extra-territorial coverage” might provide some coverage. For example, NY WC coverage can apply to a worker employed by a NY firm who lives in Connecticut and is injured when sent to a Connecticut location to do repairs, even though the policy lists only NY as a covered state. A NY employee who generally works in NY is eligible for benefits under the NYS Workers’ Compensation Law while temporarily working outside NY under the direction and control of his or her NY employer.

However, in such a situation a worker could elect to forgo NY benefits and file for benefits in the other state. To the extent that the other state’s mandated benefits exceed NY’s, they would clearly not be covered by a NY-only policy.

A major complication is that the NY State Insurance Fund, far and away the largest writer of workers compensation insurance in NY, can only provide coverage under the NY WC law and cannot provide other states’ coverage.

If there’s a chance a client may have employees who are subject to another state’s WC law and the insured’s current insurer can’t or won’t cover in that state, get a policy that lists that state. Use the state’s assigned risk plan, if necessary.

An employer with sufficient premium attributable to states other than New York should be able to obtain a policy covering those states under 3A with 3C (other states) coverage included for the remaining states.

Another complication is the monopolistic state funds. There are only four such states at present: Ohio, North Dakota, Washington, and Wyoming.[4] For employees subject to one of those workers compensation laws, coverage must be obtained through the state WC plan. Other states’ coverage in commercial WC policies does not apply to monopolistic states.

Caveat: the monopolistic state funds do not provide employers liability coverage, just workers compensation. That’s a serious gap in the insured’s protection. When a client has employees covered in a monopolistic state, be sure to add a stop-gap endorsement to either the insured’s general liability or workers compensation policy. The endorsement closes the gap.

But if a client has a claim and doesn’t have coverage, you’ll certainly want to recommend exploring the extra-territorial coverage of the client’s policy.

Crime Gotcha–Police Notification Requirement

Q: My embezzlement claim was denied because I did not turn it in on time.
A: After you discover a loss or situation that may result in a loss, you must
Notify the insurance company
Notify law enforcement (emphasis added)
Provide a “proof of loss” within 120 days

In this one, Ken either made an error or the answer is based on a non-standard crime policy form. It’s true that insurance policies almost always require that the police be notified in the event of a crime loss. But that’s not true for every coverage. Here’s the wording from the ISO crime form:

Duties In The Event Of Loss

1) …If you have reason to believe that any loss (except for loss covered under Insuring Agreement A.1. or A.2.) (emphasis added) involves a violation of law, you must also notify the local law enforcement authorities.

Insuring Agreement A.1 is the employee theft insuring agreement (A.2 is forgery or alteration). It may seem counter-intuitive that a police report isn’t required. The rationale often offered is that requiring the insured to report embezzlement to the police might expose the insured to false arrest—and the insurance company might be slapped with a nasty lawsuit by its insured on the grounds that “you told me I had to do it.” It may also derive from the influence that the American Bankers Association had in the drafting of what was originally known as a “Bankers Blanket Bond,” from which our present fidelity coverage developed.

Whatever the reason, there’s no police report provision in most crime forms. Most of the larger insurers who use their own forms instead of ISO’s omit the requirement to notify the police in the event of an employee dishonesty loss, but some insurers do require that the insured notify the police—caveat emptor.

Assuming that employee dishonesty coverage requires a police report is a common misconception and can cause problems. I once had a protracted dispute with an insurance company claims manager who insisted that there was no coverage for an embezzlement loss because the insured had not promptly reported the claim to the police. Only when I finally prevailed on him to get the policy and show me where that requirement appeared did he back down.

EPLI Gotcha Wage and Hour Claim

Here’s one that is literally correct, but can be misleading:

Q: An employee claims that we should have paid overtime, and we are now being audited by the U.S. Department of Labor for failing to comply with the law regarding overtime payments. Our legal fees are significant. Is this covered under general liability insurance?
A: No. You need wage and hour defense coverage under your Employment Practices Liability Policy.

Notice the question deals with legal fees. A quick reading of the Q&A might give the impression that the awards penalizing the insured for failure to pay time-and-a-half or double-time can also be covered. Very few, if any, insurers offer coverage for awards or settlements to resolve wage-and-hour claims.  Even coverage for legal defense of such claims is not widely available; most insureds will not be able to obtain it. Most EPLI (employment practices liability insurance) policies exclude coverage for wage and hour claims. Don’t mislead clients into thinking that there is coverage.

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[1]Michael Lerner “How big should your emergency fund be?” http://www.bankrate.com/finance/savings/how-big-should-emergency-fund-be.aspx

[2] Kenneth R. Hale, J.D., CPCU “Over 100 Insurance “GOTCHA’S” (sic) That Can Ruin Your Day (or Business or Personal Assets) http://cambridgeunderwriters.com/wp-content/uploads/2013/05/Over-100-Insurance-Gotchas.pdf

[3] If the insured has worked on the effective date of the policy in any state listed in Item 3C, there’s no coverage for work in that state unless the insurer is notified within thirty days.

[4] Puerto Rico and the US Virgin Islands are also monopolistic WC jurisdictions.