Coming to America? 5 Risk Management Issues to Consider for European companies operating in the U.S.

Transcription

1 Coming to America? 5 Risk Management Issues to Consider for European companies operating in the U.S. 1) Worker s Compensation and Employer s Liability 2) U.S Healthcare Reform Frequently Asked Questions 3) General Liability Vs. Errors and Omissions 4) Natural Hazards 5) Compulsory Insurance and Non Admitted Insurance

2 Worker s Compensation and Employer s Liability Each private company is responsible for providing Worker s Compensation insurance for their employees. This differs significantly from the European system and can often be a shock to companies moving to the United States. Worker s Compensation As opposed to most European countries, where Worker s Compensation coverage is typically provided by the government, every company in the United States is responsible for providing this coverage for their employees, including expatriates, who are provided the same rights and coverage even if they are working illegally. Rates and premiums vary greatly by state and can be significantly more expensive in extremely litigious states such as California and Illinois. Worker s Compensation is often the most expensive line of coverage for companies with a large number of employees and/or relatively hazardous operations. Much like rates and premiums, Worker s Compensation regulations vary greatly by state, making it extremely important to review the laws and requirements of any states in which a company operates. In most states, Worker s Compensation coverage can be purchased from a state fund as well as in the open market place; however, there remain a few places where the only option is to purchase coverage from the state. These are called Monopolistic states and include Ohio, North Dakota, Washington, and Wyoming. Employer s Liability Employer s Liability provides coverage if an employee files suit against an employer for negligence in causing injuries covered under the Worker s Compensation policy. In most states, this coverage is included as part of the Worker s Compensation policy. However, in the Monopolistic states mentioned above, Employer s Liability is not offered by the state and must be purchased from a private insurer through what is called a Stop Gap policy. Additionally, in the state of Ohio, the Supreme Court has ruled that an employee cannot sue their employer for negligence unless the employer intentionally causes harm. Thus, Employer s Liability coverage in Ohio essentially only covers defense costs incurred as a result of a lawsuit.

3 U.S Healthcare Reform FAQ s Frequently asked question regarding U.S. Healthcare reform and Employer Requirements Coverage How does the health reform law impact part-time worker coverage? There generally is no requirement under the health reform law for employers to offer health coverage to any employees (whether full-time or part-time). However, employers that employed an average of at least 50 full-time employees (defined as those employees for any month who work on average at least 30 hours per week) during the prior calendar year (an applicable large employer ) may be subject to certain financial penalties if a full-time employee enrolls in a qualified health plan through an Exchange and receives a premium tax credit or cost-sharing reduction during any month in the current calendar year (i.e., the so-called free rider or shared responsibility penalty). Part-time employees are relevant for this purpose only to determine whether the employer is an applicable large employer: when determining whether an employer employed at least 50 full-time employees in the prior year, the number of part-time employees is converted into the equivalent number of fulltime employees (on an aggregated basis of hours worked for the month divided by 120 hours) and then added to the number of full-time employees. Seasonal employees employed for no more than 120 days are disregarded when determining whether the employer employed at least 50 full-time employees in the prior year. When do plans governed by collective bargaining agreements have to comply with the market reform/plan design requirements? The health reform law provides that health insurance coverage maintained pursuant to one or more collective bargaining agreements (CBAs) ratified before March 23, 2010 is not subject to many of the employer mandates in the law until the date on which the last of the CBAs relating to the coverage terminates. It is unclear whether this provision applies to self-insured plans. Employer free rider Penalty How does the free rider penalty work? Effective for the first plan year beginning on or after January 1, 2014, applicable large employers will be subject to the so-called free rider penalty if any of their full-time employees purchase subsidized insurance through an Exchange. For purposes of the penalty, a full-time employee is defined as an employee who works on average at least 30 hours per week with respect to any month. Employers who DO NOT offer health coverage to full-time employees must pay a penalty of 1/12 times $2,000 per month per full-time employee, without including the first 30 employees in the calculation. Penalties are calculated on a monthly basis. Employers who DO offer coverage must pay a penalty for each employee who purchases subsidized coverage in the exchange AND either of the following criteria is satisfied: -the employer s coverage is deemed unaffordable for the employee because it exceeds 9.5% of household income; or -the plan s share of the total allowed costs of benefits has an actuarial value of less than 60%. The monthly penalty is equal to 1/12 times $3,000 for each non-covered employee who meets the criteria specified above, subject to a ceiling of 1/12 times $2,000 times the number of full-time employees. For purposes of the ceiling, the first 30 full-time employees are not taken into account. The free rider penalty is paid by employers and is not tax deductible.

4 Will employees need to work a minimum number of hours in order to be covered under an employer's health plan? Employers can still establish the eligibility criteria for group health plan coverage. However, applicable large employers will be subject to the free rider penalty if they do not offer full-time employees the opportunity to enroll in minimum essential coverage under an eligible employer-sponsored plan. Does the free rider penalty apply to part-time employees? Employers will not be subject to a penalty for not offering coverage to employees who work less than 30 hours per week. However, part-time employees are included in the calculation to determine whether employers potentially are subject to the penalty for any year because they employed at least 50 full-time employees in the prior year (see question #11). Does the free rider penalty apply to seasonal employees? If an employer is considered an applicable large employer (i.e., employed at least 50 full-time employees in the prior year), then it must provide health coverage for all full-time employees (working 30 or more hours per week), or be subject to the free rider penalty. This requirement appears to apply monthly with respect to any full-time employee, including seasonal employees who work at least an average of 30 or more hours per week for the month. Note: Seasonal employees who are employed for no more than 120 days are disregarded only when determining whether the employer is an applicable large employer (see question #11). Is the free rider penalty tax-deductible to employers? No, employers cannot deduct any free rider penalty amounts. Free Choice Vouchers Please explain how the voucher program will work? The health reform law provides that employers that offer, and subsidize any portion of, minimum essential coverage must provide free-choice vouchers to qualified employees to be used to purchase Exchange-provided coverage. This provision is effective for taxable years beginning on or after January 1, Who is a qualified employee for purposes of the voucher program? A qualified employee is any employee during a plan year: who does not participate in the employer s health plan; whose contribution towards minimum essential coverage under the employer plan is more than 8.0%, but not more than 9.5% (the health reform law states that this is 9.8%, although that appears to be an error), indexed for inflation, of the employee s annual household income during the taxable year; and whose household income does not exceed 400% of the federal poverty limit for a family of the size involved.

5 How will employers know which employees are eligible for vouchers? The Exchange will notify the employer when an employee has opted to enroll in an Exchangeprovided plan and is eligible for the voucher payment. It is unclear how the notice will be provided and how payments will be processed; these details will be established by regulations. How do employers determine the amount of the voucher to provide to eligible employees? The voucher amount is equal to the employer s monthly subsidy towards the cost of the plan which would have been paid by the employer if the employee were covered, based on the employee s coverage level (e.g., individual or family coverage), and to which the employer pays the largest portion of the cost. If employers provide vouchers for eligible employees, are they also subject to the free rider penalty for those employees? No, the free rider penalty is not imposed for employees who receive vouchers. Do employees who receive vouchers have to pay taxes on the voucher amount? No, the voucher value is excludable from the employee s federal taxable income to the extent it is used to pay for Exchange-provided coverage. If the cost of Exchange coverage is less than the voucher amount, the difference is paid to the employee and includible in income. The employer can deduct the amount of the voucher for federal income tax purposes. Are employees who receive vouchers also eligible for premium tax credits and cost-sharing reductions through an Exchange? No, voucher recipients are ineligible for tax credits or cost-sharing reductions through an Exchange.

6 General Liability versus Errors & Omissions The definition of Bodily Injury and Property Damage in most U.S. General Liability policies leaves a coverage cap for financial losses to a third party caused by error, omission, warranty, or product defect. One frequently overlooked aspect of liability insurance in the U.S. is the relationship between General Liability and Errors & Omissions insurance. Often times a potentially enormous coverage gap is created through a misunderstanding of what is covered under a General Liability policy. With few exceptions, most liability policies in the U.S. only cover damages defined as bodily injury or property damage for which the insured becomes liable to pay as a result of their own negligence. The excerpt below provides a typical example of a claim for property damage and bodily injury. Company A sells ink to Company B that is to be used in Company B s printing operation. Due to a contamination at Company A s plant the ink becomes tainted and will not retain its color when printed. As a result, Company B was forced to discard all of the product on which the ink was applied. Additionally, the ink is toxic when inhaled and has caused several of Company B s employees to become sick. In this situation, Company B would then file a claim against Company A seeking reimbursement for their losses. Company A s policy would pay the full amount of the damages as the loss is for bodily injury and property damage which is covered by their General Liability policy. However, in addition to property damage and bodily injury, Company B is also seeking reimbursement for the financial loss that they incurred as a result of not being able to use the discarded product. Company B had a sizable contract with one of their largest customers to deliver the finished product by a certain date. Due to the contaminated ink, Company B was unable to fulfill their contractual obligation and their customer had to use another vendor. As a result, Company B lost the income they would have earned on that contract and perhaps has lost one of their best customers. Since Company B s loss of income is not property damage or bodily injury, the claim would not be covered under the General Liability policy. Instead, Company A will have to pay the damages out of their own pocket. In order to protect themselves from this exposure, Company A would have to purchase a Manufacturers E&O policy. Errors & Omissions policies are intended to cover financial loss to a third party as result of a product defect (product cannot be used) or false warranty (the product not performing as promised). In addition to Manufacturers E&O, coverage also exists for contractors, distributors, and many professional services industries. An alternative to Errors and Omissions coverage would be to address the exposure through contract language with customers or suppliers. Contracts can be worded to explicitly waive the right to cover financial damages between both parties.

7 Natural Hazards The geography of the United States lends itself to a variety of natural hazards which can cause substantial economic loss and property damage. The prevalence of earthquakes, volcanic eruption, wildfires, flood, windstorm, landslides, and tornados affecting nearly all areas of the country has contributed heavily to record losses suffered by the insurance industry in recent years. Earthquake Each year, the U.S. Geological Survey National Earthquake Information Center records between 2,500 and 3,000 earthquakes in the United States. Most of these are of a magnitude of less than 3.9 with Alaska and California recording the highest number of earthquakes. Earthquakes in California also tend to cause significantly more damage than other areas due to the proximity of the San Andreas Fault. As regards property insurance, there are separate deductibles for earthquake, usually expressed as a percentage rather than a dollar amount. The percentage typically varies from 2% to 10% of the total values insured and can rise to as high as 25% in California. Earthquake coverage can be expensive and difficult to attain in California and typically must be purchased through Excess and Surplus lines markets. In other areas of the country, the coverage is relatively inexpensive and can be added to the property policy offered by most admitted carriers. Windstorm The entire east coast of the United States has significant exposure to windstorm with the most vulnerable states including Florida, Texas, Louisiana, and North and South Carolina. In addition to hurricanes and offshore windstorms, many parts of the United States are also exposed to frequent tornadic activity. Texas, Oklahoma, and Kansas have traditionally recorded the most tornadoes on an annual basis while some southeastern states including Alabama and Mississippi have suffered an enormous loss of life and property over the past year. Windstorm is typically covered under a standard commercial property policy in most areas of the country. However, coverage in coastal areas can be difficult to obtain and is usually quite expensive. Similar to earthquake coverage, the deductible is often based on a percentage of the total value insured or can also be structured as a higher monetary amount in the range of $10,000 to $50,000. Flood The coastal areas of the United States are highly exposed to flooding from storm surge as a result of hurricanes or other offshore systems. The most severe damage occurs in the states of Louisiana, Texas, Florida, and North and South Carolina with parts of Mississippi, Alabama, and Georgia at risk as well. In addition to the coastal areas, the Mississippi River Valley and Ohio River Valley to the east of it are vulnerable to flooding from heavy rainfall and springtime snowmelt. Flood coverage can be purchased through the National Flood Insurance Program (NFIP) sponsored by the Federal Government and is often required by commercial lenders for property located in flood zones. Most commercial insurers will offer flood coverage in excess of the limits available through the NFIP which are listed as $500,000 for both real and personal property. This is a common source of confusion for insured s and brokers alike as the excess coverage offered by most carriers is often mistaken as a primary flood policy. In most cases, if primary coverage is not purchased through the NFIP, the flood cover offered by private insurers will not pay claims until the limit available through the NFIP has been exhausted, essentially acting as a $500,000 deductible.

8 Other Perils One of the largest sources of economic loss in recent years has been the prevalence of wildfires burning uncontrollably in the dry areas of the western United States, where wildfires are easily started and have proven nearly impossible to stop. Particular areas of concern include huge expanses of forest in California, Oregon, and Colorado and areas where forests adjoin major cities. Los Angeles and San Francisco are commonly thought to represent the cities with the largest accumulation of exposure to wildfire. Landslides occur in all 50 states of the U.S. and the occurrence of property losses has increased in recent years as mounting population pressure has led to the development of vulnerable areas, particularly in California. Additionally, states such as West Virginia and Kentucky that have an extensive history of coal mining are subject to occurrences of mine subsidence.

9 Compulsory Classes and Non Admitted Insurance There are several items of federal legislation which establish a statutory requirement for insurance or financial responsibility and provide guidelines on the use of non admitted carriers. Compulsory Classes Classes of insurance required by federal law: Flood insurance available through the National Flood Insurance Program is a requirement of property loans from federally regulated lenders. Motor carriers, including interstate bus companies and trucking companies, must meet minimum financial responsibility requirements for the interstate transport of passengers, cargo and hazardous materials. Air carriers' liability coverage is required to receive a license to act as an air carrier. Marine vessels must demonstrate financial responsibility to meet any liability incurred for death or injury to passengers or others on voyages to or from US ports. Space risks liability coverage is required for each event of launch or re entry. Surety bonds, including performance and payment bonds, are required for all public works with a contract value in excess of USD 100,000. Classes of insurance required by state law: Motor third party bodily injury and property damage. Most states require drivers to carry auto insurance as part of the financial responsibility laws of each particular state. Workers' compensation insurance is compulsory in most states. Medical malpractice is required for doctors, hospitals and healthcare providers in some states. Beginning in 2014, all US citizens and legal residents will be required to maintain a minimum level of health insurance coverage. Position on Non-Admitted Insurance Non Admitted Insurance refers to policies that are placed with insurers that are not licensed within a particular country or territory. Conversely, "admitted" coverage refers to policies issued in a particular country by insurance carriers who are licensed to write coverage in that country. Roughly 85% of all countries have prohibitions on the use of non admitted insurance, including the United States. Please refer to the text below for the regulations that apply to non admitted insurance for this country. Summary Unauthorized insurers are not permitted to write insurance policies in the US, however, there is no specific legislation which indicates that insurance must be purchased from locally authorized insurers except for compulsory auto and workers' compensation. In general, this is interpreted by the markets that insurers can issue policies from outside the home state of the buyer if approached by an out of state intermediary or directly by the buyer.

10 Non admitted insurance is typically purchased through wholesale brokers who work with Excess and Surplus markets. This is an important element of the U.S. insurance industry as the Excess and Surplus lines companies can often be the only solution for high risk industries or insureds with significant claim activity. An important aspect of the E&S market to consider is that most non admitted companies are not included in any state guarantee fund and thus insureds are not protected from insolvency if the company is not able to pay claims. Each state has its own laws and regulation relating to this business including additional taxes not applicable to admitted carriers. Market Practice While it is possible to use a foreign non admitted carrier, locally licensed companies are preferred when available as they can more readily issue the necessary certificates to evidence property or casualty insurance that remain a vital part of business contracts and loan requirements in the United States. It is a common requirement in the U.S. for property insurance to be arranged as a condition of a bank loan or liability insurance to be in force as a contractual obligation between business partners. Admitted carriers are preferred in these instances as banks and parties to a contract like to know that the carrier is locally supervised and regulated in the event of a claim.