Employee Benefits Due Diligence: Project Alpha (ABC Company) Michael Aronson Partner - Risk Management Services E-mail: [email protected]Direct: 516.750.7512 Kevin Quinn Partner - Health & Benefits Services E-mail: [email protected]Direct: 516.247.3342 Steven R. Marcus, ASA, EA, MAAA, FCA Vice President & Senior Consulting Actuary - Retirement Plan Services E-mail: [email protected]Direct: 516.247.3402 Mark Schneiderman, PhD Partner - Compensation & Human Resources E-mail: [email protected]Direct: 646.683.6100
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Employee Benefits Due Diligence: Project Alpha (ABC Company) · Due Diligence: Project Alpha (ABC Company) Michael Aronson ... associated with the Risk Plans and Business Insurance,
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Kevin Quinn Partner - Health & Benefits Services E-mail: [email protected] Direct: 516.247.3342
Steven R. Marcus, ASA, EA, MAAA, FCA Vice President & Senior Consulting Actuary - Retirement Plan Services E-mail: [email protected] Direct: 516.247.3402
Mark Schneiderman, PhD Partner - Compensation & Human Resources E-mail: [email protected] Direct: 646.683.6100
cherrybekaertbenefits.com 1
Scope of Work
The purpose of our analysis is to:
identify any high level red flags or liabilities
associated with the Risk Plans and Business
Insurance, Health & Welfare, Retirement, and
Executive Compensation Plans for ABC
Company (“ABC”); and
analyze the coverage and costs associated with
the plans.
The scope of work includes of the following:
Review and comment on the current insurance
policies for ABC’s therapy business.
Review any applications and backup information
used in the underwriting submission for ABC’s
therapy business current insurance policies.
iProvide analysis of any coverage concerns;
projected costs by line of coverage; assessment
of material deficiencies in the insurance policies;
and claims analysis.
Understand the operational and financial
exposures of ABC.
Identify areas of potential liability and financial
aspects of the Health & Welfare plans and
Retirement Plans that should be discussed and
either addressed or corrected at close.
Scope Limitations
This report is based solely on the documentation
and data provided by ABC. In preparing this report,
we have assumed that all information provided to
Cherry Bekaert Benefits Consulting (“CBBC”) to date
is true, complete and accurate. We do not assume
responsibility for the accuracy or completeness of
the information provided.
Non-Reliance
Third parties may not rely on the report for any
purpose, and CBBC will have no liability to the third
party with respect to the report.
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Risk Management Diligence – Key Findings
Products, Medical Professional
Liability, and Errors and
Omissions Coverage
The coverage trigger for the liability policies is a
combination of the retroactive date, products
manufacture date, the terms of the purchase
agreement, and the date that the claim is presented
and reported to the insurer.
In order to avoid potential coverage gaps in
products, professional, and errors and omissions
coverage post transaction, we recommend using
a “Continuum” policy. This policy is purchased
separately from the policies purchased for the
ongoing operation after the transaction is closed.
The policy is the best option to eliminate
potential gaps due to coverage triggers, it
provides a single coverage amount with no
deductible, and the cost is similar to adding
retroactive and extended reporting coverage to
the existing policies.
The underwriting for this coverage can take a
few weeks. We recommend that the process is
started as soon as a closing date is established.
Management Liability Coverage
It is crucial that ABC Company consider the impact
of the transaction on the Directors and Officers
Liability Coverage.
The management of ABC Company should
consider if the current coverage limit is adequate
considering the significantly increased sized
financial scale of the business post close.
ABC Company must verify that the underwriters
will approve coverage for the new operation. We
expect that transaction will be carefully
scrutinized based on the “Going Concern”
wording in the financials for the therapy
business.
We were not provided information regarding the
current Management Liability program for ABC.
We recommend that ABC be required to
maintain or extend their coverage for Directors
and Officers and Employment Practices
Coverage for five (5) years post close.
Assuming the employees of the therapy
business will not be part of the ABC Company
Total Source plan, we recommend that
Employment Practices and Employee
Dishonesty coverage is in force on the closing
date. Please consider the time needed to
negotiate terms for these with the carriers.
Property and Business Income
Coverage
With the main facility for the therapy business in
Tampa, Florida, the risk of a property and
business income coverage loss is concentrated in
a location that is considered by the underwriters to
be exposed to a catastrophic windstorm claim.
Further, the insured values in Tampa are
disproportionate relative to the balance of ABC
Company‘s property coverage.
The availability of coverage could be an issue
and the cost for coverage may be higher than
the current program.
The property deductible for a windstorm loss at
the Florida location could be $4,600,000. ABC
Company may want to consider alternative loss
funding programs to address the self-insured
portion of the risk.
We were unable to determine the property and
loss of income coverage amounts for the
therapy business separate from the balance of
ABC’s operation. We recommend that the limits
are verified post close.
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The Stock Throughput property policy
includes coverage for property in transit. We are
unable to determine the transit risk for the
therapy business as a standalone operation and
if the Throughput policy is needed.
Workers Compensation
Workers compensation coverage is required in all
States and coverage must me in effect when the
transaction closes. It is our understanding that ABC
Company uses ADP’s TotalSource for workers’
compensation coverage.
It is possible that ADP will not agree to add the
therapy business to the ABC Company program
due to adverse loss experience over the last few
years.
We recommend that ABC Company considers
creating a workers’ compensation program for
the entire organization prior to or shortly after the
closing. A loss sensitive program that pays
dividend based on the ratio of losses to premium
has the potential to significantly reduce the cost
of coverage.
Additional research is needed to determine is
the loss experience charge will apply to the
therapy operation post close and if the factor has
changed. Based on the loss information, we
believe that the factor will improve and the
premium adjustment could reduce the cost by as
much as $60,000.
Cyber Liability Coverage
Cyber Liability Coverage is not included in the
current program. We recommend that ABC
Company consider the financial exposure if
personally identifiable information in their control is
attacked by a third party. The cost per record for a
breach can be as much as $300.
Premium Adjustments
Premium adjustments for the current program will
result from changes to the coverage and audits of
the payroll amount that was utilized to calculate the
deposit premium for the workers’ compensation
policy.
There are no loss sensitive or retroactive rating
adjustments to the current policy.
ABC will be responsible for any premium
adjustments on the current policies.
Carrier Financial Ratings
CBBC recommends that all insurance coverage be
placed with carriers who have a minimum financial
rating of A‐, VII from A.M. Best. Insurance
companies who do not meet this standard are
susceptible to financial difficulties which can impair
their ability to pay claims. All of the carriers providing
coverage in the current program meet the financial
rating standard.
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Current Program – Carrier & Premium Summary
Policy Policy Term Insurance Company Annual Premium Limits and Deductibles
Property &
Business Income
Policy
January 4,
2016-17
Factory Mutual
Insurance Company
$849,683 $250,000,000 for prop damage
and business including with
sublimits at specific locations;
$100,000 deductible except
2% with a $4.4 million max at
Tampa locations for losses
from wind
Products and
Errors &
Omissions (E&O)
Liability
Coverage
April 12, 2016-
17
ACE Insurance
Company
$210,000 $10,000,000 per claim and
aggregate
$100,000 retention
Commercial
Automobile
Coverage
April 12, 2016-
17
Travelers Insurance
Company
$10,143 2 units - $1,000 deductibles
$1,000,000 auto liability
Excess Liability
Coverage
December 25,
2015-16
ACE Insurance
Company
$21,345 $25,000,000 limit;
excess auto, workers
compensation, and foreign
liability
Workers
Compensation
Coverage
April 12, 2016-
17
Travelers Insurance
Company
$428,370 $57,349,654 total payroll;
1.16 experience mods;
guaranteed cost program
General and
Medical
Professional
Liability
Coverage
April 12, 2016-
17
ACE Insurance
Company
$148,000 $10,000,000 per claim and
aggregate;
$100,000 medical professional
retention;
$25,000 general & employee
benefit retention
Fiduciary
Liability
March 7, 2016-
17
Travelers Insurance
Company
$11,721 $3,000,000 fiduciary liability;
$1,000,000 crime
Excess Liability
Coverage
April 12, 2016-
17
Ironshore Insurance
Company
$280,000 Excess of Products, E&O,
general, and medical
professional liability
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Cargo Stock
Throughput
Coverage
October 29,
2016-17
Lloyd’s of London $450,000 $10,000,000 transit;
$40,000,000 Tampa location;
various limit for other listed
locations/
$100k deductible/$250k
deductible for wind losses
Foreign Package April 12, 2016-
17
ACE Insurance
Company
$4,514 $1,000,000 foreign general,
auto, and employer’s liability
Flood Coverage July 2, 2016-
17
FEMA $2,650 5800 Building Tampa -
$500,000 building and
contents
Flood Coverage June 19, 2016-
17
FEMA $2,650 5900 Building Tampa -
$500,000 building and
contents
Environmental
Coverage
April 12, 2016-
17
Commerce & Industry
Insurance Company
$2,544 $2,000,000/$4,000,000 third-
party; storage tank liability -
$5,000 deductible
Business Travel
Accident
April 12, 2016-
17
Chubb Insurance
Company
$4,018 $250,000 Class I; $100,000
Class II;
$25,000 Class III; $10,000
Class IV
Total Premium
$2,425,638
Current Annual Premium by Policy
$849,683
$210,000
$10,143
$301,345
$428,370
$148,000
$4,514
$450,000
$11,721 $5,300 $4,018 $2,544 $0
$100,000
$200,000
$300,000
$400,000
$500,000
$600,000
$700,000
$800,000
$900,000
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Go Forward Program – Coverage & Premium Summary
Policy Policy Term Insurance Company Estimated Annual Premium
Limits and Deductibles
Property & Business Income Policy
TBD TBD $315,000 $125,000,000 for property damage and business income with sublimits at specific locations; $100,000 deductible except 2% with a $4.4 million max at Tampa locations for losses from wind
Products and E&O Liability Coverage
TBD TBD $78,000 $10,000,000 per claim and aggregate; $100,000 retention - $76,000,000 estimated revenue
Commercial Automobile Coverage
TBD TBD $13,250 2 units - $1,000 deductibles; $1,000,000 auto liability
Excess Liability Coverage
TBD TBD $21,345 Excess auto, workers’ compensation, and foreign liability
Workers Compensation Coverage
TBD TBD $285,000 $32,822,800 total payroll 1.16 experience modifications; guaranteed cost program
General and Medical Professional Liability Coverage
TBD TBD $85,000 $10,000,000 per claim and aggregate; $100,000 medical professional retention;
TBD TBD $125,000 Excess of Products, E&O, general, and medical professional liability
Cargo Stock Throughput Coverage
TBD TBD $145,000 $10,000,000 transit; $57,000,000 Tampa locations; $1,000,000 unnamed locations; $100k deductible/$250k deductible for wind losses
Foreign Package TBD TBD $2,500 $1,000,000 foreign general, auto, and employer’s liability
Flood Coverage TBD FEMA $2,650 5800 Building Tampa - $500,000 building and contents
Flood Coverage TBD FEMA $2,650 5900 Building Tampa - $500,000 building and contents
Environmental Coverage
TBD TBD $2,544 $2,000,000/$4,000,000 Third Party Storage Tank Liability - $5,000 deductible
Business Travel Accident
TBD TBD $2,500 $250,000 Class I; $100,000 Class II; $25,000 Class III; $10,000 Class IV
Total Premium $1,085,439
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Property and Business Income Coverage
Property Coverage Limit Deductible
Building Coverage $125,000,000 blanket limit for two (2) locations
$100,000 deductible except 2% with a $4.4 million max at Tampa locations for losses from wind
Business Personal Property Included above Above
Equipment Breakdown Included Above
Business Income, Extra Expense, Loss of Rents
Included above 72 hours
Extended Period of Business Income
180 days 180 days
Earthquake and Flood $50,000,000 $500,000 flood and quake $1,250 deductible on FEMA Flood policies
Electronic Data Processing Equipment
Included Above
Service Interruption $15,000,000 property damage and business income
72 hours
Cause of Loss Form Special – Provides coverage against All Risk of direct physical loss or damage, except those perils that are specifically excluded in the policy
Valuation Replacement Cost for Property Actual Loss Sustained for Business Income
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Coverage Terms
Policy Limits
Coverage amounts for building, machinery, and office contents are estimates based on appraisals and policy
information in the data room.
Coverage amount for Business Income and Extra Expense is estimated based on loss control reports and
income worksheets in the data room.
We are unable to determine if there are exposures at location other than those in Tampa, Florida.
We recommend maintaining the flood coverage through FEMA. The policies help to offset the deductible
portion of the other property coverage.
Underwriting Considerations
We expect that the current carrier will agree to continue to provide coverage for the locations occupied by the
therapy operation.
With a significant concentration of exposure in Florida, the underwriters will be concerned with the risk of a
catastrophic windstorm loss. We expect that the total cost of coverage will increase.
There may be a benefit to combining the coverage with the abc Company program.
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General, Environmental, Products, Errors & Omissions, and Medical Professional Liability Coverage
Primary and Excess Coverage Limits
General Aggregate Limit $25,000,000
Per Location Aggregate Yes
Products/Completed Operations Aggregate Limit
$25,000,000
Personal/Advertising Injury Limit $25,000,000
Retention $100,000/$1,000,000 aggregate $25,000 for general and employee benefits liability