COMMERCIAL PROPERTY owners throughout California are getting hit with significant insurance rate hikes and non-renewal notices as a confluence of factors reverberate through the market.

The commercial property insurance industry is struggling with years of losses after paying out billions of dollars annually for increasingly costly and numerous wildfire claims in California and other natural disasters around the country.
While massive costs dominate the conversation, there is another factor that is contributing just as much to rising insurer costs: The role of reinsurance.

Reinsurance explained

Just like you mitigate your risks by buying insurance, your insurance company does the same by purchasing reinsurance.
This coverage pays claims when they reach catastrophic levels or a certain threshold, like those from massive wildfires.
These arrangements call for the reinsurer to cover the cost of claims for a certain region or for a certain risk, like wildfires or hurricanes. Each reinsurance treaty is different and they are often tailor-written for individual insurance companies.

Without reinsurers taking on a good portion of catastrophic claims, insurance rates would be much higher than they are today. But that’s changing.
Reinsurers pay for a significant portion of any global catastrophe as they are the backstop for insurers around the world. And catastrophes have been growing in number and scope all over the planet.

During the first half of 2023, natural catastrophes caused $52 billion in insured damage globally, which is 18% higher than the average of $44 billion in the past 10 years and 39% higher than the 21st-century average of $38 billion, according to a report by Swiss Re.

The U.S. accounted for $34 billion of the world’s insured property losses in the first half. The nation also accounted for 13 of the 17 global natural catastrophe events that each caused more than $1 billion in insured losses, according to the report.

What reinsurers are doing

Raising rates – Reinsurance companies have been raising their rates significantly. A recent report on the trade news site Artemis.com said property catastrophe reinsurance rates had
seen a substantial average increase of approximately 30% during July 1 renewals.

Reconsidering where they provide coverage – Reinsurers have also started pulling back from covering properties in areas or regions that are at higher risk for natural disasters, particularly California and Florida, the latter due to increasingly costly hurricane damage and the former due to the increasing wildfire risk.
When reinsurers pull back, the primary insurers often have to take on more of the risk themselves.

Changing terms – Reinsurers are taking on less risk than they have in the past by raising attachment points, forcing primary insurers to take on more of the cost of claims.
Reinsurers are changing conditions for paying claims, getting more stringent in their definitions of various catastrophic events and triggers for paying claims.

The takeaway

While this hard reinsurance market continues, there is hope that rates will stabilize in the future bringing relief to insurers, and more importantly: You.
Both reinsurers and insurers are struggling to catch up with increasing costs and the “new normal.” Once they adapt, your premium may be more predictable.

CALIFORNIA INSURANCE Commissioner Ricardo Lara has issued an order that cut the average advisory workers’ compensation benchmark rate across all classes by 2.6%, starting Sept. 1.

The benchmark rate, also known as the pure premium rate, is a baseline that covers just the cost of claims and claims adjusting, but not other overhead like rents, underwriting costs, and provisions for profit.

The rate is advisory, and insurers can use it as a guidepost for pricing their individual policies. Individual premiums that employers pay will depend on a number of factors, including the pure premium rate, the carrier’s own pricing methodology, and the employer’s claims and claims cost history, location, and industry.

Why the rate is falling

The insurance commissioner’s decision cuts the average published pure premium rate to $1.46 per every $100 of payroll, compared to the current $1.50.

Despite the average rate decrease of 2.6%, individual class codes may see swings as much as plus or minus 25%. Several factors are driving the lower rate decision:

• Slowing claims cost inflation
• Falling frequency of claims
• Lower overall claims costs
• Stable medical costs
• Fewer COVID-19 claims
• Lower claims-adjusting costs.

What insurers are doing

The most recently available industry average level of pure premium rates filed by insurers with the Department of Insurance is $1.71 per $100 of payroll as of Jan. 1, 2023, which is about 14.6% higher than the current published rate of $1.50. In 2022, carriers were charging $1.68 on average.

While the workers’ compensation market remains competitive and rates continue hovering around record lows, the final rate any employer will pay will depend on several factors beyond the pure premium rate. Some employers may see rate increases instead.

Factors that can influence the prices include the employer’s:

• Industry.
• Geographical location (employers in Southern California, for example, face a unique claims environment that results in a surcharge).
• Individual claims experience.

THE U.S. Department of Labor has issued its long-awaited proposed changes to the nation’s overtime rules for American workers, proposing to increase the threshold for exempt status by more than 50% to just over $55,000.

Under DOL rules, workers who are exempt from overtime rules — typically managers, executives, and certain administrators — must make at least the threshold amount, which is currently $35,568.

If the new threshold goes into effect, employers will have a choice to either raise the pay of their currently exempt staff to the new threshold (or above) or change those workers to non-exempt, meaning they must be paid overtime wages (typically time and a half) if they work overtime.

It’s rumored this proposal is on a fast track and that it could become permanent in the next few months, giving employers a short window to make changes.

Title alone does not designate someone as “exempt.” There is a two-pronged test for classifying a worker as exempt from overtime pay:

• Their salary, which will have to be $55,068 per year, under the rule.
• The duties test, which outlines exactly what someone’s duties must be in order to qualify for exempt status (see box in the column on the right).

 

 

 

 

 

 

 

 

 

 

 

 

 

How to prepare

Start by making a list of all your current exempt employees who earn between $35,568 and $55,068 a year.
You will have a decision to make about these workers:

• Raise their salaries to meet the new threshold, or
• Change them to non-exempt status so they are eligible for overtime pay if they work extra hours. You’ll also have to put in place systems for tracking their hours worked, including overtime.

Also, you may have to change benefits for anyone whose status changes. You should plan how you are going to communicate these changes to your workforce.

THE WAY courts have interpreted a California law – the Private Attorneys General Act (PAGA), which has been on the books for 18 years – has led to an explosion of lawsuits against employers during the last few years.

The law has generated more than 20,000 lawsuits since 2017 at an average cost of $1.1 million per case, according to one study.

PAGA permits employees to sue for civil penalties on behalf of themselves, fellow workers and the state for alleged labor code violations. If a suit is successful, the state receives 75% of the damages with the employee receiving the balance.
As a result, California employers face increasing litigation uncertainty that traditional insurance may do little to mitigate.
The employee in essence acts as the state’s watchdog; he or she need not suffer any actual harm from an alleged violation in order to file a lawsuit. One employee has the ability to file a suit alleging multiple labor code violations.
The result? An average of 15 PAGA notice letters arrive at the California Labor and Workforce Development Agency daily.

How did we get here?

The law was enacted in 2004 to improve California Labor Code enforcement by empowering employees to pursue violations when the state has insuffi cient resources to pursue them.
The growth in litigation started after a California Supreme Court decision in 2009, holding that PAGA suits did not have to meet the certification requirements that apply to class-action lawsuits.
Litigation activity jumped significantly again in 2014 after the state Supreme Court held that employees could not waive their rights to fi le PAGA claims when they reach arbitration agreements in disputes with their employers.
Three years later, the court ruled that employees were generally entitled to request and receive large amounts of information from employers early in the litigation.
The high cost of providing the information gives employers an incentive to settle claims quickly.
Finally, an appellate court ruling in 2018 gave employees the right to sue over alleged violations that do not directly affect them, so long as at least one violation does.

What’s being claimed?

 

PAGA claims can also involve allegations of discrimination, retaliation and failure to protect the health and safety of employees. There are even COVID-19-related claims. One allegation triggers multiple other ones related to the first, such as failure to pay all earned wages, failure to pay wages in a timely manner, and so on. One potential bright spot: In December 2021, the U.S. Supreme Court agreed to consider whether California employers may enter voluntary agreements with employees in which the employee agrees to pursue only their individual claim and
not bring a PAGA claim. A decision is expected this summer.

Insurance implications

One issue for employers is that employment practices liability insurance typically won’t cover wage and hour disputes or signifi cantly sublimit the amount of coverage available for defense costs only.
Also, EPLI policies usually carve out coverage for wage and hour claims under PAGA representative actions.

Directors and officers liability policies exclude wage and hour claims.
One option is wage and hour insurance, which most likely would provide defense and indemnity coverage for PAGA claims that allege violations of wage and hour laws and regulations.
However, these policies are expensive and usually have quite high retentions, which could price out most smaller employers.

COMMERCIAL PROPERTY insurance rates are continuing to climb, as the segment faces a number of headwinds that have pushed claims costs to new heights.
A number of factors are affecting rates, including the frequency and severity of extreme weather claims. the cost of rebuilding, rates for commercial properties not keeping pace with claims costs, and more.
The end result has been a steady increase in property rates across the board, but businesses with operations in areas that are more susceptible to natural disasters are seeing the highest
increases.
As a business owner with commercial property, you’ve probably already seen rates increase, and you should be prepared for further rate hikes in the coming year. Here are the main drivers of these increases.

 

Mounting natural catastrophes

The number of natural catastrophes hitting the U.S. continues increasing as does the cost of those disasters, which are affecting more properties around the country.
Depending on the part of the nation a property is located it can be exposed to hurricanes, wildfires, tornadoes, hail, flooding and more.
There has also been an increase in civil unrest, which often results in property damage to businesses.
Insured property losses in the U.S. hit $74.4 billion in 2020, the second-most expensive year on record.
Also, last year set the record for the most major natural catastrophe events to hit the U.S. in a single year (22 of them).
Five of the 10 most expensive catastrophe years for the insurance industry have occurred since 2011.

 

Reconstruction costs

Reconstruction costs have skyrocketed during the past five years, averaging 5% a year, according to the Associated Builders and Contractors analysis of Bureau of Labor Statistics data.
Lumber prices rose by 73% between April 2020 and July 2021, greatly increasing rebuilding costs. On top of that, iron and steel products jumped 15% in price during the same period, and steel mill products by nearly 7%.

 

Construction labor shortage

The construction industry faces a serious labor crunch. And many firms have backlogs that stretch out more than six months.
According to the U.S. Chamber of Commerce Commercial Construction Index, this shortage is leading to real-world setbacks for contractors:

• 68% of contractors say they are asking workers to do more work.
• 56% report a challenge in meeting project schedules.
• 50% of contractors are putting in higher bids.
• Over a third (35%) report turning down work due to skilled labor shortages.

 

Property rates are inadequate

Despite the fact that rates have been increasing for the last five years, insurers are still struggling to keep up with the rapidly rising cost of claims as well as the number of claims they are seeing.
Those factors have made it difficult for the industry to peg pricing at the right level, resulting in a string of losses in property insurance for most carriers.
As the industry struggles to get back to profitability, insurers will have to continue boosting rates.

 

Reinsurance rates

A portion of the property insurance rate gains can be attributed to insurance companies dealing with higher reinsurance costs.
Insurers buy reinsurance to pass on claims costs from catastrophic events, in order to reduce their overall risk.

 

The takeaway

There are some steps that businesses can take to try to affect their premiums.
If you have an older building, you can replace your mechanical, electrical and plumbing systems with newer, code-compliant variants.
Safeguard your building against location-specific hazards (for example, creating a defensible space and using fire-resistant roofing in wildfire areas and upgraded cladding in hurricane areas).
Also, electrical fires are the number-one cause of property damage, so you should consider installing fire-protection systems such as sprinklers and fire hose cabinets.

CYBER INSURANCE rates are going to increase dramatically in 2021, driven by more frequent and more severe insured losses, according to a recent industry study.

The report by global insurance firm Aon plc predicted that rates would jump by 20% to 50% this year due to two main factors:

 

1. Cyber attacks are becoming more frequent

While publicly disclosed data breach/privacy incidents are actually occurring less often, ransomware attacks are exploding in frequency.

Ransomware incident rates rose 486% from the first quarter of 2018 to the fourth quarter of 2020. The comparable rate for data breach incidents fell 57% during the same period. The incident rates for the two types of events combined rose 300% over the trailing two years.

 

2. The costs of these attacks are growing

The average dollar loss increased in every quarter of 2020. Ransomware attacks were particularly severe – many of them resulted in eight-figure losses. Others may grow to that level as business interruption losses are adjusted and lawsuits against insured organizations proceed.

The combination of more frequent and more costly losses is a
recipe for higher rates.

Cyber insurance rates continued increasing in 2020, with rises of between 6% and 16% in the last four months of the year. In January 2021, most of the top 12 cyber insurance companies told Aon they were planning more drastic rate hikes. Nearly 60% reported that they would be seeking rate increases of 30% or more during the second quarter. None of them expected increases less than 10%.

 

New underwriting criteria

When insurers evaluate cyber insurance applicants, they will be particularly concerned with the organization’s overall cyber risk profile, its cyber governance and access control practices, and its network and data security. Prior loss history will be less important because the frequency of attacks is growing so quickly.

Some insurers may also cap how much they will pay for ransomware losses, or even exclude them entirely. They may also increase the waiting periods before coverage begins to apply.

 

WHAT BUSINESSES CAN DO

To improve your chances of getting more favorable pricing and coverage, the report recommends that you focus on:

• Reducing the risk of cyber losses.
• Measures to keep data private.
• Building an internal culture of cybersecurity.
• Preparing for ransomware attacks and disaster recovery planning.
• How your contracts and insurance will respond to a supply chain security breach.
• Understanding primary and excess coverage terms and
  communicating primary terms to excess insurers.

THE $1.9 TRILLION American Rescue Plan Act (ARPA) that President Biden signed into law on March 11 contains a number of provisions intended to help small businesses and other organizations hurt by the pandemic.

Foremost, it includes additional Paycheck Protection Program (PPP) loans to struggling businesses, and a number of special grants to companies in industries that have been especially hard hit, including restaurants, movie theaters, concert spaces, and museums.

The measure also includes provisions extending a number of tax credits to employers affected by the pandemic, in order to make it easier for people laid off during the health emergency to access COBRA coverage after they lose their jobs and their health coverage.

ARPA opens up a new opportunity for businesses that have been hurt by the pandemic to access financial aid to keep their doors open and stay viable. Many of the programs build on ones introduced earlier in the Coronavirus Aid, Relief, and Economic Security Act (CARES Act) and extended by the Consolidated Appropriations Act of 2021 (CAA).

PPP extended

The law authorizes another $7.25 billion for the Paycheck Protection Program, which offers forgivable loans to small firms and other organizations that have been hit by the pandemic.

These loans are forgivable if 60% of the funds are used on payroll and the rest pays for mortgage interest, rent, utilities, personal protective equipment or certain other business expenses.

While the legislation set the deadline to apply for March 31, the deadline was extended until June 30 after Congress passed supplemental legislation.

Other assistance

There are a number of other provisions of the new law aimed at providing financial aid:

• $10 billion for state governments to help leverage private capital and make low-interest loans and other investments to help their small businesses recover.
• $15 billion to the Economic Injury Disaster Loan grants program to be given to small businesses in underserved areas, especially minority-owned enterprises.
•  $29 billion for financial relief grants to restaurants. The maximum grant size will be $5 million for restaurants and $10 million for restaurant groups. The Small Business Administration will administer these grants.
•  $15 billion will be added to the Shuttered Venue Operators Grants program, which was launched by the CARES Act. More funds will be made available to
  museums, theaters, concerts, and other venues that had to shut down due to COVID-19-induced restrictions. This program has not yet launched.

Tax credits

Originally enacted under the CARES Act and CAA, the Employee Retention Credit (ERC) lets certain employers take advantage of a tax credit for qualified wages paid to employees.

The CARES Act capped the ERC at $5,000 per employee for 2020. The CAA, passed in late 2020, expanded the ERC to apply to qualified wages made between Jan. 1 and June 30 this year. It also increased the maximum amount of the credit to $7,000 per employee per quarter.

The new stimulus law extends the ERC through the end of this year. That means that eligible small firms can take a tax credit of up to $28,000 per employee for 2021.

Who is eligible: Businesses that were either fully or partially suspended as a result of COVID-19-related government orders that restricted their ability to operate and generate sales. Also, any business that has gross receipts that are less than 80% of gross receipts for the same calendar quarter in 2019.

ARPA also makes eligible for the tax credit for any start-up businesses that also suffered revenue losses as a result of the pandemic. In addition, ARPA extends through September the availability of paid leave credits to small and midsize businesses that offer paid leave to employees who may take leave due to illness, quarantine, or caregiving due to the pandemic and any closure orders.

Employers that offer paid leave to workers who are sick or in quarantine can take dollar-for-dollar tax credits equal to wages of up to $5,000.

A NEW LAW has come to the rescue of a number of freelance professions by exempting them from the onerous requirements of AB 5, which required most independent contractors to be classified as employees in California. Governor Gavin Newsom on Sept. 1 signed AB 2257 as an urgency measure so that it took effect immediately. If you remember, AB 5 set a new standard for hiring independent contractors, requiring many to be reclassified as employees covered by minimum wage, overtime, workers’ compensation, unemployment and disability insurance. It created a three-pronged test that needs to be satisfied to determine if someone is an independent contractor or an employee.

To be independent contractors under AB 5’s “ABC test,” workers must (A) work independently, (B) do work that is different from what the business does, and (C) offer their work to other businesses or the public. All three conditions must be met.

It is prong B that’s problematic. For example, a freelance writer working for a magazine would not be doing something different than the business does. The new law sets limits on the amount of income someone can receive while doing this kind of work before being considered an employee. AB 2257 also expands the “business-to-business” definition in AB 5 to cover a relationship between two or more sole proprietors.

 

 

 

 

GOVERNOR GAVIN Newsom has signed legislation that creates a new framework for COVID-19- related workers’ compensation claims. SB 1159 replaces an executive order that Newsom made on March 18 that required all employees working outside the home who contracted COVID-19 be eligible for workers’ compensation benefits if they file a claim. The new law expands that rebuttable presumption” that a coronavirus case is work-related to front-line workers, as well as employees in workplaces that have had an outbreak of cases. The new law is retroactive to July 6, the day after Newsom’s executive order expired, and is set to expire Jan. 1, 2023.  Employers with fewer than five employees are exempt under the statute.

SB 1159’s three parts

Part 1. The law codifies Newsom’s prior executive order that provided a “rebuttable presumption” that COVID-19 was contracted in the scope and course of work by employees working outside of the home who get infected.

Part 2. The law provides a rebuttable presumption that firefighters, law enforcement officers, health care workers and home care workers who contract COVID-19, contracted it in the workplace.

Part 3. The law creates a rebuttable presumption that a worker’s COVID-19 diagnosis is work-related within 14 days of a company outbreak. Under SB 1159, an outbreak is defined as when four employees test positive at a specific place of employment with 100 or fewer employees and, for larger places of employment, when 4% of the employees test positive. It’s also deemed a workplace outbreak if the employer had to shut down due to the coronavirus.

Rebutting a claim

Employers can rebut the presumption that COVID-19 was contracted at work if they have:
• Proof of measures they put in place to reduce potential transmission of COVID-19,
• Evidence of the employee’s nonoccupational risks of contracting COVID-19,
• Statements made by the employee, or
• Any other evidence normally used to dispute a work-related injury.

REPORTING REQUIREMENTS

When an employer learns of an employee testing positive, they must report to the insurer the following information within three business days:
• The date the employee tested positive.
• The address or addresses of the employee’s specific place(s) of employment during the 14-day period preceding the date of their positive test.
• The highest number of workers who reported to work in the 45-day period preceding the last day the employee worked at each specific site.

Filing False Information Can Result in a $10,000 Fine

The Rossi Law Group has the following recommendations for employers in California:
• Keep track of all locations each employee works at, the number of employees on each day at each location, as well as a log of those that test positive (including the date the specimen was collected).
• If you are aware of any staff who have tested positive between July 6 and Sept. 17, you have 30 days after Sept. 17 to report the positive test to the claims administrator.
• You must also report to the insurer positive COVID-19 results for employees that are not filing claims. In that case, you must omit personal identifying information of the employee.
• Provide any factual information to the claims administrator that could help rebut any claim of work-relatedness.

The law also has some teeth: Anyone who submits false or misleading information shall be subjected to a civil fine up to $10,000.

One last thing…

The governor also signed into law AB 685, which requires employers to report an outbreak to local public health officials. Employers must also report known cases to employees who may have been exposed to COVID-19 within one business day.

RISK MANAGEMENT – Even Small Firms Need a Crisis Management Plan

With risks to companies and employees growing, sometimes the unthinkable happens and a business has a real crisis on its hands. While large companies are usually well-prepared for a crisis should one occur, most small and mid-sized firms don’t have the resources or have not put much thought into how they would handle a crisis.

One of the most difficult parts of crisis planning is just what to prepare for, since a crisis could be a number of different events, like:
• The sudden death of a key member of your team.
• A defective product leads to an injury, illness – or worse.
• An accident severely maims or kills a number of your workers.

Your strategy

To get started, assemble a team that includes key members from your organization who will be responsible for creating your crisis-response plan. INC. Magazine recommends the following for your team:
Make a plan – You cannot start planning without first identifying your objectives. Once you identify them, you can make response plans for each type of event. Typically, that includes:
• Safeguarding any person (employee, vendor, customer and/ or the public) who may be affected by the crisis. Your plan would include how to respond to the crisis if people’s health and wellness are at stake.
• Making sure the organization survives. This would include steps you would take to ensure the company can continue as a going concern after a significant disruption.
• Keeping stakeholders (employees, vendors, clients, the public and government) informed on developments.

Create a succession plan – You should clearly outline the necessary steps to follow if you or one of your key managers suddenly became unable to perform their duties. This plan may include selling the company, or transferring ownership to family members or key employees.
Seek advice from the experts – This includes your leadership team, employees, customers, communications experts, investment bankers, exit planners, lawyers and financial managers. Each of these individuals has unique insights that can be invaluable for how to tackle a crisis.
Name a spokesperson – This is important if you have a crisis that spreads beyond your organization and affects the health and safety of a member of the general public, your staff or customers. Funneling all media communications through a spokesperson can help you deliver a clear and consistent message to media, as well as to the public at large.
Honesty is the best policy – A lack of honesty and transparency can lead to rumors, as well as a general distrust of your organization if the truth is exposed. The best approach is to be transparent and truthful about what happened and what you are doing to resolve the crisis.
Keep your staff up to speed – To stop the rumor mill and also keep employees from becoming worried amidst the uncertainty, keep your workers abreast of developments – and what the crisis means for the organization, and what you are doing about it.
Keep customers and suppliers informed – If you have an event that’s causing some disruptions, you also owe it to your clients and vendors to let them know what’s happening. Like your employees, keep them regularly updated on events and the steps you are taking to address the crisis. Put together a plan for how you would keep them posted.
Act fast and update regularly – Keeping the communications alive is important and once you grasp the situation and its effects, you can issue summary statements of the crisis and what’s happened. Then you can follow up with regular updates on your action plans, on people affected, any hotline you may set up, and more.
These days news travels fast and like wildfire on social media. You need to move at the same pace.
Social media is vital – More and more people get their news from social media and the discussions that ensue on posts, so you need to make sure that your company stays on top of the flow. You may want to assign a person or two to monitor social media and post and react to posts on social media. That way, your team can tell the company’s side of the story and put to rest unfounded rumors.
Make a plan for what a social media contact’s responsibilities would be during a crisis.

Get an early start

Your plan won’t be effective if you create it during a crisis. Plan in advance, so everyone can approach the strategizing unrushed and with a clear head.