Q&A: How do health insurance deductibles and coinsurance work? For the following post I was asked how these two concepts worked within a health insurance plan. A specific design that is referenced as part of the question is a medical plan with a $1,000 deductible with 100% coinsurance, here’s the answer.
First let’s define the two terms you are asking about. First there is the deductible, similar to other forms of insurance such as auto coverage, deductibles are a set amount of money you have to pay first in the event of a claim. For the purposes of health insurance, most deductibles will range from zero to $2,000 for an individual. If you have a less expensive plan you can see those deductibles get upwards of $5k if you have a Bronze level benefit plan.
The second term to define is Coinsurance. Coinsurance is the percentage split of cost between you and your insurance company for covered services. Whatever the stated coinsurance amount is on a policy is your responsibility toward the cost. In many cases a policy will have a 90/10 or 80/20 split. This means that if you had services rendered that are subject to coinsurance, your insurance company would pay 90% of the bill, and you pay 10% (90/10) or your insurance company would pay 80% of a bill and you pay 20% (80/20). So what does 100% coinsurance mean? It means that for services subject to coinsurance, your insurance company will pay 100%, fully covered.
Deductibles will always come first followed by coinsurance. In the example you are describing, the $1,000 deductible would need to be paid. Once the deductible is satisfied the insurance company would cover the rest since the example has 100% coinsurance.
For the sake of argument, what if you had a 10% coinsurance feature, how would that look?
Let’s say you had a $1,000 deductible with a 10% coinsurance and a $3,000 out of pocket maximum. All plans have some form of annual cap called an out-of-pocket maximum, this way coinsurance costs can be managed and don’t get completely out of control. Then let’s say you had an incident and ran up $41,000 in medical bills. Here’s how that would play out.
– First you pay $1,000 on a deductible, that leaves $40k from $41k
– Then comes the coinsurance on the remaining $40k, 10% of this is $4k
– The out of pocket max is $3k and you’ve paid $1k on the deductible already, this leaves $2k subject toward the out-of-pocket max.
– Even though the $4k is the amount of coinsurance on $40k, you wind up paying only $2k on the coinsurance because you will hit the out of pocket max at $3k ($1k deductible plus $2k coinsurance equals $3k annual out of pocket max).
All this said, in your particular instance if you have the $1k deductible with 100% coinsurance and you had services where just the deductible and coinsurance applied, you will pay $1k. Hope that helps.
Here is a link to some related information from our blog. Q&A: How much do first year startups pay in employee benefits per month?
If you’ve read this far and feel this is something you could use more guidance on, here comes the shameless plug. I work with my clients in the startup space quite often on getting company level medical plans established. If it is something you could use some help with feel free to reach out. I’d be happy to act as a resource.
What is EPLI Insurance and why is it important? EPLI Insurance (Employer Practices Liability Insurance), provides coverage against claims stemming from employees and former employees allegations of Discrimination, Harassment, Retaliation, Wrongful Termination and Improper Workplace Conduct. This type of coverage is unique in that the risks mentioned are not picked up in other policies, not General Liability, not Errors and Omissions, not Directors and Officers. A lot of people will make the incorrect assumption that amongst those policies there is coverage for such risks, that can become an expensive mistake.
The risks to a company making such an incorrect assumption can be risky, and that risk is increasing. Claims related to EPLI have been and continue to be on the rise. According to the U.S. EEOC (Equal Employment Opportunity Commission), for 2017 the most common form of employment related charges is retaliation followed by discrimination based on race, sex or disability. Between these categories there have been over 122k claims made in FY 2017. Some other common forms discriminatory practices that can result in such a claim include religion, age and pregnancy.
In terms of the expense and time associated with an EPLI claim, the following information comes from The 2017 Hiscox Guide to Employee Lawsuits
A representative study of 1,214 closed claims reported by small to medium-sized enterprises (SMEs) with fewer than 500 employees showed that 24% of employment charges resulted in defense and settlement costs averaging a total of $160,000. On average, those matters took 318 days to resolve.
So what you have are claims that take a long time to settle, can cost hundreds of thousands of dollars and are covered by this specific type of insurance coverage. The short answer to the question of why is it important is pretty self explanatory, if a company doesn’t have EPLI coverage it would be looking at such claims resulting in defense costs and damages being paid by the company itself … maybe yours.
According to Chubb’s 2018 Top Risks for Private Companies in the U.S. more than one in four private companies reported experiencing an EPLI loss in the last three years. What’s interesting is that despite these numbers one-third of the respondents to the study have not purchased EPLI coverage.
What that says is that while the risks are prevalent, companies aren’t taking the steps they need. Why? The Chubb report goes on to say that one-third of non-buyers think it is covered by another form of insurance, nope.
So what are the benefits and why is it important? The benefit is coverage against some of the most prevalent forms of insurance claims made against companies today. As a broker I can tell you that a majority of the claims actions I see now are in the EPLI space. To be frank I explain EPLI exposures as a ‘when’ situation and not an ‘if’ to my clients and impress upon them the importance of getting it.
If this is something your company has considered implementing and could use some more guidance feel free to reach out with a call or an e-mail. I’ll be happy to act as a resource.
Business Insurance & Benefits Services of MA
What does directors & officers insurance cover and how do you know if you need it?
First off, directors and officers insurance is specialized coverage designed to specifically protect the management of a company. The insurance covers litigation expenses and damages should a director or officer be sued directly by an outside party. Such third parties may include investors, customers, employees or other interests. In the event of such litigation, the personal assets of those directors and officers may be at risk. Directors and Officers insurance is the type of coverage that will indemnify a director or officer for legal defense costs and damages. This type of coverage would also indemnify a company in instances where the company covers such costs for its directors or officers.
So what are some instances in which a director or officer could face this kind of situation? This is an area that has been getting more and more attention due to the frequency with which such suits are being brought. Claims made against a companies management can cover a lot of ground including instances such as
- Breach of Fiduciary Duty
- Claims of illegal business practices
- Regulatory violations
- Shareholder lawsuit
There’s more than this to the list but you get the idea that there is quite a bit of risk that this type of insurance will cover. Essentially claims aimed at the leadership of a company involving management decisions or company policy can fall into these category.
Hopefully this give a bit of insight as to what the insurance is designed cover. As far as knowing if you need it, if you are a publicly traded company, you do need it and you already have it (at least you better). More likely if you are asking this question it is because your company is a privately owned and you are debating if you need it. From my experience the answer comes down to three rationales.
A prerequisite to a funding round
One point at which it makes sense to insure your directors is if getting a pile of money depends on it. In many cases, venture capital or private equity firms will make directors & officers insurance a contingency to closing a round of funding for a company. The amount of coverage will be set by the funding entity but more often than not this figure will start at $1mm coverage. As the size of a funding round increases, the amount of coverage will go up.
You are trying to land a board member and they require it
I’ve had clients out in Silicon Valley try to bring experienced people in to become part of a board of directors. The people that were targets of these companies were experienced old hands in the tech and startup space, so one of the first requirements these folks had was making sure that D&O was in place. If you are trying to put a board in place made up of experienced industry veterans, be prepared to have Directors and Officers coverage become part of the conversation.
A third rationale is a little more of a judgment call on the timing, but if you yourself are an officer and are asking this question, you will want to consider it when you feel it is time to……
CYA-Cover Your Ass
As soon as there are directors and officers acting in a management capacity, there is a need for this type of coverage. Most bootstrapping startups will put it off until there is a trigger and that’s understandable but if the company has some traction and is moving along well enough where the resources are there, get this in place.
If this is something your company has considered implementing and could use some more guidance feel free to reach out with a call or an e-mail. I’ll be happy to act as a resource.
Business Insurance & Benefits Services of MA
What is cyber liability insurance and what does it cover?
Primarily Cyber coverage covers a business against risks associated with damages resulting from a breach of its computer systems. Hacking attacks can result in different types of damages such as data theft or bringing down a companies website. Cyber insurance would mitigate the cost associated with the damage that these types of computer hacks can do.
Regardless of the type of business it is, if a company has custody sensitive data that they are responsible to protect then that business should have Cyber Liability coverage. This is simply a matter of the world we live in these days where businesses are responsible for damages related to a cyber incident or privacy breach in which such information is compromised. Most smaller business may not feel that it is worth the expense or trouble but the costs associated with litigation and damages from such risks can can be the end of them.
There are multiple factors that go into determining the price for such coverage. Three particular points underwriters look at that are specific to Cyber Insurance are internal company controls, the type of data in custody (financial, HIPAA…) and the number of records a company has. Other more common underwriting points include company revenues, number of employees and the nature of business.
Types of Damages Covered By Cyber Insurance Policies
To begin with, Cyber Insurance policies will cover 1st party and 3rd party damages, so what does that mean? 1st party damages are costs incurred directly by the insured as a result of a cyber incident. If you have direct costs associated with a cyber incident, 1st party coverages within a Cyber Insurance policy are there to make you whole.
3rd party damages are damages incurred by an 3rd party such your customers. In this instance you as the insured are the 1st party and the insurance company is the 2nd party. If your customers, a 3rd party, were financially harmed as a result of a Cyber incident your company were to suffer, your insurance would cover the associated 3rd party damages. So the next question is what are some examples of these costs the insurance would cover?
3rd Party Coverage
Since 3rd party damages would be what most people are familiar with I will begin there. Damages like this are the ones you most hear about because they are most commonly associated with big hacks and data breaches where highly sensitive data is compromised. This as you can imagine leads to lawsuits. Your customers, vendors, even your employees who’s data is compromised or is injured as a result of a data breach are within their right to take legal action against you. These are 3rd parties and all of them can file suit.
In such an event, the insurance will cover the legal cost of your defense and as well as damages a court finds you responsible for. In this instance, a parallel would be General Liability insurance for a company if someone got injured on your premises or Errors and Omissions if a client were to suffer damages as a result of your professional negligence. Cyber Liability simply covers a different set of risks.
1st Party Coverage
1st party coverages don’t get as much attention as 3rd party but are still very important to have in place. There are many direct costs a company can incur as a result of a cyber incident, some examples are as follows:
- Public Relations Costs
- Credit Monitoring
- Cost to Restore/Recreate data
- Coverage for Fines and penalties
- Business Interruption Expenses
- Notification Costs
- Forensic Investigation Costs
- Cyber Extortion
Without 1st party coverage, these costs would come out of the insureds pocket.
So here comes the shameless plug. If this is something your company is considering and you’d like to talk about in a little more detail, free free to reach out. I’d be happy to act as a resource.
Key-Person Insurance is a life or disability insurance policy taken out by a company on a key-person within the company. The Key-Person insurance policy itself is nothing exotic, it’s a standard life or disability insurance contract. For life coverage, typically it will be a term insurance policy, perhaps a 10 or 15 year policy. The differences in procedure revolves around the documentation since a company will own the policy as well as be the beneficiary.
Who is a Key-Person?
A key-person is a person within an organization that without which, that company would be in trouble. Examples of a key-person could be an executive such as a CEO or COO, an employee that has exceptional technical knowledge essential to the company like a CTO or key engineer or a key salesperson without which significant revenue would be lost.
The shared attribute of the examples is that if the executive, techie or sales chief was gone tomorrow there would significant damage done to the organization as a whole.
What is Key-Person Insurance for?
The insurance would secure the company against potential losses that derive from the death or disability of such a key person.
For starters, it would insure the company against the expense of replacing a key person. An executive search to replace a key officer can be time consuming and expensive. The insurance coverage would mitigate the company’s financial risk.
The coverage would also insure against potential lost revenue due to the loss of the Key-Person. As a for instance, if a key salesperson were gone tomorrow, what would that mean in terms of sales revenue lost. If a key executive with a litany of strategic contacts and relationships were gone tomorrow, what would that be worth in dollar terms?
The amounts of coverage needed comes down to the potential revenue lost and the cost to find and train a suitable replacement.
When should a company have Key-Person Insurance
Probably the most common trigger for procuring this kind of coverage stems from VC funding as quite often it will be a prerequisite to closing out a deal. Outside investment will be apt to want to mitigate the risk of the death of a key-person in a company they may be investing in.
In the absence of an outside trigger, companies need to take stock of their own employee’s value. As a company grows and scales, there will be those certain employees upon which a company relies heavily. It is up to leadership to identify such employees and protect against the loss of those employees.
If this is an issue your company faces, here comes the shameless plug. I work on these issues quite a bit with companies facing this need. If it is something your company faces and warrants some guidance, feel free to reach out. I will be happy to act as a resource.
At a very early stage it won’t be a necessity but that doesn’t make it a bad idea to have sooner rather than later. A buy/sell agreement will go a long way toward getting ahead of issues down the road. If a founder wants to leave a startup, sell a stake, becomes disabled and can’t work…. or dies, the buy/sell agreement will map out how the shares of the company are to be valued and to whom they can/will be sold.
Why is a Buy/Sell Agreement Important?
This becomes more important as a company grows, is generating revenue and has a significant value attached to it. At this point there can be real money at stake and as the money gets bigger, the potential ramifications to all parties involved increases.
A buy/sell can become one of those forgotten tasks, one of those things everyone says they need to do but growing the company, hitting deadlines, moving things forward get in the way. Often something happens unexpectedly and all the sudden you have a dumpster fire of a situation on your hands.
Amending a Buy/Sell Agreement
Getting an agreement mapped out early on sets parameters right from the start. The agreement can be flexible and amendments can be made. Maybe another founder or outside money enters the mix. Maybe a founder wants to buyout another founder. If the valuation of a company gets to the point to where one founder can’t buy out another, funding an agreement with insurance is going to become a key factor. You can change an existing agreement, in fact it’s something that should be reviewed regularly and amended to suit.
You can’t amend something that never existed though, and you can’t turn back the clock if a situation occurs and such an agreement has never been placed. If you do it early on when you are establishing associated items such as the Founding/Operating Agreement, a lot of the details will fall into place logically toward a buy/sell. Just grind it out and take care of it, save yourself an inevitable problem down the road.
If you’ve read this far and feel this is something you could use more guidance on, here comes the shameless plug. I work with my clients in the startup space quite often on getting buy/sell agreements together and getting them funded. If it is something you could use some help with feel free to reach out. I’d be happy to act as a resource.
Business Insurance & Investment Services of MA
I typically start talking to my clients about EPLI when they cross the 10 employee threshold. Once a startup gets to that point it is typically beyond the founding team and first couple of hires that the founders probably knew well or had targeted. When you get past 10 you are starting to bring in people outside of that tight circle. You are also going to begin to have some churn as it relates to employees coming and going.
As a startup, if you have this many employees it usually means you are going up from there as well. Most of the time the founding team and build out staff is going to be small. Once some funding comes in this triggers expansion. If you are expanding fast you are going to need to protect yourself against claims that EPLI protects you from.
If you have D&O already (most funded startups will), EPLI is a fairly inexpensive add on. Usually it’s less than $2k/annual at 10 odd employees. It’s going to come down to when management feels it is important enough to pull the trigger on. Given the rise in EPLI claims in recent years, it’s becoming more and more important. The earlier you get it the better.
A funding round that will trigger expansion is a pretty good trigger if you wanted to look to a particular event. I would think series A versus a seed round but that will depend on the size.
This is an issue I talk to clients about quite a bit so here comes the shameless plug. If this is something you feel warrants some discussion feel free to reach out with a call or an e-mail. I will be happy to act as a resource for you.
Business Insurance & Investment Services of MA
What are the vital/recommended types of insurance my new tech startup will need?
Types of Business Insurance Recommended:
- Workers Compensation: Fairly straight forward here. This is mandated by the state if you have employees. Get it or get fined. Workers Comp provides disability payments to employees that are hurt on the job. Some states (NY and CA are a couple) will also mandate that your company purchase State Mandated Short Term Disability Insurance as well. Like Workers Comp, if you don’t get it you can be fined, so get that too if you are in an applicable state.
- General Liability: Comprehensive General Liability is foundational coverage for your business. It covers aspects such as ‘slip and fall’ incidences, product liability, damage to rented premises, advertising and personal injury and will typically incorporate property coverage for the business. It covers a lot of ground and the basic risks for your business.
- Technology Errors and Omissions: This is the one that is really going to count. Tech E&O is the coverage that is going to cover your company in the event that your services fail. E&O covers risks that stem from the services provided by your company. If that service is technology related, most of the risk associated with your company is going to be covered by this component.
- Cyber/Privacy: This used to get overlooked or poo-poo’d as not worth the money some years back, not anymore. Cyber/Privacy’s major purpose is to cover a security breach in your company’s systems that results in the loss/theft of sensitive client data. This is especially important if you work in the financial or medical space where the information you have custody of is personally identifiable data such as medical records or SSN’s or financial data such as banking account or credit card info. You will need this. Make sure you have it.
- Directors and Officers: This goes a little next level for a startup but it should be on your radar screen. D&O covers your management team against risks that stem from the management of the company. For a tech startup, a couple of the more common triggers is a VC round or a prerequisite by a potential board member. Claims that stem from these types of risks have been on the rise and without it your company leadership (including you) are potentially exposed to litigation with no coverage to back you up.
These are issues I talk to clients about quite a bit so here comes the shameless plug. If this is something you feel warrants some discussion feel free to reach out with a call or an e-mail. I will be happy to act as a resource for you.
Business Insurance & Investment Services of MA
How does Directors and Officers insurance work?
Directors and Officers insurance is becoming more and more prevalent these days as a necessary protection for companies and their management. Quite often, I am asked how does directors and officers insurance work? Since a full explanation is pretty detailed, this post will give a broad, detailed response.
Directors and Officers insurance protects the management of a company against a broad array of potential claims. If an act should occur that triggers one of these claims, what happens next? How does the coverage kick in? To answer this we need to look into the different parts that make up a D&O policy. Most every policy begins with three main parts known as Side A, Side B and Side C. These components determine which part of the coverage would be responsible to pay for defense and damages when a claim comes to bear.
Side A D&O Coverage
Side A coverage of a directors and officers insurance policy is the component of the policy that will indemnify a director or officer when the company cannot cover such an officer for defense and damages. This is especially important to directors and officers because a situation such as this puts their personal assets at risk.
Nine times out of ten, a company will cover costs to defend company officers if a claim is levied and needs to be defended. If the suit is lost, the company will cover the damages….nine times out of ten. But what if there is a situation where the company can’t indemnify an officer in this situation? A common cause of this is bankruptcy. If a company goes belly up and there is a claim against an officer of that company, how would that officer be indemnified? The answer is he or she wouldn’t.
This is where Side A coverage would kick in. Since the director or officer would not be indemnified in certain scenarios, the Side A coverage steps into the gap in order to cover defense costs and potential damages for which a director and officer would be liable. In absence of such coverage, if the company is not in a position to indemnify, the officer is on the hook for defense and damages costs.
Side B D&O Coverage
Side B coverage of a directors and officers insurance policy is the component of the policy that will indemnify a company when such a claim arises. As mentioned, nine times out of ten a company will defend and indemnify a director or officer if a claim is filed. If a company indemnifies a director or officer once a claim is defended and damages paid, there are substantial costs associated with defense and damages that the company has to cover. So where does that leave the company? This is where Side B of the Directors and Officers policy comes into play.
Side B does not cover directors and officers personally. Side B covers the company in the event that the company is picking up the tab for defense and damage costs associated with a suit brought against that company’s directors and officers. This is how a company gets made whole.
Side C D&O Coverage
Side C of a directors and officers insurance policy is the part of the coverage known as ‘Entity Coverage’. Entity Coverage covers a company should a company been involved in a claim along with its directors and officers. Often if a claim is made against a director of officer of a company, that company will be named in the suit as well.
Side C covers the firm’s liabilities in such a scenario. This is opposed to Side A or B where the liabilities of the director or officer is taken into account.
Retention is just another word for deductible. A retention amount will typically be assigned to Sides B & C ranging from $5k to $25k. The choice of retention is up to the company and will affect the premium amount for the company. The higher the retention, the lower the cost. In the event of a claim, the retention becomes the company’s responsibility after which the insurance kicks in.
In most cases, Side A coverage will have a $0 retention. The rationale behind this is that Side A is the part of the coverage that covers directors and officers personally when a company does not provide cover. Because of the personal cost nature of Side A, a large retention such as $25k becomes unaffordable. Hence, Side A coverage is typically first dollar coverage (or $0 deductible).
For more information on Directors and Officers insurance you can check the following related posts:
The links provide will connect you with content contained in our company blog. The content in our blog can help to answer questions you may have concerning these and other related topics important in protecting your company.
I hope this post has given you some insight as to how does directors and officers insurance work. If you have any questions after reading this content I invite you to reach out to us with a call or an e-mail. We are always available to act as a resource.
Directors and Officers coverage: Hogan vs. Gawker, Hogan puts the smackdown on CEO Nick Denton
Somewhere in the back of my head as I write this I can hear the intro music for Hulk Hogan as he heads toward the ring. ‘ I am a real American…fight for the rights of ev’ry man …. Da, da, da da da …….da da da da….’
If you have been following the news lately, you may have seen that Hulk Hogan recently won a huge judgment in his invasion of privacy lawsuit against Gawker Media. $115 million in compensatory damages for invasion of privacy stemming from the sex tape that Gawker posted on their site without permission. Putting aside the morality of posting a sex tape of someone online and then defending it by calling it newsworthy, that’s a noteworthy amount. If it doesn’t come down in appeal it could bankrupt the company.
I personally can’t get enough of this case, it has everything. Sex tapes, lawsuits, new media, 80’s wrestling legends… and now a smooth segue to Directors and Officers insurance coverage.
For the purposes of this blog post I am going to focus on what happened in day two of the penalty phase of this trial. A key point to remember in this is that Hogan not only sued Gawker Media, Hogan sued both the CEO of Gawker, Nick Denton, as well as the editor-in-chief, AJ Daulerio. In day two of the penalty phase, Nick Denton was hit with a $10 million dollar judgment and AJ Daulerio for $100k.
Somewhere in my head on 80’s wrestling commentary…..
Gorilla Monsoon: ‘ Ohh look out Brain, Hogan’s hulking up!!!’
Bobby ‘The Brain’ Heenan: ‘Wha… this guy’s not human, GET OUT OF THERE NICK, GET OUT OF THERE!!!’
Gorilla Monsoon: ‘Too late for that Brain! Here comes the big leg!!!’
Now for a guy who is at the head of a huge media empire, odds are Nick Denton will be covered by Gawker Media’s Directors and Officers coverage. Good thing too because even on appeal, Mr. Denton likely won’t get completely off the hook for the damages that he is personally liable for at this point. Depending on the kind of policy Gawker has, perhaps AJ Daulerio could be covered as well. Some policies will cover non-executive directors to a limited degree.
As far as the argument that ‘Hey, even if he gets nailed for $10 mil, he owns the company. The company will pay him back’. A good argument, two things go against it. One, if the company is solvent after all is said and done, who pays Gawker Media for making their CEO whole? The D&O coverage, that’s who. Without it (provided Gawker reimburses officers in such cases as standard operating procedure), Gawker Media would be out another 10 million. With the coverage, Gawker will be covered for the amount needed to make its officer whole.
But what if the $115 million dollar judgment holds up on appeal? What if the worst case comes to pass and Gawker goes under? That $10 million dollar personal judgment is still there. Nick Denton would still be personally liable with no entity to make him whole. Once again, here’s where having a comprehensive D&O policy becomes so important. If a company goes under due to a lawsuit and a firm’s directors and officers are still liable, there had best be a healthy D&O policy in place. The policy would be there to cover said directors and officers against a judgment, protecting their personal assets. Without it, well….. someone will get left holding the bag.
Now Gawker is not a publicly traded company, note that this is a perfect example of how Directors and Officers coverage isn’t just for publicly traded companies. In this day and age, if there is a lawsuit worth pursuing, it’s worth pulling everybody in, and that includes a company’s leadership. In this case, company policies that filtered down to what Gawker saw as admissible to post as news came back and bit them…hard. Ultimately a jury found Nick Denton had a personal responsibility for the actions taken at Gawker that lead to where we are now. Hogan hit ’em hard on it in day 2 on the penalty phase.
Note to directors and officers of a business, even small businesses, you don’t need to be a huge publicly traded company to have a risk. This is just a recent example in a long line of examples where directors and officers find themselves in the line of fire. If this is something your company has not taken up yet and merits discussion, please feel free to reach out. I would be happy to act as a resource for you on the matter.