Mazda, Google, Or You? Who Will Decide If You Will Continue to Drive a Car?

“After a lifetime of driving, repairing and studying automobiles, I have come to an unavoidable conclusion – we are the weakest link in a car. As car components go, human beings are deeply substandard – we have imperfect perception, we are ruled by emotion, and we vary wildly in quality.” Peter Cheney, award winning Canadian writer for the Drive section of the Globe and the Mail

Are we really seriously considering relinquishing our right to drive a car?

For fourteen years Mazda has celebrated what it calls the “emotion of motion” with its “zoom zoom” advertising campaign. The early ads featured a young boy dressed in a black suit and tie who looked into the camera and whispered “zoom, zoom”. His voiceover is still used in current ads to signify our love affair with acceleration.

Even at an age where I’m gleefully cashing the first of my social security checks, I know exactly what “zoom zoom” means. I can remember being a boy of nine on the farm. I had dawdled with my chores and subsequently lost out on an opportunity to drive the half-mile from our farm to my grandmother’s farm.

I was crushed because I would always know that no matter how many times I drove a car after that . . . I could have driven more. A year later I was driving our farm’s grain to the elevator, which was six miles away in our three-quarter ton pickup. Driving had become a necessary tool on a family farm, but no less satisfying.

Zoom zoom.


Perhaps today’s generation has been ruined by cars that were designed to drive fast.

In my teens I went for a test-drive with a friend who had built a hotrod. We took the car out on a stretch of highway that had been semi-abandoned when the interstate was built. The car didn’t have any floorboards so we were looking down at the pavement flashing by beneath.

It wasn’t that I was a stranger to speeds in excess of 100 MPH. At that time it was fairly common to “bury the needle” which meant the speed of the car exceeded what the speedometer was capable of registering. It was the day of big engines, even in family sedans. Even our family Rambler was deceptively fast in a 0 to 60 MPH run.

Yet, going down the highway in a “homemade” roadster at 130 MPH is the “fastest” I ever experienced. I suppose it had a lot to do with the perception that I was in a state of near-death. Tom, the friend who did the work on roadster, was incredibly smart and talented. He eventually became an aeronautical engineer, which apparently became boring because he later went back to school and became a neuro-surgeon. Knowing that Tom was smart was comforting, yet in a world where speed is best measured by how much our butt puckers my sphincter-meter was topping-out.

Today’s “couches on wheels” are so comfortable that they apparently prompt people to believe they can multi-task with their personal devices while driving without undue risk. Big “comfy” cars definitely make driving at the speed limit on a four lane road seem like you’re standing still. With the soundproofing and other “enhancements” we have become detached from our surroundings. I’m not advocating doing away with floorboards, but changing a car into a transport “pod” seems just as Draconian.

Perhaps the driverless car is merely an outgrowth of the change to an automatic transmission?

As stated above, I was driving our grain to market at the ripe old age of ten. The local elevator featured a steeply-sloped driveway. During harvest, trucks would line up waiting to dump their grain. It was considered a rite of passage for young drivers to be able to successfully simultaneously work the clutch and accelerator with a fully-loaded box of grain at the apex of the ramp. Adding to the complexity was the knowledge that if you got the truck moving into the elevator too fast you would have to stomp on the brakes to stop at the right spot. Since that “spot” was on the elevator’s scale, Mister Rutherford and Mister Munson would have a stern talk with you, if you caused their scale to bounce. The worst outcome would be to “buck and stall” repeatedly on the hill leading into the elevator, to the extent that one of them would take over driving the truck, “To get things moving, for crying out loud!”

Even though I dreaded each trip to the elevator that demanded I negotiate that driver’s-skills gauntlet, I still much prefer a standard transmission to an automatic.

I’m not a Luddite and truly understand that today’s automatic transmissions are modern marvels in their efficiency.

I went through this philosophical dilemma years ago when automatic braking systems were first introduce, eliminating the need to rapidly pump your brakes to stop on ice.  Having grown up in North Dakota I can attest that the ABS changed driving tremendously . . . for the better.

Yet, I love the ability to control my car as much through the clutch as I do the brake. I want to be the one aligning my gears to the car’s needs.

Predicting the Future with Driverless Cars

According to Google, the driverless car will ease traffic congestion, lower pollution, and prevent accidents.

Years ago I was an underwriter for an insurance company that specialized in insuring long-haul trucks. Based on loss experience we realized that 70% to 80% of accidents were caused by external factors; and that was before the day of cell phones and texting.

Traffic congestion is largely caused by inattentive drivers who create a rift in the “flow” by going too fast or too slow, tailgating or leaving too much room between us and the car in front of us . . . or in general, being human. Supposedly driverless cars will allow many more cars to occupy the same stretch of highway and move at faster speeds because their movements will be predictable.

Try saying this out loud. “Computers are predictable.” That sounds ridiculously wrong, because it is.

Even more salient is this. Are we going to have one apocalyptic day when we send all current cars to the junkyard and replace them with driverless cars? If not, Google’s Nirvana will be marred for many years by cars with drivers. Further, if these “driverless” cars are equipped with steering wheels and pedals for “emergencies” humans will find reasons to believe their situation is an emergency, even when that emergency is nothing more than being late for soccer practice.

If all cars actions aren’t “predictable” the efficiencies gained will be much less and probably non-existent.

The same logic applies to the promised lower pollution and some of the prevented accidents.

Google touts the 360-degree vision for its cars’ computers and their perfect attention to the matter at hand. It would seem to me that a human’s basic desire for self-preservation is a much stronger barrier to carnage than a machine that still finds “rebooting” to be a satisfactory response to most problems.

I would be much more comfortable if Google left the development of the driverless car to Volvo, who has been working on this for decades and seems poised to launch its first cars. Volvo has an amazing dedication to safety, while Google has a great tradition of April Fools’ Day jokes.

Driverless cars? What is wrong with the heart of our generation?

NASCAR is the number one spectator sport in our nation, with one in three adults claiming to be fans. Yet, where is the equivalent of Charlton Heston staring into a camera and promising to put pedal to the metal until you pry “my cold, dead hands” from the steering wheel of my 68 Corvette?

James Holm

Farmers Insurance Sues Over Climate Change

Farmers Insurance Sues Over Climate Change

“What the heck???!!!”

You’ve probably heard the news that Farmers Insurance filed a suit against about 200 Chicago-area municipalities. The suit contends that those municipal governments knew the risk posed by climate change and should have been better prepared.

Farmers Insurance Sues Over Climate Change

Farmers Insurance is seeking damages for losses caused to their insureds’ homes by the surge of storm water and sewage overflow due to a 2013 torrential storm. Farmers Insurance contends that because of climate change heavy downpours are happening more frequently and cities should know this and make the proper preparation.

They argue the cities should have increased their storm water capacity. They further argue that steps could have been taken days before the storm to mitigate damage.

Farmers Insurance is a subsidiary of Zurich Insurance Group. Another Zurich subsidiary won a climate related suit in 2012.

Some combine the logic of the two suits to indicate a Zurich strategy to insulate itself against climate change losses.

Some pundits have speculated that since cities enjoy governmental immunity, Farmers Insurance will probably amend the suit to bring in the oil and gas industry. And, would it be long before the agricultural industry would be brought in as a co-defendant?

What is really at stake here?

There is great fear in some quarters that the insurance industry will be left holding the bag for costs related to climate change much like it was for asbestos.

The lawsuit by Farmers states, “The defendant knew or should have known that climate change in Cook County has resulted in greater rainfall volume, greater rainfall intensity, and greater rainfall duration than the pre-1970 rainfall history evidenced, resulting in greater storm-water runoff.”

It would appear defense attorneys would claim that Farmers Insurance’s underwriters also had knowledge of the potential damage and elected to accept the risk. I would tend to agree with that position.

I believe the sustainability of the property and casualty market for homeowners into the future depends on increased deductibles, making the accountability for incurred loss more squarely the individual’s problem. At that point decisions will be made by homeowners that result in much less total catastrophic loss. Fewer homes without proper construction will be built in areas prone to tornados. Dwelling will be built less often on ocean front property with limit ability to withstand storms. Sprinklers will protect homes built in areas that are prone to fire.

Courts are a lousy place to seek change to protect your business.

James Holm

Ethics and Insurance

I started my career in 1970 in a management trainee program for the Continental Insurance Company of New York. The two-year course included classroom instruction in the Chicago office from the corporation’s top management in the various departments.

Continental Insurance logo

As I recall, even though the course went into great detail with subject matter that ranged from a full day tour of Underwriter’s Laboratories to actual hands on boiler inspections, the material presented barely touched on ethics.

The education manager did tell us that our corporate objective was to meet the reasonable assumption for coverage by the insured. Of course, that was the legal theory in practice at that time and still is to some degree.

The education manager railed against Mayor Daly’s actions when the McCormick Place burned. According to him the huge convention center should have been a partial loss of about 10%. He said the Mayor condemned it based on political reasons and rolled the bulldozers before objections could be launched. He said it very quietly, because such words criticizing “Hizzoner” were considered treason in Chicago in the early 1970’s.

The VP of underwriting for farm, who was the head of underwriting for the nation, spoke to us for over an hour about the ethical considerations of farm underwriting. He said that when a fire occurred the difference between a small fire and a total loss often came down to whether the farmer walked or ran to his phone to call for help. He said that if the farm was prosperous he would likely run.

He never once spoke to the ethics of the underwriters on his own staff. He seemingly just assumed they would “do the right thing”.

It seemed like ethics were considered a given, at that time.

Shortly after we went through the course, I heard about an underwriter in the Chicago office who “issued” a phony policy to one of the large downtown Chicago hotels. The underwriter, and a small number of co-conspirators collected and pocketed the “premium”. They had written the policy on the $30 million hotel with a $100,000 deductible and assumed there would be no losses. Unfortunately for them, a $3 million fire occurred.

That was the first time that I realized that insurance employees did bad things.

About that same time a theatre burned to the ground in a small town in southern Minnesota. The agent in that town wrote nearly every large business in his town with The Continental. The Continental was the largest fire company in the U.S. at that time. The agent had “bound” the business verbally the day before the fire. I was traveling with the Special Agent (field rep) for that territory as the last lap of my training. We were working out of the Minneapolis branch.

About ten people in the branch, the manager, production superintendent, several key underwriters, the claim manager and several field people met after hours and constructed an underwriting file to send to the home office. The file was duly date stamped to make it appear it had been handled properly, and in a timely fashion, so that the $250,000 loss could be paid without fail.

I didn’t feel right about what was done that evening. I did understand that The Continental was the “logical carrier” and probably would be held for coverage by a court of law. But in my mind, the agent’s E&O should have responded. I was told the E&O carrier would subrogate against The Continental, so what we were doing was merely avoiding a lot of red tape and embarrassment for a good agent.

My first year in the field I was asked by one of my largest agents to help him back date coverage to cover a claim. I refused. He went around me to my superior who also refused. In the end, the agent cut back sharply on the business he placed through our company. In hindsight doing less business with an unscrupulous agent wasn’t a bad thing.

A few months later another agent asked me to fulfill the promise of an exclusive sales territory that my predecessor had “promised” to him. The agent was a bank president whose agency placed a great deal of crop/hail through our company. He wanted me to make him the only agent who could write crop/hail through us in his county. My predecessor had retired but stopped in our office quite often for coffee. He told me that not only had he not offered an exclusive, the subject had never come up.

I kick myself even to this day for not closing that agency for my company, because two years later that banker/agent handed us a $2 million loss under the bankers’ blanket bond. It seemed his dishonesty went beyond fabricating conversations.

Perhaps the first instance of corporate ethics that hit home for me was on the last day of our training. We were having a few congratulatory beers when one of the home office people asked me what I thought of the education manager. I can remember telling him that I thought the manager was quite sharp, maybe too sharp for the position he held. It was explained to me that he had recently been demoted from a fast track to the CEO office. His son had broken into a draft board and burned records. His corporate career was essentially over. I’ve often wondered about that home office decision.

Over the years I’ve seen dozens of occasions when ethics were challenged and found wanting. So much so that it appears that maybe we all should take a moment to think about how we make ethical determinations.

Years ago I was introduced to a process for determining whether or not a considered action passed the test of ethics.

  1. Define the problem. If you can’t reduce the problem to a one-sentence statement, perhaps it is more about unresolved personal issues than a real business problem.
  1. Consider alternatives. Once you have a comprehensive list, you might be able to eliminate those alternatives that present ethical problems immediately. Make sure your alternatives are legal and meet the standards and rules you work under.
  1. Establish a list of the stakeholders, who will be impacted by your actions.
  1. Determine how each stakeholder will be impacted by your action and assign a score for each stakeholder on a scale of one to ten with one being very poor and ten being excellent.
  1. If your average score is less than seven you need to consider other alternative actions.

If all else fails use the “mom” test. Many people say if you would not be embarrassed to have your mother read about your actions in the local paper, it probably is ethical.

James Holm

The Federal Insurance Office (FIO)

Word came out of Washington this week that the Federal Insurance Office (FIO) is looking to establish the government’s definition of “affordability” of private passenger auto insurance. The Dodd-Frank Law gave the government authority to bark up this tree.

When I hear “government” and “insurance” in the same sentence my warning bells go off.

I don’t have a firm position on whether the federal government would be a better regulator than individual states. It would seem the opportunity for stupidity would be just as pervasive on either level.

The FIO stated that auto liability is mandatory in all states except New Hampshire, and that owning an automobile is likely associated with a higher probability of employment and other factors associated with economic wellbeing.

They went on to say that, “personal auto insurance may be interpreted as affordable if it is actually purchased by individuals and/or families.”

It might be that the FIO is looking for an issue in order to assert that there’s “trouble, trouble, trouble” that only federal regulation can fix.

Or, even worse, it could be the FIO is looking to start down the road toward a federal private passenger auto insurance program.

They have a ready partner in consumer lobbyist Bob Hunter who has made a career out of misinterpreting numbers in order to be the Professor Harold Hill of our industry. His latest quote is a gem.

“With millions of low- and moderate-income Americans struggling to afford state-required auto insurance and insurers constantly adding new highly questionable factors like education, occupation and elasticity of demand that drive up the cost to those least able to afford coverage, FIO’s interest is not only necessary, it is urgent.”

It’s safe to say that Mr. Hunter has yet to meet a free enterprise driven market that he likes. “Insurance” might not rhyme with “T” but our nation’s capitol is looking for “trouble” and Mr. Hunter would seemingly like to be at the front of that parade.

I’ll agree that education might not be the strongest proxy variable for a responsible insured, but I’ll defend forever an insurance company’s right to decide under what circumstances they will establish their rates and underwriting criteria.

I would love to ask Mr. Hunter, at one of those hearings he loves to populate, what percentage of the current 14% uninsured autos would buy insurance if their rate were cut in half. My guess would be under 25% would buy the reduced-cost coverage, leaving the uninsured number still north of 10%.

I would love to ask him if he thought maybe stronger enforcement of the laws requiring auto insurance might not be a better first step?

Did you ever have an upset stomach sending you the false message that if you would just eat more your pains would go away? I wonder if D.C. isn’t going through something like that. Could it be they think the answer to the Obamacare-rollout cramps is another hardy meal of boondoogle?

James Holm

Snow Storm Atlanta Traffic

Insurance Is the Ultimate Infrastructure

Snow Storm Atlanta Traffic

The videos and news accounts of the horrible traffic snarls and accidents in Atlanta is a grim reminder of the power of nature. At times it seems like mankind’s ability to mitigate the negative impact is overly limited. Especially when you read that as many as thirteen people died due to the storm, including the traffic fatalities.

A few days ago I posted a blog on about fracking. In that blog I came to the conclusion that fracking might not be as big a problem in North Dakota as the lack of proper infrastructure. Infrastructure can be defined as basic organization or services.

Definition of Infrastructure

Faulty and insufficient pipelines are creating spills and causing too much traffic on roads and railways. Lack of adequate restaurants and stores and housing are forcing the oil field workers to live in “man camps” made of semi trailers and imagination, and to spend hours shopping  . . . instead of minutes.

My blog also concluded that insurance could play a powerful role in the oil field in applying loss control and engineering in a constructive effort to reduce loss without impeding production. As such, insurance could be an important part of the oil field infrastructure.

The situation in Atlanta would be much, much worse if it wasn’t for insurance.  Obviously auto insurance is a necessity that can mitigate the devastation of a chain reaction collision that ultimately involves dozens of automobiles. The resulting bodily injuries can easily run health care costs in the $millions. In those instances where death occurred life insurance can make the loss less traumatic by easing the financial transition.

Lack of Snow Plows in Atlanta

It might seem a far stretch to think of an economy where insurance doesn’t exist, but for me it is quite easy. In the mid-1980s we were in the midst of a very hard market. Political subdivisions and state agencies in North Dakota were struggling to find affordable insurance.

  • The University of North Dakota Medical School, whose graduates supply a large percentage of health care for the state, was closing because it couldn’t find malpractice insurance for the teacher/physicians.
  • The leafy spurge program had shut down and projected losing twenty years in the battle against this noxious weed.
  • The municipal zoos in Bismarck and Wahpeton had both closed.
  • Many senior citizen buses were parked because they couldn’t afford insurance.
  • Hundreds of board positions for cities, counties, schools, and other political subdivisions were going unmanned because they couldn’t purchase director’s and officer’s coverage.
  • Many cities, counties, schools, etc. were facing budgetary problems with their insurance premiums doubling and tripling.

I was asked to talk to an interim committee of the state legislature about insurance cycles. At the end of my discussion they asked what they should do to solve their crisis. I told them to form a self-insurance pool.

Several state officials including the insurance commissioner, the attorney general, and the head of management and budget met with me the next day and challenged me to create such a pool. Less than sixty days later we issued our first insurance policy. Today that pool has over $50 million in assets, works through agents, and has saved the people of North Dakota $millions while solving the pending problems.

Insurance is necessary and life without it would be harsh.

Affordable Care ActA few weeks ago I had lunch with my insurance agent. He had an idea for saving us some money. He reminded me that health insurance has been turned inside out by the Affordable Care Act. He suggested that we have our people buy individual policies and increase their payroll accordingly.

It sounded absurd, but we gave it a try because life without health insurance would be unthinkable. It was nice to find out that we’d dropped our annual expense for health care for our employees by nearly $3,500 per insured person per year.

I have great empathy for the tragedy in Atlanta. It must be rough living where public officials seemingly don’t understand the importance of ice-free roads. However, their plight is one more example that knowledgeable agents combined with robust insurance policies written through financially strong insurers provide infrastructure for our country.

James Holm

How to Prevent Your Small Business from Becoming Insurance Poor

During my career I have started several businesses. One of them became an overnight success and grew to be worth over $35 million. Another demanded much more capital to create than I originally thought. I originally budgeted $300,000, and it eventually required a total investment of $3 million before it started to turn a profit.

Small Business Insurance

One of the earliest decisions an entrepreneur needs to make is the type of insurance to purchase and how much. This is a complex question and there really is no “right” answer.

Early on in my insurance career (over forty years ago), I told a man he really didn’t need flood insurance because he was at least fifty feet above the level reached by any past floods. A year later, a downpour sent water from above above his business location, flooding his storeroom. The water never got more than eight inches deep, but it ruined all the paper in his storage area that he had for his printing business.

That taught me a very good lesson about telling people what insurance coverage they don’t need: The minute you state what a person needs Murphy’s Law will prove you wrong.

The Small Business Administration site states, “Insurance coverage is available for every conceivable risk your business might face.”  That’s exactly the kind of claim that makes great fodder for a professional liability loss for an insurance agent, because it simply is not true.

Kennel FireSeveral years ago, a dog kennel burned to the ground. The owner lost about twenty dogs. I was sued as a general agent under the legal theory that I should have taught the retail agent enough about insuring a dog kennel to make sure he had animal mortality coverage on the dogs. That coverage is available through a select number of companies, but is rarely carried by kennel owners because of the cost and restrictive coverage. The court quickly dismissed me from the case. No one buys insurance to protect against a highly improbable loss, but they all wish they had once that one in a billion occurrence happens.

Insurance is only really available if it is affordable. I’ve been a Lloyd’s of London correspondent for over three decades and have delivered quotes for many unique and unusual risks. Many of those quotes seemed ridiculous, even to me, but some were purchased.

The lesson to be earned from my experience with the dog kennel owner is that if you’re starting an insurance agency, an insurance coverage you must have is professional liability (Errors & Omissions Insurance). It is important because it is a primary exposure of the business. Any small business owner should try to determine what their primary exposure is, and then make sure that it’s covered.

Actually, a good rule of thumb for a new business would be to start with the coverage you are required to carry by law. After satisfying your statutory requirements, you should then consider that coverage you’re required to carry by your lease(s) or by mortgagees or lenders.

  • Your coverage options might include:
  • Businessowner’s Policy
  • Commercial Package Policy
  • Professional Liability
  • Comprehensive General Liability
  • Business Income Insurance
  • Commercial Property Insurance
  • Commercial Auto Insurance
  • Crime Insurance
  • Disability Insurance
  • Group Health Insurance
  • Long-Term Care Insurance
  • Surety Bonds
  • Workers Compensation
  • Umbrella/Excess Liability Insurance
  • Flood Insurance
  • Earthquake Insurance
  • Pollution Liability Insurance
  • Director’s and Officer’s Liability Insurance
  • Fire Legal Liability Insurance
  • Data Breach Insurance
  • Inland Marine Insurance

The good news is some of the above are redundant. The bad news is that this list is far from comprehensive. The really bad news is that you can never purchase “enough” insurance. Consider the Texas anhydrous ammonia distribution plant that reportedly had $1 million in liability coverage to cover the estimated $100 million in damage done by their fire and explosion.

In many states it is extremely hard to “pierce the corporate veil”: to hold shareholders responsible for awards beyond the corporate assets. After satisfying statutes and written agreements, what you actually “need” and what you should carry becomes largely personal preference.

Start Your Insurance Program with Workers Compensation

Since workers compensation is a required coverage by statute, it is a good place to start. Your state might allow you to exclude officers of the corporation from coverage, which could save you money.  Be very careful to document that decision.

Next, give your rental-space lease a thorough review to make sure what insurance you’re required to carry. You should review this before signing the lease, to be in a position to negotiate terms.  You probably will be required to carry Fire Legal Liability, which protects the building owner’s interest in the even that you are responsible for starting a fire that damages his property. You most likely will be required to carry general liability insurance and name your landlord as an additional insured.

Copier Insurance

If you lease a copier or other office equipment, that lease will require certain insurance. They will more than likely require a policy to cover the equipment for fire and other perils.

If you have a loan and have pledged assets, you need to meet the requirements in the loan document and provide certificates of insurance to the lending institution.

If you have a company-owned vehicle and have a bank loan, you will need to meet the insurance requirements of the loss payee.

Should you not meet the requirements of a loss payee, or other lender, the lienholder has the right to purchase “forced placed” insurance to cover those requirements and bill you for the premium. Those premiums are normally quite expensive.

Commercial auto insurance is required by statute to carry bodily injury and property damage liability insurance and by your loss payee to carry physical damage coverage. If you have a loss payee, Collision and Other Than Collision coverage are normally both required, in addition to a set limit of liability insurance.

Save Money by Buying an Insurance Package

Insurance companies offer discounts for placing multiple lines of insurance through them. Some insurance companies will even provide a discount on your auto and general liability should you place a life policy through their life subsidiary.

Your insurance agent might recommend a BOP (Businessowner’s Policy) or a Comprehensive Business Policy. The difference is in how many lines of coverage are included. Both of these policies include a range of automatic coverage for such things as general liability, products liability, profit insurance, extra expense insurance, mechanical breakdown, personal injury, valuable papers, accounts receivables restitution, crime, inland marine, and electronic data processing equipment. These polices normally do NOT include flood or earthquake.

Professional Liability Might Be Your Most Important Coverage

For many small business start-ups, a good professional liability coverage is important. This coverage not only covers improperly performed professional tasks, but also covers failure to perform necessary acts. Over the years I have had several of these actions brought against my agency. I sell millions of dollars of annual premiums per year, and with hundreds of thousands of transactions it is almost inevitable I will be sued. The suits have never resulted in a paid loss, but because the coverage includes legal defense, I have saved many thousands of dollars. General liability normally excludes professional acts.

Stand Alone Liability Coverage

There are many kinds of liability coverage that are normally excluded from a General Liability policy. These might include: pollution liability, aircraft liability, liquor liability, watercraft liability, product recall liability, and director’s and officer’s liability, as well as others.

Start-ups might not consider director’s and officer’s liability as essential. If you’re a certain kind of start-up you might find yourself the target of patent trolls. Patent trolls aggressively misuse the patent law as a business strategy. There are director’s and officer’s policies that will respond on your behalf to this kind of attack. In many instances this could be your most important coverage.

Employee Benefits

Health Insurance is important, but is becoming less and less of an issue for small start-ups because individuals can purchase reasonably priced insurance and it is portable.

Your business will have a value right from the start, based on the employees you have put together. A key-man life policy should be considered for those people within your organization that are irreplaceable. A good agent can help you construct a split-dollar Life policy that will allow you to keep good employees through “golden handcuffs” by allowing them to have the cash value if they stay with you a set amount of time (vesting), while your company enjoys the protection of the death benefit.

My business has fluctuated and survived at times because of the loan value of our Life policies. It has been a source of capital during times when credit has been highly volatile.

Dental insurance is an option that I’ve never thought extremely important although it is a large industry and quite popular coverage for some.

Although I’ve carried Disability Insurance for my employees for three decades I think it is an extremely weak coverage that might be one of the last things you can afford. Proving disability appears problematic to me.

I have also carried Long Term Care insurance for my key employees for three decades and believe it has been an important coverage although none of my employees have ever used it.

Limits of Liability

You need to decide what asset level you need to protect and the kind of catastrophic exposure your business represents. In hindsight, having an anhydrous ammonia facility represents a huge risk that should have several million dollars in coverage for liability. On the other hand, a shoe store might not have apparent potential for huge liability losses.

In general, every company should consider an excess liability policy of at least $1 million. This kind of policy is often called an “umbrella” policy, but it is quite rare that excess policies today are true umbrellas because insurance companies want to know what their exposure is for high limit policies. Excess liability policies are normally following form, in that the coverage mirrors the primary policy. A lot of insurance companies are willing to provide $1,000,000 per person and $2,000,000 per occurrence. The cost to purchase larger primary limits is normally relatively small. This is not an area to look to rely on for cost savings. Even a shoe store can have a trip and fall loss that results in paralysis and long-term injuries.

A true umbrella has coverage that is much broader than most primary policies in that it will have fewer exclusions of coverage.

Once you decide what level of liability limits you want, you should logically carry that limit through your various insurance policies. For example, it is illogical to carry much lower limits on auto insurance liability than on your general liability. It is also illogical to carry minimum limits on uninsured and underinsured motorists coverage when you carry higher limits on the liability. About 14% of all vehicles in the United States are uninsured so the potential for loss under uninsured motorist is quite high. A large percentage of insured vehicles carry statutory minimums, which are woefully inadequate in catastrophic claims.

Crime Insurance

In my personal experience, I have been involved in more large-employee dishonesty losses than large fire losses. The circumstances are always tragic and devastating. In one loss that I insured, the bookkeeper of a ready-mix concrete operation took over $400,000 from company that had a net worth of far less than that. In another loss, a deliveryman took over $100,000 from a laundry in increments of less than $35 over a twenty-year period.

The largest employee dishonesty loss I was involved in was in a bank and cost over $2 million. I had another bank loss of over $1.5 million.

Many employers have told me over the years, “Carrying insurance for employee dishonesty would be like telling my employees I don’t trust them.” That isn’t the cast. Rough Notes indicates that the American Management Association estimates 20% of business failures are due to employee dishonesty. The most honest person will succumb to temptation if the circumstances force the issue. People and circumstances change.

One pattern seems to hold true in most employee dishonesty losses. The person is highly trusted, rarely takes a vacation, and handles a portion of the business’ transactions exclusively. It is simply good business to have multiple signatures required on company checks and to rotate duties in sensitive positions.

Other crime coverages that should be considered are: Forgery, Theft of Money and Securities, Theft and Robbery Outside the Premises, Robbery and Safe Burglary, and Computer Fraud.

Computer Privacy Issues

The government can quickly put almost any company out of business with fines related to data breach. This coverage is almost mandatory if you’re handling private data.

In October 2013, a Missouri Federal Court proposed the following settlement of a data breach case for a large supermarket chain that involved 2.4 million customers. It included the following:

  • Pay up to $10.00 to each customers for every card that was compromised and had fraudulent charges posted to it;

  • Pay customers for certain unreimbursed out of pocket expenses such as bank overdrafts and late fees;

  • Pay for up to 3 hours for documented time spent at the rate of $10.00 an hour for customer’s time spent on the data breach;

  • A cap of $1.6 million would exist on all of these customer reimbursement expenses, up to $170.00 per class member.

  • Pay up to $10,000 for each related identity theft loss with the total capped at $300,000;

  • Pay up to $635,000 for plaintiffs’ attorney fees;

  • Pay $500.00 to each of the nine main plaintiffs in the lawsuit.

This chain had data breach insurance and adequate assets.

Surety Bonds

For many businesses, many bonds are a statutory requirement. For many others, they need surety bonds to qualify for contract bids. Court mandated bonds are, of course, a top priority.

Inland Marine

This coverage might be required by your lender. For example, if you own a wind farm, you probably will want inland marine coverage on your wind turbines to protect against physical loss.

Contractors will want inland marine on their equipment and tools because theft of tools is quite common.

Like with all physical damage insurance, you can reduce your insurance bill with higher deductibles, but usually it is hard to justify large deductibles for start-ups.

If you have customers’ goods in your care, custody and control, like a dry cleaners, you will want an inland marine policy to cover that exposure.

I have not covered every possible kind of insurance and may have left out the very coverage your small business needs.

Most insurance agencies either specialize in certain kinds of businesses, or will consult a Coverage Applicable book.

Many insurance companies have helpful guides for their licensed agents to help them work through your needs. My agency works with a number of national carriers that provide excellence assistance on their websites for deciding what coverage is needed. They also have specialty coverage endorsements for specific businesses.

Selecting what is best for you is a tough job. A good agent will show you your alternatives and discuss your options within those alternatives. The agent’s comments will help you make your ultimate decision.

James Holm

Did the Twitter IPO Rig Big Profits

Twitter logoOn November 7th, 2013, Twitter opened on the New York Stock Exchange at $26. By the end of the day, the price had soared 73% under the symbol TWTR to a closing price of $44.90.

Institutional and wealthy investors who bought the stock at $26 made a very healthy “paper” profit.

Did the underwriters make a huge error in setting the initial price for the IPO? Who are the underwriters? And, what does that term mean?

Let’s start with the history of the word “underwriting”.

Lloyd’s of London, the Home of Underwriting

I have been a Lloyd’s of London correspondent over three decades. During my years with them, I’ve noted that there is a much higher regard for insurance in Great Britain than in the United States. The Brits are bound in a long history of insurance tradition that started in the 17th century at a coffeehouse in London.

Edward Lloyd had a coffeehouse whose clients included merchants, shipowners and ship captains. Because the conversation at Lloyd’s was a goldmine of information, those who wished to insure ships and cargo congregated there to meet with people who wanted to assume their risk.

Some people inaccurately describe Lloyd’s as the birthplace of insurance. Actually “insurance” in many forms has been around since long before it was acknowledged in the Babylonian Code of Hammurabi in about 1750 B.C. Insurance is a system of handling risk, all the way from avoidance, to spreading, and on to actual transfer by contract.2

Loyds of London

The Lloyd’s building

Lloyd’s of London might accurately be described as the genesis of modern insurance as many of the techniques and terms used today started at Lloyd’s.

As things progressed at Lloyd’s, cargoes and ships became much more valuable (increased exposure), shipping perils became more treacherous through pirates, wars, and length of journeys (increased risk). People became less and less willing to assume the entire amount of any one loss. A system was developed at Lloyd’s whereby a piece of paper would be presented to those who wanted to accept the transfer of risk to them for a consideration (premium).

At the top of the paper would be information about the shipping journey. Such things as name of captain, name of ship, kind of cargo, shipping route, estimated date of departure, and estimated date of arrival would be included.

After each person looking to accept risk for a consideration would decide what percentage of the risk they wanted, they would “write” their name “under” the description of the risk with the percentage of risk they would accept.

Those taking the paper from table-to-table in Lloyd’s coffeehouse, trying to fill out the “line”, would soon determine who amongst those taking risk carried the most prestige with the other risk bearers. They would go to those people first, and they consequently became known as “lead underwriters”.

That system is still in place today at Lloyd’s. Although, in most instances, the actual placement of most insurance is handled by general agreements that are covered through overriding guidelines with agents around the world.

Underwriting As Regards Public Radio and TV

You also will often hear the word “underwriter” in regards to charitable giving for non-profits, such as public radio or TV. In that setting an “underwriter” is differentiated from a “sponsor” by the amount of public exposure given to the individual, foundation, or corporation who is donating funds.  It is a difference of nuance.


An IPO is the first time stock for a company is offered to the general public through a securities exchange.

With Twitter, investment bankers were contacted to establish the initial price for the initial public offering (IPO) and to provide marketing to assure that a certain percentage of the stock would be sold at that price. The investment banks involved are called underwriters.

They pledge that they will use their contacts to sell a set percentage of the stock at the set initial price. With Twitter they had to sell a pledged number of shares at the agreed upon price of $26. If the underwriters cannot sell the amount of stock they pledged, they are said to have to “eat the stock” or purchase it themselves and sell it for what they can get. Obviously the underwriters are taking a risk. They would be fairly certain that the amount of stock they can sell is enough so that any stock they have to purchase would not create more of a financial loss for them than the amount of their fee.

In the case of Twitter,  the IPO fee was 3.25 percent of the amount raised There were 70 million shares sold at $26, so the total fee was $59.2 million, split unevenly according to the amount sold by investment bankers (underwriters) according to how many shares each sold and their actual involvement in the process.

The underwriters set the price as high as possible as they were getting 3.25 percent of the proceeds. They didn’t set it too high because they wanted to make sure they could sell the vast majority of the 70 million shares.

Goldman-Sachs was the lead underwriter with help from several other firms including Morgan Stanley and JP Morgan Chase & Co.

Had the investment bankers missed on the pricing and only been able to sell 60 million shares at $26, they would have had to buy the other 10 million shares at $26. Had they eventually been able to sell those 10 million shares at an average of $20 a share they would have lost a net $800,000 on the sale.

It appears to me, their odds of losing on this transaction were remote.

I have been an underwriter’s assistant, and assistant underwriter, an underwriter, and a senior underwriter but have never had a $59.2 million payday. When I started in insurance, I had to fly to Chicago for my interview with the insurance company who hired me as a management trainee. I went to a bank to borrow the cost of an airline ticket that would be reimbursed. The bank president was the father of a fraternity brother and he thought I was worthy of the $200 risk. It seems now I would have been much better off had I borrowed the money from an insurance company to go to an interview with a bank.

James Holm