Chapter 15 Managing Insurance. © 2009 Stephen C. Barth P.C. and John Wiley & Sons, Inc. All Rights Reserved 2 Managing Insurance Introduction To Insurance

Chapter 15Chapter 15

Managing Managing InsuranceInsurance

2© 2009 Stephen C. Barth P.C. and John Wiley & Sons, Inc.

All Rights Reserved

Managing InsuranceManaging Insurance

Introduction To InsuranceIntroduction To Insurance Types Of CoverageTypes Of Coverage Selecting An Insurance CarrierSelecting An Insurance Carrier Selecting The Insurance PolicySelecting The Insurance Policy Policy AnalysisPolicy Analysis


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In This Chapter, You Will Learn:In This Chapter, You Will Learn:

1.1. To understand the value of insurance in To understand the value of insurance in protecting a business from financial loss.protecting a business from financial loss.

2.2. To become familiar with the different types of To become familiar with the different types of insurance required of hospitality operations.insurance required of hospitality operations.

3.3. To understand the role of workers’ To understand the role of workers’ compensation and the requirements of an compensation and the requirements of an employer.employer.

4.4. To critically evaluate the financial rating of an To critically evaluate the financial rating of an insurance company and other information to insurance company and other information to help you select an insurance carrier.help you select an insurance carrier.


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In This Chapter, You Will Learn:In This Chapter, You Will Learn:

5.5. To distinguish between the terms To distinguish between the terms “primary” and “umbrella” insurance “primary” and “umbrella” insurance coverage, and determine coverage, and determine appropriate amounts of coverage.appropriate amounts of coverage.

6.6. To analyze an insurance policy and To analyze an insurance policy and determine what types of claims will determine what types of claims will be covered, and what types of be covered, and what types of claims will not be covered.claims will not be covered.


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Introduction to InsuranceIntroduction to Insurance

CoverageCoverage ExclusionsExclusions Ability to payAbility to pay


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Legalese:Legalese:

Insure (Insurance) Insure (Insurance) - To protect from - To protect from risk.risk.


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Legalese:Legalese:

Actuary Actuary - A mathematician or - A mathematician or statistician statistician who computes who computes insurance risks and insurance risks and establishes establishes premium rates.premium rates.


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Legalese:Legalese:

Insurer Insurer - The entity that provides - The entity that provides insurance. insurance.


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Legalese:Legalese:

Premium Premium – The amount paid for – The amount paid for insurance insurance coverage; can be paid coverage; can be paid in one lump sum in one lump sum or over time, such or over time, such as monthly.as monthly.


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Legalese:Legalese:

Insured Insured - The individual or business - The individual or business that that purchases insurance against purchases insurance against a risk.a risk.


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Legalese:Legalese:

Policy (Insurance) Policy (Insurance) - The contract for - The contract for insurance agreed upon by an insurance agreed upon by an

insurer insurer and an insured.and an insured.


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Legalese:Legalese:

Annuity Annuity - Fixed payments, made on a - Fixed payments, made on a regular basis, for an agreed-regular basis, for an agreed-

upon upon period of time or until the period of time or until the death of the death of the recipient. recipient.


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Legalese:Legalese:

Indemnification Indemnification - To insure against - To insure against possible liability and loss, and/or to possible liability and loss, and/or to

compensate financially for losses compensate financially for losses incurred.incurred.


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Legalese:Legalese:

Claim Claim - Demand for money, property, - Demand for money, property, or or repairs to property.repairs to property.


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Analyze the Situation 15.1Analyze the Situation 15.1

Samuel Renko, president of the Senframe Samuel Renko, president of the Senframe Hotel Management company, authorized the Hotel Management company, authorized the purchase of a $2 million fidelity insurance purchase of a $2 million fidelity insurance policy, the purpose of which was to protect the policy, the purpose of which was to protect the company in the event of employee theft or company in the event of employee theft or fraud. In discussing the purchase with the fraud. In discussing the purchase with the insurance agent, Jana Foster, Mr. Renko insurance agent, Jana Foster, Mr. Renko assured Ms. Foster that all hotel Controllers assured Ms. Foster that all hotel Controllers were subject to a thorough background check were subject to a thorough background check before they were hired. As a specific condition before they were hired. As a specific condition of the insurance policy, background checks on of the insurance policy, background checks on Controller candidates were required prior to Controller candidates were required prior to employment. employment.


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The insurance policy was purchased The insurance policy was purchased and went into effect on January 1, 2003. On and went into effect on January 1, 2003. On June 1, 2003, the Senframe company took June 1, 2003, the Senframe company took over the management and operation of the over the management and operation of the Roosevelt Hotel, a 300-room property in a Roosevelt Hotel, a 300-room property in a resort area. As part of the operating resort area. As part of the operating agreement, with the Roosevelt Hotel's agreement, with the Roosevelt Hotel's owners, the hotel's Controller and its owners, the hotel's Controller and its Director of Sales were retained by Director of Sales were retained by Senframe. Senframe.


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On December 20, 2003, Senframe On December 20, 2003, Senframe management discovered that the management discovered that the Roosevelt Hotel's Controller had been Roosevelt Hotel's Controller had been creating and submitting false invoices. The creating and submitting false invoices. The invoice payments were deposited in a invoice payments were deposited in a bank account he had established for bank account he had established for himself five years earlier. Total losses for himself five years earlier. Total losses for the five-year period that the falsification the five-year period that the falsification occurred were over $500,000. occurred were over $500,000.


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The controller resigned, but the The controller resigned, but the hotel owners sued Senframe for the hotel owners sued Senframe for the portion of misappropriated funds portion of misappropriated funds ($70,000) taken during the period the ($70,000) taken during the period the hotel was under Senframe's hotel was under Senframe's management. Ms. Foster maintained management. Ms. Foster maintained that her insurance company was not that her insurance company was not liable to indemnify Senframe, because liable to indemnify Senframe, because the Controller had not been subjected the Controller had not been subjected to a background check, as Mr. Renko to a background check, as Mr. Renko had promised. had promised.


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Mr. Renko countered that the Mr. Renko countered that the Controller, although not background-Controller, although not background-checked, had no criminal record of any checked, had no criminal record of any kind, and thus a background check kind, and thus a background check would not have prevented the hotel would not have prevented the hotel from hiring the Controller.from hiring the Controller.


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1.1. Must Ms. Foster's company defend Must Ms. Foster's company defend Senframe in the litigation brought by the Senframe in the litigation brought by the hotel's ownership?hotel's ownership?

2.2. If you were on a jury, would you hold If you were on a jury, would you hold Senframe responsible for the employee Senframe responsible for the employee theft? theft?

3.3. Regardless of the outcome of this situation, Regardless of the outcome of this situation, what changes in operational procedure what changes in operational procedure should be implemented by Mr. Renko and should be implemented by Mr. Renko and the Senframe Hotel Management Company?the Senframe Hotel Management Company?


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Types of CoverageTypes of Coverage

Property-CasualtyProperty-Casualty LiabilityLiability Employee LiabilityEmployee Liability Health/Dental/Vision Health/Dental/Vision Workers’ Compensation Workers’ Compensation


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Types of CoverageTypes of Coverage

Legalese:Legalese:

Course and Scope Course and Scope - The sum total of - The sum total of all all common, job-related employee common, job-related employee

activities dictated or allowed by activities dictated or allowed by the the employer.employer.


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Christina Fleischer was 16 years Christina Fleischer was 16 years old when she was hired to work as a old when she was hired to work as a busser for a private country club. On busser for a private country club. On Sunday mornings, the club operated a Sunday mornings, the club operated a popular brunch that served 500-1,000 popular brunch that served 500-1,000 people between the hours of 9:00 A.M. people between the hours of 9:00 A.M. and 3:00 P.M. On Christina's first day of and 3:00 P.M. On Christina's first day of work, her supervisor quickly detailed work, her supervisor quickly detailed the job requirements. the job requirements.


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As part of her job, Christina was to remove As part of her job, Christina was to remove the guests' used dishes from the table, take the guests' used dishes from the table, take the dishes to a bussing station, and scrape the dishes to a bussing station, and scrape any leftover food from the dishes into a any leftover food from the dishes into a garbage receptacle lined with a plastic trash garbage receptacle lined with a plastic trash bag. Periodically, she was to bring the dishes bag. Periodically, she was to bring the dishes to the kitchen to be washed, and take the to the kitchen to be washed, and take the garbage receptacle to a designated area garbage receptacle to a designated area where she would then remove the plastic where she would then remove the plastic trash bag and replace it with an empty one. trash bag and replace it with an empty one.


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The filled bags were left in the The filled bags were left in the designated area until they could be designated area until they could be taken out to a dumpster by a member taken out to a dumpster by a member of the dishroom staff. The garbage of the dishroom staff. The garbage receptacles would often get very heavy, receptacles would often get very heavy, and all bussers were instructed to and all bussers were instructed to replace the plastic bags in them when replace the plastic bags in them when they were half full. Christina's they were half full. Christina's supervisor made it a point of supervisor made it a point of mentioning that during their 15-minute mentioning that during their 15-minute training session. training session.


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The club was very busy with Sunday morning The club was very busy with Sunday morning brunch patrons on Christina's first day of work. brunch patrons on Christina's first day of work. Halfway through her shift, Christina forgot to Halfway through her shift, Christina forgot to replace one of the garbage bags until it was replace one of the garbage bags until it was nearly full. She placed the garbage bag with nearly full. She placed the garbage bag with the others in the designated location. Later the others in the designated location. Later that afternoon, a dishroom attendant, while that afternoon, a dishroom attendant, while taking out the 20 plastic garbage bags filled taking out the 20 plastic garbage bags filled from the brunch, attempted to lift the bag that from the brunch, attempted to lift the bag that Christina had accidentally overfilled. The Christina had accidentally overfilled. The dishroom attendant seriously injured his back.dishroom attendant seriously injured his back.


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The injury was deemed within the scope of The injury was deemed within the scope of his work, and the dishroom attendant was his work, and the dishroom attendant was awarded a monetary settlement by the awarded a monetary settlement by the workers' compensation board in his state. workers' compensation board in his state. However, he then threatened to sue the However, he then threatened to sue the country club, claiming negligence in Christina's country club, claiming negligence in Christina's training, and stated that this negligence was training, and stated that this negligence was the direct cause of his accident. He also stated the direct cause of his accident. He also stated that management had provided workers with that management had provided workers with garbage receptacles that were too large and garbage receptacles that were too large and thus directly contributed to the accident.thus directly contributed to the accident.


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1.1. Was management negligent? Was management negligent? 2.2. Does the dishroom attendant have a Does the dishroom attendant have a

viable claim against the club? viable claim against the club? 3.3. Do you feel the workers' Do you feel the workers'

compensation premiums for the club compensation premiums for the club should be increased because of this should be increased because of this incident? incident?

4.4. What steps might the country club What steps might the country club take to avoid paying higher take to avoid paying higher premiums? premiums?


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Selecting An Insurance CarrierSelecting An Insurance Carrier

Legalese:Legalese:

Underwrite Underwrite - To assume agreed upon - To assume agreed upon maximum levels of liability in the maximum levels of liability in the

event event of a loss or damages.of a loss or damages.


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Search the Web 15.1Search the Web 15.1Log on to Log on to www.insure.com.www.insure.com.1. Select: Insurance Company Guide.2. Select: What the Ratings Mean.3. Read the definitions of AAA, through B

insurance ratings.4. Select: Go to Insurance Company Guide.5. Follow the path required to find the rating of your

own automobile or life insurance company.6. What is your insurance company’s rating?7. How does it rank among the insurance

companies in your state?


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Selecting the Insurance PolicySelecting the Insurance Policy

Primary coveragePrimary coverage Umbrella (or excess)Umbrella (or excess) DeductibleDeductible


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Selecting The Insurance PolicySelecting The Insurance Policy

Legalese:Legalese:

Primary Policy Primary Policy – The main insurance – The main insurance policy policy that provides basic that provides basic coverages and the coverages and the amount of amount of insurance provided by the insurance provided by the policypolicy


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Legalese:Legalese:

Per Occurrence Per Occurrence - The maximum - The maximum amount amount that can or will be paid by that can or will be paid by an insurer an insurer in the event of a single in the event of a single claim.claim.


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Legalese:Legalese:

Aggregate Aggregate - The maximum amount - The maximum amount that that can or will be paid by an can or will be paid by an insurer for all insurer for all claims during a claims during a policy period. policy period.


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Legalese:Legalese:

Umbrella Umbrella - Insurance coverage - Insurance coverage purchased purchased to supplement primary to supplement primary coverage.coverage.

Sometimes referred to as excess Sometimes referred to as excess insurance.insurance.


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Legalese:Legalese:

Deductible Deductible – The amount of money – The amount of money the the insured has to pay before the insured has to pay before the insurance coverage will begin to pay. insurance coverage will begin to pay. Accordingly, the higher the Accordingly, the higher the deductible, deductible, the less risk to the the less risk to the insurance company; insurance company; should equal should equal lower premiums.lower premiums.


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PolicyPolicy Analysis Analysis

Legalese:Legalese:

Face Sheet Face Sheet - A one-page document - A one-page document briefly briefly describing the type and describing the type and amount of amount of insurance coverage insurance coverage contained in an contained in an insurance policy. insurance policy. Sometimes referred Sometimes referred to as a to as a declaration page.declaration page.


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Legalese:Legalese:

Exclusions Exclusions - Liability claims that are - Liability claims that are not not covered in an insurance policy.covered in an insurance policy.


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Legalese:Legalese:

Exceptions Exceptions - Insurance coverage that - Insurance coverage that is is normally included in the normally included in the insurance insurance policy, but that will be policy, but that will be excluded if the excluded if the insured fails to insured fails to comply with comply with performance terms performance terms specifically specifically mentioned in the policy.mentioned in the policy.


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What Would You Do?What Would You Do?

Assume you are an insurance Assume you are an insurance agent with the Arizona Business agent with the Arizona Business Insurance Company (ABIC). You sell Insurance Company (ABIC). You sell ABIC products exclusively. Your ABIC products exclusively. Your company, which is rated AA, offers company, which is rated AA, offers insurance coverage against a variety insurance coverage against a variety of risks, including workers’ of risks, including workers’ compensation, and specializes in the compensation, and specializes in the hospitality industry. hospitality industry.


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You are approached by Ted Betz, You are approached by Ted Betz, the Operational Vice President of J-the Operational Vice President of J-Town Smokies, a chain of pit Town Smokies, a chain of pit barbeque restaurants. Mr. Betz would barbeque restaurants. Mr. Betz would like to purchase workers’ like to purchase workers’ compensation insurance from your compensation insurance from your company because he will be opening company because he will be opening five stores in the southwest in the five stores in the southwest in the coming year. coming year.


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A review of his application and claim A review of his application and claim history indicates that J-Town Smokies has history indicates that J-Town Smokies has experienced a rather large number of experienced a rather large number of worker injuries in its four years of existence. worker injuries in its four years of existence. In fact, the rate of worker injury per man-In fact, the rate of worker injury per man-hour worked is nearly two times that of the hour worked is nearly two times that of the restaurant industry average. Further restaurant industry average. Further investigation indicates that most of these investigation indicates that most of these injuries resulted from cutting meat prior to injuries resulted from cutting meat prior to or after the barbeque process.or after the barbeque process.


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What Would You Do?What Would You Do? A review of the U. S. Department of Labor A review of the U. S. Department of Labor

statistics reveals the following highest injury rate statistics reveals the following highest injury rate industries for this year and last. industries for this year and last.

Accident Rate Accident RateEmployeesEmployees per Thousand per Thousand(in thousands)(in thousands) This Year Last This Year Last

YearYearMeat-packing plants Meat-packing plants 147.2147.2 36.6 36.6 30.3 30.3Ship-building and repairingShip-building and repairing 102.5102.5 32.7 32.7 27.4 27.4Steel foundriesSteel foundries 26.626.6 26.4 26.4 26.4 26.4Mobile homesMobile homes 68.068.0 24.3 24.3 26.2 26.2Automotive stampingAutomotive stamping 117.7117.7 23.8 23.8 23.2 23.2RestaurantsRestaurants 250.0250.0 16.1 16.1 16.6 16.6


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1.1. What type of information would you want What type of information would you want to see from Mr. Betz before you offer to to see from Mr. Betz before you offer to sell him a workers’ compensation policy sell him a workers’ compensation policy from your company? from your company?

2.2. Do you believe Mr. Betz’s restaurants Do you believe Mr. Betz’s restaurants should pay the same amount for workers’ should pay the same amount for workers’ compensation coverage as other compensation coverage as other restaurants, or should he be charged restaurants, or should he be charged rates consistent with those in the meat-rates consistent with those in the meat-packing industry? packing industry?


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Rapid ReviewRapid Review

1.1. Describe the importance of Describe the importance of mathematics and statistics to the mathematics and statistics to the insurance industry.insurance industry.

2.2. Identify at least five types of insurance Identify at least five types of insurance that would be needed by a nightclub or that would be needed by a nightclub or bar owner, and discuss the importance bar owner, and discuss the importance of each.of each.

3.3. Assess the pros and cons of self-Assess the pros and cons of self-insurance in the area of workers’ insurance in the area of workers’ compensation.compensation.


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Rapid ReviewRapid Review4.4. Use the Internet to find a company that will likely Use the Internet to find a company that will likely

provide liability coverage for your new hotel. provide liability coverage for your new hotel. Assume the hotel is to be built in Berlin, Germany Assume the hotel is to be built in Berlin, Germany and your company requires a minimum of an AA and your company requires a minimum of an AA Standard and Poor’s financial strength rating.Standard and Poor’s financial strength rating.

5.5. Assess the legal climate today, and determine Assess the legal climate today, and determine the amount of umbrella coverage your hospitality the amount of umbrella coverage your hospitality company would need to defend itself against a company would need to defend itself against a wrongful death suit brought about by Dram Shop wrongful death suit brought about by Dram Shop legislation. Assume you have $1 million in legislation. Assume you have $1 million in primary coverage. Be prepared to discuss the primary coverage. Be prepared to discuss the factors that influenced your decision.factors that influenced your decision.


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Rapid ReviewRapid Review

6.6. Describe the function and limitations of a Describe the function and limitations of a face sheet, or declaration page.face sheet, or declaration page.

7.7. Develop a checklist for purchasing Develop a checklist for purchasing insurance, beginning with the recognition of insurance, beginning with the recognition of the need for insurance to the evaluation of the need for insurance to the evaluation of the face sheet and the actual policy.the face sheet and the actual policy.

8.8. Describe, in detail, an example of both an Describe, in detail, an example of both an exclusion and an exception that might be in exclusion and an exception that might be in effect with a workers’ compensation policy effect with a workers’ compensation policy at a hospitality operation where you have at a hospitality operation where you have worked.worked.

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Chapter 15 Managing Insurance. © 2009 Stephen C. Barth P.C. and John Wiley & Sons, Inc. All Rights Reserved 2 Managing Insurance Introduction To Insurance