Welcome to the Medicine Hat

Innovators Network Breakfast Seminar SeriesManaging Risk and Liability with Insurance

Today’s speaker: Neil Maser

Cedar Square Insurance and Financial Services

www.mhinnonet.com

Neil Maser

•partner in Cedar Square Insurance and Financial Services

•16 years experience in the industry

•an associate of the Insurance Industry of Canada

•accredited Canadian Insurance Broker

•specializes in larger, morecomplex commercial and business accounts

Technology, of course, encompasses a wide range of services and businesses. To name but a few, these of course include those involved in information technology, service technology, including engineering and design work, as well as lab, facility, and field testing operations.

Others may be more focused in the area of product innovation and design, and computer software programming with for a wide variety of applications As you can see, the diversity in this evolving field can present unique challenges when they come before an insurance company.

What I would like to do this morning is make some general comments about what a commercial insurance policy is and then deal with more specific issues and common problems I am sure some of you have encountered when you take on contracted work and try to obtain the necessary insurance to satisfy your client or customer. Hopefully I will get through my presentation in 15 minutes or so, and then open the floor if anyone has any questions.

For our purpose here today, I will not discuss any consideration for health or disability insurance or the need for Director's and Officer's liabilityinsurance. So what is Business Insurance? What are your client's looking for when they ask you to provide evidence of insurance?

Generally, a well written business insurance policy will address five major areas of coverage. The first three, which includes coverage on your

•property, •business interruption coverage •crime

are usually quite easy to obtain and usually quite affordable. Unfortunately, someone looking to you for proof of insurance, may not really care if you choose to insure any of the first three! What they are looking for is proof you have general liability insurance.

•Property coverage deals with insuring your business contents-for example, your office equipment, perhaps your building, and perhaps the need for off-premises coverage on property, against perils such as fire, theft and vandalism etc. Hopefully this is done on a replacement cost basis.

•Business Interruption, on the other hand, simply provides a means of generating funds to replace lost income and the provision of money for extra expenses following an event such as a fire, while

•crime coverage protects against loss of money from things like robbery or hold-up and includes employee fidelity.

As I mentioned earlier, the first three areas present little challenge in obtaining and anyone looking for evidence of coverage will generally not be too concerned whether you have this or not, with perhaps the exception of your banker!

•Commercial General Liability Insurance This is the area where technology based businesses often run into difficulty and it is, in most instances, what your client is looking for when they require evidence of insurance. It is typically purchase in increments of $1M, $2M, or $5M.

What does “general liability insurance” protect against? This coverage protects the business entrepreneur, and often the client if they insist on being added to your policy as an additional insured, for claims against you for any

bodily injury or property damage as a consequence of the use of occupancy of your premise, your product, or the service or operation you provide.

Not only will the policy pay if you are found negligent in terms of injury someone or damaging their property, it also looks after your legal expenses along the way.

This is probably the most important aspect inunderstanding “why” insurer's are reluctant and often do not want to freely grant this coverage, particularly to a technology entrepreneur. An insurer's concern stems from what is referred to as the

•product and completed operations hazard

As I move along today, this will be the focus of my discussion because it clearly presents the greatest challenge to obtaining liability coverage.

At this point, I would like to briefly mention the fifth and final area of coverage. This is known as

Professional Liability insurance and is more commonly referred to as

•errors and omissions" coverage or

•malpractice as it is known in the medical field. This type of coverage deals with your

•competence in the area or field in which you work.

.

This type of coverage is often purchased througha professional society or association such as APEGGA although it certainly can by bought separately and in the context of our discussion today,

Professional Liability will refer to coverage for errors in design, engineering, non-performance, among other things

As I mentioned a few minutes ago, our discussion will revolve around the area of liability, particularly general liability, and to a lessor extent, professional liability.

So what is the big deal or problem for a technology based entrepreneur in getting general liability insurance? Why doesn't an insurance companysimply take your money (as much as they can) and give you a policy?

Firstly, by their very nature, insurance companies are very conservative! If they do not " fully" understand something, they are far less inclined to offer favorable pricing or indeed offer coverage at all, at any premium!

Something which is new, something with little history or marketplace place experience leaves underwriter's nervous and far more likely to say NO when asked to provide a $1M, perhaps $2M, or even $5M blanket line of credit, which is essentially what a policy of insurance is. Think of the fun you would have at the bank with no security whatsoever if you tried to arrange the same thing!

A very simplistic analogy which influences modern day underwriting stems from the enormous long term problems that resulted for insurer's when theyissued product liability policy's for manufacturer's of asbestos years ago!

Who would have thought that simple product would have resulted in the financial nightmare that followed. The insurance policy was priced withlittle knowledge of the magnitude of future claim costs.

So how does as an entrepreneur deal with this?Simply put, you •give your broker all the information he requests, whether it be in the form of professional training, pamphlet's , brochures, marketing material, website's, completed applications, and anything else that will help your broker can sell "you" and your business , and

•make it as attractive as possible to a potential underwriter. The more clearly they understand what you are doing, the more likely you can expect favorable results.

Let me make a comment on website's before I come back to the "product and completed operations" discussion. Today, everyone uses websites to promote their businesses, even the simplest businesses often look like a Fortune 500 company, involved in all sorts of interesting things, offering products and services and expertise in a wide range of of activities.

Remember, underwriter's look at website's too!I have been called many times by an anxious underwriter who has visited a website and been shocked and greatly disturbed by what he has seen! It's a great promotional vehicle but ironically, it may not necessarily be a good thing when someone already a little uncertain about what you do and who you work for, is looking to insure you!!.

Getting back to our discussion about the "product and completed operations hazard", this is, of course, the area where the coverage for the product you make, design, sell, or service you offer, comes from, and normally where the underwriter gets scared off. With globalization and the widespread use of the internet, worldwide distribution of ideas, technologies, services and products has brought into focus differing values,responsibilities, and willingness to litigate and presented serious challenges for insurers. A contract of insurance, which after all is alegal document, contemplates Canadian and Provincial rights and responsibilities and must now recognize and face far reaching scrutiny inplaces it was never intended, particularly US litigation.

One only need recall the MacDonald's coffee incident in California where a patron spilled his coffee on himself and managed to get $60,000 USA out of the deal.

Another reason for reluctance you may run into when looking for liability coverage is recent verdicts which have "blurred the line" in terms of defining what is a professional liability or error and omission's claim and a general liability claim.

As a consequence of litigation and the deep pocket syndrome, many general liability insurers simply will NOT issue a policy until confirmation is received that professional liability is in place. Put another way, insurer's have found themselves in court incurringexpenses to defend themselves from allegations that they took the client's money, they should have given the client the proper coverage in the first place, even if, for example, they do not offer and had no intention of picking up the professional liability exposure!!.

A interesting misconception I often run into is the assumption that field tests, trials, prototypes, soft ware program and research etc is the responsibility of the particular government agency one is working with. I have heard comments that "they will look after things" if something goes wrong! Yet, it is that very same agency or company that insists you must be insured. In this context, you can effectively interchange the words "insurance and responsibility" !

They are one of the same! I can assure you that someone will be looking to you for responsibility if any opportunity exists to shift blame and you will be obligated to possibly defend yourself in a court of law.

The other day I was reading in one of our industry publication's and an article which I felt was rather timely and I though I might share it with you here today. A disturbing trend seems to be emerging in the the information technology or IT sector whereby a vendor launches an initial lawsuit to collect unpaid fee's from a customer and then is promptlycounter-sued with allegations of non-performance.

The IT sector is particularly prone to "performance based disputes" due to inherent bugs, fixes prevalent in any new or customized application. (Professional Liability issue)

So what does proper liability insurance look like?

Obviously, it includes both general liability and professional liability.

Where do you get it?

As a rule, the mainstream insurance marketplace will decline. Well known brands like ING, AMA, Royal & Sunalliance, Dominion, Wawanesa, AXA, to name a few, typically are reluctant and although not in every case but for the most part do not cater to technology based business requiring both general & professional liability. It does not hurt for your broker to have them take a look at your operation but generally speaking they will decline.

That leave us with what is known as the "Specialty Market's” •Companies like Elliott Special Risks, Encon, St Paul Fire & Marine, Cree Church, to name a few, and of course group associations I mentioned earlier.

•Unfortunately, with more specialized underwriting and fewer insurer's, greater lead time is required, greater demand for information, such as lengthy applications, and of course higher premiums are likely.

All of this of course inevitably leads to the classic struggle between cost and coverage. When underwriter's hear language like

•electronic, metallurgical and mechanical support services•destructive testing•explosive simulations•computer programming•field trials•remote piloted vehicles•airborne platforms and•contracts with the Dept of National Defence

it simply scares the hell out of them!!!!!

To Summarize:

•Full disclosure in terms of what you are doing,

•Ample lead time for your broker to search the market,

•Willingness to include professional liability as part of your protection package

should well go a long way toward acquiring generalliability with the least hassle.

With that, this brings me to the conclusion of mypresentation and I would like to thank you for your attention this morning.

Hopefully, I did not bore you too badly!!!!