Financial Loss · Insurance · Risk Management

Not Sure The IRS Agrees With a Tax Position Your Company Has Taken? Here is a Solution

I recently read that Illinois Tool Works (ITW) prevailed in a case against the IRS.  The IRS challenged that a loan from ITW’s foreign subsidiary to its parent company was a nontaxable return of capital as ITW contended.  The IRS dtermined that it was not a loan but a dividend and as a result a taxable event. ITW challenged the IRS and the case was brought to the US Tax Court.  In early August the court released their decision and sided with ITW.  A short write-up can be found here.

Why I bring this up is that many companies have tax positions they are aware of that could be challenged by the IRS.  Companies rely on their accountants to determine whether certain events have tax implications and then proceed accordingly.  Unfortunately, this is not foolproof strategy, the IRS can and will challenge these events even if you are using the best and biggest accountants.  What few companies are aware of is that there is an insurance policy that can protect them in these instances.

Tax Liability insurance can protect against many types of tax issues, including, but not limited to, spinoffs, M&A, multinationals, tax exempts, related party transactions, and foreign investors.  The policy can cover the taxes, interest, defense costs, in some cases fines and penalties, and gross-up.  What is different with this type of insurance compared to traditional property and casualty insurance is that we are covering a known event, or tax position, that may not be 100% clear cut but that we are confident is correct.

The underwriting process is specific to that event and coverage is tailored accordingly. Information is collected on the event and might include commentary from a tax attorney and/or an accountant.  After preliminary info is collected it is presented to the insurance market and the carriers come back with non-binding pricing and terms.  At that point a carrier usually identified that would be a good fit and a more exhaustive underwriting process commences.  At this stage an insured typically pays an underwriting fee that is used to pay for the due diligence (think lawyers and accountants that really dig into the info) that allows the insurer to put together the actual terms and pricing.  Assuming all is in order, the insured can then bind the policy that can have up to a 7 year policy term.

If you are a company and have uncertain tax issues then a tax liability policy is worth looking into.  There is no upfront cost to get a non-binding pricing indication, but be aware that policy pricing is in the 6 figures to start, however, it is a one-time premium and not annual.  The policy limits usually start at $5MM and can go up from there.

Financial Loss · Insurance

Employment Discrimination Lawsuits – What To Know About How Your Insurance Policy Will Respond

It was recently announced that Wells Fargo prevailed in an age discrimination lawsuit.  The claimant was convicted of a crime in 1963 but apparently was not found in the initial background check, but subsequently found when Wells Fargo implemented a new system at which point they fired the employee.  The employee turned around and sued Wells Fargo on the basis of age discrimination.  Wells Fargo won on the basis that federal law bars banks from employing people who have been convicted of crimes involving dishonesty.  More on the case can be found here.

Even though Wells Fargo won the case, the case went to trial so the legal bills were most likely quite large.  Because it was a discrimination claim their employment practices liability insurance policy (Wells Fargo may not have this type of policy but we will assume they did) should have responded and paid the legal fees after the deductible/retention was met.

How could this have played out differently from an insurance perspective?  The most common mistake we see with claims is late reporting, particularly when an insured believes their case is rock solid.  The insured will decide not to report the claim or report it after legal fees start to mount which could jeopardize coverage.  Late reporting can be grounds for a claim denial in the worst case scenario.  A delay in reporting a claim also means the insured incurs more legal fees that will not be reimbursed by the insurer.  The insurance carrier typically does not count any past legal fees against your deductible until the claim is reported.  For example, if you spent $10,000 on legal fees before reporting the claim and your deductible is $10,000 you would have to spend another $10,000 before the deductible is met and the insurance company starts footing the bill.  Most insureds are worried that their “rate” will go up for reporting a claim so they caution on the side of not reporting claims, but in actuality if the claim turns out to be nothing you insurance rate should not be adversely impacted.

What most insureds also do not realize is that their policy is set up as a “duty to defend.”  This means that the carrier is responsible for defense counsel and ultimately has control on how to proceed with the case.  “Duty to defend” is more common for private companies and can be a very sensitive situation when an insured feels they are right and do not want to settle.  The problem is that even when the insurance company agrees that an insured’s case is strong it could still determine that would be more economical to settle the case and move on.  This of course does not sit always sit well with clients, but the policy terms can be amended so that the insured has more of a say in how to defend a claim.  Often times there is a “hammer clause” in the policy as well, which further compels the insured to defer to the insurer.  The “hammer clause” is also something that can be amended.  The important thing is that you as an insured are aware of these coverage conditions so there are no surprises if you have a claim.

Wells Fargo being a large company and most likely having a large retention would not have “duty to defend” language in their policy which is part of the reason this case may have made it all the way to trial.  If there had been “duty to defend” language it may have never made it as far as it did, and probably would have settled a long time ago.  Just because an insured believes they are in the right and the case against them is frivolous does not mean the insurance company will defend it all the way to trial.  Remember, insurers are for-profit companies and their objective is to make money so they will be looking at it from an economic standpoint and what puts them in the best position to be profitable.  This is why it is so important to make sure the terms and conditions are understood and that your broker works to tilt the policy in your favor as much as possible.

Financial Loss · Insurance · Risk Management

Your Insurance Broker Has No Incentive to Retain You as a Client!!!!

Skin in the game – that means your insurance broker actually having a vested interest in your success and the level of service you receive year in and year out.  Skin in the game does not mean your broker having a greater financial interest in year one compared to subsequent years yet that is how most brokers are paid. Most brokers get paid a set percentage for new business and then see that drop significantly after year one, and at some of the largest brokers that percentage might actually go to zero.  If your broker is always looking for the next deal to maintain their income how do you think that aligns with your interests?  You might say that the service team is incentivized to keep the account, but that is rarely the case, the service team’s is usually paid a salary and a small component of their bonus might be based on how well they service the customer.

At Alliant we believe that we should have a vested interest in your success and that your success leads to our success.  How do we do this?  We as individuals get paid the same percentage every year as long as we retain you as client, we don’t get paid more to bring in new clients or take a haircut after year one.  In fact, if we lose you as a client we feel that in our wallets because that income is gone.

Why am I telling you this?  I tell you this because it demonstrates that we value our existing clients just as much as our new clients.  A lot of brokers come in and tell you a story about service and how good their service is but can’t point to a reason as to why that service level will continue – we can.  We can point out that we actually get paid or, if the service is not good, not paid based on how we service your account – we put our money where our mouth is, we have skin in the game.  How many times has your service fallen off, even just a little bit in each year (cumulatively this could add up and you might not even recognize what good service is anymore), from the initial engagement?  Unfortunately, this is just considered part of how insurance works and what one can expect but it shouldn’t be.  That is why my firm strives to be different, we are not interested in a slow deterioration of service for our clients but a firm and consistent model of service that is the same in year one as it is in year eight.

I probably will get emails from brokers saying you shouldn’t be sharing this information but if we are being transparent about how much the firms are getting paid shouldn’t we be transparent about know how the individuals servicing your account are being compensated?  I am not saying W2’s need to be shared but knowing the structure and how it aligns with a service model I believe are good pieces of information to have because it can be a predictor of the future.  Maybe you are different than me, but when I deal with a “service” provider I want those individuals servicing my account to have repercussions if the level of service is not there but sadly in the insurance industry that is seldom the case.  With Alliant that is exactly the case, if the service drops we feel it in our wallet.

Financial Loss · Insurance · Risk Management

When Your Insurance Broker Masquerades as a Specialist

 

Is your insurance broker actually specialized in your industry or are they half-specialized?  You are probably asking yourself – “Matt, what are you talking about?  What does that even mean?”  Let me explain.

What most insurance brokers do is tell you they are specialized, but really are only giving you the specialists for one line of coverage, which in the life science sector is Products Liability.  I would call this broker half-specialized, they have highly specialized brokers for the Products Liability but those brokers do not touch the other lines of coverage.  Instead, they typically hand off the other lines to what I would call the “general industry” or “middle market” broker who does not necessarily understand the nuances and risks that a biotech or medical device company might encounter.  The individual broker could work on a five real estate companies, a manufacturer of widgets, a tire distributor and one biotech company.  Does that sound like a specialist?  Does that make you feel comfortable?

Think about where your greatest risk is if you do not have a commercial product.  Your biggest risk is probably not the Products Liability due to informed consents, protocols and defined patient count but on the other lines of coverage where you are getting the non-specialized broker.  To me that does not make sense.

I work in the life science industry and I consider myself specialized, not half-specialized, but 100% specialized.  I can say this because I do not outsource certain policies to brokers that are working on accounts outside of the Life Science industry.  In our group we work with life science and healthcare clients exclusively, across all lines of coverage.  We would love to demonstrate to you what the difference is between the two; we can do this by reviewing the policies you currently have in place and giving you our findings. Message or email me to discuss further.

Biotech · Financial Loss · Property Insurance

AVEO Pharmaceuticals Lost 40% of Their Market Cap – How Insurance Can Protect Against Delays

Delayed

AVEO Pharmaceuticals (stock chart) was in the news this week because they were forced to revise the timing of their topline data from the third quarter to the fourth quarter.  As a result of this news their stock dropped from over $2.80 to under $2.00.  The reason for the delay was the number of progression free survival (PFS) events occurred slower than forecasted combined with ten patients leaving the study without documented progression.   The point is, delays can decimate the value of your company and they can be caused by a multitude of events.

PFS events are out of one’s control but are part of running a clinical trial, they are a business risk. Physical loss or damage to an R&D location is also out of one’s control, but the financial impacts can be an insurable risk.  The problem is that most companies either don’t have the coverage in their insurance policy or have it but not enough.

Your policy should be setup to pay the actual loss of business income you sustain due a covered peril to property that is directly related to your “research and development operations.” The policy should pay for the period equal to the length of time it takes restore the damaged property.  For example, your key R&D site had a fire and it took 3 months to restore resulting in a 3 month delay of you launching your product, the insurance would pay this difference if setup correctly.

Let’s say you are not ready to launch a product, you are at the other end of the spectrum and are conducting animal studies.  The same fire scenario described above occurred and your R&D documents or prototypes were damaged or destroyed.  If your insurance policy is setup correctly, the continuing operating expenses you incur while you restore your operations should be covered by your insurance policy.

AVEO is an example of what happens to a company when there are delays.  In AVEO’s case the delay was due to something out of their control (their CRO could be negligent for a part of the delay, but that is another issue).  If you can tell your shareholders and key stakeholders that yes there was a delay, but that the financial loss due to the delay is insured, wouldn’t that be a much better conversation to have?  The question is – are you insured for these risks and if so are you insured adequately?  Or are you just finding out that these risks can be insured by reading this article?  If it is the latter, I would be happy to discuss with you how I can help.

Financial Loss · Insurance · Risk Management

What is a Black Swan Event?

I got a lot of great feedback on my post about protecting yourself from Black Swan events, but numerous people asked me to better define what a Black Swan was and to provide some examples.

A Black Swan is simply an event that you never could have predicted that causes catastrophic damage.  Even when something is predictable the results are typically underestimated.  Some real life examples are the banking crisis in 2008, the Fukushima nuclear disaster in 2011, and 9/11.

Here are some examples of what a Black Swan could like for a company in the Life Science industry:

  • A fire destroys your building.
  • You are a sole sourced company and your key supplier suffers a loss so they can no longer produce your product.
  • You or your key supplier are shut down due to regulatory action.
  • Your patent is infringed upon and you need to defend it.
  • Your CRO’s computer system is hacked into and the data from your clinical trial is stolen or destroyed.

What these examples have in common is that they can all be insured.  The problem is that only the first example is usually covered correctly by your insurance program.  If you are not sure if you have coverage for the other events, it means you probably don’t.  Do you not have coverage because your broker never told you there was a solution or because you made a conscious decision to self-insure?  If it is the former you need to ask yourself if your broker is actually providing value.

Financial Loss · Insurance · Property Insurance

Protecting Your Supply Chain

I read an interesting article* the other day about a supply chain issue Ford is having because one of their key suppliers suffered a fire loss.  Ford said the disruption could cause a reduction of up to 15,000 trucks being manufactured per week and would have an “adverse impact” on its financial results.

Ford is a colossal company and to see how a single supplier could have this much impact on its financials is mind numbing.  Many of my clients in the Life Science space are beholden to one or two suppliers and finding alternative suppliers and vendors can be both difficult and time consuming given the highly regulated industry of Life Sciences.  For many Life Science companies (both pre-revenue and revenue generating) this could potentially put them out of business.  This is the Black Swan event, both hard to quantify and catastrophic.

There is a solution, but it is often overlooked or at best underestimated.  The solution can be solved through the use of the Property Insurance policy and making sure there are adequate limits under Contingent Business Income.

The approach I use with my clients when designing their program is to first take a deep dive into their supply chain and identify worst case scenarios.  I like to ask few questions to get the process started.  Who are my client’s key suppliers?  Who are their suppliers?  If a supplier goes down can my client quickly move to another supplier or facility?  How much product does my client have in reserve?

Once we identify weakness or vulnerabilities in the supply chain we then start looking at the economics of each vulnerability.  This is part math and part art.  We start at what would be the worst possible scenario, what could put my client out of business.  An example would be a company with a single product using a single supplier for a key ingredient and the supplier goes down with no backup facility or vendor in place.  How long would it take to get another supplier?  If this scenario played out, what would be the economic cost to the client?  Once we identify this scenario it becomes my job to develop different program options that best fit the risk tolerance and economics of my client.

I had one client who was very conservative.  They had a recently approved product and were expecting significant sales from that product.  They had no other product on the market and they used a single manufacturer with no backup facility in place.  We determined the quickest a backup facility could be identified and validated was 8-10 months.  The client had about 4 months of product in reserve.  We created options that ranged from 4 months of protection to 24 months.  We also looked varying deductibles based on their reserve amounts.  In the end the client moved forward on a program that would protect their business income for a period of up to 12 months if the third party facility went down with a deductible of 30 days.

The more difficult situation to quantify is the R&D organization with X amount of dollars and a burn rate of Y who has a trial interrupted because of supply chain issues.  There are no sales but there would be a real economic loss if the trial is interrupted.  This is not necessarily business income, but can still be protected in the same exact way making sure the proper wording is on the policy form to protect R&D expenses.

Out of all the issues I see every day, this is often the most overlooked or the limits are inadequate because a deep dive on the exposure was never contemplated.  If Ford has a supplier that can cause an “adverse impact” on their financial results, how good do you feel about the protection you have if one of your suppliers suffers a loss?

*http://www.autonews.com/article/20180509/RETAIL/180509786/ford-f-series-production-cut-supplier-fire