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.
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.
A great mid-year report by Cornerstone Research on Securities Class Action Filings for the first half of the year. I recommend you check out the full report which you can find here.
These visuals really speak for themselves but the big takeaway is that if you are publicly traded company the chances of being subject to a Securities Filing are rising. In 2017, 8.4% of exchange listed companies were subject to a filing and in 2018 it is projected to be 8.5%.
If you are a member of the S&P 500 the chances of a filing are even higher at 9.6%.
Breaking this down even further, the industry you are in can change the odds dramatically as well as the chart below demonstrates.
The clients I work with are in the Life Science and Healthcare space and this is how filings breakdown in that group.
I will dig a little deeper on this at a later post, but I believe companies need to believe a Securities Class Action filing is inevitable and prepare accordingly.
Once again I recommend you check out the full report from Cornerstone Research which you can find here.
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.
Almost every day I read about a company receiving a milestone or grant payment, but sometimes milestones aren’t met and it is not for lack of science. I often wonder how a company would be affected if the milestone or grant were not received because of a fire or some other natural event rather than the science simply not working? Even worse, how would a company and its shareholders feel if they knew this financial loss could be covered by insurance?
For many life science companies these payments allow them to continue operations or avoid having to raise additional money that will dilute shareholders. The financial loss of a missed milestone due to an event that is insurable but not covered by your insurance policy is inexcusable. For R&D companies where there is no cash flow, a missed milestone could put you out of business or significantly impact operations. Sadly, many clients never have the conversation with their broker regarding this important coverage. As you look through the chart below, how deep of a dive have you and your broker done?
Typically when I speak to new clients they have rarely gone deeper than the second question, “has your broker discussed what limit is appropriate?” Milestones and their applicable payment are usually well-known in advance so this is actually a rather straightforward coverage to determine the correct limit of insurance if the right questions are being asked. However, if you don’t know the coverage is available and your broker is not asking the correct questions it can turn into a costly coverage gap that is either uninsured or under-insured (limit is not adequate for the loss exposure).
If this is as deep as you have gone, what other coverage are you missing in your policy? If you think this is the only aspect of business income insurance commonly overlooked I am sorry to say you are mistaken. In future posts I will discuss other business income issues that are not often not covered properly or not covered at all.
If you have questions on whether your policy is correct, feel free to shoot me a message and I would happy to discuss.
According to the 2018 Allianz Risk Barometer, the #1 threat to companies worldwide is Business Interruption (in the US, cyber is #1 and Business Interruption is #2). What is Business Interruption? Business Interruption occurs when a business suffers a loss to its premise that causes a suspension or slowdown of its operations. This loss of income would only be covered by property insurance if the damage was caused by a “covered” peril (think wind and fire or natural hazards), but not all interruptions to your business are covered by a traditional insurance policy. Have you heard the term NDBI (Non-Physical Damage Business Interruption)? If not, you are not alone. Let me explain.
If your business or one of your key suppliers is forced to suspend operations by a regulator – how would that affect you? What is more likely: A key supplier being shut down by a regulator or the key supplier being shut down by a covered peril? Most likely it is the former. When I ask CFOs and Risk Managers how they are managing the regulatory risk, they basically tell me that they are keeping their fingers crossed and looking at putting in a dual sourcing plan. Is hope a good strategy for an event that could decimate your business? How long does it take and at what cost to put a dual sourcing plan in place? As I said, most companies I speak with do not know there is an insurance policy available that can cover the loss of income due to regulatory action. If you are a med device, biotech or pharma company you understand how a regulatory action to you or your supplier could cripple your business and that these shutdowns happen far more frequently then what a traditional property policy covers. Wouldn’t it be nice to have a coverage that could protect your cash flow if this were to happen? This is what an NDBI policy can provide.
The biggest risk to companies worldwide is Business Interruption, yet the vast majority of companies have never even been introduced to NDBI coverage. If you are only looking to insure your risk in the same way you always have, isn’t it time you ask yourself why? Why aren’t you being introduced to new ways to transfer your risk? Why are you bringing this coverage up to your broker and not the other way around? What other coverages are available that might enable you to better protect your business?
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.