Tag Archives | insurance

Payroll Accounting

See also:
Commission Accounting
PEO Arrangement Compared to Outsourcing Payroll
Direct Labor
Pension Plans
Federal Unemployment Tax Act (FUTA)
Outsourced Accounting Services

Payroll Accounting

Payroll Accounting is the function of calculating and distributing wages, salaries, and withholdings to employees and certain agencies. It is generally done through different documents such as time sheets, paychecks, and a payroll ledger. Payroll Accounting also involves the process of issuing reports to upper management, so that they are able to make informed decisions about the company’s labor-cost data.

Payroll Accounts

Below are some payroll basic accounts that are used in association with accounting payroll entries as well as a description of each one and the relevance towards payroll.

Assets

Cash is the petty cash account which is used to empty the accrued payroll account when the payroll is distributed to the company’s employees.

Liabilities

Accrued Payroll represents a liability calculated by taking the gross pay and subtracting all deductions, or the amount that is due to the employees.

Federal Income Taxes Withheld

This account serves as a deduction from the gross pay or payroll account. It is an accumulation of payroll taxes as a percentage amount which is due to the U.S. Government. Payroll tax rates differ from business to business.

Federal Insurance Contributions Act (FICA) Taxes Payable

The FICA Taxes Payable represents a liability that is due to the U.S. Government. It is then used to fund institutions like Medicare and the Social Security Administration.

Insurance Withheld

Insurance withheld is another deduction from the gross pay and represents a contribution to the employee’s insurance provided by the employer.

Note: Other voluntary payroll deductions and withholdings can be present like bond or stock withholdings that a company would use for investments on the employee’s behalf. Other deductions include union dues or pension funds that the company may hold for its employees.

Expenses

The payroll account is the gross pay that is calculated by a payroll accountant (i.e. the salary payment or the hourly rate times the number of hours worked).

Payroll Accounting Journal Entries

This is a typical accounting payroll example of journal entries when a company is calculating and distributing the payroll.

Account                           Dr.               Cr.

Calculation:
Payroll                           xxxx

Federal Income Taxes Withheld                       xxxx

FICA Taxes Payable                                  xxxx

Union Dues Withheld                                 xxxx

Bond Withholdings                                   xxxx

Accrued Payroll                                     xxxx
Distribution:
Accrued Payroll                   xxxx
Cash                                                xxxx

Payroll Accountant Duties

Oftentimes, companies outsource their payroll accounting to specialized firms. These firms can perform the same function for a much lower cost than if the company generated them in-house.


Click here to download: The Guide to Outsourcing Your Bookkeeping & Accounting for SMBs


There are six major job functions that the payroll department or specialized company must perform throughout the year, including the following:

1)  Compute gross pay (hourly or salary)

2)  Compute the total amount of deductions (FICA, taxes, etc.)

3)  Calculate the total amount due to employees i.e. the gross pay minus the amount of deductions.

4)  Authorize the amount of payments due to employees.

5)  Distribute the payroll once authorized.

6)  Issue reports to upper management concerning labor-cost data.

Accounting Payroll System

In the past, accounting payroll systems consisted of two journals. The first is the payroll journal. Then, the second is the payroll disbursements journal. Companies used the payroll journal to accrue for salaries and wages towards employees as well as government obligations withheld from the employee’s paycheck. Thus, companies used disbursements journal to pay off these accumulated accruals when they became due.

But thanks to computer systems like Peachtree and Quickbooks, they have combined both of these journals into a payroll ledger. Furthermore, you can outsource these payroll functions at a lower cost and efficiency for a company.

Guide to Outsourcing Your Business's Bookkeeping and Accounting


Payroll Accounting

Originally posted by Jim Wilkinson on July 24, 2013. 

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Black Friday

See also:
Traditions Turned Financial Fluctuations
Improving Profitability – Fuel for Growth
Product Life Cycle Stages
Beware of the J Curve

Black Friday

In America, Black Friday is an event that is not only the most shopped on day during a typical year, but it also generates huge sales.

“Only in America do people trample others for sales exactly one day after being thankful for what they already have.”

~Author Unknown

Black Friday Definition

The Black Friday definition is a retail store sale that occurs the Friday after Thanksgiving – an American holiday in November. Many consider this event to be the kick-off to the Christmas shopping season. Many retailers, such as Walmart, Kohls, Kmart, Macy’s, Express, and other major retailers, open their stores in the early hours of the morning to receive the first rush of customers. Door busters, sales, huge discounts, and giveaways are all part of this event.

The History Of Black Friday

Let’s look at the history of Black Friday. Black Friday originated in 1952 as the start of the Christmas shopping season. Because many states in the United States considered the day after Thanksgiving to be a holiday as well, retail shops realized that there were enormous amounts of potential shoppers available during this four-day weekend. But since 2005, this event has launched into record numbers for sales, shoppers, etc. For example, sales dropped for the first time since the 2008 recession in 2014. Yet, sales boasted $50.9 billion over that weekend.

Although not all states in the United States permit workers to work on national holidays or even the day after Thanksgiving, companies have broken many boundaries to take advantage of this rush of customers. Over time, retail stores and e-commerce platforms have expanded on Black Friday to include Cyber Monday. It’s become a tradition to many.

Cyber Monday

Because Black Friday became such a hit, online companies created another shopping event – Cyber Monday. It occurs the Monday after Thanksgiving and encourages shoppers to purchase more gifts and things on Monday. Originally, it was launched in 2005.

The Cost of Black Friday

While it may be tempting to join in on Black Friday specials and sales, you have to consider the cost. Remember, a sale isn’t necessarily a good sale. It has to be a profitable sale.

Some of the costs associated with Black Friday include.

How to Win on Black Friday

In order to win on Black Friday, you have to price your products for profit. Especially since you project to sell large quantities of product, you need to make sure you don’t start with a pricing problem. If you cut prices off a product that is already not profitable, then you will loose more potential profit. Before you start planning for Black Friday, make sure your pricing is in check. Click here to download our Pricing for Profit Inspection Guide.

Price for Profit During These Sales

Each sale you make has to return a profit. Therefore, you need to allocate as many costs to each good to make it easier. How much inventory do you need to push in order to turn a profit? But also, what prices are customers willing to spend? The trick with Black Friday is that since everyone is competing for the best deal, you must know what others are pricing the same product at.

Reduce DSO by Turning Over Inventory

The risk for big sales like Black Friday is that there will be some that cancel their credit card transaction for $1,800 worth of product. Because you are putting a lot of cash up front to increase inventory, you need to collect cash as quickly as possible. For example, you can offer discounts for cash only. For other pricing tips, download the free Pricing for Profit Inspection Guide to learn how to price profitably.

Black Friday Definition, History Of Black Friday

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Black Friday Definition, History Of Black Friday

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Third Party Insurance

See Also:
Evaluating and Renewing Employee Health Insurance Plan
How to avoid additional insurance premiums
Insulate Your Company from Rising Health Insurance Costs
How to Select Your Commercial Insurance Broker
Credit Life Insurance

Third Party Insurance Definition

Third party insurance, defined as insurance purchased by an insurer (1st party) to protect the insured (2nd party) against claims made by someone outside this agreement (a 3rd party), is a common way to hedge risk in a business. This insurance can come in 2 forms: liability or as a part of full coverage insurance. Liability covers the damages to only the 3rd party. Full coverage insurance covers the damages for the third party as well as those for the insured.

Third Party Insurance Explanation

Third party insurance is a way to mitigate the cost of damages which occur to an unexpected victim. You can purchase it as coverage on a variety of assets. Or you can purchase it for a single asset, most commonly a motor vehicle, or a series of assets such as an entire business. For the vehicle, this insurance protects the purchaser from damages made to an outside party due to some sort of accident. For a business, this insurance protects any of the businesses assets from damages created by any other part of the business. As with any other insurance, it is purchased in specific amounts, bears a deductible for any claims made, and has a term sheet made which defines requirements and limitations.

You can purchase third party insurance coverage for both tangible and intangible assets. For example, a machine in a manufacturing plant can physically damage a plant visitor, but so can a website which posts improper information that defames the name of another entity. Some third party insurance coverage is recommended for any business venture. And it is usually included in business insurance. Insurance, third party included, is a necessary cost.

Third Party Insurance Example

Leroy is the owner of a small insurance syndicate which provides services to small, local businesses. Leroy, who started at the lowest job in a major insurance firm and worked his way up to becoming a self-made entrepreneur of his own. As a result, he knows a little something about his business. In fact, he reviews the major claims made to his company every day.

His assistant informs Leroy of a claim that just came in. Apparently one of his client companies, a cloth dying plant, has had an accident. This accident has, unfortunately, hurt 2 employees and a visiting client. Leroy knows what to expect with the workers compensation claim made by this business; he has many calculating applications which provide him a range of costs for this claim.

Third Party Insurance Reimbursement

What concerns Leroy, however, is the third party insurance reimbursement he may be facing. The visiting client, known to Leroy as his insurance third party beneficiary, has apparently hired one of the best lawyers in the city. Leroy is not used to this type of claim, due to how unusual they are. Thus, he is concerned. If the court case associated with this claim wins a large settlement, then it could mean trouble for his company. He knows that his company will survive long term, but in the short term this may create issues in the cash cycle of his company.

Leroy does proper research by looking back into the deductible and total coverage associated with the claim which this third party insurance covers. It seems, perhaps, he was a little more worried than he needs to be. The claim only covers a small portion of the potential sum from the lawsuit. Additionally, the company has made small payments and opted for a relatively large deductible should any problems arise. This, to the misfortune of the business owner being sued, prevents Leroy from paying a large sum in settlement. He resolves to do a little more research but can relax for the time being.

Conclusion

Leroy ends his research on a good note. The case is dropped due to an outside factor. Leroy, knowing that his business would have survived either way, resolves to keep higher cash balances for any future problems. This will protect him from any future, unexpected third party insurance claim.

third party insurance

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Select Your Commercial Insurance Broker

See Also:
How to Avoid Additional Insurance Premiums
Rising Health Insurance Costs
Evaluating and Renewing Employee Health Insurance Plan
Risk Premium
Service Department Costs

Select Your Commercial Insurance Broker

Often times, the CFO of a company has the responsibility for making the decisions regarding the commercial insurance coverages for their company. Normally, this is an additional duty thrust upon them and typically is one for which the CFO has had little or no training. It is like this author going to buy a new computer at one of the computer super stores. I know what I want the computer to do, but I am at the mercy of the 21 year old kid who looks at me like I am a relic from a long gone era. He barely tolerates my ignorance and then impatiently tells me what I need. Therefore, in the absence of any training, approach the situation with the skills you would use in making any major purchase for their company.

The Bid Process

The “bid process”, as comedians say, “Goes a little something like this”…

Steps 1-6 of the Bid Process

1. Identify three or more brokers who want to bid.

2. Each are be provided the data that they need (this alone can be mind numbing because while they do want some common data, each seems to have their own special list).

3. Each broker will want to be assigned certain markets, but they all want the same ones (this will resemble refereeing a Little League baseball game).

4. You are then asked to answer an incredible number of questions that come in from the various underwriters and answering the same questions multiple times to different brokers.

5. You then have to expedite each broker to make certain that their bid is received in time to give you ample time to analyze each of their proposals (by the way, they will all want to present last).

6. Then each broker will make an in person presentation.

Steps 7-12 of the Bid Process

7. You are then faced with the impossible task of spread sheeting each bid to make sure you have “apples to apples”. (Insurance companies make sure that this is an exercise in futility by putting all sorts of special extensions and exclusions of coverage in their quotes).

8. You then have to go back to each broker to get specific questions answered so your “apples to apples” comparison will work.

9. The unsuccessful bidders will have to be notified of the outcome. (Each unsuccessful broker will make the impassioned plea to “Let me have one last chance to get the right price. What do I have to beat?”)

10. You will notifying the winner (finally you get to do something that is pleasurable, or at least a relief).

11. You have to rush the new broker to get insurance binders, auto ID cards and Certificates of Insurance out on time.

12. And finally, the fruits of your labor will show up as an invoice the next day and your policies a half of a year later.

Issues With This Process

The main problem with this process is that it does not always guarantee the desired result is achieved. You should have some kind of warm fuzzy feeling that your company has been taken care of for the money you are paying, but typically you are just relieved that the process is over.


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Desired Result of Insurance Purchasing Process

What is the desired result of the insurance purchasing process? Simply put, it is to:

1. Identify the exposures your company has which could lead to a possible loss.

2. Identify those exposure which you want to consider insuring. (Not all exposures need to be insured – the can also be avoided, retained, or transferred to others. All of these are preferable to insurance.)

3. Procure that insurance at a fair price.

4. Allow you to sleep at night knowing you have proactively addressed the main areas which would keep you awake after watching the ten o’clock news and seeing what is happening to other companies.

The good news is that there is a way to achieve this result. A much, much, much better way. And not only is it better, it is easier. And not only is it better and easier, it is more professional.

Assumptions

So, let me begin this by making a few assumptions.

• The total premium you pay for your commercial insurance (property, general liability, business auto, workers compensation, umbrella, directors and officers, crime, professional liability, etc.) represents a major expense item to your company.

• If you take 10% of the total premiums paid above for your insurance (which is the average compensation your broker is receiving for their services to your company), then your insurance broker is one of the most highly paid consultants your company employs.

• The CPA and Legal relationships of your company are NOT one that you put out for bids on a regular basis.

Basic Question

So here is the basic question:

Does it make sense to put the fate of your company’s survival in the event of a catastrophic event and the hiring of one of the most highly compensated consultants your company hires into the hands of the insurance companies in the marketplace? After all, if you conduct the bid process as described above, then that is exactly what you are doing. You are letting the insurance company with the lowest bid select your agent for you.

Take Control

As promised, there is a better way. Simply put – YOU TAKE CONTROL. Here are the facts:

1. There are only a few insurance companies that are willing to competitively write your company’s insurance.

2. Most agencies, that are independent agencies and are of the size to handle your company’s business, represent all of them.

3. If the current insurance program design is not re-thought EVERY year, then the odds of it responding as you want in the event of a loss are very slim.

4. If you ask for “apples to apples”, then you are going to get no innovative thought from the brokers as to how to improve your program’s design.

5. If you use multiple brokers to approach the insurance markets, then you are letting the insurance companies pick your broker.

Select the Best Broker

So, this is how it should work. This is the method to use to select the best broker for your company.

Steps 1-5 to Select Your Commercial Insurance Broker

1. Begin this process 5-6 months prior to your expiration date.

2. Select the brokers you would like to consider for your risk management consultant (formerly referred to as your broker). This list can come from either: a) competitors, b) business advisors, c) brokers you have met and gotten to know over the years d) industry association meetings, e) etc.

3. Narrow the field to not more than three brokers.

4. Notify each broker, then tell them of your intent to open a broker competition. Also, tell them they are invited to make a presentation. In addition, ask them to send you a list of what they will need in order to make their presentation. Each will begin to immediately to demonstrate their professionalism and differentiate themselves by the questions and data they ask for.

5. Do not be surprised by the amount of data you are asked to provide. It could range from nothing (in other words they have it canned) to a list that would include the following:

a) Copies of all policies

b) Copies of loss runs for the past 3-5 years

c) Information on your company

d) Interviews with the key people

Steps 6-9 to Select Your Commercial Insurance Broker

Typically, the more data the broker asks for the more thorough the job is they are going to do.

6. Have them schedule their presentation with you a minimum of 130 days prior to your expiration date.

7. Allow each broker up to one hour to make their presentation and thirty minutes for questions from you and your team.

8. The winning brokers presentation will include, as a minimum, the following components:

a) The broker will bring their whole team that will be working with your account and your personnel and present their qualifications.

b) Then they will discuss the design of your current insurance program, ask questions about how it evolved, and discuss design options they have come up with that you may want to consider.

c) They will also discuss your current pricing and offer their opinion as to where it fits in the marketplace.

d) They will discuss their marketing strategy for your upcoming renewal which as a minimum will include the insurance companies they are going to go to and their timeline for the renewal.

e) They will discuss your company’s ongoing service standards to make certain that your company will be receiving the service it needs.

f) They will be prepared to answer any questions you and your team might bring forward.

9. Schedule all presentations for the same day and then assemble your team at the end of all the presentations, narrow the field to the field to the final two, check their references, and then make your decision. Make the decision 120 days prior to your expiration date. This is because the change of brokers can be most effectively and efficiently made.

Result of Selecting Broker

This process will seem strange to you, however the result will provide the following:

1. You will have a broker that will be a valued business advisor and not just a vendor of insurance.

2. You will also go to bed at night knowing you have proactively addressed the risks of loss to your company.

3. You will have an insurance program designed for your company for the way it is now… Not the way it was in previous years.

4. You will know your company has selected the best risk management and insurance program. In addition, it has the most competitive price for that design.

5. You and your team will be selecting your broker and NOT delegating that to the low bidding insurance company.

6. You will have entered the realm of professionally managing the risk management of your company.

Conclusion

In conclusion, companies tend to view their insurance broker as a VENDOR of the insurance. The truth is, the broker puts the price on nothing. Your company should be selecting your insurance designer and your insurance negotiator. This is a professional relationship more like your CPA firm and your legal firm, not like your copier firm.

If you are selecting a new commercial insurance broker, then your CEO needs you to be their trusted advisor. Learn how you can be the best wingman with our free How to be a Wingman guide!

Select Your Commercial Insurance Broker

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Select Your Commercial Insurance Broker

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Private Placement

See Also:
Convertible Debt Instrument
Common Stock Definition
Preferred Stocks
Hedging Risk
Treasury Stock

Private Placement Definition

The private placement definition is the process of raising capital directly from institutional investors. A company that does not have access to or does not wish to make use of public capital markets can issue stocks, bonds, or other financial instruments directly to institutional investors. Institutional investors include the following:

You do not have to register private placement issuances with the Securities and Exchange Commission (SEC). In addition, you do not have to provide a detailed prospectus. The issuing company and the purchasing investors negotiates the terms and conditions are negotiated. You cannot trade private placement securities on public markets, but they can be traded privately among institutional investors after they have been issued by the issuing company.

A private placement is in contrast to a public offering, which is issued in public capital markets, requires a detailed prospectus, must be registered with the SEC, and can be traded by the investing public in the secondary markets.

Advantages and Disadvantages of Private Placement

The primary advantage of the private placement is that it bypasses the stringent regulatory requirements of a public offering. You have to conduct public offerings in accordance with SEC regulations; however, investors and the issuing company privately negotiate the private placements. Furthermore, they do not have to register with the SEC, do not require the issuing company to publicly disclose its financial statements, and ultimately avoid the scrutiny of the SEC.

Another advantage of private placement is the reduced time of issuance and the reduced costs of issuance. Issuing securities publicly can be time-consuming and may require certain expenses. It forgoes the time and costs that come with a public offering.

Also, because the investors and the issuing company privately negotiate private placements, they can be tailored to meet the financing needs of the company and the investing needs of the investor. This gives both parties a degree of flexibility.

Now, let’s look at the disadvantages of private placement. The main disadvantage of private placement is the issuer will often have to pay higher interest rates on the debt issuance or offer the equity shares at a discount to the market value. This makes the deal attractive to the institutional investor purchasing the securities.

If you want more tips on how to improve cash flow, then click here to access our 25 Ways to Improve Cash Flow whitepaper.

Private Placement, Disadvantages of Private Placement, Private Placement Definition
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Private Placement, Disadvantages of Private Placement, Private Placement Definition

 

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Moral Hazard

See Also:
Business Risk
Commercial Risk
Interest Rate Risk
Investment Risk
Risk Premium

Moral Hazard Definition

Moral hazard, defined are the circumstances or situations that increase the probability or riskiness of a loss. This is often due to a person’s habits or morals.

Moral Hazard Explained

Moral hazard risk is the risk that is associated with a particular person or group. In other words, it is a situation in which another person takes on the risk of loss while another makes the decision on how much risk that person will have. This happens in finance with brokers or fund managers. It can also be seen in insurance where a person might not care as much about a certain property or equipment because the insurance company will cover the loss.

Moral Hazard Example

For example, Pete owns a barn that he has recently insured. Pete walks into the straw filled barn where he sees a loose wire from an electrical outlet. Normally Pete would fix this problem right away, but he doesn’t really feel like doing it. The barn is insured so it is of little concern to Pete whether the job get done today or tomorrow. He vows to fix the problem in the morning. Over the night the barn catches fire and burns down. The insurance company pays Pete for his complete loss.

The moral hazard here is that Pete simply did not care to take care of his property as he should have because he knew the insurance company would pay for the entire amount of the repairs. Insurance companies have to deal with this moral hazard all of the time. They even try and spend time valuing the amount of moral hazard risk.

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Moral Hazard
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Moral Hazard

 

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Intellectual Property Risk

See Also:
Tips on How to Manage your Lawyer
What should General Counsel’s relationship be with a Board
Corporate Veil Definition
Corporate Veil
Ten In-House Secrets for Reducing Your Company’s Legal Costs
Red Herring

So What Is the Problem With Intellectual Property Risk?

What do a small business software company, a privately held manufacturing company, a big box retailer, and a medical device company all have in common? Intellectual property risk.

Intellectual Property

“Intangible” versus “tangible” assets include intellectual property, which covers a diverse range of legally-protected rights such as patents, copyrights, trademarks, trade secrets, and designs, and other forms of intangibles such as human capital, contract rights and goodwill. In our increasingly knowledge-based economy, intangible assets have economic and strategic importance just like tangible assets such as real estate and product inventory. In fact, there is a silent war between “intangible” assets and “tangible” assets. Many would say that intangible assets are winning.


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Intellectual Property Risk

From the traditional risk management perspective, categorize intellectual property risk as both a first and third party risk.

From the first party intellectual property ownership perspective, the risks include the following:

  • The legal costs of protecting and enforcing intellectual property rights
  • The loss or diminished value of intellectual property as an asset, or diminished licensing or product revenues, as a result of legal findings of invalidity, unenforceability, or non-infringement, or challenges to title or ownership

From the third party intellectual property infringement liability perspective, the risks include:

  • The legal costs to defend against an intellectual property infringement or theft suit;
  • Any resulting settlement or damages costs;
  • Design-around costs; harm to customer relationships; and negative impact on company share price.

Example of Pharmaceutical Companies

To illustrate several of these intellectual property risks, let’s look at the example of a generic pharmaceutical company challenging a name brand pharmaceutical company’s patent-protected drug through a paragraph IV ANDA and a lawsuit against the name brand pharmaceutical company’s patent on that drug.

The risk to the name brand pharma company is that the generic drug company will be successful in invalidating its patent by proving that the US Patent and Trademark Office should not have issued the patent to the name brand drug company in the first place. If this happens, then the name brand pharma company can keep selling its drug. But it can’t prevent the generic drug company from selling a drug based on the same compound at a much lower price. And, the patent asset’s value goes to zero.

The risk to the generic drug company is if it cannot prove that either the name brand drug company’s patent is invalid or that its drug does not infringe on the name brand drug company’s patent. If found to infringe, then the generic drug company must pay damages for any past sales of its infringing product. It must pull its infringing drug off the market or develop another, non-infringing compound on which to base the drug. Oh yes, and both sides will incur several million dollars in litigation costs in this process.

Minimize Intellectual Property Risk

There’s no quick fix, but the disciplined, integrated use of sound risk management practices will minimize intellectual property risk. This requires a coordinated approach by risk management, legal, financial, product development, and marketing to identify the risk, analyze it, and manage it. Who within a company should be responsible for managing intellectual property risk–Legal? Risk management? Product development? Marketing? Finance? Accounting? All of the above.

Is Insurance the Answer?

Insurance is not the only intellectual property risk management strategy. But it can be a key intellectual property risk management tool. The intellectual property insurance market is continuing to mature, despite some stops and starts. The global intellectual property market is on the increase, with some national patent offices creating and supporting intellectual property enforcement programs for their nationals. As underwriting processes and methodologies and policy forms are improved and actuarial data becomes more widely available, intellectual property insurance is expected to grow into a large, mainstream line of coverage, much like what has happened with D&O, E&O and product liability coverage.

Lloyd’s of London

Generally speaking, types of specialty line, stand-alone intellectual property insurance include: infringement liability; enforcement or abatement costs; reps and warranties, and first party loss or impaired value. Lloyd’s of London has been underwriting intellectual property risk for non-North American companies since the early 1980s. Some of its member syndicates are the most experienced global risk insurers.

After a five year hiatus, Lloyd’s of London, along with other London and US capacity, is back to providing intellectual property infringement liability coverage and intellectual property reps and warranties coverage to North American companies. These carriers offer claims made indemnity policies of up to $15+ million in limits for competitively priced premiums. There are also some US domestic alternatives, both stand-alone and as part of other types of coverage such as media, tech E&O, and cyber.

Infringement Liability Policies

Focusing specifically on infringement liability policies, the scope of coverage varies. For example, some markets require that the applicant obtain a freedom to operate opinion from an attorney. Then build the cover around the terms of the opinion. Others undertake their own due diligence and provide full coverage for products, processes or services sold or used by the applicant. More recent policies cover indemnities given to suppliers and licensees. This a very valuable extension for the technology community. Arrange territorial coverage worldwide. Policy terms are typically one year.

Such policies may or may not be duty to defend policies but most will include hammer clauses. Because insurers recognize that intellectual property litigation, particularly patent litigation, requires special training and experience, policy holders are frequently allowed to use their own intellectual property counsel in the event of a claim. However, most intellectual property infringement liability policies have a self-insured retention or deductible that must first be satisfied. In addition, a co-insurance percentage, which insurers may increase if an insured uses its own counsel, does not satisfy the insurer’s criteria or is not on the insurer’s list of approved counsel. The self-insured retention can vary from zero to several million dollars.

Submission and Underwriting Process for Intellectual Property

The submission and underwriting process varies depending on the type of coverage and the carrier. Some carriers use a staged process that provides a non-binding indication of terms to give potential insureds an idea of the limit of indemnity, self-insured retention, and co-insurance that would be offered and the estimated premium. If the potential insured goes forward with applying for coverage, then pay a nonrefundable underwriting risk review fee to the insurer before the insurer will accept the insurance application or perform its risk review. Other carriers require applicants to obtain a legal opinion and the carrier underwrites behind the legal opinion.

How Can Insurance Help?

Use intellectual property insurance for balance sheet protection, contractual liability protection and deal facilitation. For example, a software company with less than $2 million in annual revenue purchased intellectual property infringement liability coverage. But it also covers its larger licensees/customers. The annual premium was only $35,000.

As another example, a company was seeking to close a $60 million sale of a medical device product range to a large medical device company. A term of the agreement was originally drafted so that a $15 million retention (by way of escrow) was to be maintained for intellectual property infringement claims. This was proving to be a deal breaker until the transaction was saved by placing an insurance wrap for the intellectual property reps and warranties in isolation on a multiyear basis.

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Intellectual Property Risk

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Intellectual Property Risk

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