Changes to the CGL are Needed
Security companies must be flexible to address unique client needs, and they expect their insurance company to be just as flexible with them. As an example, some companies are using drones and other new unmanned technologies that could involve significant privacy issues. Changes to the CGL are needed or significant coverage gaps will occur.
An important way for a retail agent to help a client is to partner with an experienced and knowledgeable security company broker. That broker is aware of the options available and can work with the client to identify all of its exposures in order to better match the risk with the coverage.
Security Guard Exposures Continue to Evolve
Opportunities abound for agents who partner with top specialists
By Dave Willis
The security guard industry continues to rebound from financial pressures it faced during the recent economic downturn. "Based on the renewal submissions we're seeing, the trend from 2014 is continuing in 2015, with an uptick in security guard firm payrolls and revenues," explains Marc Katz, principal at The Mechanic Group. "This is partially attributable to the economic recovery in the first part of 2015, as well as the need to respond to public security concerns heightened by ongoing news coverage."
Tory Brownyard, CPCU, president of the Brownyard Group, also sees continued solid growth. "A good chunk of the security guard firms are having year-over-year increases in payroll and receipts," he observes. "Demand is strong given international threats as well as domestic incidents, including theater and school shootings. The security guard industry is being asked to step in and supplement law enforcement and federal government resources."
Even as business rebounds, security and investigative firms are facing what could be described as an explosion of lawsuits. "In one situation," says Bruce Brownyard, president of Brownyard Programs, Ltd., "security guards at a manufacturing plant escorted from the building an employee who alleged that her co-workers were spraying her with radioactive materials. The employee re-entered the building with a gun and shot three employees, two fatally."
The incident led to a $46.5 million judgment-the lion's share of which was for punitive damages. "The issue was that the two guards who escorted the employee out of the building saw her returning and, being unarmed and undertrained, failed to warn employees or notify police," he notes.
Another situation involved a guard company and its hotel client, where an armed guard shot a guest in the hotel parking lot. "The insurance company settled the claim for a few million dollars but is challenging the coverage because of an exclusion," Bruce Brownyard says. "A subtle exclusion in the policy says the company won't cover guards who aren't properly licensed or authorized to carry a firearm."
In this case the state was experiencing major delays in processing guard licenses when this guard applied for a license. As a result, he was not technically licensed at the time of the shooting. "The other more common problem with an exclusion such as this is the guard who brings his own unauthorized weapon on to a job site without management's knowledge," Brownyard adds.
Another claim-one that could top $200 million when all is said and done-involves a background screening company. "Investigative firms doing background checks need to be very diligent about following relevant laws, particularly the Fair Credit Reporting Act," Bruce Brownyard explains. "A class action suit alleges that the screening company did not follow all of the laws, and it could face fines of $100 to $1,000 for each of the 200,000-plus violations."
Other factors are affecting the security guard industry more positively. "Many security guard companies are using digital technology to assess situations prior to guard response," explains Karen Izzo, president of Izzo Insurance Services. "Guards are able to review video clips sent to cell phones and can monitor closed-circuit television screens. The use of alarm-based technology reduces costs and allows for appropriate response to the situation."
Katz of The Mechanic Group sees this trend too. "We continue to see a paradigm shift in which larger security guard firms in particular are moving away from or supplementing manned security and investing more in technology-related products," he explains. "With labor becoming more expensive and complex and with technology developing fast and becoming less expensive, we are seeing security guard firms offering a combination of electronic security and, more frequently, remote video monitoring, combined with manned guards."
Drones also have become a source of inquiries, Katz points out. "Drones can be used for a number of purposes, including surveillance in an investigation or monitoring a client's property," he remarks. "At this point, drone-related legal and privacy issues are largely undefined."
Tory Brownyard points out that standard GL policies don't cover drones. "Drones have been defined as aircraft, which are excluded," he notes. "Guard firms have started to use drones, but they may not think to ask their broker about coverage. Bodily injury, property damage and invasion of privacy are issues to consider." His firm works with a carrier that allows for certain exceptions to the exclusion, based on drone size and type of use. "But it really is a fluid situation," he adds.
The use of body cameras also is growing. "In the past few years we've read more about law enforcement using body cameras, and the security industry is generally in line with law enforcement," he notes. "From an insurance perspective, we think it will be a net positive; people are generally on better behavior when they're being filmed, and when a claim does occur, it can reduce the 'he said, she said' scenario and perhaps reduce frivolous claims."
Body camera footage can deliver other benefits. "They provide a tremendous training tool for the security firm," Brownyard comments. "Guard companies will have video footage to show employees how to properly handle situations and what to avoid."
The security guard industry continues to be plagued by onerous client-initiated contracts. "As we've mentioned previously in Rough Notes articles, risk transfer via written contract management continues to affect the security industry," Katz points out. "We realize that some larger clients of security firms may enforce their own written contracts, which include broad, unfavorable indemnity and hold harmless language. But small tweaks can be made to these contracts."
He adds, "Larger clients often will accept such adjustments. By changing words such as 'gross negligence' to 'contributory or direct negligence,' security firms can potentially save hundreds of thousands of dollars in unnecessary litigation. We try to protect our security guard insureds from these increased exposures, to the degree their clients are willing to accept."
For the most part, the security guard insurance marketplace is relatively stable. "We've seen rates leveling out a bit this past year, especially on the casualty side," Katz says.
Tory Brownyard points out that markets writing higher profile risks-such as guard firms working at high-exposure venues like sporting events, concert arenas and shopping malls-are facing challenges. "Those books may be under a little more pressure, and clients are seeing increased rates and restrictions," he says. "Security guard industry claims have a very long tail, and some markets that entered the business four or five years ago are seeing losses grow."
Given the increase in large lawsuits and settlements, Bruce Brownyard anticipates changes in the security guard insurance arena. "I think we may see a shake-up among insurers that cover the security guard business, based on the increased frequency and severity of claims involving the private security industry in the U.S."
Such events also are driving immediate changes. "Today we're seeing many companies increasing their exclusions," Brownyard observes. "Retail agents can encounter a virtual minefield of exclusions, so if they decide they want to insure security guard companies, they should be certain they're dealing with a program manager that specializes in the sector and cares more about providing comprehensive coverage than about profit sharing. That's more important than ever."
Industry-specific endorsements also come into play. "Carriers are meeting their security clients' needs by providing endorsements specific to their business," Izzo explains. "Insurers actually distinguish themselves based on endorsement terms."
For example, she notes, "Assault and battery coverage can be defined as an occurrence, or the terms can be more restrictive and limit coverage to 'reasonable physical force necessary to protect persons or property.' It's important that guard companies and the brokers who represent them read the coverage forms to understand these differences."
Building a book
Agents and brokers who are interested in prospecting for security guard business may need to look no further than their state house. "Licensing authorities in several states make security guard company license lists available to the public at no cost," Izzo remarks. "These lists can provide a good marketing base for brokers."
Katz encourages producers to engage with local, regional and national security industry trade groups. "By attending their meetings and social events, you'll build trust and recognition with security firm owners," he says. "It is, after all, the security business, and trust doesn't come overnight."
He also recommends teaming up and cross marketing with vendors that serve the industry. "For example, sharing leads with a uniform vendor who may have several security firm clients could prove mutually beneficial and increase a broker's security clientele," he suggests.
Izzo believes that partnering with a wholesaler or other provider that specializes in insuring security guard companies offers brokers and agents added industry-specific expertise. "We help boost brokers' understanding by explaining the exposures and available coverages," she says. "Filling gaps in current coverage generates trust and referrals from existing clients."
Tory Brownyard concurs. "Align with a solid, experienced program administrator," he advises. "They can help walk you through what makes a good risk and what makes a bad or high-profile risk. Recognize that if you work with high-profile firms, you'll have a smaller choice of markets."
Bruce Brownyard encourages agents and brokers to conduct due diligence to ensure that their prospective partner is indeed a specialist. "Some firms out there represent themselves as experts, but the expertise really doesn't run deep," he warns. "If an agent chooses the wrong partner, not only is his reputation on the line, but so is his E&O insurance."
He recommends similar due diligence with policy terms. "A number of companies that insure investigative firms and guard companies have exclusions for criminal acts or penal statute violations, as well as punitive damages exclusions," Bruce Brownyard explains. "Sub-limits also are common and can reduce liability coverage dramatically. Agents should look closely at policies; some have more holes in them than Swiss cheese."
Policy terms are particularly important as security firm contracts become more complicated. "We often help brokers review contract specs and offer our opinion on issues or separate coverages they may need," Tory Brownyard notes. "It's important for brokers to do their homework and make sure the insurer can handle what the client needs."
Teaming up with a true specialist carries longer term benefits. "It's interesting how many of the agents and brokers we work with have built their own expertise or specialization in this market after responding to and serving a single guard firm that cold-called them," he notes. "Starting small lets agents and brokers build confidence and a reputation in the marketplace."
Education is the key for brokers to retain security guard companies as clients. "Knowing what endorsements are available and understanding variations in coverage forms can mean the difference between an insured and an uninsured claim," Izzo points out. "We provide a comprehensive coverage checklist on our website that security companies and their brokers can use to compare coverage available from all carriers."
Getting to know and understand the security business and ways to improve loss control and risk management also is important. "That's particularly true with workers compensation," Katz says. "Besides payroll, workers comp is one of the largest security guard firm expenses. Controlling this cost is mission-critical to growing their business."
He adds, "If an agent can assist with lowering claims resulting in lower rates, this can translate into increased business for a security firm because it is able to bid lower for a security contract. Our experienced in-house claims staff and solid carrier partner resources can help agents and brokers control losses and manage risk."
Tory Brownyard points to claims handling as another retention driver. "We see more and more complaints from new customers and their brokers about how claims were handled by their previous insurer," he says. "Many years ago we set up our own in-house facility to handle claims from first report to settlement. We understand the nuances of the business, and this familiarity offers a huge benefit to guard firms and the agents and brokers they work with."
Customer service also is key. "When a broker calls, the insurer needs to drop everything," he explains. "This make the broker look like a hero, and it delivers the service customers deserve. Agents and brokers should take the same 'drop everything' approach when clients call. It's just common sense."
Finally, he advises, "Maintain frequent contact with clients. Understand what they're doing and whom they're serving. And stay on top of any changes in the guard firm's client mix. Knowing what a security guard company does is the only way to make sure it's properly protected. Frequent engagement ensures this and makes for a strong and lasting relationship."
Dave Willis is a New Hampshire-based freelance insurance writer and regular Rough Notes magazine contributor.