In past articles, I have spent much time discussing the types of insurance coverage most dealers carry. As a change of pace, I thought it might be interesting to discuss some lesser-known policies that, in the right circumstances, may be just what you need.
Kidnap, ransom and extortion coverage
We see news reports more and more frequently regarding kidnap and ransom cases. But, we only hear about a small percentage of the actual cases. The people at most risk are those perceived as wealthy.
Dealers who live very close to our southern borders are certainly aware of these risks and some are buying the coverage. Traveling outside the country, especially to Latin America and those with children traveling abroad may also want to consider coverage.
Kidnappings are usually carried out to obtain ransom. In most cases, ransom is paid. A recent study showed that in 67% of cases ransom is paid. In only 15% of cases was the victim released without payment. It is estimated that kidnappings have increased by 100% worldwide over the past six years.
A number of larger insurers offer KRE coverage and the coverage varies slightly from carrier to carrier. Most policies cover ransom money, informant money, accidental death and dismemberment, payment of transit and business interruption. The policies usually also include the services of a crisis management team that will include experienced negotiators strategically positioned in kidnap hotspots. There are a number of other risks and services available, such as political evacuation coverage and personal security consultation. The coverage limit can be as high as $50,000,000 or more.
With dealerships both closing and selling, insurance related to these transaction are becoming more commonplace. In past articles, I have discussed insurance related to the closing of a dealership but not the sale. The purpose of this insurance is to address the contingencies or disagreements that can threaten a sale or purchase. Often this coverage is divided into three subcategories, contingency insurance, reps and warranties insurance and tax insurance. The seller can use the policies in place of an indemnity requirement such as a letter of credit, escrow account or the retention of a liability.
The coverages offered can be somewhat complex and tailored to the specific transaction. Contingency insurance addresses potential contingencies that are a part of your transaction related to possible legal interpretations, funding for possible litigation, or successor liability issues, to name a few.
Sales transactions often include an indemnity agreement should one party breach the representations and warranties that are part of the transaction. Reps and Warranties Insurance provides coverage for such breaches and can be used to resolve disagreements over the size, structure and scope of the indemnity agreement.
Tax insurance is designed to provide certainty when complex yet legitimate tax positions are taken as part of the transaction. All these coverages are intended to help your sale close in a timely manner when contingencies threaten to postpone or possibly derail your transaction.
Fiduciary liability policies cover the liability risks associated with the administration of employee benefits and employee retirement lawsuits where the dealer is a fiduciary. Over time the legal environment has favored the employee creating more avenues for legal actions brought by employees and former employees.
Most dealers carry some form of employee benefits liability coverage to protect against lawsuits involving errors and negligence related to plan administration. However, this coverage often excludes the more complex and expensive ERISA lawsuits. A number of auto manufacturers have faced such suits. They may include allegations related to imprudent investment of retirement funds such as investing too much in the company’s own stock. In many cases your employees will have discretion and be able to, within set parameters, make their own investment decisions. This should lessen your risk. However, for the organization that controls and directs the fund investments, this is a coverage to consider.
Contingent business interruption
Contingent business interruption coverage was recently brought to light because of Toyota’s order to dealers to stop selling certain models until a solution to an unintended acceleration issue was resolved. Contingent business interruption is a rarely used coverage that is intended to provide business interruption insurance for a manufacturer or similar company whose business would be interrupted by the inability to get a particular component of their process. As an example, you make widgets that included a part made only in one factory in China and that factory burns down. You can no longer make widgets since the integral part is no longer available. Here is the problem, contingent business interruption works just like regular business interruption, and you must have an insurable event, like the fire mentioned above to trigger coverage.
In a case similar to the Toyota situation where a supplier simply suspended the sale of its product there would be no coverage. We have not seen any insurers offering to sell a policy that would cover this type of event.