INSURANCE: OPIATE OR ANALEPTIC?
By Robert L. Sallander, Jr.
Greenan, Peffer, Sallander & Lally LLP
The businessperson who purchased insurance without first thinking about his risk transfer needs purchased peace of mind, not liability coverage. So said the judge when finding that the policy did not cover the businessperson's liability.
Irony oozes from the judge's words. The businessperson's peace of mind depended on his expectation that he would have insurance when needed. Yet, in his time of need, the insurance was not there. His peace of mind, like an opium-induced state of well-being, was illusory.
What is not illusory is that an insurance policy is a contract just like every other contract. It has terms and conditions that must be satisfied before the insurer is obligated to afford policy benefits. And it deserves highlighting: those terms and conditions go beyond the mere payment of premium.
The most common liability policy available to businesses is known as the CGL policy or commercial general liability policy, formerly known as the comprehensive general liability policy. The replacement of the word "comprehensive" with the word "commercial" in the title of the policy is instructive. It underscores the fact that the policy does not cover or satisfy all of a business's liabilities.
The CGL policy is intended to cover the liabilities a business might face that the business cannot minimize or reduce through implementing its own quality control and best practices. In that way, a CGL policy does not cover what is sometimes referred to as business risk. An example will be helpful.
COMPANY manufactures and sells electronic widgets. Its business strategy is to capture market share by beating its competition on price. To achieve the desired price point while still maintaining profitability, COMPANY installs substandard gizmos, which it purchased at a deep discount, into its widgets. COMPANY offers a one-year warranty on its widgets.
Within the first year of sale, 75 percent of the widgets fail. Some of the widgets simply cease to function and COMPANY provides replacements. A few of the widgets shock their users, causing bodily injury for which COMPANY is sued. One of COMPANY's distributors goes out of business because of the product failure, and sues COMPANY.
COMPANY looks to its insurer to bear the risk for the widget failures. The insurer issued a CGL policy. That kind of policy will afford coverage for the bodily injury lawsuits, but not for the product replacement or the distributor's business loss. COMPANY must bear the cost of the replacements as well as the cost of defending against the distributor's lawsuit and paying any damages that may be awarded.
If COMPANY had given no thought to its risk transfer needs, as in the example at that beginning of this article, the impact of the widget failure could be catastrophic. In this way, the insurance served as an opiate, lulling COMPANY into a false sense of well-being.
If COMPANY had attempted to understand its risk transfer needs, however, the limitations on coverage afforded by the CGL policy should have acted as an analeptic, stimulating it into taking additional steps to managing its risk. Examples of such additional risk management tools include protections built into the contract with the gizmo supplier, liability limitations built into its distribution contract and perhaps a different insurance policy.
The take-away message for the savvy businessperson is to avoid being lulled into a false sense of security by the mere purchase of insurance. The savvy businessperson will take the steps necessary to appreciate the spectrum of his risk transfer needs, the role his insurance plays in meeting those needs and the other protections available to him to make sure his peace of mind is justified.
SPORTS INJURIES
Lightning Strikes Golfer
Patrick and his friend Christopher decided to get in some late-afternoon golf on a summer day that had seen periods of turbulent weather, but also some clear skies. As Christopher held the flag for Patrick to putt, a golf course employee sounded a horn to warn of lightning in the area. Patrick putted out to finish the hole. Then the two friends started walking back to the clubhouse, which was about a quarter of a mile away. On their way, they were struck by lightning. Christopher was rendered unconscious for a few moments, but Patrick suffered serious injuries, and he now needs total care.
A negligence suit by Patrick's parents against the golf course owner was unsuccessful. For an owner of property to be liable for injuries to someone on the property, the injury must have been foreseeable. Without that, no duty of care arises in favor of the injured person. Practically everyone knows that lightning is dangerous, but that is quite different from being able to foresee that a particular lightning strike may occur.
Even assuming that the golf course operators owed a duty to Patrick, they did not breach that duty. Patrick and Christopher were given notice that lightning was in the vicinity by means of the horn, which sounded about 10 minutes before the strike that injured Patrick. That would have been enough time to get back to the clubhouse had the boys immediately heeded the warning. Aside from the specific audible warning, a prominent sign at the course warned all golfers that they were playing at their own risk and that when lightning was in the area they were to return to the clubhouse.
The sobering lessons from this case are that golfers themselves bear the most responsibility for protecting themselves from lightning, and that to delay in seeking shelter when lightning is near is to risk a tragic outcome.
Fan Hit by Foul Ball
Practically since our national pastime was in its infancy, operators of baseball stadiums have benefited from a more limited duty to spectators than that which generally applies to businesses that invite the public to come onto their property. Alone among spectator sports, baseball has fans who actively try to catch errant balls, sometimes even risking life and limb to get one. Even if fans would just as soon avoid the batted or thrown balls, the law has assumed that they are aware of the risks from these balls when they take their seats in the stands. The limited duty favoring fans generally is met if seats with protective screening are provided for as many people as normally would want them.
But what of the unsuspecting fan who is clobbered by a foul ball when he has left the sanctuary of his screen-protected seat to get a beer from a vendor? That was the misfortune of a fan who overcame the limited-duty rule when he sued a minor league baseball team for his injuries. A state supreme court ruled that his lawsuit could proceed under ordinary negligence principles.
The limited-duty rule for baseball fans loses its rationale when an injury from a flying ball occurs somewhere other than in the stands. In other areas of a stadium, it is foreseeable and predictable that fans will let down their guard. They may not even be paying attention to the game at such times and places, nor should they have to for their own safety. In the case at hand, when he was struck by the ball, the fan was chatting with other people in the line for concessions, and he could not have seen the batter hit the ball even if he had tried.
The court's concern for fans was heightened by some changes in baseball as a spectator sport. Children and seniors frequently attend professional baseball games. Today's players hit baseballs harder and farther. In keeping with the notion of the sport as multifaceted entertainment, ballparks today present what one observer has called "a sensory overload of distractions." As the court observed, "the beauty of common law is the ability to adapt to the times."
VALUATION DISCOUNTS FOR ESTATE AND GIFT TAXES
Upon the death of the owner of stock in a closely held corporation, the fair market value ("FMV") of the stock must be determined before an estate tax return can be filed. For gifts of such stock, it is also necessary to ascertain the value of the stock for gift tax purposes. Unlike publicly traded stock, the value of which can be determined easily on the Internet or in a newspaper, stock in a closely held business has a value that is more difficult to nail down. By definition, the shares are held by a much smaller number of people and are not widely traded.
Fair market value means the price at which property would change hands between a willing buyer and a willing seller when neither party is under any compulsion to buy or sell and both parties have a reasonable knowledge of relevant facts. Calculating the FMV of closely held stock generally starts with an estimate of the total value of the closely held company itself. Application of discounts (or premiums) to account for the specific circumstances of the company then reduces (or increases) the FMV of the stock.
The process is highly focused on the particulars of each business. For example, in a recent decision by the United States Tax Court, the starting point in valuation of a decedent's minority interest in a closely held family corporation was easier to figure, because the corporation was a holding company with a portfolio of widely traded securities that had readily ascertainable values. But that market value was discounted by 10% to take into account a buyer's lack of control over the company and by another 15% for lack of marketability of the shares.
The Internal Revenue Service likes to keep an eye on valuation discounts, since they lead directly to a reduction in estate tax liability. Federal statutes, regulations, and Revenue Rulings have shed light on the use of valuation discounts. IRS Revenue Rulings have identified the following list of some primary criteria for determining the valuation discounts for closely held stock:
* nature and history of the business;
* outlook for the economy and the specific industry;
* book value of the stock and financial condition of the business;
* earning and dividend-paying capacities of the company;
* goodwill or other intangible value of the enterprise;
* sales of the stock and size of the block of stock to be valued; and
* market price of publicly traded stocks of corporations in the same or similar line of business.
THE HAZARDS OF RÉSUMÉ SCREENING
It is popular now for employers to use screening tests, often administered on the Internet, to weed out a large portion of applicants for job openings before making the more difficult selections from among those who survive that first cut. Such tests are supposed to measure cognitive ability, personality characteristics, or, in fewer instances, the ability to perform in a simulation of the duties that the job requires. The easily administered and scored screening tests have their appeal, especially if you are charged with filling, say, 10 positions from 100 people who have submitted résumés.
A downside to screening tests is the risk that rejected applicants may persuade a court that the tests essentially were a tool to accomplish prohibited discrimination, even though that may not have been the employer's intent. For example, an employment test that impacts racial minorities or women disproportionately could lead to liability unless the employer can show that the test is sufficiently related to the job and is necessary to the employer's business.
Another potential pitfall stems from the prohibition in the Americans with Disabilities Act (ADA) against medical testing of job applicants. There sometimes is a fine distinction between acceptable personality or psychological tests and prohibited medical tests. The screening of applicants also could run afoul of some state statutes that protect against invasions of privacy.
When individuals adversely affected by a personality test challenged the test in federal litigation under the ADA, an appellate court struck down the test. The test, at least in some of its 502 questions, was a prohibited examination of the applicants' mental health. Its true or false questions went much farther than the acceptable lines of inquiry about matters such as working well in groups or in a fast-paced office. Instead, they ventured into the realm of psychiatric disorders. In this case, a prospective manager of a rent-to-own store could not be required to give true or false answers to statements such as: "I see things or animals or people around me that others do not see"; "At times I have fits of laughing and crying that I cannot control"; or "My soul sometimes leaves my body."
SMOKE ALARMS: INEXPENSIVE GUARDIAN ANGELS
If you could pay $10 and, in return, get a guard who would warn your family if your house caught fire, would you? Of course you would. Despite this, most people do not have enough smoke detectors in their homes--detectors that will stand guard over your family's lives 24 hours a day. The evidence shows that using even an inexpensive smoke detector increases your family's chance of surviving a house fire by 50%, making it one of the best investments you can make for your family's safety.
Experts recommend installing smoke detectors, the cheapest of which start at about $10, throughout your house. At a minimum, install one detector for every floor and one outside of each bedroom. Test your smoke alarms once a month, and replace the batteries once a year. Make sure that every member of your family knows (1) what to do when the smoke alarm sounds, and (2) the fire escape route from each room. A little advance planning can help make sure that you and your family have a better chance if a fire should start in the night.
For more information, contact:
Robert L. Sallander, Jr
Managing Partner
6111 Bollinger Canyon Road, Suite 500
San Ramon, CA 94583-0010
Telephone: 925-866-1000
rsallander@gpsllp.com
www.gpsllp.com