Stray Thoughts on Business Insurance and How Your Insurance Carrier Can Kill You

One of the bigger threats to your company’s security could come from an unexpected source: your own damn insurance company. In our experience, the company you pay to save you when the chips are down is the most likely instant killer of your business. It’s not the moron that sues you (and he or she will), or the accident that happens (it will), or health care costs (we agree, they’re terrible), but it’s the very company that you hire to insure against the risks of day to day business that may pose the biggest risk of all.

The relationship between your business and your insurance provider is unique in the sense that you are making payments toward purchasing peace of mind with the hope that you will never have need for the insurance company’s services. However, billion dollar ad campaigns notwithstanding, insurance companies are not in the business of providing generous support and security to their clients. They are in the business of making money: by charging premiums, and hopefully receiving more premiums than the costs of paying out claims. Even if you make all of your monthly payments in full and on time, your insurer may not cover you in the event of a catastrophic loss and will likely be more willing to expend resources toward defending itself in a rejection of your claim than toward paying out your policy.

No matter how positive your relationship is with your insurance provider or for what length of time you have faithfully paid your premiums, when the chips are down, your insurer is not your friend. It is easy to vilify the insurance agents and assume they are inherently evil (and it’s true, there are many scumbags out there), but it is equally likely that you are engaging in some self-sabotage with your insurance. However, there are numerous steps you can take to be proactive about your insurance policies and better secure your business, as well as an active body of California law that protects the insured from many of the most egregious examples of bad faith conduct by insurance providers.

Perhaps the biggest mistake most business owners make when purchasing insurance policies is not reading the contractual language behind their policies. And who can blame them?  Policies are long, boring, and full of legalese. Relying on the word of your insurance broker is easier, particularly if you do not have a background in the legal terminology employed in most contracts, but brokers do not necessarily have your best interests in mind and may not accurately or completely describe the specific exclusions and coverage outlined in your policy.   Brokers are essentially marketing agents of the insurance companies they represent and make money by commissions on the premiums you pay.  That’s not inherently a bad thing, and in our experience, most independent insurance brokers are hardworking and knowledgeable. However, they also find the policies to be long, boring, and, well, full of legalese.  They often don’t read them either.

Nevertheless, read your policy and all supporting documentation and be aware of what your insurance actually covers. If you’re still unclear, have a lawyer read it: preferably a lawyer with some background in insurance coverage issues. You have a legal right to have an attorney review and explain a contract to you prior to your signature if you do not feel comfortable interpreting the contractual language on your own. Oftentimes a business owner will assume that they are covered in the event of certain losses, only to find out in a moment of crisis that the fine print calls for lower coverage limits than expected or exclusions of coverage all together. It may not be that your insurance company purposely misled you, but rather that you bought the wrong insurance for your needs due to willful neglect to read what you were signing. It would be nice to know this beforehand, right? Whether your business is truly covered if something happens? Think about it.

We have a saying here at Rad | Krogh:  any idiot who can afford a filing fee can file a lawsuit.  Your business insurance is the key to managing the costs of such a suit and any loss that may result.  But in the event of a catastrophic event insurance companies can get, well, sort of “wiggly”, and deny coverage on various grounds.   Then, boom, you have an uncovered loss – and then the trouble really begins.

Another mistake many business owners make is in mistaking the relationship between their company and their insurance provider. Insurance is inherently an uneven business expense in which you pay for a service you may never receive. The product you are really purchasing is the peace of mind and feeling of security that insurance can provide, but it is important to remember that insurance providers are businesses as well, and accordingly, they are out to make a profit. To the extent that both you and your insurance provider are hoping that there will never be a cause for you to make a claim on your insurance, you and your insurer can be on the same side. However, if a situation arises in which you are dependent on your insurance to cover business losses, the insurer’s goal is to protect its assets by taking whatever recourse it can to prevent paying out on a policy. The best tactic to use in the event of a loss is to be aggressive with your insurance company. Insurers will only pay out on a policy when they feel that they are legally compelled to, not just because you ask nicely. Be prepared to confront your insurer with evidence of your loss, excerpts from your policy identifying your related coverage areas and limits, and a strong drive to get what you are legally entitled to based on your policy.

Insurance companies employ a large team of legal counsel, accountants, and insurance agents who are experts at contractual analysis and insurance law, making it difficult for a customer to succeed at going against them alone. It can be helpful to arrange a similar team on your side in the event of a dispute with your insurance company by seeking legal representation to aggressively pursue your claim. You can also work to circumvent the experts employed by insurance companies by using independent brokers when you purchase your policies. A broker employed by a specific insurance firm is more inclined to act as a sales associate and advocate for that company’s products, regardless of actual value, than an independent broker would be. Groups such as Independent Insurance Agents and Brokers of America can prove to be useful resources in finding a broker who can objectively weigh the pros and cons of specific policies as applicable to your unique situation, risks, and needs. Furthermore, your broker’s job does not end after you purchase your policy; they are also there to assist you with claims and understanding insurance law, as well as to maintain client records in case you misplace your policy documents. Regardless of whether you choose an independent broker or one employed by a specific company, ask for his or her licensing information and several references before allowing him or her to negotiate a contract on your behalf to ensure that you are prepared with a trustworthy team of experts on your side. Over the years, we have worked with many outstanding insurance brokers in the region, many of whom are actively engaged in their clients businesses and provide outstanding service.

Unfortunately, even if you steadfastly follow all of the above suggestions, there are still ways that your insurance provider can kill your business by going outside the legal boundaries of their own rights and obligations. Luckily, beginning with the landmark case Comunale v. Traders & General Ins. Co. (1958), which established the concept of insurance bad faith as a cause of action, lawmakers and courts have been increasingly proactive in protecting business owners from fraud and unethical business practices at the hands of their insurers. Although insurance companies have their own rights and are legally entitled to pursue profits, there is a fine line between exercising their rights and engaging in unethical conduct to avoid a claim. In any situation, insurers have basic obligations to accurately represent their own contractual obligations to the insured in the event of a claim, to refrain from doing anything to injure the right of the insured to receive the benefits of the insurance contract, as well as to conduct prompt investigations of any claims (see CA Insurance Code § 790.03). In the event that an insurance provider breaches its contract with an insured by unjustly denying a claim, engaging in dilatory claims handling, or any of numerous other “bad faith” business practices, many businesses have seen success in the courtroom in pursuing both civil and punitive damages against their insurers.

Civil penalties are presumed to make the plaintiff “whole” by remedying any losses the plaintiff sustained by the conduct of the defendant. In cases involving lawsuits against large insurance corporations, civil penalties are often not sufficient to deter the insurance companies from engaging in bad faith conduct with other clients. Consequently, CCP §3294 (a) is frequently cited in resolving these cases, allowing a defendant to be charged with punitive damages in cases of intentional dishonesty as a means to punish and deter future bad behavior. One such case involving a particularly egregious example of an insurance company purposely misleading a client and denying a claim on fraudulent grounds, Amerigraphics, Inc. v. Mercury Casualty Company (2010), initially led to a $1.7 million punitive damages award, approximately 10 times the amount of compensatory damages (this value was later reduced to $500,000, just under four times the amount of compensatory damages). The court cited the defendants’ “really terrible,” “really, really bad” handling of the plaintiff’s insurance claim as the grounds for punitive damages, calling the case “a disaster,” a “total disaster,” and “a very, very, very solid case for punitive damages, as solid as I have ever seen in my time on the bench.” It is usually worthwhile to pursue your options within a court room if you are wronged during an insurance claim and can offer compelling evidence, particularly if the misconduct led to large losses to your business.

Let’s face it though: nobody wants to see the inside of a court room. Although Amerigraphics had court room success, the hell they were put through trying to get coverage spanned years, and it’s unclear whether this small company was made whole.  Don’t let this happen to you.  Make good, informed business decisions early on.

Insurance coverage is important to the security of any business and, in many situations, is legally mandated. It is nearly impossible to avoid purchasing insurance and it is likely that you will face the need for an insurance claim at some point during the operation of your business. There are numerous mistakes business owners make in finding and purchasing insurance, as well as in pursuing claims against their insurance companies in the event of loss. Furthermore, insurance companies are intrinsically designed to benefit themselves rather than the insured. In light of these obstacles, it can be daunting to deal with the legalities of a claim on your insurance, particularly if you are already dealing with the effects of a business loss or catastrophic event. The attorneys of Radoslovich | Krogh, PC are experienced in assisting clients from businesses small and large who are impacted by unfair business practices of their insurance companies and we can help you navigate the complexities of insurance contract law should a dispute arise.



From a recent scam reported in the Sacramento Business Journal in which three employees stole $18 million from a local casino to an employee taking an unapproved long lunch, workplace theft is a growing and varied problem of which all employers should be aware. The Association of Certified Fraud Examiners (ACFE) released a report in 2010 estimating that the median loss caused by employee fraud was about $160,000 and that a total of 6% of annual revenue is lost to theft throughout the country each year.

In most cases, the employee who defrauds your company will be the one you least expect.  And, as an employer, you will feel angry and betrayed as the person who stole from the company will likely be a trusted employee.  The ACFE found that a quarter of the employees who committed fraud were with their companies more than ten years, often in managerial positions, and that the theft took place over an average of 18 months before being detected. Frequently, it is the employee who makes the biggest show about his or her virtuousness and who works the most diligently who has something to hide. Generally, employees involved in theft exhibit three factors: (1) need; (2) opportunity; and (3) rationalization/justification.

Since there is a wide range in the types of behaviors that qualify as employee theft, it is likely that nearly all employers will deal with one of these issues at some point. Sometimes, it will be a large-scale fraud in which an employee creates fake vendors or adds fake employees to the payroll in order to collect on the checks written for payments, enabling the gradual skimming of large amounts of money off the company’s books without detection. In certain situations, an employee’s use of copyrighted material owned by the employer in an unapproved manner can constitute theft.  In other cases, it’s an employee taking materials or supplies from the company in order to conduct freelance work. Even such behaviors as over-reporting time worked, including failing to note a long lunch and claiming those extra minutes as paid time on a time card, are considered “time theft” and have financial repercussions to the employer.

Small companies are especially susceptible to employee theft as they often have fewer safeguards to prevent such behaviors and typically have fewer resources with which to absorb losses. In nearly every case, it is much more effective to implement procedures to prevent employee theft than to recover from the damages after an incident has already occurred. Unfortunately, with such varied methods employees can use to defraud their employers it can be difficult to detect and prevent all instances of workplace theft. However, there are a number of steps you can take to safeguard your business as well as to prosecute or pursue restitution if a theft does occur.

One of the easiest and most effective methods to prevent large-scale employee theft is to divide responsibility for any financial transactions between multiple employees.  Dividing responsibility will aid in eliminating the opportunity to commit theft.  If one person is responsible for issuing checks to vendors or handling payroll, then another employee should be the one balancing the books and signing the checks. If a single person is given full responsibility for maintaining the accounts of the company, it is far easier for him or her to disguise theft as a valid transaction.

Additionally, unscheduled and frequent external audits should be conducted on the financials of your business so that an indifferent party can detect any abnormalities or suspicious activities on the company’s books. An unapologetic lack of a predictable routine in conducting analyses of your business’s finances can prevent employees from knowing when to cover their tracks. It is the guilty employee who will be offended by his or her employer’s insistence on reviewing the books.

Another important method to safeguard against fraud is to get to know your employees and watch their behaviors. An employer who knows their employees will better understand their employees’ needs.  Thus, the employer will be able to identify employees who are in a financial crisis or may have a drug or alcohol problem and thus are more likely to steal from the company.

In addition, employers should take note of employees who refuse to take vacations, as they may be concerned that someone else will notice discrepancies in the financial records in their absence.  As such, it can be helpful to mandate regular vacations for employees who have access to financial records. An employer should take note if there are unexplained declines in profits, inventory shortages, or even rumors about employee behaviors. For example, an employee with a new and expensive medical problem may be prone to theft if he or she sees it as an easy way to secure new income to finance medical bills.

It may present a moral issue to an employer who wants to “help out” with an employee who is down on his or her luck, but it is important to ensure that such employees are not presented opportunities to defraud the company. Turning a blind eye to even minor theft can set a precedent to other employees who may see that there are limited repercussions to their actions if they steal from the company.

Also, employers should be on the look-out for employees who believe that they are solely responsible for the company’s success or maintain an entitlement mentality.  Employees who strongly exhibit these traits justify and/or rationalize their theft.  Often in investigations, we find that employees who were caught stealing from their employer did so because, in their mind, they deserved the money.  Employee reasons for deserving the stolen loot range from making the big sale or landing the big account to simply their years of “loyal” service.  In other words, the employee believes they are so important to the company, they deserve the money.

If you have reason to suspect that an employee is in some way defrauding your company, your first step should be to remove that person’s access and control over any financial matters. However, it is important not to jump to conclusions or directly accuse an employee as a false accusation can open an employer up to severe civil liability, along with alienating people who may in reality be loyal employees. Your next step should be to gather your evidence and present it to police or to your lawyer, who can help you to further investigate and assess what recourse is best in your particular situation. In some cases, particularly with minor theft, it can be enough to terminate the employee and seek restitution of stolen funds. In other cases, it is important to prosecute the employee and pursue criminal charges, both to recover the stolen money as well as to set an example to other employees that fraud will not be tolerated.

One problem many employers face is that they do not read or understand their general commercial liability insurance policies until after they have already been damaged by theft. Many of these policies do offer coverage for employee theft and the limits to this coverage may be lower than you think. Some companies offer separate employee dishonesty insurance, which can be a good safeguard for some employers as it can help to recover your business’s sound financial footing if a large scale employee theft does occur. If you have insurance coverage for such losses and you have any suspicion that an employee theft has occurred, it is imperative to notify your insurance agents immediately so that they can begin processing a claim.

In any case, it is important not to feel that you are alone. Employee theft is a problem most business owners face at some point, and accordingly, there are numerous avenues of support in dealing with these problems. At Radoslovich | Krogh, PC Attorneys, we have assisted dozens of clients in cases involving employee theft with outstanding results. Whether prosecution or restitution is the ideal recourse for your individual situation, we can help to ensure that your business and your assets are protected.

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Supreme Court Issues Major Meal and Rest Period Ruling: Brinker v. Superior Court

The California Supreme Court recently ruled on one of the most hotly anticipated California Supreme Court rulings in recent employment law history.  On April 12, 2012, the Court issued its decision in Brinker v. Superior Court, a case that had the potential to redefine employment law cases, particularly class actions, based on meal periods and rest breaks.  While defense counsel has touted the decision as a “victory for employers”, plaintiffs counsel have also applauded the detailed guidance that the Court offered in its opinion, making it clearer to determine when a violation of law has occurred. 

The Brinker decision has been touted by employers as establishing that although employers must provide certain specified meal periods and rest breaks, employers are not required to ensure employees do not work through those breaks.  In other words, the employer does not have to police the workplace to make sure employees are eating their lunch after being allowed to do so.  However, the Court did state the employer has to “relieve the employees of duty and “relinquish control over their activities”.  Moreover, the employer “must not undermine a formal policy of providing meal breaks by pressuring employees to perform their duties in ways that omit breaks.”

Arguably one of the biggest disputes concerning the issue of meal periods prior to the Brinker ruling related to the calculation of the “five hour rule”.  The rule refers to Labor Code section 512, which states that employers “may not employ an employee for a work period of more than five hours per day without providing the employee with a meal period of not less than 30 minutes…”  Plaintiffs have long contended that the five hours was calculated on a “rolling” basis—meaning an employee who took a thirty minute meal period within the first five hours of work started the five hour clock rolling again, potentially entitling the employee to two thirty minute meal periods within a single 8 ½ hour shift.  The Court clarified this dispute by laying out bright-line guidelines for meal periods:

  • A thirty minute meal period must be provided by the end of the employee’s fifth hour of work;
  • If the employee works more than ten hours, a second thirty minute meal period must be provided by the end of the employee’s tenth hour of work;
  • The first thirty minute meal period may be waived by mutual consent of the employer and employee, but only if the employee does not work more than six hours on that day; and
  • The second thirty minute meal period may be waived by mutual consent of the employer and employee, but only if the first period was not waived and the employee does not work more than twelve hours on that day.

Similarly, prior to Brinker there had been confusion over how to calculate the ten minute paid rest breaks that employers are required to give employees.  Again, the Supreme Court provided bright-line guidance:

  • Employees who work less than three and one-half hours are not entitled to a break;
  • Employees who work between three and one-half and six hours are entitled to ten minutes of break time;
  • Employees who work between six and ten hours are entitled to twenty minutes of break time;
  • Employees who work between ten and fourteen hours are entitled to thirty minutes of break time, and so on.

These bright-line rules allow employers to craft detailed and lawful meal period and rest break policies, which in turn should help insulate employers from exposure to these types of claims by employees.  However, employers must also remember that although they are not required to ensure that employees do not work during these break and rest periods, employers must not do anything that actually, or seemingly, impedes the employees’ ability to take these uninterrupted break and rest periods.  Managers or supervisors should be formally instructed not to force or coerce employees to work through meal periods.  In other words, paying “lip-service” to the policies is bound to result in a violation of the law. 

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California has more employment laws than most states, many employers would say too many employment laws.  The recent news that some employers are asking for Facebook passwords from potential employees raises the question whether this is illegal under California law.

It is likely such a practice would violate the California Constitution, Article 1, Section 1, which provides that all persons have a right to privacy in their personal affairs.  This Section has been interpreted broadly in some cases, and held applicable to the employer-employee relationship.

Moreover, the California Fair Employment and Housing Act, codified in the Government Code, provides that employers cannot discriminate against employees or job applicants on the basis of sex, national origin, race, religion, or disability.  If an employer could not ask a job applicant what religion they are in an interview, the argument is “why should the employer be allowed to view private information on Facebook that may very well lead to the discovery of the same information?” 

Two U.S. Senators are asking U.S. Attorney General Eric Holder to investigate the alleged practice.  Facebook itself has recently warned employers not to ask job applicants for their passwords, and has even threatened legal action for violations of Facebook’s policy regarding sharing passwords. 

It is questionable how widespread this practice really is.  That being said, employers in California would be well advised to steer clear of it. 

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The Los Angeles Times is reporting that Democratic Senator Dianne Feinstein is calling on the leader of California’s senate to end what she calls “abusive lawsuits filed by private attorneys against small businesses” for minor violations of disabled access laws. 

Senator Feinstein, widely regarded as an influential politician, made this request in a letter to Senate President Pro Tem Darrell Steinberg.  Steinberg is said to have written back stating the California Legislature shares her concerns, but thus far no solutions have been agreed upon.  Feinstein has warned that if the California Legislature does not act, she will consider introducing legislation responding to this problem with the U.S. Senate.

Many of you reading this will be thinking “what took so long?”  Nearly every business-owner knows disabled access lawsuits have been a problem for years now.  While the ADA and Unruh Act laws on disabled access were undoubtedly written with the best of intentions, opportunistic individuals have managed to make a killing hunting out businesses displaying the most minor of violations, and then settling with those businesses to the average tune of $5,000.00 to $14,000.00.  

Critics of these lawsuits also focus on the serial nature of those who file the majority of the suits.  According to a 2006 story in the Sacramento Bee, notorious ADA lawsuit filer Lynn Hubbard, who is not disabled, filed over 1,221 ADA lawsuits.  220 of these lawsuits alone were on behalf of Hubbard’s parents, with the demands totaling over $13 million.   

If you have a question on disabled access laws do not hesitate to contact our firm.  We have worked closely with certified access specialists in this field, and can help you prevent or correct violations before they result in litigation. 

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Many of you reading the headline will be eagerly hoping this is in fact the case, and the dreaded karaoke is gone.  Karaoke, or “empty orchestra” as translated in Japanese, has been fairly widely available in the United States since at least the 1990s.

The Hollywood Reporter recently published a story on the fight between karaoke company KTS Karaoke and Sony/ATS (a joint venture that is partially owned by the estate of Michael Jackson).  It seems Sony/ATS is suing KTS in federal district court for “willful copyright infringement.”  Sony/ATS is demanding damages, an injunction, and a recall of KTS’ products so they can be destroyed.

Copyright is an intellectual property concept which generally gives the holder of the copyright exclusive rights to an original work, for a limited period of time.  In the music world, this generally means that money needs to be paid for the use of original music or songs.  Sony/ATS’ lawsuit alleges that the use of original music in karaoke as the background score requires a license, as does the use of the song composition.  It also alleges that performance of an original song in public via karaoke requires payment.  By Sony/ATS’ calculations, KTS owes $1.28 billion in damages.

One of KTS’ arguments is that the company is not infringing on any rights as it purchases songs that are re-recorded by other musicians, and thus it is those musicians who are arguably responsible for any royalties.  KTS has also filed its own lawsuit against Sony/ATS, claiming that the latter has committed copyright misuse by attempting to collect multiple awards on a single product from the upstream producer, the downstream producer (the bars and restaurants with karaoke), and KTS, the packager/distributor.

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The Perils of Misclassifying Your Employees

Are you misclassifying the people that work for you?  The improper characterization of employees as independent contractors is, and has been, a major issue in California.  The potential civil penalties, not to mention the tax implications, are costly.   Well, those penalties just got worse.

Senate Bill 459 has added sections 226.8 and 2753 to the California Labor Code.  The first statute adds a potential penalty of $5,000 to $25,000 per violation for “willful misclassification” of an individual as an independent contractor.  The second statute provides that paid advisors of an employer (excluding attorneys and employees of the company) who “knowingly advise” employers to misclassify workers are jointly and severally liable for any penalties imposed on the employer as a result of the misclassification.

Perhaps more unusual is the requirement that employers who violate the law be required to post a “prominent” notice on their public website, stating, among other things, that the employer has “committed a serious violation of the law” by willfully misclassifying employees, and directing other employees who believe they have been wrongfully misclassified to contact the California Labor and Workforce Development Agency. Given that the vast of majority of businesses nowadays have websites, this posting requirement is something that could have serious and far-ranging effects on a business.  Moreover, if the business does not have a website this posting still has to be made “in a prominent and accessible” location at the employer’s physical location.

Do not take a chance on misclassifying employees.  If you have any questions on employment law do not hesitate to contact our offices at (916) 565-8161.  You can also obtain more information on employment law generally at:

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