I have been valuing insurance agencies for a long time. I have been valuing them using both the Intrinsic Value and Market Value methods most of the time. For anyone interested in reading a brilliant description of these two methods, I suggest reading the article, "Musings on Markets" (September 7, 2011), by Professor Aswath Damodaran of the NYU Stern School of Business.

Intrinsic value is usually determined using one of several versions of the discounted cash flows method (the exact definition of cash flow varies, but all are intrinsic). This method states a firm's value is determined by the firm's future expected cash flow, discounted for time and risk.

In theory, market value also emphasizes cash flow. However, my experience is that most practitioners, especially when applied by agency owners but also some consultants, so inadequately account for cash flow and the risk that something will go wrong so that for all practical purposes, cash flows are disregarded. This makes market value agency appraisals purely speculative. Sometimes the result is an under valuation. More often the result is a value exceeding reasonability. Sometimes market value and intrinsic value are materially the same. After all, a broken clock is correct twice a day and 730 times a year. Most people would say being right 730 times a year is an awesome record.

A good example is the real estate boom and bust. The intrinsic value of the real estate never supported the market value. Many analysts and promoters became quite innovative in their development of "intrinsic" metrics that supported the market values, but the basic cash flow never supported the market value. The real estate investment only made sense if one could flip the investment at an adequately higher price before the market crashed.

The same force occurred in the market for insurance agencies. Very few agencies have an intrinsic value exceeding two times today or five years ago or ten years ago. If a business appraiser or a business broker sees someone who wants to believe an agency is worth more, the list of rationalizations, justifications, fictitious economies of scale, insightful product diversification strategies, and capital plays (interesting since capital is arguably free in some forms today) are infinite. If someone shoots holes in all these arguments, then ultimately the business broker will play their ultimate card: "We're so much smarter that we can make this work."

The fact is the intrinsic value did not justify the price paid by many agency buyers five years ago. The strategies that caused the buyers to believe the values were justified were mirages of wishful thinking. The market was overheated and for whatever reasons, if buyers wanted to be in it, they had to pay a high price. There is and was nothing else to it.

The fascinating difference between intrinsic and market value for insurance agencies is that the intrinsic value should remain in a rather narrow band because:

1. Profitability in a well-managed agency is stable. By well-managed, I am excluding firms that are 100% or more dependent upon contingencies for their profits. In these agencies, profitability will vary wildly depending on their contingencies. Otherwise, expenses do not vary much year-to-year in well-managed agencies and therefore, profitability is stable.

2. Sustainable growth is humble. When you read about an agency growing 10% to 25% annually, ask, "How many annuals?" In other words, how long have they truly achieved such significant growth? Also, what risks are they taking? The Property & Casualty industry grows at approximately the same rate as the U.S. economy because the Property & Casualty industry insures America's economy. That rate is approximately 3% annually.

The Property & Casualty industry is not a growth industry and it has not been one for decades. To pretend otherwise is like an older model choosing the right makeup, the right lighting, and the optimum angle to look ten years younger. In fact, the evidence is strong that firms who grow multiple times faster than average have a higher than normal probability of cheating. Often the cheating is not malevolent, but it is still cheating.

3. Risk is comparatively moderate. The insurance agency business is one of the least risky businesses. It may feel risky, but compared to most other businesses, it is quite safe.

These three factors combine to create periodic value fluctuations, but within a rather narrow band on an intrinsic basis. This is why owning an agency is a great business in tough times while maybe less appealing in great times. So why is the fluctuation so much more on a market value basis? Speculators. The speculators may be banks, brokers, private equity, other agencies, but they are speculating. This creates some issues because speculators use market value plus twenty percent or so for their values. They have a tendency to build price without adequate regard for supporting cash flow or risk. This is why a boom takes years to build and the resulting bust can take just a few weeks.

The fact that speculators pay too little attention to cash flow and risk has two significant consequences. The first is that speculators value good agencies and bad agencies too similarly. The result is they pay too much for bad agencies and sometimes fail to purchase the best agencies because they're not willing to pay an adequate premium for quality. Now, some really smart speculators have learned that certain kinds of supposedly bad agencies do not actually have post acquisition bad results. One should not confuse these two situations.

The second consequence is when inadequate attention is paid to cash flow and risk upon acquisition, speculators eventually cannot or do not pay enough attention to building the people and systems necessary for organic growth. This is readily apparent in some brokers' results today.

Whether you should or should not emphasize market value over intrinsic value depends on your position and the market cycle. As a seller in good times, the market value will usually be your best deal because this industry has blessed sellers with an infinite supply of irrational buyers. Their numbers grow and constrict with the seasons, but rarely are they in short supply for long. The only exception to this is the really good agency. A market value may rarely adequately capture the true value of these agencies' cash flows and risk. Internal perpetuation is almost always the best course for maximizing their value.

If you are a buyer, a brutally honest intrinsic valuation is the best way to manage your risk. Market value should be entirely secondary. Always remember that no acquisition is better than a bad acquisition and since roughly every study ever done shows that 75% of acquisitions are failures when truly tested, this rule is worth cementing in your brain. The exception is that if the buyer has such a bad situation that a bad acquisition can hide their current dilemma, then maybe make the bad acquisition.

The observed increase in workers' compensation claim liabilities and ultimate losses is partially attributable to external factors — those outside the control of risk management, such as medical inflation. Elizabeth Bart's article, Ever-Increasing Unpaid Claim Liabilities: When Does The Growth Stop? explores such external factors.

This article also explores the topic of increasing workers' compensation claim costs, with a focus on how claims practices can influence claims costs and contribute to the increasing liabilities, and discusses what self-insureds can do to better manage practices in an effort to control costs.

The management of a workers' compensation claim incorporates several key areas, all of which interact and combine to influence the claim's outcome (e.g., initial handling, investigation, reserving, medical management, etc.). It can be challenging to understand whether a workers' compensation claim is well-managed and whether optimal outcomes are being achieved. This is particularly true for self-insured entities, which often delegate claims management responsibilities to an outside third-party claims administrator (TPA).

The result of using TPAs for claims administration is that the self-insured entity itself maintains little if any expertise in the area of sound claims management practices. Moreover, the TPA will often delegate certain functions to other vendors such as case management and medical and legal bill review, further removing the oversight of these services from the self-insured's reach. Finally, many self-insured/TPA contracts focus on the quick resolution of a large volume of smaller dollar claims, with little consideration for the efforts and resources needed to resolve large claims. Therefore, the management of larger claims may not be well understood or outlined in these arrangements.

Improving three often misunderstood or underestimated claims handling areas could result in a significant improvement in claims outcomes and have a material impact on liabilities:

• Initial activities
• Information and data collection
• Change in case reserving practices

Basic knowledge of these essential claims handling activities will enable the self-insured to effectively work with its TPA to avoid common pitfalls and to proactively manage the TPA. This, in turn, will mitigate or avoid unnecessary cost increases.

Initial Activities
Activities undertaken by the claims handler immediately after a claim is reported are often thought of as administrative tasks — no more than an intake exercise whereby the handler runs through a checklist of scripted questions. These activities include assessing immediate medical management needs, making three-point contact (i.e., contact with the employer, the injured worker, and the medical provider), assigning to the appropriate adjuster, taking statements, and gathering documents (e.g., medical authorizations, photos, police reports, and wage statements).

And in truth, activities that occur in the early stages of a claim may not be terribly significant for the large number of reported workers' compensation claims that resolve quickly. However, for that small percentage of claims upon which the majority of the costs are ultimately expended, proper claims management from the outset is crucial to achieving optimal claims outcomes.

For example, a claimant who has had previous injuries or prior surgeries, or who otherwise presents with certain characteristics such as chronic pain, is more likely to require medical management from the outset to ensure optimal medical outcomes, which in turn reduces costs. For a small number of high-severity claims, if the medical aspects are not understood and well controlled at the outset, the claimant often does not improve and the claim can adversely develop into a larger-than-anticipated and larger-than-necessary claim — a lifetime pain management claim perhaps involving multiple surgeries, and costing hundreds of thousands or even millions of dollars without optimal medical outcome or endpoint for the claimant.

Thus, it is important upon receipt of a claim to investigate all prior injuries, surgeries, prescriptions, and comorbidities (i.e., health issues that are not work-related but nonetheless could impact the treatment of the injury). In many cases, the best practice of making three-point contact has devolved in practice into two-point contact (the employer and the injured worker) and in some cases even one-point contact (the employer). This can leave basic medical questions unanswered for weeks or months. For a small percentage of claims that have the potential for developing into the highest-severity losses, these delays could be critical.

Another key initial activity is adjuster assignment. Assignment to the appropriate adjuster can be particularly important for some claims — for example, those where the claimant reports injuries to nonspecific or multiple body parts, such as "neck, shoulder, arm." These claims present an element of subjectivity, uncertainty, and potential complexity. It is important that the adjuster thoroughly investigate precisely how the injury occurred and communicate with the medical providers about the types of injuries that can result from that activity.

This means that the adjuster needs to have the proper background and expertise to ask the right questions. If injuries or body parts are reported that are not medically connected to the work-related injury, the adjuster may only have a short period of time within which to deny those unrelated claims. An inexperienced adjuster may not identify or attempt the valid denial, in which case that injury and all subsequent treatment may be deemed accepted for the duration (perhaps for the life of the claimant), with no further opportunity to deny. In a large number of cases, this missed opportunity will not have a significant impact on the outcome, but for that small population of high-severity claims, such an error will be costly.

As a final example, the initial investigation is important to assess the claimant's ability or motivation to return to work based on one or more subtle aspects of the claim, such as educational level, child support status, disability status of the claimant's spouse, ability of the employer to accommodate the claimant's limitations, proximity of claimant's home to job opportunities, or other factors.

It is important for the handler at the outset of the claim to immediately contact the employer, the injured claimant, witnesses, and medical providers to ask pertinent questions. Equally important is the need for the handler to listen carefully to the answers and follow up on unusual or inconsistent information. Inexperienced claim handlers often appear to be following a list of predetermined questions and may hesitate to go "off script." Many times, the claims that adversely develop are those that, in retrospect, could have been controlled had certain information been collected and had the investigation been thoroughly completed and thoughtfully assessed early in the life of the claim.

Information And Data Collection
Increasing claim costs are also associated with the inability to easily locate and evaluate the information gathered on the file. A claim may be assigned to an adjuster with the appropriate level of expertise, and that adjuster may undertake a prompt and thorough investigation. However, the pertinent information emanating from that investigation is not captured in discrete data fields in one location in the file system. Rather, that information is buried throughout the "notes" section of the claim system — along with numerous immaterial or administrative entries. This impedes the ability of the self-insured to easily identify claims that have the potential to be large and work with the TPA to effectively control costs.

For example, a large volume of the "notes" section of a claim file may include entries such as the date of a reserve review, an adjuster's failed attempt to contact a party, the payment of a bill, the date a processing decision was made, the scanning of a document into the file, or the receipt of a police report with no substantive commentary. Even entries related to the status of a claim — one that on its face would appear to be highly relevant and current — are often simply "copy/pasted" from prior status entries.

Thus, including in the claim notes pertinent information vital to making prompt and reasonable strategic decisions can lead to inefficiencies and suboptimal outcomes. The amount of stale, outdated, repetitive, and sometimes misleading information makes it exceedingly difficult to identify and assess the pertinent facts, issues, and activities in the file, and impedes the adjuster's (and supervisor's) ability to make informed decisions. In many claim operations, reviewing the file is so time-consuming and difficult that the supervisor is only able to randomly select a small sample to audit at regular intervals. If that supervisor does not by chance select the "right" files, important issues might not be identified and key strategic opportunities might be missed.

The problem is compounded when information is entered incorrectly. Common errors can lead to costly repercussions. For example, assume that the medical records all clearly identify a right shoulder injury. If the handler inadvertently references the "left shoulder" injury in the claim notes, all subsequent actions might be based upon that. A supervisor or newly assigned adjuster may not have the time, or may believe it is unnecessary, to confirm that information by checking the original medical records. Body parts and treatments could be implicitly accepted and additional costs expended for injuries that are not work-related.

Similar types of errors can be made with wage information or rate calculations, and can go unnoticed for long periods of time, resulting in costlier claims. Finally, as more and more claims departments are outsourcing medical bill review functions to third-party vendors, some of that key medical information is not captured in the claim system at all, which can also distort the true picture of the potential exposure.

Thus, it is important that the self-insured verify that the TPA, or other claims-handling entity, develops a system of meaningful data capture, whereby key pieces of information are systematically downloaded or manually entered into consistent discrete fields in as few screens as possible. Many claims systems already have these capabilities, but handlers are not required to enter the data and the fields remain blank. Such a data capture would allow representatives at the self-insured entity the ability to obtain a current and comprehensive snapshot of the development on the claim. Discrete data fields also ensure consistency, facilitate fact-checking, and support the creation of meaningful metrics and management information reports. Self-insureds should ensure that they have full access to the claims system and that they understand all the features of that system.

Change In Case Reserving Practices
The onset of conservative case reserving practices can lead to unnecessary increases in ultimate losses. This may not be intuitive. Many people may think that inadequate case reserves lead to increasing ultimate losses, because over time the case reserve (which was initially set "too low") needs to increase to cover actual payments. While this is true, the ultimate losses may not be affected by the development of inadequate case reserves, because the actuary may have taken the case reserve practices into account in estimating the actuarial reserve.

Thus, even if the case reserves were "too low," the actuarially estimated additional reserves would have compensated, resulting in a total reserve (case plus actuarial), or "ultimate," of "just right." As case reserves increase, actuarial reserves may decrease (all else being equal), and the ultimate will not change. In that way, inadequate case reserves do not necessarily result in increasing ultimate losses.

An important aside: We must remember that inadequate case reserves are not necessarily the result of poor claims handling or intentionally suppressing case reserves. When we say that case reserves are inadequate, we mean that, despite best efforts to set a case reserve that reflects the ultimate value of the claim at any given point in time, there are a few claims that will develop adversely in unanticipated ways (i.e., in ways that could not be foreseen by the claims handler when the prior case reserve was established). That is in part what the actuarial reserve is intended to estimate — the unanticipated development — and is outside the purview of the claims handler.

Changing case reserving practices by making them "higher" or "more conservative," however, can result in increasing ultimate losses. Consider, hypothetically, a TPA that decides to institute a new practice of establishing a case reserve reflecting the worst case scenario, or adding an arbitrary amount (e.g., 25%) on top of the best estimate of case reserves. That change could result in higher ultimate losses, for two reasons:

• First, if the actuary is unaware of this change, it will not be incorporated into the actuarial estimates. This could result in higher actuarial estimates. When added to the already increased case reserves, the ultimate losses increase substantially.
• Second, raising case reserves on a claim can lead to overpayments by the adjuster, a phenomenon commonly referred to as "leakage." In this case, the additional case reserves are believed, either explicitly or subconsciously, to be available to make payments. Efforts to reduce costs and manage the claim to its optimal result may be tempered by the knowledge that there is "extra" money with which to negotiate. This change in case reserving practices can lead to overpayments and rising claims costs.

Conclusion
In this article, we explored a concept mentioned but not developed in Elizabeth Bart's article, Ever-Increasing Unpaid Claim Liabilities: When Does The Growth Stop? Specifically, we discussed three basic claims practices that could result in increasing workers' compensation costs. Understanding and recognizing the importance of these practices will enable the self-insured to effectively manage the TPA to control increasing costs.

Large deductible and self-insured workers' compensation programs often face year-over-year increases in their unpaid claim liabilities, even though they are not suffering from adverse claim development, unexpected large losses, or materially changing their risk profile. Why does this keep happening? The increase is the natural result of several external factors, with the biggest drivers being rising indemnity costs and rising medical costs. Why should program managers expect these increases? And how can the inevitability of these rising costs be conveyed to executive management?

The solution starts with recognizing the nature of liability growth and focusing not solely on liabilities but rather on ultimate losses.

How Actuaries Determine Unpaid Claim Liabilities
Actuaries estimate a program's ultimate losses — the amount that will eventually be paid to close all claims that have occurred under the program. For a review as of December 31, 2012, the ultimate losses include all claim payments, current case reserves, and an incurred but not reported (IBNR) provision for any future case reserve development (including reopened claims) and for claims that have occurred but have not been reported as of December 31.

There is one important (non-numerical!) formula that relates to ultimate losses and the resulting reserves called unpaid claim liabilities. The ultimate losses as described above can be shown as follows:

The actuarial report will estimate the total amount to be paid (i.e., ultimate loss) and we know the total amount paid to date from the claim data. The program's remaining obligation is what is left to be paid: the known case reserves and the additional estimated IBNR provision — that is, the remainder of the ultimate loss amount.

Utilizing the estimated ultimate loss and the actual paid losses, we can arrive at the estimated unpaid claim liability:

Just as the unpaid claim liability is the ultimate losses minus the paid losses, the change in the unpaid claim liability from one evaluation to the next is the change in ultimate losses minus the change in paid losses. The key to understanding the change in the unpaid claim liabilities is to understand the drivers behind the change in the ultimate losses relative to the change in paid amounts. Because, in an ongoing program, both will theoretically increase at each subsequent evaluation. The amount by which the change in ultimate losses outpaces the change in paid amounts will determine the change in the unpaid claim liability.

When unpaid claim liabilities are increasing, it is really because the ultimate loss estimates for each new accident year are increasing faster than the losses are paid during the calendar year. So what causes the ultimate loss estimates to increase?

Many risk managers are concerned that executive management will perceive increasing ultimate losses and increasing unpaid claim liabilities as a reflection of an underperforming current risk management program as well as claim management practices. However, there are many factors completely unrelated to risk management that influence the unpaid claim liabilities.

Changing risk management practices such as claim reserving methods and claim payment speed, or shifting the type of work performed or injuries incurred, will influence actuarial studies, but we're going to focus on external trends that influence programs and cannot be controlled by risk management. These factors, even with keeping all aspects of the program's risk management consistent from year to year, cause the natural tendency of ultimate losses to grow each year.

An Illustrative Example — Without Trend
While actuaries and risk managers are fluent in the actuarial terms of ultimate losses and unpaid losses as described so far, when describing the cash flows to executive management at a high level it may be easier to think in terms of buying a house and making annual payments on it. If a $250,000 house is purchased, it's clear that ultimately the full $250,000 will be paid. Until then, the remaining unpaid portion is equivalent to the actuarial unpaid claim liability.

Let's say a $250,000 house is purchased and $50,000 payments are made every year for five years to pay it off. An additional house is purchased every year. The first house is purchased in 2012 and, at the end of the year, $50,000 is paid. The unpaid amount is $200,000 ($250,000 - $50,000). In 2013, another house is purchased and a $50,000 payment will be made on each house this year.

At the end of 2013, we know that ultimately $500,000 for both houses is owed and that $50,000 was paid in 2012 for house #1 and $100,000 in 2013 for both houses. The unpaid liability as of December 31, 2013, the remainder left to be paid, is $350,000 ($500,000 - $150,000) — which is an increase of 75% over the prior year end.

If the same thing is done in 2013 as 2012 (buying a $250,000 house and making $50,000 payments on each), why does the liability go up? It's because the change in ultimate losses (another $250,000) is much larger than the additional $100,000 payments in 2013. In 2013, the ultimate increased by $250,000 for the new year's exposure of an additional house and the payments increased by $100,000 for the two $50,000 payments made on the two houses. The prior liability of $200,000 plus the change in ultimate losses of $250,000 minus the change in payments of $100,000 equals a new liability of $350,000 at the end of 2013.

For the next four years, the liabilities will keep increasing. The liability will go unchanged only when the payments made in the calendar year are equal to the new exposure brought on with the purchase of a new house. When five (or more) $250,000 houses are owned, $250,000 in payments will be made each year, offsetting the additional $250,000 in liability picked up with each new house purchased, as shown in Figure 2 below.

Many executive managers (and some risk managers) feel that their programs are in this "steady state" and do not expect to see increases in the liability. However, in the real world of large deductible and self-insured workers' compensation programs, the ultimate losses for each new exposure year are heavily influenced (and increased) by rising medical and indemnity costs. The injuries that cost $250,000 in 2012 dollars will cost more in the future.

An Annual Occurrence?
It is very important that executive management is aware that unpaid workers' compensation claim liabilities are expected to increase each year. And that the increases will be more than inflation (as represented by the consumer price index, or CPI). While other balance sheet items may be subject to inflation only, unpaid claim liabilities are subject to inflation, severity trends, and frequency trends. The 2012 State of the Line annual presentation by the National Council on Compensation Insurance (NCCI) shows a five-year indemnity trend of 2.9% from 2006 to its projection for 2011, with a medical trend of 4.4%, noting that the negative frequency trends that had been offsetting the rising indemnity and medical severity trends are beginning to flatten out.

This means that as business continues into the future, and even if all other variables remain the same, each new year of additional workers' compensation exposure is expected to cost more than the prior year by the aggregate trend. This is analogous to buying the same house every year in a housing market that's rising.

In this next example, the houses bought are 3% more expensive every year. All the houses have similar characteristics from year to year — square footage, tax rates, school districts, etc. — just as from year to year, many companies' workers' compensation exposure stays similar, as far as the number of employees, the mix of NCCI class codes, the location of employees, and the retention limit of the insurance program.

Adding Trend
Continuing from Figures 1 and 2, if a 3% housing increase trend is used, the change in liability will now increase each year and will continue to increase by the 3% trend. In our first example, a constant liability was achieved because the total calendar year payments ($50,000 on each of the five houses with a mortgage at any one time) lowered the liability the same amount as the new house raised the liability each year.

In the 3% trend example below, payments are made on less expensive houses while the incoming houses are the most expensive. In 2018, the first trended house is purchased for $257,500 ($250,000 × 1.03). The first of five payments is made on this house for $51,500. Each of the other four outstanding mortgages is still being paid at $50,000 each, so in 2018 a total of $251,500 is paid. But this is $6,000 short of the $257,500 change made to the ultimates when the new house was purchased.

Recognizing that the majority of payments are being made on mortgages (or claims) in earlier, "cheaper" years, while more expensive, trend-influenced mortgages/claims are being brought onto the program's liabilities, is the key to accepting the natural rise in liabilities over time.

Large deductible and self-insured workers' compensation programs face liability increases that are due to cost trends every year. In order for a program's liabilities to stay at the same level or decrease, the program would have to overcome these trends. But inflation, severity, and frequency trends aren't the only variables out there.

What To Watch For In The Future
As the economy recovers and workforces grow, this will increase the future additional costs applied to the program's liabilities. As a workforce increases by 1%, 3%, or 5%, so too do the anticipated ultimate losses for the next year. It would be comparable to buying a house with 1%, 3%, or 5% more square footage at the same cost per square foot.

Additionally, as the insurance market slowly hardens, programs may begin raising their retention levels. As the retention levels rise, so do the oncoming liabilities. Retention level increases will have a much larger impact than trend increases, as retention levels can increase by substantial amounts. In this example, a workers' compensation retention increase from $250,000 to $500,000 is similar to suddenly buying more expensive houses. While a 3% trend will raise the house price from $250,000 to almost $300,000 over six years (and raise liabilities by 3% each year), a jump to buying $500,000 houses will noticeably increase the liability with the addition of $500,000 mortgages, while most payments on the houses are in the range of $250,000 to $300,000.

In these examples, a very even payment pattern was used, but it is also important to note that the timing of payments influences the unpaid claim liabilities. In real life, workers' compensation payments may not be this regular, and large claims can have sudden payouts due to judgments or settlements.

As shown in the earlier formula, unpaid claim liabilities are equal to the ultimate losses minus the paid amount to date. Let's say that a decision is made to fully pay one of the mortgages on these houses. An additional payment of $250,000 would decrease the liabilities by $250,000. And while this large payment will decrease the liability, it does not have an effect on what is paid in total — the ultimate payments will remain the same — they just have to be paid sooner. And the decrease in the liabilities came from an equal decrease in the assets, which will offset on the financial statements.

Your actuary can explain and quantify the trend effects on your insurance program in detail and how any other changes in your program (to retention levels, employment levels, etc.) will affect the liabilities going forward. Internally, the actuarial report should be reviewed for its information on the change in the program's ultimate losses, which is a better reflection of the program's performance over time than the change in liabilities over time that is due to their sensitivity to payment timing.

Risk managers who need to manage executive management's expectations on unpaid claim liability growth can explain the external factors that play a large role in changing liabilities over time. If liabilities are increasing with the increasing trends, that's to be expected. If liabilities are increasing less than trend, staying flat, or decreasing, that's great. If liabilities are increasing by more than trend, ask your actuary for some suggestions.

A safety analysis can help identify which kinds of injuries make up the majority of the loss dollars, the program's retentions and allocation methodology can be reviewed, or for a thorough review of claims, predictive analysis can zero in on loss drivers.

An actuary can't make external trends disappear but can help explain them to executive management and make other suggestions on finding solutions in your data.

On June 16, 2013, the American Medical Association voted to declare obesity a disease rather than a comorbidity factor. This change in classification will affect 78 million American Adults and 12 million children. The new status for obesity means that this is now considered a medical condition that requires treatment. In fact, a recent Duke University / RTI International / Centers for Disease Control and Prevention study estimates 42 percent of U.S. adults will become obese by 2030.

According to the Medical Dictionary, obesity has been defined as a weight at least 20% above the weight corresponding to the lowest death rate for individuals of a specific height, gender, and age (ideal weight). Twenty to forty percent over ideal weight is considered mildly obese; 40-100% over ideal weight is considered moderately obese; and 100% over ideal weight is considered severely, or morbidly, obese. More recent guidelines for obesity use a measurement called BMI (body mass index) which is the individual's weight divided by their height squared times 703. BMI over 30 is considered obese.

The World Health Organization further classifies BMIs of 30.00 or higher into one of three classes of obesity:

• Obese class I = 30.00 to 34.99
• Obese class II = 35.00 to 39.99
• Obese class III = 40.00 or higher

People in obese class III are considered morbidly obese. According to a 2012 Gallup Poll, 3.6% of Americans were morbidly obese in 2012.

The decision to reclassify obesity gives doctors a greater obligation to discuss with patients their weight problem and how it's affecting their health while enabling them to get reimbursed to do so.

According to the Duke University study, obesity increases the healing times of fractures, strains and sprains, and complicates surgery. According to another Duke University study that looked at the records for work-related injuries:

• Obese workers filed twice as many comp claims.
• Obese workers had seven times higher medical costs.
• Obese workers lost 13 times more days of work.
• Body parts most prone to injury for obese individuals included lower extremities, wrists or hands, and the back. Most common injuries were slips and falls, and lifting.

The U.S. Department of Health and Human Services said the costs to U.S. businesses related to obesity exceed $13 billion each year.

Furthermore, a 2011 Gallup survey found that obese employees account for a disproportionately high number of missed workdays. Also earlier National Council on Compensation Insurance (NCCI) research of workers' compensation claims found that claimants with a comorbidity code indicating obesity experience medical costs that are a multiple of what is observed for comparable non-obese claimants. The NCCI study demonstrated that claimants with a comorbidity factor indicating obesity had five times longer indemnity duration than claimants that were not identified as obese.

Prior to June 16, 2013, the ICD code for comorbidity factors for obesity in workers' was ICD-9 code 278. This is related to obesity-related medical complications, as opposed to the condition of obesity. Now the new ICD codes will indicate a disease, or condition of obesity which needs to be medically addressed. How will this affect work-related injuries?

Instead of obesity being a comorbitity issue, it can now become a secondary claim. If injured workers gain weight due to medications they are placed on as a result of their work-related injury or if an injured worker gains weight since they cannot exercise or keep fit because of their work-related injury and their BMI exceeds 30, they are considered obese and are eligible for medical industrially related treatment. In fact, the American Disability Act Amendment of 2008 allows for a broader scope of protection and the classification of obesity as a disease means that an employer needs to be cognizant that if someone has been treated for this disease for over 6 months then they would be considered protected under the American Disability Act Amendment.

Consider yet another factor: with the advent of Mandatory Reporting (January 1, 2011) by CMS that is triggered by the diagnosis (diagnosis code), the new medical condition of obesity will further make the responsible party liable for this condition and all related conditions for work-related injuries and General Liability claims with no statute of limitations. It is vital to understand that, as of January 1, 2011, Medicare has mandated all work-related and general liability injuries be reported to CMS in an electronic format. This means that CMS has the mechanism to look back and identify work comp related medical care payments made by Medicare. This is a retroactive statute and ultimately, it will be the employer and/or insurance carrier that will be held accountable.

The carrier or employer could pay the future medical cost twice — once to the claimant at settlement and later when Medicare seeks reimbursement of the medical care they paid on behalf of the claimant. This is outside the MSA criteria. The cost of this plus the impact of the workers' compensation costs as well as ADAA issues for reclassification of obesity for an employer and carrier are incalculable.

The solution is baseline testing so that only claims that arise out of the course and scope of employment (AOECOE) are accepted. If a work-related claim is not AOECOE and can be proved by objective medical evidence such as a pre- and post-assessment and there is no change from the baseline, then not only is there no workers' compensation claim, there is no OSHA-recordable claim, and no mandatory reporting issue.

A proven example of a baseline test for musculoskeletal disorders (MSD) cases is the EFA-STM program. EFA-STM Program begins by providing baseline injury testing for existing employees and new hires. The data is only interpreted when and if there is a soft tissue claim. After a claim, the injured worker is required to undergo the post-loss testing. The subsequent comparison objectively demonstrates whether or not an acute injury exists. If there is a change from the baseline site specific treatment, recommendations are made for the AOECOE condition ensuring that the injured worker receives the best care possible.

Baseline programs such as the EFA-STM ensure that the employee and employer are protected and take the sting out of the new classification by the AMA for obesity.

Let me ask you something: Do you believe in the products and services that you are selling? Do your employees believe in the products and services that they are selling? If the answer is "no" to either one of these questions, you are in danger of losing the sale.

I will tell you right now that as a CEO, Founder, and Salesperson, I refuse to sell a product or service in which I do not believe. I refuse to sell a product or service that I am not proud of. Why? Because if you yourself do not believe in a product or service, how do you expect consumers to believe in it? You cannot possibly expect to make a sale if this is the case!

In order to make the sale, you need to 1) develop a belief system; and, 2) coach both yourself and your sales team to believe.

Developing A Belief System
There are two very important things to believe in when trying to successfully sell a product or service. Number one, you must believe in yourself. Number two, you must believe in what you are selling. Having confidence in both areas will work in your favor and it will ultimately shine through to the potential client with whom you are sitting face-to-face. If you truly believe that you are serving the customer the best possible product or service, it will show.

People are not interested in being sold things. Let's face it! People are afraid of salespeople. The reality of the situation is that people want to buy from somebody who is not selling them, but helping them to make an educated buying decision. If you know everything there is to know about what you are selling — and you believe in it — the consumer will trust your judgment. The consumer will see that you have the facts laid out right in front of them. As a professional, it is your duty to develop belief in all areas before you head out and push a product or service on potential buyers. If you have a belief system in place, you can communicate what you are trying to do very effectively.

Coaching Yourself To Believe
If you are not a believer in your own product, you have a whole new set of problems to deal with. As the CEO and Founder of Astonish, I know that our company has the greatest digital marketing system in the world. I know that we sell the best product, have the best technology, the best training and the best digital marketing strategies for local insurance agencies across the country. I am telling you right now: The reason I want to be the best at sales is because I truly believe that at the end of the day, insurance agencies that don't work with Astonish are making the biggest mistake that they have ever made — and I will tell them this! And guess what? They begin to think. They begin to second guess. They can see the passion I have. They can sense that I am genuinely concerned.

If you do not truly believe in your products and services, then what do you do? Whatever it is that you are in doubt of, you need to fix! You need to pinpoint exactly what you do not believe in and improve it — because if you do not believe in it, you will never be in danger of selling it.

It is your ultimate goal to have a client believe you, trust you, and see that this sale is coming from some place much deeper than just the point of making a sale and making money. Once you achieve this, you will absolutely, positively sell more.

Coaching Your Salespeople To Believe
For all the salespeople out there, I say this: If you do not believe in the company for which you are working, leave. If you do not believe in the products or services that you are trying to sell, please just leave! If this is the case for you, sticking with a company in which you do not believe will not do any good for anybody involved — not you, not the company, and certainly not the consumer.

If you are a business owner, it is your responsibility to make sure that you have a team of salespeople who truly believe in what they are selling. How do you do this? You have to coach them. You have to amp them up. You have to prove to them that the product or service that they are selling is literally the greatest product out there.

The first step to coaching your salespeople is to train them on what they are out to sell. They must know the ins and outs and everything in between. It is your job to make sure these people have a full understanding of what their purpose is! You can do this by hands-on training, tutorials, providing manuals, documents, and more. Once they have a grasp on the product or service, you send them off ... and then what? Measure and monitor.

How can you tell if a salesperson is passionate about selling? Numbers, numbers, numbers. Take a look at metrics. By the way — numbers do not lie! If a salesperson is not meeting goals, chances are, he or she is not trying hard enough to push the product. Why? It's a lack of passion. Without the passion or belief behind the product, their sales pitch is merely words. Mindless words with no enthusiasm. Chances are, they are either not cut out for sales or they are not interested in the product or services that they are promoting. If this reads on their face during a meeting with a potential customer, guess who is not going to believe? Bingo.

Do You Believe?
If you are a true believer in the product and services that you are selling, you have every right in the world to look a consumer dead in the eyes and ask for their business. If you would not sell this product to yourself, your friends, or your family, why would you sell it to an important customer? Until you trust that the product or service that you are trying to sell is the best decision that the buyer is going to make — I repeat — you will never be in danger of making a sale.

So let me ask you one last question: Do you believe?

An Actual Scenario: A CPA was preparing the tax return of a longtime client who had purchased three captive insurance companies from a well-known provider of such entities, and had paid $3.3 million in insurance premiums to these companies. The client wished to show that payment as a tax deductible item. The client had $28 million in revenue and paid $92,000 annually for their usual third-party insurance program. The insurance premiums paid to these new captives were for "coverages" that supplemented their existing insurance. What could the CPA do with this request?

Background: Owners of profitable businesses are attracted to the tax and financial planning benefits of forming and owning a captive insurance company that qualifies for the tax benefits of section 831(b) of the Internal Revenue Code (the "Code").

The Code section provides that if an insurance company has no more than $1.2 million in annual premium income, it can elect to exempt that income from taxation. And under a series of judicial decisions and Revenue Rulings, the insured company may be able to fully deduct the premium paid, even if the same person (or persons) owns both the insured and the insurance company.

This concept can be financially powerful, resulting in an immediate reduction in the owner's tax bill, yet virtually all of the funds remain tax free inside a related company. The profits of that company can either be accessed later at capital gains rates or passed to heirs outside of the estate tax regime.

The Problem: The deductibility of the premium is not automatic. The hurdles for properly deducting premiums paid to one's own insurance company are both numerous and, to some extent, subjective. The new insurance company must demonstrate sufficient "risk distribution," the amounts charged by the insurance company as premium for the coverages offered must be "reasonable," and the client must demonstrate an adequate "business purpose" for entering into the transaction, to name just a few of the important hurdles involved. These are each very important requirements that a tax preparer is unlikely to be able to judge with any degree of comfort.

Tax preparers who face the request to sign a return that reflects the deduction of such premiums must be careful not to run afoul of the Return Preparer Penalties of section 6694 of the Code. In addition, the client could face an accuracy-related penalty under section 6662 of the Code equal to 20 percent of the underpaid tax should the deduction ultimately be disallowed.

The standard for avoiding the Return Preparer Penalty is that the preparer held a reasonable belief that the position (the deductibility of the insurance premium) would have a greater than 50 percent likelihood of being sustained on its merits.

One of the factors included in the Regulations covering Section 6662 to determine whether a tax return has been negligently prepared is "failure to reasonably ascertain the correctness of an item that to a reasonably prudent person would appear 'too good to be true' under the circumstances."

In this case, it appeared that a sudden increase in insurance expense from $92,000 to over $3 million might make the deduction of that expense "too good to be true." But how could the preparer "reasonably ascertain" the likelihood of this deduction being upheld in audit?

The third party that the client relied on for advice in this transaction was the captive insurance company provider that sold them the program in the first place. But that party obviously believed that their program was fully compliant and therefore could not deliver a truly objective response to the CPA's concerns.

The client's attorney was not versed in captive insurance companies and could not be helpful without an expensive journey up the learning curve.

Turning to another captive insurance provider for an analysis of the client's situation was an obvious option. But each provider has their own competing program and clearly has an incentive to undermine the competition and encourage the client to switch providers. Certainly this may not always be the case, but it is wise to question the objectivity of the person doing the analysis if that person is a competitor.

The Solution: In this case, the CPA needed two sources of help. First, she needed to find an expert in captive insurance who did not also offer his own competing program. Second, she had to find an independent actuary who was familiar with captive insurance programs and who would be willing to opine as to the "reasonableness" of the premiums being charged by the captives.

Finding these independent advisors required networking with other CPA firms, searching the web for relevant articles and identifying their authors, and locating captive insurance sites and blogs.

The Result: The independent advisor created a report that the CPA could rely on, stating that while the structure of the captive insurance program would likely be compliant, the amounts of the premiums being charged did not appear reasonable, given both the nature of the client's business and relevant premium rates in the third-party market. The CPA then advised the client to hire an independent actuary to perform a rate review. The actuary ultimately opined that the client could reasonably support premiums of about half of the amount originally considered.

The client got a large tax deduction and the preparer had in file objective third-party support for the position ultimately taken on the tax return. While this support does not guarantee a favorable result in the event of audit, it should be very valuable evidence in any such audit and should satisfy the requirements for avoiding the Return Preparer Penalty.

Hiring an insurance advisor to handle your insurance is a critical necessity for a business owner. While many business owners know this, unfortunately, others default to a personal friend, a relative in the insurance business or the sales person that is friendly and wants to save you money. While there is not really anything terribly wrong with this (after all, you should work with someone you like), it is often better to work with someone you respect. That respect should be based upon experience and knowledge. The problem with that sentence is that since you do not understand insurance in all of its complicated glory, how do you select your broker?

Well, nothing is a perfect science, but if we put aside personalities for a little bit, there are some basics that you can follow that will help you make an appropriate decision based upon facts and then can factor in the personalities.

Some Basic Truths

First: Interview a prospective insurance agent/broker and qualify them according to your own needs.

Second: Insurance is a large portion of your annual expenses.

Third: You have a significant potential for uncovered losses that can put you out of business or cause you to lose capital and/or assets.

Fourth: All insurance policies are not created equal.

Fifth: There is no such thing as coverage for every type of loss.

Any insurance broker that starts the conversation by offering to reduce your insurance premium should be shown the door — immediately. If that is all they have to offer, move on.

It's All About Price, Right?
Purchasing insurance is a very serious consideration for the preservation of your business capital and should never be just about price. Every agent/broker will attempt to get the lowest possible premium so that they are competitive. Many businesses have purchased insurance only to find out at the time of a loss, that the insurance was inexpensive because it did not provide proper coverage. Although agents and brokers are licensed, there are great differences of education, knowledge and market understanding among them. An insurance advisor that is at the top end of that scale is an invaluable resource to you and your business.

For illustration purposes, here's a classic example: An underground water pipe breaks and the business owner has to remove a significant portion of paving as well as the pipe and replace both. The cost is $500,000. The insurance coverage placed by their insurance broker paid not a dime. Why? Underground pipes and pavement are often excluded types of property. Here's the pitiful part: Coverage can be provided for these items and at no additional premium (the limit of insurance, however, must include these values).

It is important that you understand which losses you are insuring and which losses you are retaining. A knowledgeable insurance advisor will help you identify your normal as well as unique exposures to loss, offer coverage and, most importantly, be able to explain that coverage in terms that make sense to you as a business owner without a lot of insurance techno-babble.

Think about the many complexities of various contracts you enter into. Insurance is another contract that is just as complex and detailed as your other business agreements.

Keep 'Em Honest
If you are sending your insurance out to quote to "keep your insurance agent honest," get another insurance agent because clearly you do not trust your current agent.

You should have a trusted advisor that has demonstrated their skill and depth of knowledge, who understands you and your business by asking for information and providing insurance or other risk guidance to you on an ongoing basis. If your business generates significant premium, interview competing agents and select one in addition to your incumbent agent and obtain a coverage review and quotation every three years.

You should create a Request For Proposal in order to provide the same information about your company to each competing broker. Assign them insurance markets. Allow your current advisor first choice for their top three or four insurance companies and have the competing broker identify the three to four insurance companies they will be using. The competing broker cannot use the same markets as those of your current broker. Your current broker should always bring their proposal to you after the competing broker.

Don't Shoot Yourself In The Foot
Never provide one broker's proposal or reveal information to the other. If the competing broker brings significant coverage issues and solutions to the table that your current advisor has never talked about, then perhaps you need to reevaluate your choice. One of the business practices that is the most aggravating to insurance professionals and is just plain wrong is to send everything that a competing broker has developed as risk exposures and solutions over to the existing broker by the owner. If the exposures are significant and the coverage analysis has been performed and specifics given to you, why would you do this?

Let's see if this makes sense: Give someone else's work to the person that has been mishandling your coverage and tell them to fix it. That is not buying insurance based upon real solutions — that is simply buying insurance either from someone you like or because you think they are the cheapest game in town.

Ask And Tell Policy
The relationship between you and your insurance advisor must be based upon proper communication. Tell your broker everything about your business and ask questions about your insurance program. Never assume that "your agent is handling" it. Ask your insurance advisor to become involved in contract negotiations or buy-sell agreements before you sign them. Their job is critical to your continued viability as a business: standing between you and your loss of capital and assets. As President Reagan famously said: "Trust, but verify."

Important Terms

Download an interview sheet that you can use that may be of help to you in this endeavor.

On a recent call with a large manufacturer, my company's team expected to describe how we develop primary care medical homes that become platforms for managing comprehensive health care clinical and financial risk. But the team on the other end of the phone beat us to it. Their remarks — that health care cost is a multi-headed monster that requires a broad array of simultaneously executed approaches — were a breath of fresh air.

They wanted to avoid approaches that don't work or are designed to accrue to a vendor's disproportionate financial advantage and focus instead on mechanisms that measurably improve health and reduce cost. Their conventional current clinic vendor wasn't onboard, philosophically or in terms of capabilities, and so wasn't getting results. They were looking for a replacement vendor that could help them drive more appropriate care, with clear rules for patients and providers.

Often we have to cajole clients into more aggressive actions: restructuring their benefits or their PBM formularies, redirecting care to high performing doctors or hospitals, direct contracting for advanced images or ambulatory surgeries, creating stronger incentives for approaches that are most likely to produce better results. But now we're finding more employers exhausted and eager to pursue out-of-the-box approaches that can drive more appropriate care and cost.

Since the end of World War II, when employers began offering health benefits to recruit and retain better employees, a tug-of-war has been waged over the rules of engagement. Employers want competitively healthy and productive work forces, but see health care as an unpredictable significant cost that must be managed. Employees may bristle at participating in risk assessments, or seeing certain doctors or working toward a healthier lifestyle. These may be seen as brazen invasions of privacy, as work overflowing into personal life, as constraints on patients' abilities to obtain quality care.

Until now, most employers have been reluctant to be too dictatorial. But the financial threats of relentlessly surging cost — 4.5 times general inflation for more than a decade — and overwhelming evidence of industry excess have been impossible to ignore, fueling a focus on using strong carrots and sticks to steer behaviors that follow what works.

This is no small task, because a profiteering health care industry has developed scores of ways to extract more money than it is entitled to. Low primary care reimbursements have translated into rushed visits, driving up specialty referrals, diagnostics, procedures and costs for complicated patients. Egregious unit pricing on drugs, devices and specialty procedures — think stents, advanced images and complex spinal surgeries — encourage delivering more unnecessary products and services. Yellow-pages provider networks give patients "choice" to unwittingly see lousy doctors who consistently produce poorer outcomes at higher episodic cost, or get care in hospitals where there are higher opportunities to experience an error or acquire an infection. Leaving all this to health plans that have, for decades, been unwilling or unable to manage these vectors or control costs is repeating a behavior while hoping for a different result.

Last year, Walmart contracted for heart, spine and transplant surgeries with six Center of Excellence health systems around the country. These organizations use salaried specialists who are more likely to diagnose and treat correctly the first time for lower overall utilization and cost. They use and share evidence-based protocols, share data and coordinate care with local providers. Walmart employees who visit these Centers pay nothing. Many large and mid-sized firms are now pursuing this design.

Jerry Reeves MD, a medical management innovator, structured an alternative health plan design for one of his clients. His plan used rules that strongly encouraged approaches that work. Employees who adhered to the rules paid about one-third less for their coverage. But the program required a commitment. Participants who signed up had to use one of eight primary care medical homes that had been established. They needed to visit within 90 days for an exam, including a biometric profile. If the medical home called to recommend visiting a nurse coach, the patient needed to do that. Patients seeing specialists needed to make sure that the specialist information came to the primary care doctor. The medical homes were structured to accommodate walk-ins, so urgent care visits in Emergency Departments were not covered until after hours. There were other rules as well.

There are rules for doctors and hospitals too. To participate in good standing, they had to develop and sign documented care plans for patients, so patients and physicians could know what to expect. They had to be able to exchange clinical information so care could be better coordinated.

Patients failing to follow any of these rules would receive "strikes," and three strikes would land the patient in health care timeout for a year, back to the original health plan, with more choice but 35 percent more cost.

Dr. Reeves' numbers were striking. 97 percent of the group signed up for the plan, and only one person struck out. Hospital days dropped 55 percent. Advanced images dropped 35 percent. Health improved and costs plummeted.

Employers are waking up, and are tying stronger incentives to approaches that get results. On the hook for exorbitant health care costs, employers and employees are game to know who delivers value and what works. They want good care for their families without financial peril. And they want help orchestrating that process without financial conflict.

More employers are making this shift. Broad-spectrum medical management organizations see this as an opportunity to succeed by bringing health care back into balance.

This article first appeared on Care and Cost.

1. The right medical care at the right time is always in the best interest of the injured worker and almost always will result in the lowest claims costs.
2. The right medical care at the right time will (almost always) result in an earlier return to work with less permanent residual disability.
3. Evidence-based medicine is the right care for the legitimately injured workers. (There is a hierarchy on how to apply evidence-based medicine).
4. To control worker's compensation medical costs requires both a fee schedule and an ability to control the frequency and the appropriateness of treatment. One without the others usually results in massive increase in medical costs for the system.
5. The medical treatment fee schedule should be clear, easy to use, accurate and reflect the latest technology.
6. A fee-for-service system may result in incentives for physicians to over-treat, inappropriately.
7. In many jurisdictions Worker's Compensation is generally the last fee-for-service system.

8. As long as workers compensation uses a fee-for-service system, medical utilization review is needed to make sure that the physicians will treat adhering to evidence-based medicine.
9. Pharmacy utilization is problematic because of the "Medicalization" of the general population. (Medicalization is the direct advertising of symptoms and diagnoses to the general population by drug manufacturers, resulting in an overuse and/or misuse of some types of drugs and therapies).
10. There is a significant problem with "off label use" of drugs in the worker's compensation system. (Off Label is the use of a drug for treatment that was not the reason for its approval from the FDA).
11. Medical decisions should be made by medical professionals. Most Workers' Compensation judges, attorneys, and claims adjusters have little to no formal medical training and are not medical professionals.
12. Poorly (inappropriate) placed incentives will result in poor medical outcomes. (There are several studies that demonstrate that allowing physicians to do self-referrals or to dispense pharmacy goods from their offices will usually result in a utilization of unnecessary services or inappropriate usage of drugs).
13. Even if the doctor is not dispensing the drugs, opiates require regular visits to the doctor for renewal of the prescription and also may involve expensive drug testing; so there is a financial interest on the part of some doctors to prescribe opiates.
14. Some physicians who prescribe opiates do not fully appreciate the addictive power of the drugs that they are using or the difficulty in detoxing the patients.
15. There are currently enough treating physicians and specialty physicians in most urban areas; however there are not enough physicians (treating, orthopedic or neurosurgeons, etc.) in the rural areas to meet the demand. This problem will only get worse as the population ages and more doctors retire. It will also get worse if physicians leave workers' compensation due to the demand for their services due to the implementation of the federal universal health care programs.
16. Many surgeons and other physicians want to perform their craft (do surgery, provide injections, etc.). They truly believe that their surgery or injections will work even if the prior treatments have not been successful or if current evidence-based medicine says surgery is not appropriate.
17. Every patient looks like a good candidate for an MRI when there is an MRI machine in the doctor's office.
18. Not every person with a surgical or potentially surgical condition is a good surgical candidate. Though pre-surgical psychiatric evaluations are required for spinal cord stimulators (post spine surgery), the same is not true for many other surgeries.
19. It is difficult for a patient who is in intractable pain to believe that strong medications (including opiates) are not appropriate or are not good.
20. It is difficult for a patient who is in intractable pain to believe that not having back surgery will have the same ultimate result as having surgery when the surgeon is saying (with confidence) that the surgery will cure all. Even though current evidence-based medicine says differently.
21. Because "doing something is better than doing nothing" when the patient is in intractable pain, if the surgeon says surgery will not be successful, the injured worker will attempt to find someone who will say that the surgery "will be more successful than not having surgery," and will then attempt to have the surgery.
22. Patient advocacy is the application of appropriate treatment and patient encouragement that allows the patient to remain as functional and productive as possible.
23. Patient advocacy does not always mean the pursuit of treatment a patient desires.
24. Patient advocacy may require the physician to decline to do the treatment sought by the patient when that treatment is inappropriate.
25. In Workers'Compensation, there are many (known and unknown) underlying non-industrial, psyche/social issues that may hinder or completely stop optimum medical recovery.

• A couple of disruptive employees whose paychecks had been withheld for failure to have reports done on time filed a complaint about not being paid and were then terminated. (Two strikes on this one!) First, most states prohibit withholding paychecks just for poor performance. Second, terminating these two employees after they complained resulted in valid claims under the state's "whistleblower" laws.
• A poorly performing employee complained of sexual harassment. A thorough investigation concluded no harassment had taken place. The employee was then terminated on performance grounds alone. Problem — no contemporaneous documentation of the alleged poor performance existed, so it appeared to the state administrative agency that the termination was a result of the harassment allegation because it followed closely behind the report of it.
• A long-term employee of an elder daycare facility, who was a "mandatory reporter" under state law, filed a report with the state about inadequate staffing at the facility when an elderly client was left unattended and was found wandering around in traffic. She was terminated for not following "internal reporting procedures" (in this case a warning was the appropriate remedy, not immediate termination).

Twelve Components of a Model Personnel Handbook Following are twelve components that we recommend all personnel handbooks contain:

• Introductory Statements
• Nondiscrimination and Sexual Harassment
• Organization and Structure
• Training and Orientation
• Employee Classifications and Categories
• Employment Policies, Including Wage and Hour Regulations
• Benefits Disclaimer
• Leaves of Absence and Time Off
• Standards of Performance
• Workplace Violence Prevention and Safety
• Search and Inspection
• Drug-Free Workplace

At a minimum, the handbook should include statements regarding at-will employment, probationary, introductory or benefit waiting periods, and examples of disciplinary offenses (always prefaced with "including, but not limited to" language). Always have employees sign a written acknowledgment that they have read and understand the policies, or you might as well not have created them in the first place. Next comes training and adherence. Regardless of size, every nonprofit needs to train its management personnel about the employment laws relevant to their jurisdiction and the policies and procedures the agency has adopted. Include here any state mandates such as sexual harassment training for supervisory personnel. Then, walk the talk! Follow those policies and procedures diligently — every day. Oh, and did you remember to include your board members in the training? They are at risk as much as the Executive Director because they are ultimately responsible for the agency's overall management.

• One out of every 100 nonprofits (regardless of size) will have an EPL claim this year
• 97% of all claims against directors' and officers' policies are in the EPL category
• The average cost to defend when a claim has some merit is $29,000 and the average loss on those claims is $44,000 — a combined average of $73,000
• 40% of EPL claims have some merit and when they do, one in ten will cost more than $100,000
• When claims do not have merit, the average cost to defend is only $5,000, thanks to early intervention by our experienced employment defense counsel
• The two largest claims cost $1 million and $400,000 respectively

• $1 million is generally adequate for small to mid-size nonprofits. Larger agencies should consider higher limits or an umbrella policy.

• Is the nonprofit agency itself insured in addition to its directors and officers?
• What about prior directors and officers?
• Committee members?
• Employees and volunteers? (Volunteers don't have all the federal or state immunities you may think.)

• Either by endorsement or imbedded in the D&O policy itself

• Does it extend to administrative proceedings (where most EPL claims start) or just to suits in civil courts?

• The carrier should pay for defense costs as incurred, not after the nonprofit has paid for them and is seeking reimbursement