The Exit Engine Podcast Episode 27: Meet Rob Freeman (Risk Management + Insurance)

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Welcome to the Exit Engine Podcast, episode 27. Good afternoon, John.

Good afternoon, Joe.

How you doing, man?

I'm doing great. And yourself?

I'm doing wonderful. We've got another very special episode of the podcast today because we've got another guest. We're getting more, we're getting better at guests, which is good. I think it's important for us to be able to have more guests than just you and me.

Absolutely. And the guest we have is talking about a very important topic for entrepreneurs, for business owners, for really anybody can use information you're going to get from our guests today in their life, their personal life and their business life.

He's a good friend of ours, of Exio's and ExitEngine, and hopefully moving forward, a good friend of the podcast, but allow us to introduce to you Rob Freeman from Brown and Brown. Rob is a distinguished expert in insurance and risk management, especially when it comes to businesses. And we're going to talk to Rob today about risk management, how you can insure yourself and hedge yourself, and what the kinds of things you need to be looking out for as a business owner when you are thinking about selling the business from a thing. So Rob, I'm going to give you a— first of all, hello Rob, how are you?

Hey guys.

Hey, great to have you, man.

Thank you for having me.

Of course, of course. Let me embarrass you a little bit, okay? You've got decades of experience advising businesses on how to protect their assets, manage their liabilities, minimize exposure to risk, right? You are a trusted resource for business owners navigating this complex world of risk management, and it is a complex world, isn't it?

It is, it is, and it seems to be getting more complex with things like artificial intelligence. Yeah, absolutely.

Yeah, great question. We're definitely going to get to that, you know, as we go. But to open this up, start us off here, Rob, is, you know, tell us about what risk management really is and why is it such a huge consideration for business owners, and especially those obviously who are like planning, you know, an exit at some point in the near future.

Sure. So, I mean, any company that is thinking about or preparing itself for a potential sale needs to, or, you know, I should say rather wants to maximize the value that they are going to get as a result of that process. And insurance can really play a part in that process of maximizing the value for the business and the business owners and their shareholders if there are limited partners or shareholders. And so, you know, that's really what we try to do here is, you know, think as a business owner. I personally have started and sold— started 3, sold 2 small businesses. And so, you know, before I got into insurance and worked in a variety of industries from the internet to real estate and other things like that. And so, you know, I think I have a broad understanding of what business owners are looking for and understand that they're looking for, you know, they want to feel peace of mind and not have to be worried about a giant insurance bill. I mean, they're really just trying to solve a problem. And with respect to a business that's been established for a long time, but then it's coming to a time where it's going to be sold to someone else, maybe in a competitive situation where there are multiple buyers bidding on a business because it's very valuable or highly sought after in some way, having the right insurance in place can not only reduce the headaches and brain damage that goes along with that process for both the buyer and the seller, but it can also maximize the value of that sale and make the— any indemnifications or representations or warranties that the business seller is making not have to be a hindrance to the process, but it can, you know, be addressed with an insurance policy in some ways.

Yeah. And Rob, can you go deeper into that, like reps and warranties insurance? Right. Could you give us like either an example or like a story of when— or first of all, what, you know, what it is? and then sort of how it can benefit someone who's selling their company.

Sure. So, so, um, uh, reps and warranties policy, representations and warranties, uh, also, also known as RWI, um, is a type of transactional risk insurance that can be purchased either on the buy side or the sell side. And, um, it's more common on the buy side, usually for buyers who are, you know, looking to be more competitive in their bids for a company that is, you know, highly sought after. Maybe they're in a competitive bid process and they want to be able to say to the seller, look, we have gone through all of the deal docs. You know, we've— we have a good handle on all of the representations and warranties that you're making, the financials, any contractual agreements and other things like that. And, you know, we're willing to follow your lead on the indemnifications that you're willing to make, and we're going to have our own insurance policy back your representations and warranties so that if something comes up that was— you did not intend, it was an unanticipated, unforeseen issue, we will be covered by that, and the insurance company basically transfers the risk away from the buyer to an insurance company as a result of that process. And, you know, a seller can do the same thing where they want to— it's less common for sellers to purchase their own reps and warranties policy where they are the beneficiary, but it does happen in the sense that it helps them feel more confident about the terms of the deal because they can feel like they are, you know, they know that if something happens that was an unforeseen representation or warranty breach that comes up, that they would be covered by their insurance policy.

Okay.

And they would be the beneficiary of that. So it's just another way that a company can, and it's, you know, that's obviously for more businesses that are more mature, and, you know, younger businesses would have other types of insurance that they would want to have. But in the transaction process that you guys are dealing with, that is a common thing. Another type of insurance that is useful for companies that are, you know, being bought or sold is what's called a tax insurance policy. And, you know, often in M&A, there is— there are tax implications or companies are being sold with the explicit purpose of, you know, having some sort of tax advantage or some tax benefit. And the tax insurance policy can be written to essentially dovetail with an associated reps and warranties policy to cover any tax liabilities that are clearly defined prior to the transaction. And, you know, tax insurance and reps and warranties policies are what's called a claims-made policy, which means that as long as the claims are made within the policy period, which is typically, you know, a period of years after the transaction is completed, then if there's a covered claim, then it would be— the claim would be paid out.

So, Rob, give me— this is interesting. So give me an example of a situation So one of the things that we see happen a lot, okay, and it's actually happening more and more as we're going forward here in time in the M&A space, and especially in the mid-market space, is that we see a lot more dissatisfied people after the transaction has ended. And I wonder, again, you just bring up the idea of the, oh, look, there's, there, if anything was misrepresented, if there were things on both and for both parties, right? It's natural that the buyer, you know, obviously is insured against making a bad deal because he's gotten some information that was incorrect and stuff like that. And that makes it— that's natural. I think that makes sense to everybody. On the seller side, however, what you're saying is that there's still the potential to be able to have something like that to protect yourself. And I'm interested to know, is that what is there for, you know, for sellers? When they— when they— when the deal is over in terms of the ability to be able to go back and go, well, this wasn't done, this wasn't done, or, you know, whatever dissatisfaction went on with the actual transaction?

Yeah. So, I mean, every reps and warranties policy is essentially like a bespoke policy to a certain extent. They're all customized and the coverages are going to be tailored according to the reps and the warranties that are being made from either side. So, Typically, the process is that there's, you know, we encourage people to speak to a broker, their broker. That would be me in this, you know, in cases where my people are reaching out to me about a business that's being sold. And as early as possible in the process, because the sooner they get started, the sooner we can start talking to different insurance carriers and identify which carriers are going to be offering the best combination of coverage and terms and the duration, making sure that there's a duration match with respect to whatever is being done. And, you know, and then whether there are other tax, you know, implications or other things like that. And so, you know, depend— it just depends, Joe, what the specific situations are. But everything— if there is a concern, then those concerns can be addressed within the customization of the policy and the structure of the policy terms.

Could there be, and is it possible to insure yourself against, again, things that might be in the sale contract? And specifically what I'm thinking about is like, you know, all right, you, the agreement, many times what we've got is we've got buyers who are trying to sell on their own terms. And their own terms sometimes are, you know, maybe sometimes kind of out there. And what I mean is that they are less a specific part of the business sale and more about what happens to the business After they're done with it. And then, so is it possible to, in your representation and warranties insurance, to be able to cover specific parts of the contract that don't end up happening or, you know, are somehow neglected by the new owner once that company is taken over?

I mean, I think the short answer is that anything should be possible within reason. So, you know, I don't know if you're referring to like earnout terms or things like that.

That's the first thing that came to mind is the, you know, earnouts when someone has an earnout clause, the guarantee that that payment will be made as an example.

Right. Yeah. I mean, that is a specific type of risk that, you know, should be definable within the contract. And, you know, if the— I'm sure that that could be something that could be negotiated. You know, one other thing I would say that, you know, in terms of percentages of these types of claims that are made, often when— before a company puts itself up for sale, you know, one of the things that a company can do to increase the value for itself and its shareholders is to have, you know, the right insurance, such as like business interruption insurance, which you would find in like a, you know, property policy or a business owner's insurance policy. You know, directors and officers insurance, which is going to, you know, help them in the event that there's an employer-related claim or a shareholder claim or competitor claim. And then at the end of the— when the transaction happens, when the sale is done, you would typically have a D&O policy that would convert into what's called a runoff or tail, and then that allows any claims to be made within that extended policy period for stuff that happened while the policy was in effect. And so that also, you know, it helps provide reassurance about some of these things that you're talking about, Jo, with respect to performance related to the contract, because if if there's only a single owner and there are no shareholders, then that makes a much cleaner transaction. But if there are a bunch of limited partners that are worried about the performance of an earnout or other things like that, they may be saying like, look, these are important points, but we really just want to sell this thing and get our money and get out. And so the less complexity that we see in this agreement, in this contract to sale, and also in the reps and warranties policy, the better. So I'm kind of giving you a non-answer, but I'm saying that in terms of structuring the deal, we would look to be an advisor along the way in terms of how you can get this deal done for the maximum value and also in the most efficient way possible.

Right. And again, look, what we're always interested in, what we're always coaching our sellers is that the best thing that you can do is to be the person who is forthright and and transparent, and have your stuff together so that you can make the buyer feel comfortable that way, you know, in terms of— and that what we want is we want everybody to be open and honest, right? And to be able to actually look at this thing, and then also feel protected. And so, you know, what I think, Rob, your non-answer, I think, actually is actually a very good answer, because reality is that what we're learning here, and what everybody should be taking away from this conversation today, I hope, is that there are There exist in the insurance world these ways of protecting yourself as you go through these transactions, right? And so, depending on your situation, depending on how many partners you have and how many, you know, people are involved in the company and what your claims or what your worries are, there is a way to potentially protect yourself and hedge yourself, you know, against bad action, which is one thing, right? Even oversight, right? negligence, all the things that insurance is good at covering, right, in general. And so again, I think it's important for people to know right off the bat, Rob, that, man, this exists. And, you know, and as you go through this transaction, showing that you have some of these things before it happened and having some of these other protections for the transaction piece itself and things like that is something— is another piece of the puzzle that needs to be Needs to be engaged with, or at least, you know, considered.

That's right. That's right. And so just, just to give you an example, so like last year we had a— we did a fair amount of what's called tax insurance last year. And one of the situations was a guy who was building a, you know, a good-sized renewable energy solar plus energy storage project. And this guy was raising money to build the project using tax equity money. So these are third-party investors that have tax appetite. They have tax liabilities that they're looking to reduce.

Yeah.

And so they can invest in a renewable energy project to, you know, get certain tax credits. such as the investment tax credit, the ITC.

Yeah.

And with the— there was some legislation that was passed a couple of years ago called the Inflation Reduction Act, and that allowed investment tax credit projects, eligible projects, to increase the tax credits, say, to, you know, from 30% to 40% to 50% to 60% for doing certain things and meeting certain criteria. And this guy was being aggressive in terms of his structuring of this deal, not in a necessarily bad way, but he was just— he was trying to maximize the value these credits. And the investors who were looking to purchase into this project were insisting on having a tax insurance policy to basically protect them in the event that the developer was overly aggressive with the structuring of the deal. So they didn't want to get a knock on the door from the IRS a few years down the road saying, hey, just, you guys owe us millions of dollars. And so that enabled— having that policy in place enabled them to get the project done, you know, construct the project, get the project done, have that project move forward. And so we see that a fair amount in terms of, you know, deals getting done where a business person has an idea that they're looking to do, whether it's sell their business or merge their business with another business. And in order to do that, they want to maximize the value of that business and the outcome so that the end result is accretive to everybody who's involved. And so, in this case, having a discussion with a transactional risk broker early in the process, it doesn't cost anything to talk to me about any of this stuff.

Sure.

Only when you want to bind a policy essentially does it cost anything. And there's typically an underwriting fee that goes with it, but it's beyond the point of You're already ready, you know, you're ready to go at that point. So you've already decided that's what you want to do.

Evening, Buyer's Remorse. Buy a new car? I'll be moving in. Let's get started.

Uh, sorry, I think there's been a mistake. I bought it from Carvana.

You what?

Yeah, great price. I even have 7 days to love it or return it.

So there's no—

No, no buyer's remorse. More like buyer's rejoice.

I guess I'll let myself out.

Congratulations.

I mean it.

Buyers rejoice. Buy your car today on Carvana. Limitations and exclusions may apply. See our 7-day return policy at carvana.com. But it's, it's a very useful thing for businesses that are, you know, of a certain size.

Yeah, and it sounds like, Rob, the solution or the scenario you just walked us through, that's really, you know, your client has a problem. They come to you looking for a solution and in risk mitigation or specific insurance solution. And you're helping the client solve that problem. Is that fair to say?

Yeah, exactly. So, you know, for the most part, the kinds of calls I get are, hey, I have an issue and I need, I need a problem to be solved. And so I, you know, I'd say that most of the time people are calling me, it's because they have some sort of challenge that they're dealing with. And they either get a contract that they're working on that they're for a deal that they're trying to get done, or they have an idea for something that they're trying to build, or a, you know, they're starting a company, or they see a company that they're going to acquire, and they, you know, start realizing that they, you know, either the target company doesn't have the right insurance, or, you know, they don't have the right insurance. And, you know, they've just decided that they have something that they need. So, you know, we find that, like that, you know, for instance, that tax policy was—

Yeah.

—an example of something like that where, you know, the guy just called and said, hey, you know, this is what I'm working on. Can I— do you think you can help me out with this? And so that was no problem. A lot of other times it's, hey, I just signed a— you know, I'm about to sign a contract for a large construction project and the contract is calling for me to have 5 times as much insurance as I currently have. How can we get this done in an affordable way? Yep. You know, other things, you know, we do business with a fair number of commerce, e-commerce companies, manufacturers who are expanding their businesses, and they often have You know, they'll maybe sign a contract with a distributor, and the distributor, you know, say for like, say the distributor might be Costco or Walmart or, you know, somebody that is going to provide them with, you know, basically more fuel on their business. And those companies will often have certain contractual insurance requirements that require indemnification of the manufacturer, of the distributor by the manufacturer. And those insurance requirements might be you know, high levels of cyber liability.

Right.

You know, higher umbrella limits, you know, could be environmental pollution-related stuff. And, you know, we find that, you know, I'd say probably, probably 50% of companies in the middle market are probably underinsured on cyber because they're just, you know, not really thinking about it too much.

Right.

Or they have only $1 million of coverage when, you know, some sort of ransomware event or a breach or something like that would really erode those limits pretty quickly in the event that they had to deal with it. And so, you know, that's, that's something that we see. We try to encourage people to think, you know, in terms of what, what could be the, you know, what could be a catastrophic situation that you guys would not want to be in.

Right. Like if you're in the front page of the Wall Street Journal and there's some type of Black swan event that's, that's rare but impactful, right? You want to have insurance that could cover you in that instance.

Right, exactly. In the insurance world, it's frequency and severity. So do you have— is it a, you know, low frequency, high severity event or a high frequency, low severity event?

Right. But I mean, obviously we're talking— when we talk about cyber though, I mean, we're talking about anything computer-wise and things like that, right? I mean, AI now, Right, we were having a conversation about that earlier, like this notion that cyber is even growing in terms of what the potential risks are within the, you know, within the digital world, right? Especially with things like AI. So what products and what things exist out there, or what should our audience be aware of in terms of, you know, things to hedge themselves, you know, and protect themselves against the cyber activity?

Yeah, so if a company if a company has— there are many, almost any company has some cyber exposure, right? If they're using email for communication, if they're using online banking, if they're collecting any customer data, even their employees' data. So if you have a company with 10 employees and they're in New York and, you know, they're, you know, it's a small company, but they are collecting the employees' Social Security numbers and other things like that in order to just process like, you know, manage the basics of a benefits plan, or just they have collected this data in their, you know, some sort of online database from the original hiring process, and they're holding on to this information. If that information is breached according to state law, that could be the result in regulatory fines and other types of requirements where they have to notify all the employees and go into some sort of a damage control mode. And From an administrative and financial standpoint, that can be very burdensome. And so the purpose of cyber liability insurance is to help protect that and provide other things like reputation management that can help manage the fallout from a, you know, a breach or some other type of public, you know, situation related to cyber. If the— if somebody's data is stolen and then the perpetrator threatens to you know, threatens to release that data onto the dark web or publicly, in— or unless they're demanding some sort of ransomware, there typically will be coverage for ransomware within the cyber policies, you know, other things like that. And then— So, yeah, anything related to some sort of a cyber risk, malware, any type of attacks on the site themselves, distributed denial of service attacks.

Yeah.

You know, anything like that. And, you know, unfortunately in the cyber world, we see this with, you know, over and over again where companies are, you know, they find out 6 months after the fact that they've had a bad actor within their network for 6 months, you know, a year before they actually find out about it. And there are all different types of cyber attacks. You know, from ransomware to something called a man-in-the-middle attack where— or, you know, person-in-the-middle attack where somebody is basically intercepting communications that are coming from one person to another person, and then they've learned enough about how the communication is that they can imitate it. And actually, last week I did that video that you referred to, Joe, on artificial intelligence and cyberattacks. I mean, it This is a really amazing study that was done, and it basically said that— I think it was done at Harvard, and there was a very famous cybersecurity researcher who was attributed to this study. But basically they found that fully automated phishing attacks, spear phishing attacks— phishing is just a type of social engineering attack where they send, you know, Joe, you get an email that You think is coming from John, but it's really not John. It's some other person somewhere who's pretending to be John, and John's asking you to send some money to a vendor, and he gives you the, you know, the routing and the account number, and you send it, and then you find out, you know, a week later that, you know, John didn't really send you that email. And so they found out that these fully automated phishing attacks were 50— had a 54% click-through rate.

Wow.

Wow. 54% click-through rate.

To get, to get specific, Rob, I mean, just to give you, just, I know, you know, before you get into the solution here, the reality is, is that, I mean, we're seeing this happen all the time. I mean, I've got my sister sends me text messages because things they think come from Apple, and then they say Apple says do this and do the thing and go in and put your information in and blah blah blah. And it's like, yeah, it's really easy to get fooled by This stuff, man. Like, it's, it's really easy.

Yeah, I know. I've probably gotten, you know, just this morning I've gotten, you know, text messages from USPS, or, you know, my package is delayed, or, you know, my FedEx guy can't get in, can't get to where he's supposed to go.

And I got that one over the holidays. And over the holidays, like, hey, I could be expecting a package. Wait, exactly, something for Christmas.

You know, it's no wonder they have a high click-through rate, man, because it's insane. It's very easy to do that, especially if you're worried about something. If you're one of those people who's like, Like, oh my God, I'm going to overdraw my bank again, whatever. You know, I mean, that's, that's real fear.

At my old company, we had, we, you know, we had a corporate entity that was doing all that was responsible for sending out these phishing, you know, spear phishing things, phishing attacks. And I would get the report to see who clicked through. And agents would click through, branch managers would click through, senior-level executives click through. I clicked through, like, I was guilty of this. Like, I fell for one of them, like one out of, you know, 27 that we did in a year, and it was really convincing. So, yeah.

Yeah, I know. We— it's— I mean, it's really great to have those types of, um, you know, internal stress testing, uh, system, you know, processes that are going on. Um, and, you know, we have those too here, but, um, Yeah, it— but I mean, just as the— just that I won't beat this AI horse to death, but it was, it was, you know, to be the purpose of the, or the reason I did that video was 54% click-through rate when these fully automated phishing emails were sent out at 30 times less than it would cost a human to do it. So, so for, for the— for, for to save 30x the cost of doing a phishing email.

Wow.

You know, of course they're going to be automated. It's, I mean, it's completely asymmetrical warfare at this point where, you know, we just simply can't manage all these things, all the inbound emails coming into us. And so at some point, like you said, John, someone's going to click on something. And, you know, so when that eventuality happens, you're better off just having, you know, a cyber policy there to help you manage the fallout from that. And so that's, that's where it could be very useful.

And sort of like, in continuing that point about cybersecurity and this and the policies that like a company would need, do you have guidance, like a general set of policies for a new client of yours, either a new client of yours or a new company, on sort of the base level sort of table stakes insurance that you all should have?

Yeah, so I mean, pretty much any company that exists you know, should have, you know, a very basic general liability policy. And what we typically recommend for companies that are just starting out or companies that are, you know, that are preparing to ramp up, but they know that they need certain basic insurance is what's called a business owner's policy.

Okay.

And this would be like the starting point for any business. Like the minimum type of insurance that you would want is a business owner's policy. Business owner's policy is a type of package policy that includes general liability and some property property coverage is included in there. It's all packaged together in the same form from the same insurance carrier.

Yep.

And then you would typically add on top of that an umbrella policy, sometimes referred to as an excess policy. Those are slightly different things, umbrella policy and excess policies, but fundamentally they're similar. What they do is they provide a level of insurance above the general liability limits in case those limits are exhausted in a claim or claims. And umbrella coverage per cost per dollar per million, cost per million dollars of coverage is much less expensive than it is for the primary limits because they typically don't get used unless you have a series of claims. And so it's inexpensive to have, you know, a $1 million primary, uh, $2 million per occurrence on your primary GL, and then have, you know, a million dollars of excess or umbrella coverage Or $5 million or $10 million, and that will protect you in the event that the stuff really hits the fan and, you know, you would otherwise be, you know, your limits would be exhausted and you'd be coming out of pocket for defense costs and other things like that.

Okay. And then, and then, like, what about, like, liability for management teams? And you talked a little bit about, like, director D&O insurance. If you could just expand upon Like D&O insurance and errors and omissions would be helpful, I think.

Sure, sure. So as companies start to grow and become more complex and their needs expand and their risks expand, you know, we, you know, we would start with like a business owner's policy and then we would expand out to saying, hey, these are the types of insurance that you should have. So cyber would be one of those. Errors and omissions might be one of those if they're doing any consulting or advisory work, you know, Workers' compensation. Workers' compensation is a really important one if you have any employees, or even if you're just a company with like, you know, over say 1 or 2 founders. Depending on the state you're in, workers' compensation is all statutory. So, you know, defined at the state level in terms of where you need it and when and for how many employees. But, you know, once you have employees, typically in almost every state, there are certain states that don't require it, but it's, I think it's only 2. You are required to have workers' compensation. And workers' compensation is what's considered no-fault coverage, meaning if there's an employee who has— if you have work comp and an employee is injured, they just file a work comp claim, they get better, and they come back to work. There's no considered no fault from the employer in that situation.

Got it.

And so work comp is really important. And then once a company starts to grow and they say, okay, well, we're going to start raising money, we have a— now we have a board, we have— we started to take on some limited partners. We have taken an angel round, we have, you know, friends and family round, we've took it, started to, you know, Series A, Series B, whatever. Then we start looking into what's called a management liability policy. And a management liability policy is typically several types of insurance that are packaged together in one policy to dovetail the coverages, to fill any gaps that would exist in certain policies and make sure that the thing is comprehensive.

Right.

And, you know, the management liability policy is going to cover things like directors and officers insurance, or D&O.

Yep.

Employment practices liability, or EPLI, and fiduciary liability. And, you know, D&O is there to protect the company in the event that the directors or officers or other high-level management, you know, of the company are accused in some way of some sort of fiduciary breach, meaning that they're not acting in the best interest of the company. They've done something wrong to breach that fiduciary duty. And, you know, we see them— probably 40% of the claims that come into D&O policies for private companies are employee-related. So stuff that, you know, arises out of the employee-employer relationship. Now, those types of claims are— can be addressed through a D&O policy if the directors and officers are named personally, as you know, in the claim, in the suit itself. But typically you would have covered within the management liability policy that EPLI insurance, employment practice liability, that covers any type of suit or issue arising out of the employee-employer relationship. So that would be like discrimination, failure to hire, wrongful termination.

Got it.

You know, harassment, anything, you know, I mean, you know, like a few years ago we were dealing with all these sexual harassment claims and things like that that were very pop— very prominent. And the result of all those very public EPLI-related claims is that the cost of not having these types of insurance can be really can really come back to bite you because of the nature of some of these nuclear verdicts, what they call nuclear verdict, where the, you know, there's a group of employees that sue the company because they, you know, fostered a hostile work environment. And the jury is, you know, it goes to trial and the jury has said, you know, we've had enough and for what would be a, you know, a $5 million or a million-dollar EPLI claim, it's $100 million or something. And so, you know, you can— there have been a lot of these situations that I think there was one in New Jersey that was like $100 million, or, you know, maybe it was even more, that was very, very significant. And, you know, because of punitive damages and other things like that. And so employment practice liability is really useful to have. I had, you know, we had just, you know, we deal with these types of suits all the time and, you know, people can file a lawsuit and claim pretty much anything. So, you know, the EPLI insurance provides defense costs and helps you, you know, the insurance company is going to take over that process and—

Right.

You know, you still have to be involved, but they will be managing that process and dealing with the attorney from the plaintiff side.

And you're, you know, you mentioned you have a particular expertise. I mean, you work with clients all around the country, but you have a lot of clients that are sort of operating in, in New York City. Um, can you just talk a little bit about sort of the unique sort of ways that, or the, the specific cost difference Differences between companies that operate in New York City and companies that operate sort of outside of the city?

Sure. So yeah, I mean, New York is its own, its own animal for sure. So any, any, I mean, it's, it's unfortunately it's a litigious state and there's a lot of regulations related to, you know, certain performance requirements with respect to things like cyber liability or employment practices or workers' compensation or any sort of liability related to construction and heights. So we do a fair amount of work with contractors here, and I work with— I personally do a lot of work with solar contractors or renewable energy, anybody involved in the renewable energy industry, and have, you know, a lot of clients in the New York area that are doing that type of work. And so in New York, There is, and I, you know, let me know if I'm getting too in the weeds here, but there's a law in New York called Labor Law 240-241, which imposes strict liability on all parties involved in a construction project where there is a claim related to some height differential. So anything, any sort of claim involving heights and bodily injury or property damage. And so, and this was, you know, the creation of this law goes back, you know, over 100 years. And it was, you know, when you see those pictures of the guys out on like the—

The girders.

Empire State Building or, yeah, you know, whatever, the Chrysler Building, and they're sitting out and, you know, I mean, it looks incredible and inspirational, but at the same time, I think, you know, some of those workers were maybe taken advantage of or something. So they, You know, they created, you know, or who knows, you know, probably that, you know, some clever lawyer came up with the, you know, some lobbyist came up with the reason for this. And so now these laws exist and to protect workers, you know, from being exploited, but it's caused the cost of insurance in New York to go up significantly for general liability for any contractors that don't want to have what's called an action over exposure. Right. And again, I don't want to get too much in the weeds here, but basically when you have a contractor who is doing work for a building owner and that contractor uses a subcontractor and say the subcontractor is on the job and they're doing the work that they would normally be doing and they slip and fall and they maybe fall off a ladder and they injure themselves. If they would first file a workers' compensation claim so they can, you know, get back to work and get back on the job. But if for some reason they believe that the landlord or the general contractor or somebody else on the job was negligent, they can file a lawsuit against everybody involved in that project.

Right.

So that they can file a lawsuit against the landlord. And that's typically what we see is that the The plaintiff will just— or the plaintiff's lawyer will just advise to sue everybody.

Right.

And we'll get— we had just had this yesterday where a client of mine was named in a lawsuit who wasn't even on the job. They weren't even working on this project, but they had, you know, their name was on the paper, maybe because there was a lien there or something, you know, related to the project. I've had ones where they didn't even have anything to do with the project. They just just were, you know, named for some reason. And, um, so what happens is that the actual parties, the contractor or subcontractor that are actually doing the work, usually have some sort of contract with the landowner or the building owner. And that contract is going to have indemnification in it where the landlord's saying, you know, let's do this project, but if something happens that's the result of what you're doing, you're going to indemnify me because I'm I'm just hiring you. I trust that you know what you're doing. And so the lawsuit comes in, goes to the landlord. Landlord says to the contractor or the general contractor, hey, I got this lawsuit. You deal with it. It's, you know, look at this agreement we signed. It's your responsibility. And if the GC or the sub doesn't, depending on where the lawsuit's going to end up based on the contract, if the GC or the sub does not have certain types of insurance that covers this action over situation, then they won't have any coverage. And the average action over claim is over north of $1 million. The, you know, the result of, you know, negative type of claims.

That could put a subcontractor completely out of business.

Correct. That's right. And, you know, delay the project or kill the project, and that has other sites of, you know, downstream effects. And You know, and just coming back to businesses for sale and what happens with, you know, companies that they're selling when they're selling themselves, the same thing can happen if there are some sort of liabilities that are hanging out there that would open the company up to a D&O claim or open the shareholders up to a D&O claim if they are, you know, not involved in the business and something comes back based on a representation or a warranty or some sort of other You know, private shareholder disgruntled issue or financial-related claim.

And this could happen, this could happen potentially, right? That you, this kind of claim like this could happen after the deal was done, right?

That's right.

Potentially, right? And that, so that therefore now there's a new owner, right? But the new owner, right? And, and now what we're in a situation where is, is that what was covered when and what policies were there and all that stuff, right? to protect whoever is in charge in the moment, because it may actually be difficult to kind of disambiguate if something happens over a time when a transaction was happening, is who was responsible for it.

Right.

And insurance potentially at that point, you know, comes in handy there to protect even the past owner for something that potentially could be the new owner's fault, right? Or vice versa.

That's right. That's right. And so, you know, you typically would have a— when an M&A deal goes through where a company is acquiring somebody else, you know, Company A is acquiring Company B. Once the acquisition is done, you know, you would want Company B to have a, you know, have put into effect a tail policy to protect against any potential claims that could arise from something that happened during, you know, while the company was in existence, but the claim hadn't been made yet. So that's a, you know, that's the structure, you know, how the flow works with a claims-made type policy, which would be, you know, like a D&O policy, claims-made or things like that.

Yeah. So I mean, that's the kind of— again, those are the kinds of things, guys, that just is stuff you're, you know, many times we find people are not thinking about, right? It's, it's, you know, if you're lucky enough to make it through a transaction, right, which is about 50% of the time right now, okay? Once you have a deal on the table, 50%, okay? That basically that, that deal and the whole thing, there's so many reasons that that deal can go south. What you're trying to do is hedge against the things that will, that will make that hedge against or improve the things that will make that deal smoother. Pointing out that you have this insurance, pointing out to the buyer that this is something that you've done to protect the transaction— these are the things that obviously make you someone easier to work with, right, John?

Well, and the amazing stat that you mentioned earlier, Rob, that I want to make sure we discuss and everyone sort of understands is, you know, in Rob's case, or in Rob's experience, 50% of companies are underinsured. So I guess you have a choice, right? You, you have a choice. You can either be overinsured, you can either have the right insurance or the right amount of insurance, or you can be underinsured. And when you're selling your company, I think everyone would want to have the right amount of insurance. And one of the best ways to do that is to talk to someone like Rob. And, and, and so Rob can fill in the expertise and make sure it's— I mean, I view it like a checklist, right? General liability? Do you have management liability? Do you have fiduciary? You know, at certain stages in your, in your corporate life cycle, you're going to need D&O insurance. If you have multiple employees, you're going to need workers' compensation insurance. And, and just making sure that, you know, you have a trusted advisor like Rob to, to guide you through, hey, this is, this is one way to mitigate risk in your company.

Yeah, and, you know, and one thing that we do, um, which is Which is, I think people don't often— it doesn't often come to mind when business owners are thinking about insurance because, you know, insurance is a very, you know, I think it's a— nobody wants to talk about insurance. I mean, it's unless they have to. You want to talk about it. Yeah, I mean, I do, but, you know, so, but, you know, one thing that insurance brokers can do and we do is review contracts and review existing policies from partners or companies that they're looking to work with. So, you know, that's very useful because, you know, say you're somebody that's looking to do business with somebody else and you think they have insurance, but you haven't verified it, you should really reach out to your insurance broker to help, to have them help with verifying that.

Good point.

And one thing that I think is important to emphasize is that a certificate of insurance is really meaningless. So certificate of insurance that, you know, when you say somebody, you know, can you get me a COI?

Yeah.

Certificate of insurance. Those will, you know, fly around and, you know, you'll say, well, I have a certificate of insurance from someone. But if you actually read the top of the COIs or these old, you know, ACORD forms, there's actually a disclaimer in bold ink which says at the top of every insurance COI, it says that this COI essentially bestows no you know, guarantees that there's any insurance here whatsoever. It just, it just basically says that there's no— That is great. There's no— that there's no— that it's not really promising anything, that certificate. And the certificate is essentially meaningless. It's just basically a document that helps you save time when you're reading about, okay, they have this policy limits, it's carrier X, you know, the policy dates are, you know, December 31st to December 31st.

You don't even know necessarily like actually what's covered. And what's not based on that at the very—

let alone what's actually in effect. That's right. And so, you know, at the bottom of those certificates, usually there'll be some sort of, you know, there might be often an additional insured, some additional insured language, something called a waiver of subrogation or primary non-contributory language. These are all different things that are very common in certificate requirements. And, you know, so, but just having that certificate is essentially meaningless. So what you need to do is actually just request copies of the actual policies in PDF form and then just send them to your insurance broker and have them say, hey, like, you know, look, this guy's saying he has, you know, $1 million, $2 million per occurrence aggregate, and he says he has no action over exclusion.

Right.

You know, he's got a $5 million excess and he says he's got primary non-contributory and he's going to give us a waiver of subrogation and he's got this type of additional insured form and all this type of stuff. And, you know, these are all little sort of little nuances that are just boring as hell, but they actually really matter in the event that something happens. And so your insurance broker should really help you with just dealing with all that stuff.

I wish I had known that a couple of years ago because that exact— what you just said, I, I thought this COI was sufficient, right? And my attorney working with us on this deal said, no, that's not sufficient, you have to request the PDFs. And they wouldn't send us the PDFs of the policy, right? So that becomes— yeah, that was a red flag, right? So it was like one of those things. Yeah, you know, because he gave us some reason like, oh, that's proprietary information and the policy prevents me from sharing it. And it just, it raised a red flag and was like, wait a second, we got to step back from this. And we ended up not doing that.

Yeah. And, and, you know, there, and there could be, you know, very, very bespoke insurance policies that, you know, have some sort of proprietary, you know, thing to them. But overall, I think that's probably not the case because, you know, most insurance policies, or many insurance policies, I should say, where you are just using basic ISO forms. And if you start, you know, anything that's admitted is usually going to be incorporating some sort of insurance services office form. And then, but once you get into the excess and surplus lines where they are, you know, what they call non-admitted markets, those policies are typically— there's no consistency to them. There's no specific, you know, like environmental policies, pollution policies, Yep. Um, are all pretty much all different depending on the carrier. So you really need to read those policies, but there shouldn't be any reason for a company not to— not to give you their insurance policy, especially if you're trying to do a deal with them.

Yeah. And Rob, what, what have we not covered in insurance that either you're surprised we haven't asked about, or something that you really, that you really feel that entrepreneurs, and, and specifically people who might be selling their business, should know about regarding either risk mitigation or insurance? Or anything in sort of in your world that they should know about?

You know, I mean, one thing that's important, I think, for any business that's closely held and has like, you know, a very valuable founder or founders is something called key person insurance. Key person insurance is a call we get, you know, type of request that we get very often where a, you know, an investor or a board is going to invest in a company. Or, you know, the company is looking to enter into a transaction to be sold, but there's going to be some sort of an ongoing management role for that seller, and they're going to take a role within the new acquiring company. And they will typically require something called key person insurance, which is a type of— it's a type of life insurance, essentially. And it's a policy that protects the company in the event that something happens to the founder or the founders. And, um, you know, we can write those policies. They typically should be written in a way that's duration-matched with the, the goals or the business plan of the company. So like, if the, uh, if the founder or founders are going to be working with the company for 5 years after the deal goes through, or even if a founder, you know, even if there's no planned sale of the company, but the company is, um, you know, going to be raising money and they have a plan, you know, they have a certain, um, execution plan for how much, you know, their, their revenues are going to be this, this year, and then they're going to, you know, doing 50% growth next year, and they're going to do their Series B and they're going to raise money, you know, etc., etc., according to the plan. If, you know, their, their plan for acquisition is 5 years out, they would, you know, have a, you know, a key person key person insurance policy that would more than cover them during that period. And if the founders are young, these policies are going to be relatively inexpensive to have. And then if something happens, then the policy would pay out. So it's good.

It's cool.

It's a good thing to have, another way to add value to a business by reducing the risk that a buyer or The point I was trying to make was that, again, is that it's a matter of when we talk about the value of a company, okay, that it's value versus salability, right?

So in other words, from a value standpoint, what we're doing is when you've got these policies in place and the whole thing, you are protecting yourself. You're hedging against real failures and real breakdown and real money that could really just destroy lives, companies, and stuff like that, right? And so your protection— you're raising the value of your company because you've got these things in place, ostensibly, right? What you're really doing is raising the salability of your company, okay? Which is slightly different because it's about you have taken the steps to basically insure, whether you're insuring against the company, whether you're helping the buying company buyer, whether you're insuring the transaction Whatever the different permutations of this that you're doing, is that you're basically increasing the fact that your company will sell better because it's taken these steps, right? It's easier to sell a company that has gone through this process and has consulted with someone like you, Rob, to make sure that they've got these things in place that will help the company sell, and that's how it adds to the value. Right? As opposed to, oh, this policy being worth X millions of dollars adds value to my company, right?

That's right. That's right. Yeah, that's right. That's right. So it's not like a, um, it's not like a whole life insurance policy where the life insurance policy has value, um, and that that is somehow considered an asset. It's more like the value of the company in the fact that you have, you know, put on your big boy pants and you've decided that you're going to do everything right to, to protect the business and reduce risk in the event that something happens. And, you know, it's a little bit like having a board. It just shows, um, you know, forward thinking and, you know, some maturity with respect to decision-making. And, um, uh, you know, and, you know, with respect to things like, you know, key person or, you know, even just, even just property insurance. So property insurance, I don't even think we talked about this, but a type of property insurance or a component or aspect of property insurance is typically called business interruption.

Yep.

And we do a lot of work with companies that are in the manufacturing space. And so they might have a, you know, they might have contingent suppliers or contingent businesses that they rely on that are, say, importing products from overseas, or they are a manufacturer of a specific product that is a requirement as a part of an assembly for something that, that has to be manufactured a certain way. And if that part is unavailable for some reason, they can't make that product. And so you can buy an insurance policy against that that basically protects you from that sort of contingent liability in the event that there was, you know, a fire at the facility that makes that product, you know, that part, or, you know, if something happens and you have a 3PL, you have a third-party logistics warehouse that's sending your product out to your customers, and that product, that 3PL burns down or something happens there, it's a flood or something happens or some catastrophe. The party— excuse me, the policy would cover you for that period of time when your business was interrupted. And some policies are written on a certain specific time period where that coverage is existing, or other— or it might be written on what's called an actual loss sustained, or ALS, you know, term. And ALS just means that, you know, no matter how long the thing is out, you know, if it's you know, up to a year, they'll still cover that. And so it's very useful to have that. And someone who's looking to buy a business, you know, should be looking to check those types of boxes to make sure that during the buying process something doesn't happen, you know, that, you know, no one was expecting, like this, you know, the horrible wildfires that happened out in LA a few weeks ago, or, you know, recently, last week, I guess, a couple weeks ago.

Yeah, and like those can help you also mitigate situations where, you know, I'm not going to name a big box retailer by name, but sometimes in these, in these contracts that big box retailers require, they will put in something to say if you can't deliver your product to me, you owe me the margin I would have made if you had, you know, as if you had delivered them.

Right.

So not only is it they can, they can find you in breach and, and for damages, But they can, they can charge you for the margin they would have made. And, and then I think the agreements that you're just talking about can mitigate that risk, right?

Yeah, that's right. And that, that, I think that's a, that's a different type of, uh, it's a different type of insurance. There's, um, uh, there are other types of insurance policies that can be, um, you know, purchased to protect against those types of situations, um, you know, but, uh, But yeah, so business interruption could be very useful.

Got it. So, Rob, we've just got a couple of minutes here left, but what I want to ask you about is, in your experience as a business owner, right, what were the things that you came across that you see as the challenges? You know, I'm interested to know kind of why you moved. I know you've kind of been in this game for a while, in one capacity or another. But what are the things as the business owner that, that you, you saw that you went through, um, in terms of, you know, from an insurance standpoint that kind of makes this like, you know, oh, you know, was there an eye-opening moment for you?

Yeah. I mean, I, I would say, um, I mean, the, the business that I was in, I was in the hospitality business, um, and, um, That business was great when I was young, but was not so great when I started getting older and having kids and everything else in terms of just the hours involved and things like that. And then I had another business, which was an online education business, and that was great. I enjoyed it. But that it didn't, didn't work out in the end. But I would say that at every point in any one of those businesses that I would have liked to have had an insurance broker or access to an insurance broker who would have explained to me what these insurance policies that I needed did and why I needed them and why they were important. And, you know, just explain to me in basic, simple English. you know, what they were for and how to address the risk transfer situations that I needed in an affordable way. And maybe just put together like a roadmap for, okay, well, you don't need this necessarily today, but, you know, 6 months from now, let's, you know, get together and talk about this again, you know, grab a cup of coffee and just catch up on how the business is going. And So I'd say that in terms of just having a business background, and I'd say just it helps. You can't do everything yourself. So it helps to have somebody that you can trust to talk to about and just tell you, give you feedback on whatever you're going through.

Well, and there's our parting shot, right? I mean, the reality is that I think that you're talking about The, the best thing that any— anybody— any advice that we can give you today, uh, you know, about anything— and again, we can't give you anything specific about, you know, specific insurance things and specific legal things and stuff like that. So obviously always contact your own personal advisors whenever you're making a decision about this, everybody, right? Okay.

Right. But none of this is tax or financial advice. Yeah, it's a professional advice.

None of this is construed as professional advice. It's not investment advice, all those types of disclosures.

Exactly.

As usual. But that said, that what I think it sounds like the best advice that Rob can give anybody out here is to basically is to talk to either him or some insurance broker, right, as the owner of the company, and be able to say, hey, what are my options? What should I be worried about? And then they're going to look at your business. They're going to look at specifically the industry you're in, and they're going to look at, you know, all the things that you're going to— your business is about and everything it's got going on. And they're going to make recommendations to you about how to be able to protect yourself. And make sure too that you, when you're mentioning this, and I'm sure that any good insurance person is going to bring this up, is what are your intentions with the business, right? Where do you want this business to go? What's the trajectory? Because as we're always advising you, keep an eye on the end, right? And understand that someone's, as Rob just pointed out, there's going to be, there's going to be a journey of insurance, right? You're going to have— you're going to start with, you know, with a basic policy. You're going to move to other things. You're going to, you know, potentially there is a kind of a growth or an evolution even to your own, the way that you deal with insurance in your company, right?

The roadmap that he mentioned, right? I use the term checklist. Rob used the term roadmap. And it's like, you're going to need certain things at certain stages in your company. And Rob can help you provide that and give you guidance along that roadmap of your company.

That's exactly right.

That's right. That's right. And, you know, if— I mean, we've had, you know, many companies that we have worked with that successfully where the founder, you know, had an opportunity to sell the business and it worked out great. And then there's, you know, other things where they, you know, they develop special purpose vehicles or they have, you know, these guys are— a lot of my clients are selling things constantly. They develop special purpose entities that have a certain goal, and once that's done, they, they're sold. And so that type of thing happens all the time. And so, you know, having things like, you know, an org chart to look at how this business is structured is very helpful in terms of getting a handle on insurance. There are a lot of ways to save money on insurance as well by understanding how the org chart works and what the ownership structure is between, you know, all the different entities. Because You can sometimes piggyback insurance from one company onto another if that makes sense. And so we try to be as efficient as possible. And if it works out best for the client, then that's really what works out best for us in the end. Great.

Again, I think we can't stress enough the importance of this. Again, and we look through our total exit value system, right, John? We're talking about You know, this is— this falls clearly under the risk management, you know, section, right? And what we're looking at is making sure that as you go through your checklist and decide, this is what I need to do to build my roadmap for exit, that the insurance is part of that roadmap.

Exactly.

And making sure that you see, uh, you— that you're examining the policies you have, ensuring that it's enough, making sure that the right things are covered, that you're not just buying blanket policies that don't actually do what it is that you expect them to do, right? Um, and being able to kind of check this stuff. So whether it's with Rob, obviously we'd love you to use, use Rob Freeman. And Rob, where can people get in touch with you if they want to get in touch with you?

Um, you know, probably the best place is just on LinkedIn. Um, you can just reach out to me on LinkedIn. Um, and, um, I'm Rob Freeman at Brown and Brown Insurance. And, um, But yeah, just reach out to me on LinkedIn and, um, look forward to hearing about your business and, um, any problems that I can help you solve.

Yeah, and also, you know, if you want to drop a line to info@exitengine.com, um, we can get you in touch with Rob as well. So please, you know, do that if you want to get in touch with us about anything, any— we've— anything we've talked about, um, in any of our podcasts. Again, info@myexitengine.com.

You'll find us on LinkedIn. Obviously, the podcast is available everywhere you got podcasts. Please share this with a business person that you love, right? Help them, give them options, tell them it's possible, right? And with help from people like us and people like Rob Freeman, you know, you can actually make sure that you increase the value and saleability of the company that you own. Thanks again, everybody, for listening to Exit Engine. I'm Joe Stapleton. That's Jon Kniff. This has been Our friend Rob Freeman from Brown and Brown Insurance and Risk Mitigation. Take a look at our post this week. We'll do a post on this as well. And follow Rob on LinkedIn because he's always, always posting good stuff that'll be important and fun to know, things that are going to make your business more valuable and saleable. Thanks everybody. Have an awesome day. Rob, thanks so much for being here, man. Really appreciate it.

Thank you guys. Yeah, no, it was a pleasure and I look forward to talking to you again soon.

Yeah, for sure. John, thanks a lot, buddy. We will, uh, have a great week, and we will, uh, we will talk to you very soon.

Thank you, guys.