Crime and punishment comes to the forest
New Zealand Tree Grower August 2018.
The title of the article may be a bit scary but I promise not all is lost as there are solutions to be found. A few weeks ago, I met a forestry manager who supervises several forestry investments, mainly on behalf of offshore absentee owners. His main concern was cyber insurance. He went on to explain that, as they were entering a harvesting phase, there would be large amounts of money flowing into the various bank accounts and he worried about his liability if these funds went astray.
As we spoke, it became clear that his main area of concern was what is known in the insurance world as fake president cover. This is when someone pretends to be someone you have always dealt with and they email you instructions to redirect funds to another account − theirs.
Many of you may have already seen some of these attempts. They can be quite sophisticated and often the email is designed to look as if it has come from your usual contact. They will refer to you in the usual manner and may even chat about the usual people and staff. There may be only one or two minor things that might give you an indication that all is not as it should be.
Most insurers do not cover this type of risk under a cyber policy. Instead we often find ‘fake president’ cover is included as part of a crime policy also known as fidelity insurance. Insurers will often restrict the amount of cover offered for this type of event both in terms of the dollar limit they will offer and the excess applied to any loss.
Crime policies are becoming increasingly important as businesses increase in complexity and the exposure and opportunity for fraud increases. A crime policy predominantly covers theft by employees and this risk is commonly excluded from cover under material damage insurance. Computer crime policies can extend a traditional fidelity policy cover to include fraudulent activity from several sources and systems.
Often people say to me they do not need a crime policy as they do not handle cash. Interestingly, not one of the crime policy claims I have dealt with has actually involved cash handling. The crime has been much more sophisticated, sometimes involving long-standing trusted staff and one very large claim I worked on involved collusion between staff. One of the major liability insurers has a claims case example on their website involving theft of fuel which is a very topical example for us all given the current price.
Supply chain businesses where products and payments move through the supply chain have, in my opinion, an aggravated risk in this area particularly as forests come up for harvest and there is an increased amount of funds and activity. Your exposure to internal crime should be considered.
By way of comparison, a cyber policy generally covers liability and expenses incurred as a result of unauthorised use or access to your computer systems and software. The policy can also include cover for liability costs and expenses arising from network outages, transmission of viruses, computer theft and extortion.
A cyber policy will also generally include cover for a wide range of costs and events. Costs can include −
- Forensic investigators to work out problems and get the business up and running
- Loss of income and extra expenses during the cyber problem
- Restoring or re-creating data or software
- Notification and management including credit monitoring, forensic costs, public relations and legal concerns
- Cyber extortion finance to retrieve data or systems held at ransom
- Phone or system hacking such as running up unauthorised phone bills
- Legislative compliance investigations and fines
- Liability from wrongful disclosure of information in your care
- Website and advertising activities causing defamation or infringement of intellectual property rights.
Exposure to crime and cyber risks can of course be reduced internally with good control processes along with checks and balances, but as criminals get smarter it is increasingly difficult to keep pace. I often talk about liability insurance being an addition to manage risk. These policies are a good example of where you can manage risk internally with good systems and procedures. Insurance augments this and reduces your exposure to an unexpected large loss.
Someone else covering your business risk
As we continued to discuss the problem outlined earlier in this article, I asked the manager what cover he had in place for his individual forest owners. I was surprised to hear that they did not have any insurance cover. Instead, he said they relied on the fact that the individual forest managers had liability insurance. That is a very risky position and not one I would recommend to anyone.
The reason I was concerned is that the individual forest owners had no liability cover in place and relying on someone else’s policy does not always work. For example, let us look at liability under the Health and Safety at Work Act. The big changes which came into force in April last year make it very clear that the definition of a person conducting a business or undertaking is broad. If there is a health and safety incident in your forest which triggers a prosecution, it will be almost certain that everyone, including the contractor and the land owner, will be brought into proceedings. We have already seen cases of this happening.
You cannot pass your health and safety liability on to anyone else or assume that their insurance will cover you.
The other main effect of the Health and Safety at Work Act was to raise the potential fines by up to six times their previous maximum. While these fines cannot be insured, if you have a statutory liability policy in place this can respond to defence costs and any court awarded reparations.
Insurers are watching recent claims and court awards with interest to see how the courts apply these new fines limits. So far it has been a mixed bag with some potentially large fines reduced due to the financial state of the business, while in other cases the fine and the reparation awards have been high. In one recent fatality case, the courts imposed a fine of $378,000 along with reparations of $350,000. When you estimate that the additional legal defence costs may have been more than $100,000, this figure gives some indication of how important it is to have adequate statutory liability insurance.
The courts have started to award larger reparations for loss of earnings and emotional harm, with a wide range in values in respect of how these awards have been applied. There have been at least two cases I know of where the emotional harm award has been over $100,000.
Once again forest owners can reduce their risk exposure to a health and safety loss with good systems and management which you should have in place. No one wants a serious injury as the financial, reputational and personal implications can be severe. Once again, insurance should also be arranged to do what it is designed to do and protect your business from large unexpected loss.
The other example, illustrating why you should not rely on someone else’s liability policy, is in respect to public liability. A public liability policy covers general liability for damage or injury happening in connection with your business and cover includes associated defence costs.
The most common example is damage to your neighbour as the result of your business activity. The reason that relying on your forest manager’s insurance policy is not a good idea is that there may be a claim which has absolutely nothing to do with the forest managers. For example, say you have allowed honey operators to keep beehives on your property, something goes wrong and there is an allegation that they have caused damage to the neighbours. The neighbours will look to you for compensation for the damage. That may or may not be a valid liability claim but this is where the defence cost section of a liability policy can be beneficial
Think about risk
Given New Zealand’s ACC system, personal injury is not currently a risk we face. However, if your business takes you offshore that is a risk to consider. Most public liability claims in New Zealand revolve around third party property damage. As with all things the key is to think about risk and get good advice.
When talking with your advisors ask them how can you transfer this risk to insurance? What is the cost? Do they have recent claims examples that might help you with your decision- making? That will help you establish if it is cost effective.
Make sure that you undertake regular reviews of your business as things change. Those changes or changes in your business activity will likely need to be advised to insurers to ensure you have cover in place. You might need to be updated on a legislative change or updated around some other external change such as cyber crime activity. By keeping up to date and making sure your insurance programme is regularly reviewed you can rest more easily and the worries of crime and punishment will become less scary and more manageable.
Jo McIntosh is an Executive Director of Aon and specialises in insurance for forestry and horticulture. Aon has an insurance scheme for NZFFA members and in support, pays a contribution to the NZFFA.