Publisher’s Corner

As this issue goes to press, I have started my two weeks in the trenches, an annual event that keeps me in the loop about what is really happening in the search and placement world. My target group is CEOs of small companies. My purpose this year is to get retained (or partially retained) search assignments for my sponsor firm.

Since I’ve already connected with several dozen of these people (no hot assignments yet) quite a few have questioned me about fees not that they’re totally averse to paying them but wondering if there were different options available. Since this annual exercise is not necessarily about ending up with a deal (although that would be nice) the fact that so many have mentioned it caused me to examine different ways of being paid. That article will appear in the September issue so stay tuned.

In our 3/03 issue, we chronicled the lawsuit by Mount Sinai Hospital against Heidrick & Struggles for allegedly failing to conduct reference checks adequate to alert the client that they were hiring a severely tainted person as their CEO. Their ‘pick’ for the job cost the hospital nearly $65 million in losses. And all this for a $169,000 fee.

A judge has just dismissed the lawsuit against H&S by granting a summary judgment motion for dismissal of the case. The judge found that it was the hospital who made the wrong choice and that there was no evidence that H&S intentionally misrepresented or omitted critical information nor did they have a duty under their contract with Mount Sinai to do extensive background research on candidates.

While there are probably sighs of relief at H&S, wouldn’t you imagine that, for $169K, they might have uncovered something more than name, rank and serial number? Hoo boy!

Even so, you haven’t heard the last of this topic. In an article in The Kansas City Star, L.A. recruiting firm McCray Shriver Eckdahl & Associates, Inc. has been hit with a negligence suit, allegedly for failing to adequately check references on a candidate (Kathryn Thompson) who was ultimately hired through them as president of Briarcliff Development Co. Hired in September 1999, she quit in May 2001 citing personal reasons since she was being sued for more than $1 million by Orange County, California. In its lawsuit, Briarcliff says Thompson misappropriated funds, entered into contracts on behalf of Briarcliff that were intended to benefit her, and “committed other acts and omissions that damaged Briarcliff’s reputation and injured Briarcliff financially.”

McCray’s attorney said, “Executive placement is a team process in which the executive search firm and client work jointly in collaborative fashion to identify candidates for an open position,” she said. “McCray Shriver identified a broad number of qualified candidates for the position and ultimately selected Ms. Thompson for the job.”

The lawsuit, according to the KC Star says that had McCray Shriver exercised ordinary care, it would have discovered “sufficient information regarding the fraudulent actions, misdeeds and malfeasance of Thompson and would have been in a position to report this to Briarcliff.”

We’re seeing more cases like this so, before firming up a deal, guess what? Check references.

In our 6/02 issue, we wrote: “An ex-employee of Kansas City-based recruiting firm Spencer Reed took one of their candidates, placed him with one of their clients and then billed them for the fee under his own name as a free agent. This, of course, is not the first time this has happened in our business but according to the Kansas City Business Journal (5/10/02), Jeffrey Dorn could serve “up to 10 years in prison on charges of trade secret violation.” Dorn was indicted May 1st in the U.S. Court for the Western District of Kansas and could also face a $250,000 fine and 3 years of probation. Dorn’s attorney said that his client is one of the first people in the country to be charged using the federal statute on trade secret theft according to the article’s authors Kathe Hollar and Stephen Roth. The indictment only names the one incident but suspicions exist that other deals were also diverted costing Spencer Reed at least $25,000.”

UPDATE: Dorn recently entered a guilty plea before U.S. District G. Thomas VanBebber to one count of theft of a trade secret and agreed to pay restitution in the amount of $15,920 to Spencer Reed Group, Inc. Dorn admitted at his plea that while he was employed with Spencer Reed Group, Inc., (SRG), an employee placement firm, he stole information from SRG pertaining to the matching of potential employees with prospective employers. Dorn further admitted that in January 2001, working independently of SRG, he used SRG information to place a candidate directly with a company in the Kansas City area and was paid directly by the company receiving the placement. Dorn faces a maximum of ten years in federal prison without parole. Sentencing is set for August 19, 2004.ur cover story this month was an insightful stroll down Memory Lane for me (and those many readers who have been around for a while).

Mark Berger covers the oft-requested topic of solos working from home. He also covers a software program that may help in documenting your part in the process if you run across a fee avoider.

Every week, I receive a number of calls bemoaning the fact that prospective clients are requiring professional liability and/or Errors & Omissions insurance in coverage amounts ranging from $1 10 million. Some even require proof of automobile insurance, although I can’t imagine why. A boon for E&O providers for coverage that may be totally unnecessary. You can jump through their hoops with no guarantee that you will ever earn a nickel from them. Even so, there is a dearth of information about placement insurance so we again asked attorney and Placement & The Law columnist Jeff Allen to address them.

These absurd requirements are, of course, a manifestation of companies attempting to turn us into commodities, governed by the same rules as those supplying raw materials and most are written by the purchasing department or the in-house legal eagles. It is obvious that there is very little input from HR.

The kinds of clauses you’re likely to find from HR are equally incongruous since many have not yet figured out that the talent market is changing from one where they think they only need to harvest from the wishful thinker pit (job boards) to the emerging market where they will need to search outside of the cyberworld for the truly gifted candidates.

Obviously, no one has told the people at Kindred Hospital-Modesto who get this month’s goofy agreement award. Here’s why:

10. Payment of Fees – will be paid when an offer is made and accepted in writing, with payment terms as follows: one-twelfth of the fee will be payable within 30 days of the candidate’s contractual signing date, with the balance payable in equal installments over the remaining 11 months of the candidate’s start date.

11. Placement Fee: HOSPITAL agrees to pay COMPANY a placement fee of 15% per candidate referred by COMPANY and said candidate has not previously been in contact with HOSPITAL for a period of 12 months from the date of COMPANY’S initial referral.

12. Replacement Guarantee: Should the candidate referred by COMPANY leave HOSPITAL within 365 days of candidate’s start date, COMPANY will replace said candidate for the same position with an equally qualified replacement accepted by HOSPITAL at no additional cost to HOSPITAL.

Allen Salikof, president and CEO of MRI for the past 6 years has announced that he will retire at the end of 2005. His wife, Kaye, stepped down effective July 16, 2004. We wish them well and will periodically report on the search for Allen’s successor.

THE 25 MOST FREQUENTLY ASKED QUESTIONS ABOUT PLACEMENT INSURANCE

Because every rule has an exception, this should be used only as a guide, but the information should make you a more sophisticated buyer of the insurance protection you need.

What is the difference between an agent and a broker?

An agent usually has a contract with one or more insurance companies. This “agency agreement” may contain authority to extend coverage, collect premiums and settle claims. A broker represents insureds, and can place business with any company, subject to certain legal restrictions.

Many states don’t permit brokers to operate, and today almost all insurance business is transacted with agents.

What are the most important considerations in buying insurance?

a. Compare coverages. Business insurance policies vary widely, so read them carefully before you buy.

b. Compare companies. Aside from financial stability, you want a company that will liberally interpret the coverage, pay the full amount due, defend you competently, and act quickly.

c. Choose agents on the basis of reputation and experience with clients in your own area of placement or recruiting.

d. Insist that any opinions of the agent regarding coverage or price be confirmed in writing.

e. Watch policy limits as to single and multiple claims. The insurance company may be reducing its exposure without reducing your premium.

f. Use realistic deductibles and policy limits to control your cost, rather than compromising the quality of coverage or the company providing it.

Should I join an association to obtain group coverage?

This depends on:

a. The coverage available.

b. The size of the group.

c. The “loss experience” of the group.

d. Whether it is a “true” group policy or the same individual policies.

e. Whether the members are “individually rated” or the losses are averaged through rating the entire group.

f. Whether the insurance company is likely to stay with the group.

g. Whether the group does its own administration (collecting premiums, paying claims, etc.).

The most popular group coverages are found in the state trade associations, since:

a. The insurance can be packaged with single coverages, since only one state law (rather than every state) applies.

b. Administration is more manageable.

c. A single agent can service the policies (because each state requires separate licensing).

d. Certain types of claims are more common in certain states (workers’ comp injuries, property damage, etc.).

Regardless of whether you choose an association policy, you should speak with its insurance agent first. They’ll be familiar with your needs and the coverage available. Then you can use the group policies and rates to measure the other “products” on the market.

Should an insurance consultant be hired?

If you have high premiums, a high loss experience, or a high degree of confusion about coverages, absolutely.

The only caution is to be careful of “consultants” whom you don’t pay on an hourly basis. Agents are paid by the companies for writing your business. None can write for all companies. Some will only write for those that pay them the most.

There are insurance consultants out there who’ll even work for a contingency fee, charging you a percentage of the amount they save you in premiums. Here too, be careful. Coverages and quality of companies vary widely.

How often should I review the coverage and price?You can review it as often as you like, but be careful about changing carriers too frequently. Insurance companies monitor your every move, and their computerized networks can spot bargain hunters instantly. They don’t want short-term business, since writing new policies is expensive (investigating, opening new accounts, generating documents, paying commissions, etc.).

If you do have a claim, you’ll learn that loyalty works both ways — a new company is more likely to surcharge or cancel you. Then all the bargains will be gone.

What is Errors & Omissions insurance?

A form of professional liability coverage. The intent is to protect you against errors and omissions arising from placing candidates or temporary employees with clients.

Unlike general liability coverage, it is not restricted to negligence. You may check the reference you intended to check, believe the person you placed, or really think the person can do the job. But if the client is injured, you may be covered.

Do I have anything to say about settlement of the claim?

Yes. Under most “insuring agreements,” you must consent to the settlement. This may become important if you have a high deductible, low policy limit, or believe the claim is without merit.

What is the difference between an “occurrence” policy and a “claims made” one?

The “occurrence” form provides coverage for a claim that occurs during the policy period (and within your state’s statute of limitations for prosecution). The “claims made” form covers a claim that is made (submitted) during the policy period. Sometimes the claims made policy contains a retroactive date to include coverage for “prior acts,” and a “discovery” date to include late claims.

It’s a big difference, since a gap in “claims made” coverage leaves you uninsured.

Why has E & O coverage become so expensive?

As our industry has professionalized, it has moved from “placement” to “consulting.” Clients and candidates are expecting a higher standard of care, and are holding us accountable for our mistakes.

Since placements are just filled job openings, our client and candidate base constantly changes. This makes contingency placement an impersonal, “what-have-you-done-for-me-lately” business. It’s much easier to sue someone you don’t know and no longer need.

We don’t have a viable system of qualifying and regulating our industry, so the number and amount of claims are literally out of control.

Insurance carriers attempt to limit their overhead by paying administrators and lawyers the lowest amount possible. It’s not their fault, but the “hidden costs” in employee turnover, bungled claims and judgments for the plaintiff are a factor in the rates.

But E & O coverage can never become too expensive.

Do I need E & O coverage if I have general liability coverage?

Yes. Even with “comprehensive general liability” coverage.

In fact, the standard CGL policy excludes coverage for 115 activities related to the placement process. Carrying one without the other leaves you without the ability to let the carriers argue about borderline “gray areas.”

The cloud that looms over your contingency fee search business is a lawsuit for malicious prosecution (abuse of process) brought by an irate employer who wins your earlier fee collection lawsuit. The punitive and exemplary damages are unlimited, so insurance insanity can lead to insolvency.

If you make placements without requiring written acceptance or even acknowledgement of the fee in advance, you’d better be covered for at least your defense costs.

What does workers’ comp coverage include?

Coverages differ because each state has different requirements.

Generally, Coverage A pays all benefits to employees required by law. Income continuation, medical and death benefits are the usual items. Coverage B protects you from civil (court) actions by employees, their family members, and others claiming injuries beyond those covered by mandatory insurance.

How are workers’ comp rates determined?

Very scientifically. 700ifications have been developed to rank the most common types of employment. The National Council on Compensation Insurance and state rating bureaus collect payroll and loss data. These are then converted into “basic” (“manual”) rates for eachification.

What is an “ex mod?”

If you operate a temp service, you already know: It’s an “experience modification.” This adjusts the basic rate to reflect your actual loss as it relates to the expected one. If it’s better than expected, you get a “credit mod.” If it’s worse, you get a “debit mod.” That’s why the types of temps you place and the safety of the client’s workplace are so critical in determining the markup. If your markup is too low, the debit mod will catch up with you when it’s too late.

Can a large individual claim cause a disproportionate increase in the rates?

Yes, but the experience rating formula includes “actuarial credibility factors” to grade each employer and each loss by size. This tends to reduce the impact of extreme fluctuations. For example, a $10,000 loss may have a “value” of only $5,000 for experience rating purposes.

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Does incorporation, acquisition, merger or other change in business structure affect the rates ?t unless there is a significant change in the profile of the employees being insured. For instance, if a clerical temp service acquires an industrial one, there might be a reduction in overall premium. Insurance underwriters are aware of the difference between changes in form and changes in fact.

There’s no harm in trying, but don’t turn your business inside-out in an attempt to lower your comp rates.

What does general liability insurance include?

The standard “comprehensive general liability” policy includes a number of coverages a consultant doesn’t need (manufacturers’ and contractors’ liability, products liability, completed operations liability, etc.). However, CGL coverage does include premises liability, contractual liability, and tort (civil, non-contractual) liability protection. These are essential if you have an office and employees.

Depending on the policy, the insurance company will defend and cover you for everything from a candidate slipping on an introduction slip to an action for malicious prosecution if you lose in court trying to collect a fee for their placement.

We call the malicious prosecution action in this case a “silent client ambush” because the client just lures you into making a placement without giving you any documentation to enforce the fee. You won’t find “silent client ambush” in any CGL policy, but you will find “malicious prosecution defense.” It better not be in the “Exclusions from Coverage” section.

What does “reservation of rights” mean in a general liability policy?

The company will sometimes “tender a defense” to you without waiving its right to refuse payment of the claim. It “reserves” its right to deny coverage. This is sometimes known as a “non-waiver agreement.”

In recent years, “bad faith” claims against insurance companies have made them very careful about denying coverage and using the tenderest lawyers when they tender a defense.

Beware if you receive a reservation of rights letter. You may be on your own if there’s a judgment against you.

Are additional coverages available under a general liability policy?

Yes. Among those you should consider are:a. Contractual liability.

b. Personal injury liability (to candidates, including libel, slander, invasion of privacy, etc.).

c. Advertising injury liability.

d. Host liquor liability (if you entertain clients, candidates or employees).

e. Automatic coverage for additional risks that arise during the policy.

Is my “standard business package” the same as general liability coverage?

Probably not. “Package policies” are simple to understand, and the rates are easy to compare. But they lack the ability to customize the coverage to suit your needs. In some cases, “riders” can be used to supplement or exclude parts of the policies, but when this is done, they often lose their competitiveness in price.

Insurance agents often use package policies as a “leader” to meet with you. Ask a lot of questions at the meeting.

What are “restrictive endorsements” in a general liability policy?

The “taketh away” provisions. Watch out for anything that can limit your coverage for liability from:

a. Injury to candidates by disclosing negative reference checks to clients.

b. Injury to candidates from psychological, lie detector or drug tests used by clients.

c. Injury to clients by placement of candidates who lie, cheat, steal and fall asleep at the switch. (It happens even when you check them out thoroughly.)

d. Injury to clients from “raiding” competitors.

e. Injury to prospective candidates by jeopardizing their current positions (alerting their bosses that they’re looking, sending a “rubber resume” to their current employer, etc.).

f. Injury to source companies by turning over their turnover engines.

What does umbrella liability coverage include?

Protection from three kinds of rain not covered in a general liability policy:

a. Exhaustion of the policy limits of the “primary” (“underlying”) insurance.

b. Automatic replacement of the coverage of the primary insurance.

c. Few (if any) exclusions.

Isn’t an umbrella policy the same as an airtight general liability one?

Not exactly. The automatic replacement coverage feature is an extremely important difference.

Umbrella coverage usually has high deductibles too, and is designed as a “safety valve” to prevent catastrophic losses. It provides not only “excess coverage,” but the insuror will also respond to any claims that may be (directly or indirectly) excluded in the primary policy.

Who is usually covered in an umbrella policy?

Most umbrella policies use a broad definition that includes not only your business, but any individual owner, partner, shareholder, director, officer or employee.

It’s designed to keep everyone dry during a downpour.

What are typical exclusions in an umbrella policy?

 

here are two that should concern you:

a. Coverage for injury caused by one of your employees to another (libel, slander, assault, battery, etc.).

b. State-regulated disability, workers’ compensation, and unemployment insurance coverage.

Are there any other advantages to an umbrella policy?

Yes. The most useful advantage is one you probably won’t know about until you need it: The umbrella carrier will be watching the primary carrier carefully. This gives you great leverage to obtain coverage, legal defense, and payment of claims with less hassle.

The primary carrier knows that if you get wet, and the umbrella carrier has to pay, it will be explaining its conduct to the state insurance department or a court.

NOTE: Although almost any agent will attempt to write an E & O policy, they almost always end up with the same insurance carrier World Wide Facilities. Some associations offer insurance coverage. Check with National Association of Personnel Services at www.napsweb.org.

The major source of information about insurance for our profession is:

World Wide Facilities

990 Stewart Ave.

Garden City, NY 11530

(800) 245-9653

Paul Hawkinson is the editor of The Fordyce Letter, a publication for third-party recruiters that's part of ERE Media. He entered the personnel consulting industry in the late 1950's and began publishing for the industry in the 1970's. During his tenure as a practitioner, he personally billed over $5 million in both contingency and retainer assignments. He formed the Kimberly Organization and purchased The Fordyce Letter in 1980.

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