ISP Liability

Charter was recently ordered to pay over $1.1 billion to the estate of the family of an 83-year-old Charter customer that was murdered by a Spectrum technician in 2019. A jury had originally ordered Charter to pay $337 million in compensation plus $7 billion in punitive damages. The judge lowered the punitive damages to be more in line with comparable punitive damage calculations.

This was a case that should concern all ISPs. The technician, Roy Holden, was seemingly a good technician. He had completed over 1,000 service calls with no customer complaints. It turns out that the technician had stolen credit cards and checks from a few elderly customers, but this wasn’t discovered until after the murder. Charter had done a routine background check when he was hired that showed no arrests, convictions, or other criminal behavior. There was nothing about Roy Holden that made him look any different on paper than the many technicians hired by other ISPs.

It’s likely that the award was so large due to Charter being such a large and profitable company. But even the base award of $337 million would ruin all but the largest ISPs in the country.

This is obviously a pretty rare event and, as Charter argued in court, was totally unforeseeable. How can any ISP know when it has a rogue or unbalanced technician? Unless an employee is acting erratically, it’s impossible to think that an ISP, or the many other kinds of companies that do in-home customer service calls can protect against this kind of event.

ISPs have no financial backstop for this kind of large court award. Most of my clients carry general business insurance in the range of perhaps $5 million. That level of coverage won’t come close to covering the damages awarded in this case. I don’t know many ISPs that could survive a lower award – even $20 – $50 million would ruin most of my clients.

This kind of event is rare, and I can’t imagine that insurance can be purchased to protect against it. If there is such a policy, it would have to be extraordinarily expensive, and ISPs would have a hard time justifying the premiums due to the low risk of ever having such an event.

Facility-based ISPs generally don’t carry a large amount of insurance. It’s not feasible to insure expensive networks against things like storm damage. Instead, ISPs rely on big storm damage to be covered by FEMA along with other infrastructure that is damaged in big natural disasters like storms, fires, and floods.

I suspect this award will send some ISPs to talk to their insurance agent – and they will find that there is no practical way to insure against this kind of event. But that doesn’t make ISPs any different than companies that install appliances, countertops, or air conditioners. I think this is one of those things that ISPs shouldn’t think too hard about. I’ve read articles on the issue that suggest that ISPs need a more vigorous vetting process for new employees. But realistically, that probably makes almost no difference, although it might convince a jury to set a smaller award.

Do I Need to Insure My Network?

I periodically get asked about buying insurance to cover a new fiber network, mostly asked by investors or bankers who are working with a fiber network for the first time. The assumption is that there must be insurance to protect against damage to a fiber network because there is insurance for everything.

The surprising response I give them is to not try to buy insurance for a network. If you can even find an insurance company that will insure it, the premiums are going to be far larger than you can financially justify. The reality is that fiber and copper networks and electrical grids are not easily insured.

This horrifies a banker because they are lending money for an expensive asset. So how are network owners protected against losses?

Small damages to networks are generally recovered from the party that caused the damage. If a water company or electric utility cuts a buried fiber, that utility pays for the cost of the damage. This works the other direction also, and it’s rare to build a new fiber network without damaging a few other utilities during the process. This concept carries to everybody else. If a commercial truck knocks down a pole, the pole owner tries to get recovery from the insurance company of the truck owner. If a homeowner goes awry building a new driveway and badly damages the fiber network, that homeowner or his insurance covers the damage.

Big network damage is mostly covered by FEMA. If there is a big hurricane, ice storm, flood, fire, tornado, or other major events, then FEMA funding kicks in as long as the governor of a state has declared an emergency. I have had clients get fully reimbursed from FEMA in recent years for damage caused by the western fires, damage from a hurricane, and damage from a tornado. The FEMA paperwork process is not pretty, but the agency covers the cost of damage to utility infrastructure. In fact, the two biggest things that FEMA payouts often cover are damage to buildings and damage to utilities – that’s what gets damaged by storms.

There are other kinds of damage that don’t fit these two categories. For example, a small brush fiber caused by lighting might damage a short section of a pole line but not be large enough to kick in FEMA. Utilities are on the hook and self-insure for this kind of damage. They generally send out their own crews to get the damage fixed as quickly as possible, and nobody reimburses them for something like a local brush fire.

This is not to say that insurance isn’t important. Smaller ISPs generally buy insurance for all buildings, including all of the electronics inside them. You can get insurance to cover powered field huts. It’s important to make sure your insurance policy is specific and that you add new locations to your policy since property policies are often specific by the street address of the asset being insured. It’s not mandatory to buy such insurance, and many ISPs choose to self-insure. If you borrowed the money to build a network, you might be required to insure.

Note that most of the big ISPs don’t carry insurance. They self-insure because, over the long-run, it’s cheaper for a big telco or cable company to pay to repair things than it is to pay an insurance company every year. But smaller ISPs probably don’t have deep enough pockets to pick up the tab for replacing a central office or a NOC.

When insurance is optional, you should do the math. How do the premiums paid over some period like ten years compare to the cost of replacing the asset? That math gives you a numerical way to weigh the risk of insuring or not insuring a given asset.

Watching Health Care Costs

English: President Barack Obama's signature on...

English: President Barack Obama’s signature on the health insurance reform bill at the White House, March 23, 2010. The President signed the bill with 22 different pens. (Photo credit: Wikipedia)

I know in my own company and that at every one of my clients that health care costs are a big concern. We have gone through a decade long period where the inflation in health care costs has been in the double digits each year, much faster than any other of the costs we face.

The rate of inflation of health care costs nationwide has finally slowed. This year the nationwide rate of health care cost increase is expected to be at 5.5%. Next year the prediction is for 4.5%. Both of these rates are still higher than inflation, but a welcome relief after years of really large increases. I know in my own firm, which has been around for fifteen years that health care costs per employee have nearly tripled since we opened for business.

And those current inflation rates do not tell the true story for many firms. The 5.5% increase in health care costs this year reflects the cost of health care to employers, not overall insurance costs. And so the slower rate of health care inflation is due in part to companies are pushing higher deductibles and copays to employees as a way to keep their share of health insurance under control. Last year the amount of copays by employees rose 13% which shows that the overall increase in health insurance was a lot more than the published 5.5%.

There are some trends in the industry that hint at a possible slowing in the cost of health care. For example, there is a large industry now of out-patient health clinics that charge as much as two-thirds less than a normal doctor. There is hope that the large statewide pools that are being created under Obamacare will lower overall insurance premiums by bringing more young people (and healthier people) into the insurance pool.

There is also becoming a bigger emphasis in many health care plans of preventive care, meaning that many ailments will be nipped in the bud before they become big problems. Over time preventive care will significantly lower overall health care costs.

And hidden underneath all of these numbers is the very numbing statistic that 30% of our nationwide health care each year is spent for the process of people dying in hospitals and hospices. In recent years just about two-thirds of people die in an institution rather than their home. But this is down ten percent over a decade ago. Almost nobody wants to die in an institution and perhaps as a country we will be able to find a way to allow more people to die at home.

But for most of my clients, even if health care cost inflation slows to 4% – 5% they are facing an ugly future. Trend those increases out ten years and see if you aren’t very concerned.

There is also something to keep in mind which is that in 2018 there is going to be a tax on ‘cadillac’ health care plans. These are plans today that would cost over $10,200 for an individual or $27,500 for a family. That may sound like high caps, but these amounts count the contributions made by both the company and the employee. The tax is a whopping 40% charged to the employer on anything over the cap.

The average health care insurance cost for last year was $10,522, so there are already many plans that would be considered Cadillac. These amounts will be increased over time by inflation, but if health care costs continue to climb faster than the rate of inflation, then more plans each year will fall under the premium category and incur the premium tax.

I know that all of my clients want to provide good health care to our employees. The decision to increase copays or deductibles is a painful one for all of us. There are a few creative ideas that some companies are trying that are worth considering. One of the most interesting is the idea of handing your employees the money to buy their own health insurance. There are now ways to do this as a defined health care plan. Since having health insurance is mandatory for employees in 2014 you need to demand proof that an employee is really using the money for health care. But companies who try this say that their employees are finding ways to get cheaper plans than they could buy at the company level.

The bottom line is that health care costs are going to continue to increase faster than the rate of inflation. Add to that the worry of crossing the premium tax threshold and it is going to get harder and harder for you to pay for your employee’s health care costs. I wish I had some magic bullet to recommend, but for now the best I can offer is to do the math and see if there is anything you can do to keep this under control at your own company.