EP16 - Interview with Brandon Ernstes ESOP insurance expert with Houchens Insurance, Nashville TN

Welcome back. Thanks for tuning in. I'm the ESOP guy and let's continue on this journey to an ESOP. This podcast is for those that are thinking that they might want to consider transitioning their business to an ESOP. If it's your first podcast, and you're interested in more of the podcasts we have online on our website at journey to an ESOP.com, all the podcasts for you to download and listen to. Today, I'm very excited to have the pleasure of interviewing Brandon Ernsti from Haoin's Insurance Group. Hao Chin's Insurance Group is currently comprised of 5 insurance agencies within Hoochin's Industries. It's really one of the largest 100% ESOP owned companies, uh, insurance companies in the US which was established in 1988 and has nearly 17,000 employee owned owners today. So it's a very large employee owned company. Haoins Industries operates a diverse portfolio of companies ranging from manufacturing and contracting to operating multiple grocery store chains and many more sectors. Haoun's industries recently celebrated its 100th anniversary. Being an employee owned company since 1988, Hochins has a deep knowledge and background of working with and understanding the uniqueness of an employee owned company. Brandon and his team focused primarily on employee owned companies as really part of their business niche. And what they do is they leverage the mentality, the employee ownership mentality, culture and structure to really better serve their clients. Hahn's Insurance Group has capabilities and experience at managing nearly all types of insurance. Brandon, thanks for joining us today. Phil, thanks so much for having me. I'm excited to be on. Great. So, Brandon, what are the challenges that you are facing in directing your clients given the current economic crisis? You know, Philip, it's, uh, I think it's the same for a lot of folks in this area. There's just so many moving aspects to COVID-19, um, that no one really knows the, the impact tomorrow, next month, 6 months or a year down the road. We've been fielding questions from our clients, past clients, um, perspective clients, um, in regards to layoffs, furloughs, downtime. Um, delay in insurance premiums, things of that nature, um, but I think, as I said, the main thing is the unknown, and I know so many of our clients, some very impacted, some not so much impacted, um, have just consistently said, hey, how do we make a decision around this or that? One of those things being insurance, when we're, I don't think. Many of us know what's going to happen next week or the following week, so I'd say that's the number one piece. And then just working with our clients that down on top of new, newly released information legislation and bills passed, some of those in reference to some of the SBA loans and the PPP and the CARES Act, and just some of that funding and just staying on top of that. I know that like for us as a CPA firm, we have uh jumped into the deep end with the PPP loans with our clients and, and now with the new round that just got approved today by the president, it's um we're seeing, you know, a lot more activity again to hopefully for the companies that didn't get the first round of funding to get funded. Um, and the next thing we're looking at with that too, specifically, you know, is the confusion and the the questions and the concerns over the forgiveness. How that affects their taxability. So, in general, I think, you know, I think it's, you know, our, our, as professionals and, you know, Brandon being an insurance professional and, and ours being more on the CPA side, we're all trying to help uh really bridge that information to help companies because it is very difficult out there for, for many companies going through this time, this crisis. So Brandon, as we, as we look at some of the issues really for both ESOP companies and companies considering, you know, going into this transitions toward towards an ESOP, what are you seeing as, you know, the effects on them relative to COVID-19? Yeah, I think COVID-19 is in when you boil it all down, it's going to make people think differently. It's impacting the way people are doing business positively and negatively, and whether that be internally or externally. I know for us specifically, we, I think in my opinion, we've done a great job adapting to this, going from a company that really doesn't have much remote workers or much remote business. Um, to really learning how to do that on the fly and figuring out how to do that productively and successfully, um, but then on the flip side of that externally, what kind of contracts or revenue sources or how are you diversifying your business, um, I think this is making people think outside the box. Um, in regards to how they'll do business going forward, um, that's definitely what some of our clients are starting to do. Um, I think the reasons, questions, issues, business decisions are so important for ESOP companies, especially, um, is due to the company's success factor and progression through a time like this. Um, I will say majority of our ESOP clients are remaining very stable during these times. Um, I think the reason for that is because leadership and ownership of those companies, um, look through a different lens and how they make business decisions. Um, I think this allows them to weather a storm like this better than a privately or publicly held company, in my opinion. Um, and anyone that's looking to transition to the ESOP model, I think now is a very good time to look at their business, how it's operating. Grading through these times, um, and what they can either do to protect when something like this occurs again if it happens to, or what they can do to capitalize in a time right now, um, maybe when other companies are on the downturn. Um, so I think it's an issue obviously, but I think certainly just like any other time, there's an opportunity out of it and it's all about how those companies take advantage of that in my opinion. Yeah, I, I think that's a great point. I mean, all, all of that is, is very good because I know, I, and I, I looked at specifically like a few weeks ago and I did a podcast on uh reinventing your business model. And, and all I did is I took, I took some information from some Harvard business reviews and some other information that I had accumulated over the years, but, you know, the opportunity to, to start asking the questions of what, what are we doing and why are we doing it with some of the downtime that we have. And so that you can look at the trends and the opportunities that come out that are going to be coming as opportunities down the road. So positioning your business for that. And the other thing you said I'd liked is that, you know, when ESOP companies have, I think, more stability. Um, because they're structured in a way with, with great governance and a lot of involvement and engagement from people, and that's a different feel when you have and, you know, certainly great privately held companies that are not ESOPs, but that's a great feel when you're going through this and everybody's working together, um, and, and then on top of it, you get the tax advantages as well, which certainly don't, you know, hurt when you're going through a downturn and you're trying to protect as much cash as you can. I agree 100%. So, so going into that, and I, this is what I, I love, I love to talk about talking to different professionals and, you know, you, you being an insurance professional, an expert and that understands ESOPs and, you know, going into the process of planning, which is really where I spend a lot of my time for companies that are not yet ESOPs. Um, how, how do you guys get involved in helping and when does it make sense for, you know, a company that, you know, is early on in the process of becoming ESOP to engage their insurance person or professional to help them in the process? Yeah, that's a great question, Phil, and, um, surprisingly, I'm not, I don't know if it's surprising or not, but it's one we receive quite frequently, um, especially when in kind of discovery conversations with employee owned companies. Um, at the end of the day, it's all based upon having a true EOP partnership and mentality. Um, us being an ESOP ourselves, we've been able to capitalize on certain items in a risk management program that's simply other private. and publicly owned companies cannot. This often leads to some more cash flow, better managed risk appetite, and overall healthier ESOP company. All these things add value directly back to the bottom line and then ultimately back into the employee owner's pockets. Um, but I think The piece of that though, the earlier on in the process of becoming an ESOP, the better, um. When companies are looking at becoming an ESOP and the complexities of it, they're taking a deep, deep look into their business and how it operates. Um, when we're talking with folks that are looking at becoming an ESOP, I learned that almost all the time and you're included in these conversations. Um, it includes your banker, a legal team, your CPA, um, plan sponsors, fiduciaries, things like that, and basically all your key business components. Um, I find it not troublesome, but I find it surprising that a lot of times people don't bring their insurance partner into those discussions, um, and I think there's there's one, as you know, are extremely impactful discussions with some pretty serious, um. Conversations going on, but not only for that immediate transaction um of moving to an ESOP, but also for the long term and what it means from a risk side um to what you're taking on as an employee owned company, but then also using that employee ownership mentality um to basically build up that risk profile with the insurance company. I love that. Yeah, I, I, I honestly haven't thought about this, um, in terms of planning and, and I, and I think there is something in our, in our industry that needs to change when we start thinking about these types of things and engaging insurance people because uh professionals, when I, when I think About the planning site, what and, and, and correct me if I'm wrong, what you're saying is you guys look at the risk for an ESOP company differently than you do for a non-ESOP company. Is that what you're saying in terms of how they're, they're building out their insurance um products and services that they're using? Certainly, um, we're looking, I mean, we're basically looking to look at either a that mindset of the company, but then we're using that to those companies' benefits, um, and you're able to capitalize all stuff once you change that mindset of your employees, um, that quite frankly, other people that are working for stockholders or working for some other privately held um entity might not necessarily be able to take advantage. And quite frankly, most of the time they can't, and it's all just like we said earlier, it's based around that culture, that ownership mentality, and really that guidance and governance guidance and governance coming together at the top that kind of trickles down throughout the rest of the company. So when you look at that from the risk of the business side, um how do you, are you able to quantify the, the difference in, in um actual cost, insurance costs early on in the process or when, when can you actually like provide estimates of cost reduction for insurance um when you're looking at a company going through an ESOP? Sure, and so it really it really varies on what kind of lines we're looking at. Um, I specifically work on the help lines, um, depending on circumstances and depending on size of companies, um, we are easily able to look at some of the other programs we've implemented with ESO Partners and some of the things we do ourselves internally. To say, hey, here's your hard dollar cost savings number. There might be some other things from a workers' comp or property and casualty perspective that we might be able to say, hey, this is going to be more of a projection of a number that we might have to be like a living and breathing thing through time as we develop more of that ownership mentality. that ultimately drive down cost over time by communicating that over and over to employees because at the end of the day, if an employee understands that, hey, any dollar we save on our insurance is going back in my pocket, that's ultimately what we capitalize on from a work comp and property and casualty perspective. Wow, that's a huge, that's a huge role that you guys play with with that. I think that's awesome, um. So let's move on to the uh the next question, which is, uh, I always get a lot of questions in planning on fiduciary liability insurance. Um, can you, can you explain this for companies that are going towards an ESOP, what this really is? Yeah, and I'll break it down to the simplest as I know how to, Philip fiduciary liability insurance, many people refer to this as management liability, but basically this is intended to protect businesses and employers against claims resulting from a breach in fiduciary duty. Essentially, what this policy and what a fiduciary liability policy does. It protects parties against liability for managing or administering employee benefit plans. OK, OK. Uh, so what are you seeing as far as, um, this complicating process of going towards an ESOP? How do you see this being an issue when you, when you have a company that's going into an, an, an ESOP? Mhm. So the first, the first where this water, um, really becomes gray for a lot of people, um, is the, you got, the most important thing to understand here first is that an ESOP is an employee benefit of a retirement program. It is not an investment and you're not actually buying shares. It's part of the benefit package that falls exclusively into the fiduciary liability piece. Um, I'll, you'll hear me restate it a couple of times since it's an employee benefit, it is specifically excluded from directors and officers' coverage. So stock shares are not a benefit. It's a fiduciary liability issue, not a director's and officer's issue. We, when we're talking with other ESOP companies or people looking at becoming an ESOP company, we suggest much higher fiduciary liability limit than DNO limits, and usually it's much more, much more cost-effective as well. Um, because at DNO, um, the odds of having a DNO claim are much higher than having a fiduciary liability claim. Um, but like I said, we want to make sure we have those costs much higher and that the again, the real distinction is that an ESOP shares are a benefit and they're not an investment. Um, and then the last thing I'll say kind of to, to this another little complicating piece, when reviewing fiduciary liability with your insurance provider, you always want to price out options for the defense costs to be outside of the limits of liability. And we're seeing this just due to the astronomical cost of defense. Um, the reason being if the limits are within the limit or if the limits are within the cost, it will quickly erode those limits. Um, so as I said, you want those defense costs outside, otherwise, so you want to get, yeah, so you want to get additional insurance to cover the attorney, the attorney fees outside of just a fiduciary liability. Exactly, exactly, because what we've seen a couple of different times is people, yeah, hey, yeah, I've got the fiduciary liability, um, but then a claims filed against them, and next thing you know they had a million dollars fiduciary liability limit. Well, they did, they forgot about the $400,000 in defense costs, which is down their, their right, their claim now or they're down to $600,000 after that or. After the, so, so what would be a typical or, you know, I know everything's not typical, but like, uh, you know, from a, a defense cost policy, what would you say on a typical coverage limit would be that you'd be looking at in the market? Um, I would probably say something along those lines, the 250 to 500, I would say is where they usually start at somewhere in that ballpark, um, without, honestly, without looking at specific cases, I wouldn't feel comfortable really saying, hey, here's the number, um, you want to go ahead and run towards just honestly. Yeah, well, and I think for, for this podcast too, the key to this is to make sure your advisor. Or whoever's doing your feasibility work is planning those costs into your model, and you know there's there are the compliance costs of ESOPs are really important to nail down and, and, and even though they're just estimates, it's important to know you're gonna get the tax benefits. But they're gonna be offset against these other ongoing, um, additional costs that an ESOP has to carry and fiduciary liability, defense, you know, cost liability coverage, those are just very good practices to, you're, you're gonna have to get fiduciary liability because the trustee is gonna insist on it, um, but it's gonna, it's going to need to be built into your budget. So if you're not doing that, definitely you wanna, you wanna to key in on that. And again just for reiteration, just the most common thing we see is people saying oh well I have directors and officers' insurance that will cover that. that is specifically excluded from that coverage. So just make sure that when a lot of the companies out there when you're looking at going ESO, making, making sure that you have the fiduciary. liability coverage in place as well as that DNO coverage. Yes, yeah, I think that's, that's key. And I, my experience is you, the, the insurance brokers that you use typically aren't gonna know what it is because it really does take a specialist focused on ESOPs to know and, and I've, I've had to source those for my own clients, so. Um, what are some ways, Brandon, that companies can be proactive now if they're preparing their business for an EAP, you know, down the road or whenever, for from an insurance perspective. Yeah, um, I would say just, pretty simple. So if I would start asking the tough questions that you currently, uh, use as your insurance, um, partner, start asking them about things, for example, like the fiduciary liability. Have they had experience managing, managing that before? Um, what's their experience insuring ESO companies and helping with those transactions? Are they familiar with the proper limits? Are they familiar with how to manage the risk for an ESOC company? Once you get into some of the construction and the companies like that, are they experienced in bonding. Um, with ESOP companies, for example, um, and then on the health side, what are, what have they done with employee owned companies to help mitigate a lot of that health, um, healthcare spend, um, it's It is now a select group of individuals duty to make decisions on behalf of the company's employee owners when you turn to an ESOP company, and you don't ever want you don't want that getting in the way of the culture that is so valued by ESOP companies. There's so many in-depth questions that must be answered that an experienced ESOP insurance expert can answer and ease some of the stress while moving towards becoming an ESOP, because we know it is so complex and it takes so many different parties involved in that. And while looking under the hood per se of your business, I think it's in my opinion, I think it's always a good time to go ahead and evaluate your risk. Management program as well, you want to make sure you're partnered with the right folks and especially when you're talking to your CPA and your legal counsel. Like I said earlier, your insurance spend is right up there with right in your up there usually in your top three spends for any company. So it's usually a good time as well to go ahead and take a look at that piece of the business, um, especially if you're thinking about moving to an ESO structure. I think I, I totally agree with that. And, and, and I guess the comments I would make there too and just is just experience in working with a lot of clients over, you know, say 30 years is Insurance is one of those items when, especially, you know, you're running your business and, and now that we're moving into an economic downturn, it's one of those cost things and I look at the financial statements and I'm like, that's a lot of money we're spending as a business owner. I'm like, that's a lot of money we're spending. And the, the key of that is, is that you, you definitely want to look at these programs and I think what I've, what I've learned is you, you can't assume that a lower cost policy is going to give you the same benefits either or the same protection. So, Um, you know, so it is definitely a double-edged sword. One on one side, you wanna, you want to cut costs, but the other side, you really want to make sure you haven't hurt your business in any way. And, and I, and I think with that, I mean, it kind of says, and this is why finding Brandon and being able to do this interview today was really helpful because there are few, few insurance people that understand ESOPs and, you know, so getting his time today was really, you know, uh, a privilege and it was really just great for, for the audience listening to this. Um, but I would just challenge you to make sure that you're with the right insurance professional when you're going through this process. And I think a lot of companies are going to, um, when, when the economy goes down, they really do start looking at their insurance programs and the caveat is just don't hurt your business by cutting things that you really need and you know, any final comments on that, Brandon, I, I just think that's important. No, I just I couldn't agree with you more there. There's I've seen it a couple of times. There's a Scale and there's a balance between value and cost, right? You still want to make sure, um, obviously everyone wants a lower cost. We all, I want a lower cost for everything, but at the same time you want to make sure that value is still there and you want to make sure in this case the coverage is there, um, especially when looking from a company, whether you're going to NSA or not, you just want to, before you go kind of saying, hey, it's a race to the bottom on cost, um, you might want to look a little bit deeper. Into that and that's just where you want to make sure your insurance partner is helping you um during that process and making sure you're kind of dotting your T's, uh, dotting your I's and crossing your T's to, uh, make sure you're taking care of everything. It's important. So and the good and the good news with this is Brandon covers all 50 states if you're, if you're looking for somebody that you want help with, and it's certainly not, um, you know, just a shout out for his, for what he's doing, and I think his expertise really. Um, would be helpful to you. Um, it's similar, you know, Brandon and I met each other cause I'm covering all 50 states as well. So it's just, it's nice to know people that can go places and, and help companies all over. And, um, so with that, again, thank you, Brandon, for your time today. Awesome. Thank you so much, Philip. I enjoyed it and uh you have a great, it is a Friday for everyone that listen. Well, at least when we're doing this podcast, you have a great weekend. You too. And as we close out, I just want to remind you, um, if you like the podcast, please subscribe and share it with a friend. Have a, a great day and like Brandon said, a great weekend and we'll see you next time.