This is the second in a series of columns on the subject of personal risk
management, targeted especially for those agents who are considering offering
fee-based risk management services to their personal lines clients. To offer
these services, agents must broaden their paradigm of their job descriptions
to think like a risk manager rather than an insurance agent. More on what that
entails can be found at Personal Risk Management:
An Overview, which illustrates how to create a personal lines risk management
environment in an agency.
When a client for whom you're managing risks calls you with a change in his
or her personal life, the first and most important step is to identify all the
new risks associated with that life change. (You can't manage or treat risks
that never get identified.) This article outlines one potential life change—the
decision to hire a nanny for childcare—and the associated risk exposures and
recommendations related to that decision.
Hiring a Nanny
As an example, my daughter Angela and her husband Scott recently became proud
parents (and me a first-time proud grandpa) of little Sofia Isabel. They were
considering their various childcare options and were leaning toward a solution
becoming increasingly more common among young professional parents—sharing the
cost of an in-home nanny with another couple with an infant about the same age
as Sofia. They initially were going to use a professional nanny service, but
due to the substantial costs, were leaning toward hiring their own nanny and
treating her as an independent contractor.
Here are the added risks Angela and I identified, in no particular order,
relating to hiring her own nanny, and my corresponding risk management advice
regarding that risk.
| The IRS Risk* The risk of fines, penalties, and payroll taxes for improperly paying
an employee as a contractor and not withholding payroll taxes. | Hire the Nanny as an Employee Eliminate all the risk. Do the withholding. Pay the payroll taxes. |
| The Risk of Uninsured Injury Lawsuits* The risk of lawsuits for job-related injuries for which the nanny
can sue you—something she could not do if you pay her as an employee
and buy workers compensation coverage. Your home and umbrella liability
coverage will not defend you nor pay any judgment because they both
exclude injuries for which workers compensation benefits are due. By not covering her for workers compensation, you also are exposed
to owing her all benefits that would have been payable under workers
compensation plus substantial fines and penalties from the state. | Buy Workers Compensation Coverage Pay her as an employee. If injured on the job, she will be limited
to collecting her medical bills and lost wages under the workers compensation
coverage. |
| The Risk of Family Member Lawsuits* Lawsuits from a spouse for loss of consortium, from other family
members for loss of services she provided them, etc. Workers compensation coverage does provide employer's liability coverage
but the limits may not be adequate to cover the lawsuit. | Buy Employer's Liability Coverage with High Limits I recommend at least $500,000 plus additional coverage under a personal
umbrella policy. Important: Be sure to buy an umbrella policy that includes
excess employer's liability coverage. The majority of umbrellas do not,
so you may need to shop around. |
| The Added Hassle and Potential Errors of Payroll Administration* Payroll tax withholding and payment responsibility to the state and
federal governments, payroll form responsibilities, W-2 forms, etc.
Add the risk of IRS fines and penalties for errors, plus the payment
obligation of FICA and unemployment compensation taxes. (Usually about
10 percent of total payroll costs) | Hire a Payroll Service Or consider a reputable software program designed to handle the nanny
exposure that reduces or eliminates not only most of the work but most
of the potential errors as well. |
| The Risk of Injuries to Your Child Most nannies will not have their own liability insurance which means
there won't be adequate funds available to compensate your child for
her injuries. | Assume the Risk Yourself Medical bills should be covered by your health insurance, or hire
a professional nanny service that generally will carry this type of
coverage. |
| The Risk of Employment-Related Misunderstandings* Whether she's an employee or contractor, employment misunderstandings
can occur, such as workable hours, who is responsible for what type
of insurance, etc. | Consider Using a Contract to Spell out Both Parties' Obligations Include requirements to buy their own liability, workers comp, auto,
health, and disability insurance if hired as an independent contractor. |
| The Risk of Hiring an Unsafe Person* | Get Her Signed Permission to Run a Preemployment Background Check Get references. Check criminal records. |
| Car Accident Injury Risks The risk of your child being injured in a car accident caused by
the nanny's negligent driving or operation of the vehicle. | Get Her Signed Permission to Check Her Driving Record Get her driver's license number, and check her motor vehicle records.
Check her claims activity on a CLUE Report. Request proof of her automobile
insurance liability coverage if she uses her own car. Add her as an
occasional operator to your car insurance if she uses your car. Be sure
your Uninsured and Underinsured Motorist coverage limits are high—at
least $500,000 or more. |
| The Theft Risk Consider the risk of the nanny stealing personal property, jewelry,
cash, your identity, etc. | Do Background and Reference Checks Reduce the risk as much as possible by hiding valuables. A fidelity
bond might also be available for about $200 a year. |
| The Risk of No Backup* If your nanny gets sick, quits, her car breaks down, etc., there
is no one else to cover for her. | Have an Emergency Backup Plan Arrange backup childcare through a daycare drop-off facility, a kind
neighbor, etc. Otherwise, reconsider using a nanny service which probably
would have backup arrangements available. |
| Your Added Liability Exposure Having the Nanny Work Out of Your
Home The risk of the parents of the other child with whom you are nanny-sharing
suing you for an injury to their child arising out of a condition on
your premises (i.e., a dog bite, a fall on the stairs, a burn from a
hot coffeepot, etc.). This is the price of having the service provided
at your home instead of theirs. | Reduce the Risk as Much as Possible Make sure your personal umbrella liability limits are comfortably
high enough. |
| *See the
discussion "Benefits of a Nanny Service" below. |
Benefits of a Nanny Service versus Hiring a Fully Insured Independent Contractor
I have starred (*) those risks that would be greatly reduced or even eliminated
by contracting with a nanny service rather than hiring a nanny directly. If
hired through a service, the nanny would be the employee of the service—not
my daughter's employee—and this would reduce those risks. Plus, the service
would likely be fully insured for injuries and even provide a backup nanny if
needed. Those benefits, plus the convenience of using a service, may be worth
the added cost of a nanny service.
On the other hand, many nannies are hired directly, rather than through a
service. While my daughter was interviewing prospective nannies, one applicant
was formally set up in her own business with a business name, 10-page contract,
and business registration with the state and federal government. How would this
scenario affect the risks and my recommendations?
My answer is that the risks would be similar to those of using a nanny service,
except that there would probably be no backup person available. Also, strong
documentation of for being registered with the federal and state governments
needs to be obtained. Proof of liability insurance—preferably at least $1 million
limits—plus a dishonesty bond should be furnished. The nanny’s 10-page contract
needs to be reviewed by an attorney as well as by the insurance agent/risk manager
to make sure there are no adverse risk transfers or risk assumptions. A check
of background, driving record, and references still needs to be done.
Conclusion
The need to hire a nanny is becoming more and more commonplace; however,
many families are not aware of the associated risk management issues. Agents
who include risk management services for their clients can help their clients
both identify and manage these risks, most of which never get addressed until
an uninsured claim occurs. Few, if any, would disagree that the clients'™ most
precious assets—their children—are worth the consideration.
Jack Hungelmann's book Insurance for Dummies, contains much
of this information and is available at your favorite bookstore or online.
For more information on his risk management and insurance business, go to www.JackHungelmann.com where you can check out sample newsletters, brochures, other articles written
on various issues. For background information, see Mr. Hungelmann's biography.