Well, its February and by now most of us have forgotten to keep our personal New Year’s fitness resolutions. But this is a good time to check up on our insurance fitness. For those of you who are getting your annual bids on your insurance, it is a very important time. I live in the NYC Metropolitan area and after Superstorm Sandy, many business owners are wondering what am I covered for? Many people found out after the storm hit that their insurance policies were not going to cover damages because the policies contained clauses that excluded claims because of flooding or named wind storms. Some companies grew and never really updated their insurance coverage and suddenly found themselves with claims that they never expected as a small company and are not covered by the old polices that are not adequate for the current company. I am going to discuss what all business owners need to look for in their business owner policies including issues that are not related to storm damage.
Insurance coverage is part of a bigger risk management plan for companies. There are serious business decisions that need to be made when selecting insurance and insurance coverage. These decisions are typically made on the history of claims, the company’s financial performance, and their appetite for risk. Insurance selection is complex because there are many different types of policies: auto, general liability, workers compensation, property, fire and theft, EPLI, business interruption, terrorism, flood, cyber, excess coverage, just to name a few. All policies have claim limits, coverage limits, and exclusions. There are deductibles or self insurance retainage. There are companies that can afford, because of cash flow or cash balances, to pay large deductibles (i.e. $50K or higher). But many smaller companies do not have the cash or cash flow to pay deductibles that are higher than $5,000. Insurance and risk management is a complex equation of business decisions.
Larger companies have risk management departments and/or a risk manager who handles insurance and claims. Their insurance coverage is often a mix of policies with large self insurance retainage (SIR) and layers of excess coverage policies. They have a master broker and smaller brokers for different policies that are put out for bid on a regular basis. Smaller companies do not have the luxury or money to afford a separate risk management department or manager. Smaller companies that can’t afford a risk manager still need some risk management advice and should look to their broker or hire a risk management consultant. A business owner cannot abdicate responsibility to a broker or consultant; he or she must understand what does the insurance cover, what is excluded from the policy, what is intentionally excluded by not selecting some insurance products, what is the risk, what are the deductibles or SIRs, what events are excluded from the policy, what events make the policy null and void, what are the policy claim limits (per claim, per event and total limit per coverage period), does the claim limit cover making the owner whole and can they afford the risks.
Let’s break these down to understand them.
What does the policy cover and what is excluded from the policy: Generally speaking, an insurance product covers the items described in the policy title. A GL policy will cover general liability claims arising from operations of the company but GL claims from auto accidents, fire and worker injuries are usually excluded from coverage under the GL policy. There are some business owner policies (BOPs) that sometime group GL, fire, theft and property in one policy. Auto accidents and liability claims that arise from the use of company vehicles are usually covered by the auto or vehicle policy.
What is intentionally excluded by not selecting some insurance products: This is one area where a business owner needs some good advice from the broker or consultant. Not every business needs coverage for all types of policies. Some businesses do not have flood insurance and therefore have no policy coverage in the event of a flood. This may be a business decision based on the fact that the company is located miles from the FEMA 100 year flood plains. But what is the coverage if a local storm sewer backs up and floods your belowground storage area? A small company that started out as a three person operation never felt that they needed employer practices liability insurance (EPLI). Is this still true when the three partners now have 15 employees? Sometimes not selecting a policy makes sense but you need to look at this choice versus your current operation. Do you really need auto insurance if you have no company owned cars? Are you protected when your employee using his/her own car for company business gets in an accident?
What events are excluded or trigger non-coverage from the policy and what events make the policy null and void: As I covered in a previous post, fire and theft policies have clauses that limit or exclude coverage when protective devices or systems are out of service and the carrier is not notified in a timely manner. There are some GL and worker compensation policies that exclude coverage if a contractor is working on a project that is covered by an owner or contractor controlled insurance program (an OCIP or CCIP). Owners that do not enroll in the OCIP or CCIP often unknowingly place their companies and the OCIP at risk. After Sandy hit New York, some business owners found that their business interruption insurance did not allow claims if the business interruption was due to a general power outage and not one limited to their property. Floods are events that usually limit coverage under most insurance policies. Most GL policies do not cover claims arising from discrimination or sexual harassment. Pollution events and terrorist events are also usually excluded by most business policies unless there is a separate rider.
What are the deductibles or SIRs: Are the deductibles or SIRs per claim or per event? Is there a cap or maximum aggregate amount on deductibles? Typically, the deductible is set by the underwriter. The underwriter will set one deductible or give you a choice of deductible amounts. Selecting the deductible is a risk management business decision that is based on how much can an owner afford to pay out of pocket, and what is the likelihood that you will have to pay more than one deductible per event or policy period. I know one restaurant owner who is fighting his broker because they are asking for three deductibles for one event (Superstorm Sandy) – one for business interruption, one for loss of food and one for property damage – all on the same BOP.
What are the policy claim limits (per claim, per event and total limit per coverage period)? Does the claim limit cover making the owner whole after an event?: All policies have limits on the amount of money that the policy will pay out. There are per claim limits and total limits for each policy period. A business owner has to look at the risks involved in each type of event that can affect his/her business. An owner has to ask “If a storm hits and causes my building to go on fire, how am I covered?” If the cost of replacing the building and the cost of lost product or inventory plus the lost business exceeds the BOP policy limit, then the owner needs to look at a higher limit, self insure for the excess or get an excess or umbrella policy(ies).
What is the risk: The risk is the loss of a business. Most small business owners have sunk their life savings into the business, so walking away from the business is not an option. Small business owners need to be “made whole” after a loss event. So business owners need to know:
- How they are covered
- What they are covered for
- What things are they not covered for
- How much are they covered for
- How much does this cost
- What is the likelihood of any event (especially a catastrophic event) occurring., and;
- Can they afford the risks.
WHAT SHOULD A BUSINESS OWNER DO?
- An owner needs to understand the risk and his/her appetite (and the business’s appetite) for risk.
- They need to know how much can they afford to lose.
- Owners need to know how much will cost to recover from a catastrophic event.
- How much will it cost to rebuild you structure including permits?
- How long will it take and how much business will be lost?
- Can I relocate temporarily and will my insurance cover that?
- If not how will I fund this
- They need to know the likelihood that a catastrophic event will occur.
- An owner needs to understand how they bid out their insurance business and how the insurance market responds.
- Big companies like to stay with one broker or carrier for a period of time. Because of their size, the underwriter (the person who set the price) will know what the risks are for that customer and will price the policy accordingly. Underwriters will compete to keep good risk customers, so big businesses get prices that reflect their risk and size.
- Small businesses don’t have the same exposure to the underwriter. As far as the underwriter is concerned each fast food restaurant in a given area has the same risks as all of the fast food restaurants in that area. If a owner has been dealing with the same broker, he/she may get a better price because of that relationship.
- Every so often, all businesses should test the market to ensure that they are getting the best price and the best coverage. Some small businesses bid out their insurance coverage each year.
- Sometimes all the carriers think that an area has too much risk for a high cost event and they limit coverage or will abandon an area all together. After Sandy, many companies raised their deductibles for “named wind storms” and increased the business interruption periods (sometimes doubling the waiting period).
- An owner needs to understand what their business is covered for
- The only way to do this is to read the insurance policies and map out what the coverages are. By doing this you can check for gaps in coverage and coverage overlaps.
- If you don’t understand what the coverage wording means ask your broker or hire a risk consultant.
- I work with one office manager who sets up a spread sheet with the different policy categories and what the policy covers.
- Every year, she uses this spreadsheet comparison to compare bids for insurance coverage to the approved brokers/carriers for her business. On her spreadsheet she also notes the costs for each policy and any extras to ensure that all the policies that she is comparing are the similar.
- I worked with one risk manager who used a chart for coverages, deductibles and policy limits to show any gaps in coverage or coverage overlaps (ie. An opportunity for cost savings for the owner)
- An owner needs to understand what their business is NOT covered for
- The only way to do this is to read the insurance policies
- Make sure that all the risks you are aware of are covered by the policies
- Check and make sure that you are not at risk for any excluded events
- Make sure you understand all you deductibles and limits
- Do you have an umbrella or excess policy and does it cover the gaps for high end coverage
- Do you understand the time limits to notify the carrier/broker of any claims or potential claims
- If you have any questions, be like Columbo and ask “I have just one more question.” One director that I worked with said be aggressively suspicious and ask questions until you are sure there are no more questions to ask.
- Map out what the coverages are and the coverage gaps.
After an incident or disaster is not the time to find out what your insurance coverage is. Insurance is an important business decision and it is a process. Be aware. Be proactive. Be prepared.