The Business Insurance Review Process – Keeping You Out of the Danger Zone
Having reviewed thousands of business insurance programs as both a practicing broker and as a consultant to the private equity industry for firms large and small, I can say with confidence that there’s a whole lot of mistake made in business insurance programs.
I get it, no one is perfect, and I’m not pointing a finger at anyone. Mistakes are made by the biggest global brokers, the smallest neighborhood brokers, and middle-market brokers, and everyone in between. Mistakes are also made frequently by insureds who forget to tell their insurance broker of a change in operations, the purchase of a new machine or location, or any number of other issues that happen during the course of a policy year.
Errors in coverage programs don’t reveal themselves until something bad happens, like a claim. The good news is that most organizations don’t have claims very often so there’s a good chance you’ll never find out that a problematic design flaw in your coverage program exists.
But that’s also the bad news. You never know when a claim may occur, or how serious a claim may be, and if that claim lands in the trouble zone of your insurance program then that design flaw may expose you and your organization to serious out-of-pocket loss. That’s why a business insurance review is needed.
How serious?
It’s hard to say, but here are the three major areas I frequently find problems with when we do a business insurance review:
Insufficient limits of property insurance – especially in business income (aka: business interruption insurance). When property insurance limits are low on buildings, inventory, machinery, and equipment and there’s a loss, you may be able to finance your way out of a claim. Meaning if you underinsured your building by 30% you can finance or re-finance that margin to make up the difference to rebuild. But if you underinsured your business income protection which is intended to pay for ongoing business expenses and lost profits due to a claim which shuts down operations, that may be a different story. Financing cash flow at the time of a claim is difficult, if not impossible since lenders know that businesses which experience a shut down from a claim are about 70 percent likely not going to survive.
Getting property limits right including business income protection is critically important. If you haven’t reviewed this in detail with your broker in the last two renewal cycles and completed a business income worksheet, you’re probably underinsured.
The second area I often see problems with is on the casualty side of an insurance program where layers of high limit protection are not coordinated properly. Now, you may be a small or medium-sized business and say “well, I only have my primary policies and my umbrella policies, so this doesn’t apply to me.”
Unfortunately – not true. I’ve seen too many cases where a business has an excess policy that only runs excess of the general liability policy and not their auto policy. Often this will happen when an insured has their account broken up between different insurers or brokers. Broker A who writes the liability policy doesn’t know that there’s an auto policy in effect with Broker B so they only write excess liability insurance and the auto is excluded.
Or, the broker will write umbrella liability on a BOP policy which includes hired and non-owned auto thinking they’ve covered all the bases of general liability and auto liability. Unfortunately, if the business also owns autos and insures them elsewhere, the umbrella won’t provide excess protection because it only runs over non-owned autos not owned autos, this creates a dangerous gap.
Lastly, the third biggest problem area is with what I call specialty coverages. Policies like cyber insurance, D&O, or employment practice liability. Many business owners and their brokers may think “well, I’m too small for those types of policies” or “no one is ever going to sue me for employment practices”.
I’m not saying that every business needs to buy all forms of specialty insurance. For smaller firms, it’s just not economical to make these purchases, I get it. But it doesn’t necessarily mean you don’t have these exposures. So, what’s the answer?
The best is to understand what exposures you have and what it costs to insure them properly. For example, let’s look at Cyber insurance – a policy often overlooked by small firms thinking that no hacker would attack them. Cyber can be cheap – like $1,000 a year for a small firm, so at least get a quote. Can’t afford a grand? Then maybe it makes sense to add it to your BOP policy. I don’t like this option because the add-on-type cyber coverages are pretty skinny – but it’s better than going bare.
I guess concerning specialty coverages is to at least know what exposures you have and what it would cost to insure them, and then make a cost-benefit decision in your mind.
Here’s the bottom line on business insurance reviews
Business insurance is complex and confusing, but it’s also critically important to keeping your business financially sound should a claim occur. Again, this is where a business insurance review steps in.
If you’re not 100% confident in what protection you have, then a comprehensive review may be the best thing you can do for yourself and your business. Now I’m not talking about engaging a couple of insurance brokers to go out in the market and find you the best price. I’m talking about engaging an expert broker to take the time to review your policies, your exposures to loss, and your claim history to give you an opinion on the quality and comprehensiveness of your protection. Some brokers will charge you a fee for this review, others will provide it free if you commit to moving your program to them. Often it will depend on the complexity and size of your account.
If you’re interested in a discussion around a review, please contact me, and let’s chat. I work with small to middle-market firms as a broker and consultant and would be happy to strategize how to best get this done with you. Thanks!
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