Make Insurance Great Again: 5 Misunderstood Business Isnurance Coversages

business insurance and commercial risk management

Why stop with America – let’s make insurance great again! There was a time when the profession of transferring risk was sought after and even put on a pedestal. I find in today’s world, though, that the dilution of our profession into peddling of business insurance ‘products’ as opposed to risk management partnerships has caused typical insurance buyers to turn up their noses at the mere mention of the dirty word, ‘insurance.’ 

For the first step in becoming ‘great,’ let’s clear up some of the biggest misunderstandings that business owners commonly encounter in their insurance programs. Remember, every business operates with different exposure to risk, so what we are discussing here are general insurance misunderstandings that could apply to any business.

Business Interruption Insurance: No revenue means no spending money.

Let’s say your business is impacted by some peril that resulted in your inability to operate and make money. In this situation, business owners typically ask:

    1. “How do we establish our insurable amount?”
    2. “What’s covered?”
    3. “When should we file a claim?” 

The short answers are:

    1. Establish your insurable amount by calculating what the business would have earned had the event not occurred using past tax returns, P&L statements, projected sales and non-continuing expenses. It’s very common to see businesses choose a standard 12 months of gross profits for the insurable amount – but this is commonly not enough to take care of the business.
    2. Profits, revenue lost due to the business closure, fixed expenses such as rent and utility costs and expenses of operating from a temporary location are typically covered.
    3. File a claim when there is direct physical damage to your property resulting from an insured event. It’s likely that your insurer will treat the first 72 hours following an insurable event as self-insured. In other words, the first 72 hours will serve as the policy deductible.

General Liability Insurance: There’s a lot that is NOT covered.

It’s always interesting to hear feedback on what an employer expects their insurance company to cover under a general liability insurance policy. In short, general liability insurance exists to pay for bodily injury or property damage caused to a third party by your business’ negligence. This policy has A LOT of exclusions. For one, medical payments will not cover any of your employees injured on the job – hence the need for workers compensation insurance. Other common exclusions are for employee/third party discrimination lawsuits and cyber crime losses.

Workers Compensation Insurance: I’m not required to carry workers compensation insurance in my state, so I’m not liable.

This assumption is a fallacy. If you employ people, you are responsible for their workers compensation statutory benefits, whether you have an insurance policy or not. Attorneys will line up to help an injured worker get what’s owed. Also, many employers in Florida are thinking of changing their effective dates of insurance to avoid the most recent rate increase. A common misconception is that this is a good idea. What most employers don’t know is that their policies are written with an effective date of insurance and an anniversary rating date (ARD). The ARD is the date on which rates apply to the policy and an employer’s claims history (by way of their experience modification factor which is calculated by dividing expected claim into actual claims) and impacts the cost of their insurance. If a business owner decides to change the effective date to avoid the rate increase, their ARD will remain unchanged, and rates will continue to apply on the original date.

Fleet Auto Insurance: Who can drive?

Depending on how the policy is written, the coverage may only extend to drivers or vehicles specifically named on the policy. Never expect coverage to extend to any vehicle driven by anyone on behalf of your business. Also, there is commonly a ‘gray area’ as to employer responsibility as a result of traveling to and from work when it comes to workers compensation. However, an employer’s auto insurance will kick in for owned vehicles that employees are allowed to garage at their residence.

Property Insurance: Appraisals – get them before the wind blows!

Most businesses that we work with have real property. In other words, they own or lease space for their business to operate. From the perspective of insuring real property, an owner must choose a limit of building reconstruction cost to insure. Building owners commonly confuse the purpose of a market value appraisal with the vastly more appropriate ‘replacement cost insurance appraisal.’ Market value appraisals commonly give the value of real estate, including the entire lot. Generally, the real estate value and site work (including foundation) are uninsurable via a Property policy, thus rendering a market value appraisal pretty much useless. A replacement cost insurance appraisal allows the property owner to establish a starting point for which to insure real property.

Arming ourselves with significant knowledge and selecting the right partners in our businesses will surely help create the greatness we all seek. How great are you now?

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