Business Insurance: A 12-Point Checklist
In the weeks since the September 11 tragedies, some formerly mundane business considerations have suddenly become glaring priorities. Adequate business insurance, possibly one of the most complex--yet often overlooked--issues could tip the balance between your company' s survival or demise.
We spoke with the insurance experts to find out some of the key mistakes that small business CEOs make--and the things that all business owners should be aware of when it comes to insuring their company. Here' s our list of 12 things to keep in mind.
1. Do Your Homework--Before You Need to Make a Claim
Get your records updated, duplicated, and organized--and keep them that way. Maintain detailed records of all your business transactions, not just your insurance policy. In the unfortunate circumstance that you should ever have to make a claim to recover losses due to an interruption of business (especially a claim for loss of income or extra expenses incurred due to business interruption), the faster you can get detailed information into the hands of your insurer, the faster you' ll get your claim paid.
"Do your homework ahead of time," says Joy Gander, a consultant with Wisconsin-based employee benefits and risk management consulting firm T.E. Brennan Company. "Know the costs of attaining and moving into a second site. Keep duplicate records [ of equipment inventories and other essentials] off site, and make sure they' re current." The lomger it takes you to gather the information that your insurance carrier requires, the longer it will take them to confirm the information and process your claim. And the longer it takes to get that claim check in hand, the more stretched you' ll be trying to keep your business afloat. It can be difficult for small business to find the time and resources to think ahead, to get and stay organized. But, as Gander, a 15-year veteran of the risk management consulting industry, explains, "you' ll sure wish you' d spent that time if you ever have a significant loss."
2. Valuation of Property
If you experience property damage, how will you be compensated? Property insurance usually falls into one of two categories on this front: replacement cost valuation (the cost of replacing the property at current market value), or depreciated settlements (the cost of replacing the property, minus depreciation). Most of the experts we spoke with agreed that replacement cost value is, in most cases, the best way to go.
Which brings us to the issue of valuation. "It is critical to ensure that your building and its contents are properly valued," says Gander. "A lot of people use financial statements to value their property. But this can often lead to very incorrect valuations." In other words, what your property was valued at five or ten years ago is probably less than what it would cost to replace it today. And financial statements do not always reflect that change. So make sure your property is properly valued, based on current replacement costs.
3. Waiting Periods
Examine your policy for any "waiting period" that applies to business income losses. According to Barron Wall, the Managing Associate of Insurance Consulting Associates in Mahwah, NJ, such waiting periods are fairly common, and can last from 8 hours to 7 days -- or more. That means that any losses incurred during the period of time directly following an event will not be covered. "Many policyholders who suffer their greatest income loss and expenses during the first hours and days following a disaster subsequently realize... that their policies will not cover the losses incurred because of this 'waiting period' provision which operates as an unquantified deductible," Wall says. "Business owners should try their hardest to eliminate any waiting period provision for any type of business income coverage, and instead have a known 'dollar' deductible based on their own level of risk tolerance." If you have a dollar deductible instead of a waiting period, you won' t be covered for the first losses up to that amount, but will immediately be covered in full for any amount above the deductible.
Whether you should go with a deductible or waiting period depends on your business. "Some businesses can handle one day, and others can' t," says Wall. "For example, a paging service for doctors can' t wait. If doctors can' t get their pages, they' ll switch to another service right away. On the other hand, many other businesses aren' t affected as dramatically if business is down for a day."
4. Extended Period of Indemnity
Look to see if your business interruption insurance includes an extended period of indemnity. If it doesn' t, consider trying to add it in. Sometimes, policies cover losses incurred only up to the point that you can reopen your doors for business. But that' s not always where losses end. And if you don' t have an extended period of indemnity clause, you can' t make those claims. "Often in the case of a catastrophic event, like the events of September 11, revenues for businesses are reduced over an extended period of time," says Gander. "Just because a business opens again doesn' t mean revenues will immediately jump back to normal." Look at how few people are getting back on airplanes, for example. Or consider the plight of restaurants in close proximity to the World Trade Center that are open for business, but don' t have many customers because of the terrorist attacks. "If you have an extended period of indemnity clause that covers, say, 60 to 90 days, you' ll be covered for losses you continue to incur for that amount of time after the original claim," Gander suggests.
5. Exclusions and Limitations
This area is especially tricky. Look closely at what any policy does not include. All insurance policies are rife with limitations and exclusions. Decide what' s necessary to add in, and pay more for it if you think it's crucial. The last thing you want is to think your policy covers your business needs completely, only to discover that the fine print excluded the specific type of damage or loss you just experienced. For example, all-risk property insurance. Michael Rodman, a principal consultant with and 30-year veteran at J. H. Albert International Insurance Advisors, Inc. based in Needham Heights, Mass., says that frequent exclusions in these types of policies include the loss of cash or securities, losses resulting from employee dishonesty, boiler explosion (see boiler & machinery insurance, below), some computer equipment, and forgery. And this is by no means an exhaustive list. Read your policy closely, and go over it with an insurance advisor or consultant if need be. You' ll be glad you did.
6. War Clauses
Many insurance policies have a war clause, under which losses caused as a result of acts of war are excluded from coverage. The term "war" is defined in different ways, depending on the policy. Barron Wall explains that The Businessowners Special Property Coverage Form (BP 00 02 01 97) and the Causes of Loss (Special) Form (CP 10 30 06 95), which are both published by the Insurance Services Office, Inc., (ISO) are adopted by many insurance carriers, and have similarly worded definitions of "war." "War," according to the language used by ISO in these policy forms, would include "undeclared or civil war" and "warlike action by a military force," says Wall.
A war exclusion is a staple in most property insurance policies, Wall says. But some policyholders get their insurers to include a "terrorism" exception to the "war" exclusion. This kind of exclusion might be worded something like this: ' This insurance shall insure loss or damage caused by acts of an agent of any government, party, or faction engaged in war, hostilities, or warlike operations, provided such agent or faction or government is acting secretly and not in connection with any overt operation of armed forces (whether military, naval, or air forces) in the country where the property is situated.' Make sure you take a close look at your own policy to see if this kind of language is included.
7. Business Interruption Insurance
Business interruption insurance (BII) is very common--and very commonly misunderstood. In short, standard BII is designed to cover the loss of income incurred if normal business operations are disrupted or halted by damage to property. Rodman explains it this way: "Business interruption insurance is designed to cover actual loss of income due to loss of physical property. It is designed for those situations where the loss at the site directly triggers a loss of income to the business." In other words, if your business' location is critical to your ability to produce revenue, then business interruption insurance is key. Businesses most affected by this kind of loss include manufacturing, wholesale, and retail businesses. Business less affected would include many service businesses--those companies that would experience little loss of income due to facility damage.
There are many types of contingencies and clauses that can be included in BII. Many businesses affected by the WTC attacks, for example, suffered so-called "business income" losses. This could include losses from interruption of utility services, from the inability of customers or vendors to reach you, or because a critical supplier or customer has suffered significant damage. Are these losses covered? It depends. "Many business owners may not realize that a policy covering property damage loss ("direct loss") will not cover a business income loss ("indirect or consequential loss") unless the policy is specifically endorsed to provide this coverage," explains Wall. "Similarly, coverage for the other types of losses... is also generally not automatic but has to be negotiated and bought, sometimes at an additional premium cost."
Walls says that a few of these other types of losses include:
- "Contingent Business Interruption" coverage -- losses suffered from loss/damage to property that prevents a supplier from supplying goods and/or services to you, or that prevents customers from accepting goods and/or services from you. "For example, businesses that sold mementos to WTC visitors, barber shops and delis that served the 50,000 people who worked at the WTC, all would lose a significant portion of their revenues and profits from the wiping out of the WTC," says Wall.
- "Services Interruption/Off Premises Power" coverage -- losses suffered from loss/damage to the property of any service provider including electrical equipment & systems, fuel, water, gas, feedstock, pulp, liquid gases, sewage, steam, telephone, fiber optic cable, telecommunications, heating, refrigeration and/or air conditioning systems, or utility plants. For example, "this could include spoiled food at restaurants and supermarkets from interruption of power, telemarketers unable to communicate because of the disruption of the phone lines," says Wall.
- "Interruption by Civil or Military Authority" coverage: losses suffered when, as a result of loss, damage, or other event, access to your property is restricted by order or action of civil or military authority. "This would include loss suffered by residents and businesses abutting the WTC area where access was prevented for a week or more by the FBI and New York City Police."
- "Ingress/Egress" coverage -- losses suffered when, as a result of loss, damage or other event, entry to or exit from your property is impaired. This can include hotel and motel room cancellations, or the cancellation of Broadway shows due to of the closure of the bridges, tunnels and airports that people need to reach New York City.
8. Extra Expense Insurance
Another thing that basic business interruption insurance does not cover are the additional expenses--those beyond actual loss of income--that you may incur if you have to move your business as a result of property damage. For example, if your office burns down, you may need to rent substitute space (perhaps at a greater cost), buy or rent computer & other business equipment, install phone lines, set up security measures, etc. These kinds of expenses generally fall under "extra expense insurance." Frequently, business interruption insurance and extra expense insurance are rolled into one, and called something like, "business income extra expense." Be sure to ask your agent or broker if both are specifically included in your policy, and how much coverage of each your business needs.
9. Co-insurance Clauses
Rodman warns that another commonly misunderstood part of many insurance policies is co-insurance. Co-insurance clauses can create penalties if you are not insured to an adequate value at the time of a loss.
Rodman gave this example to help clarify: Suppose you own a building that is valued at $1 million. If you have a co-insurance value of 90%, that means you must insure the building for at least 90% of its value, or $900,000, in order to collect on any loss in full. If you only insure the building for $450,000 -- half of the required co-insurance amount - then you can only collect on half of any loss. So if you had a loss of $10,000, and had only insured the building for $450,000, then you could only collect $5000--half of the total loss amount--since you had only insured the building for ½ the co-insurance requirement.
"Most policies are subject to co-insurance," Rodman says. "But it can be waived if the amount of coverage that you' re buying is sufficient." So check your policy for this kind of clause, and if you cannot get the clause waived, then make certain that you have bought an adequate amount of insurance to cover the value of your property. That way, you can avoid incurring any co-insurance penalties.
10. Vet Your Salesperson (And hire help if you need it)
Like it or not, the salesperson you speak with at a given insurance company may not be all that knowledgeable about the specifics of your policy, let alone what policies are best for you particular business. The simple fact of the matter is, an insurance agent' s job is to sell insurance policies--not necessarily to sell coverage that' s best for an individual business. So, as Gander explains, "it' s worth the time to go out of your way to find someone good." Rodman agrees: "Many agents and brokers are excellent at what they do. But others do have technical weaknesses. Not everyone is an expert on the technical details. There' s a real variety as to the depth of salespeoples' technical expertise." And it' s precisely those pesky technical details that can cause you problems down the road.
How do you make sure you get the best advice on your policy? One way is to find out what certifications the agent or broker has. Some common designations to look for include CPCU (Chartered Property Casualty Underwriter), CIC (Certified Insurance Counselor), AII (Accredited Advisor in Insurance), or ARM (Associate in Risk Management). Another way is to seek recommendations from other CEOs in your industry--and when you' re asking people about their insurance carriers, make sure you ask if they' ve ever had to make a claim before, and how it was handled. A third option that Gander recommends is to belong to an industry association. "Associations will frequently endorse certain insurance programs," she says. "At least that way, you know that another party has looked closely at those company' s offerings." And finally, a fourth option--in many cases the best one, if you can afford it--is to hire an insurance advisor or consultant to review your business and help determine your coverage needs. (Make sure they don' t sell insurance, so that they aren' t biased toward any particular company.)
11. Limitations on How Claims are Paid Out
Read the fine print on your policy and screen carefully for any mention of limitations on how your claim will be paid out, warns Gander. This is particularly the case with business interruption/extra expense insurance. If you experience significant losses, as so many business affected by the September 11 attacks did, you' re probably going to need to get as much of your claim in hand, as soon as possible. But some policies specify a schedule of payments such that you only get a small percentage of the full amount up front. "For example, there may be a payout schedule where you only get 40% of the payment the first month, 40% the second month, and 20% the third month," she explains. She recommends trying to eliminate all such limitations from your policy.
12. Other Types of Insurance
Other types of insurance to consider, depending on your business: (Please note: this is only a fraction of the types of insurance available.)
- Lease-Hold Insurance (covers the difference between your old and new rent amounts if you lose your old building/office. Covers the unexpired portion of a long-term lease.)
- Accounts Receivable Insurance (covers your accounts receivable should you lose all of your receivables records and are hence unable to collect)
- Valuable Papers Insurance (covers the coast to replace crucial documents that you lose and do not have duplicates of. Includes property titles, deeds, etc.)
- Boiler & Machinery Insurance (covers damage from some event that impacts your building' s boiler and/or electrical apparatus. Often overlooked because business owners don' t realize these things aren' t covered by property insurance.)
- Convention Cancellation Insurance (covers the loss of revenue resulting from the cancellation of conventions, seminars, conferences, etc. Best for companies who derive a significant amount of their annual revenues from such events.)
- Key Man Insurance (essentially a life insurance policy for a person or persons whose death would result in severe financial difficulty for the company. Payment in the case of death goes to the company itself.)
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