With a variety of product types depending on a business’ industry and needs, insurance can be confusing for many business owners and executives.
“The reason you’re buying insurance is to provide protection from claims,” explained Brad Pearce, chairman, A&H Insurance. “So you want an insurance carrier that provides excellent claim service and excellent coverage.”
That sounds simple enough, even when addressing the complicated subject of business insurance. However, the most common mistake business owners make when shopping for insurance is looking at price rather than product.
There are a lot of different plans and policies available for a lot of different prices. “What you’re really seeking is someone that has financial solidarity as well as enhanced coverages if available at a reasonable price,” said Pearce. “It’s not one size fits all.”
Finding the Right Fit
Business insurance policies are as unique as the businesses they cover, but there are a handful of basic coverages: property insurance, liability protection, business auto and a growing need for coverage of cyber security, money and securities.
Beyond the basics, insurance needs change by business and industry, and neither the most, nor least expensive is necessarily the right fit. People need to look at product, not price.
Finding the right product means, in part, knowing what’s being insured and its value, because underestimating the value of property is another common mistake that can cause problems when claims arise.
“Property insurance, especially in Las Vegas, is pretty affordable,” said Thomas Burns, president, Cragin & Pike Insurance. “Sometimes, in an effort to save a little bit of money, people can be shortsighted in what they purchase. There are a lot of insurance products available. People should at least take the time to get educated on them so they understand the value versus what it costs, and the type of things [the policy] will protect them from.”
It’s also good to know the types of things a policy can’t protect. Because a professional insurance broker may be able to help their clients deal with those things.
“The biggest mistake I think people make when they are purchasing insurance is, they are truly only dealing with one aspect of the risk that business owners face. Those are the risks that you can transfer to an insurance company,” said Greg Pike, vice president, LP Insurance Services. “There are other business risks that a professional insurance broker should be able to deal with that are not transferable to an insurance company. There’s not a policy of insurance that can be sold, but rather there is a mechanism to help our clients avoid risk, mitigate risk or financially plan for the risk that’s not transferrable.”
Most risks falling into that category are financial in nature. Pike deals primarily with construction companies, and the types of non-transferable risk they face include things like fines for violation of OSHA policies and procedures. Those fines can’t be turned over to the insurance company to manage, but a policy that offers risk services like site inspections can help companies plan for and manage those risks when they occur.
The insurance policy needs to fit the business. Understanding how those policies work is the best way for business owners to find the best fit.
Business Insurance 101
The best way to get educated on business insurance is to identify an insurance professional and partner up, said Burns. A qualified business insurance professional should be part of a business owner’s professional team along with the attorney, CPA and banker. That way they’re more of a consultant, rather than a salesman.
Insurance agents represent insurers; brokers represent consumers. Neither is any more one size fits all than their products are. Meeting with an agent who’s not familiar with business coverages could result in getting the wrong product for a specific business or a business in a specific industry.
One of the best ways business owners can educate themselves is one even insurance professionals admit isn’t fun: Sit down and read the policy. Maybe on an annual basis.
“Take the time to pull the policy out and ask the questions prompted by it, talk to your agent, talk to someone who is knowledgeable about it, talk to the carrier, or whoever is involved, so you can determine what elements are within your policy,” said Pearce. Review coverage needs by business and industry, preferably with an agent familiar with, and doing regular business in, that industry.
“There’s some stuff that’s industry specific,” said Burns. “There are some products out there that people should take a hard look at. Exposure to cyber liability is growing substantially and that’s made the news a couple times lately. [Large organizations] have gotten hacked, like T.J. Maxx and Sony. Those folks got hacked and personal information got stolen. There’s a lot of liability out there, so that’s something people should take a hard look at.”
“One thing we’re seeing a great deal of is cyber security policies,” said Barbara Richardson, insurance commissioner, Nevada Division of Insurance. “The number of ransomware attacks have increased significantly in the last few years and small businesses don’t always have the protections of their IT. Business owners can purchase a policy that covers cyber security, or get into a service that will do cyber protections. One of the things you don’t want is your business being forced to pay ransom just to get all your own operating systems back. That’s a pretty harsh way to go.”
Another area of concern is employee practices liability, said Burns. “That protects an employer if they’re sued or the accusation is such that somebody says they weren’t hired, they weren’t promoted, they didn’t get a raise as a result of their gender, their ethnicity, their religious beliefs or that they worked in a hostile work environment, which is mostly sexual harassment.”
Coverage can vary by industry. A manufacturer doesn’t need the same coverage as a plumber, who doesn’t need the same coverage as a medical office. Larger companies may employ risk managers who work to identify upcoming risks and identify policies and procedures to mitigate them. Smaller companies can identify those risks by working with an agent with experience in their industry.
Fires, Flood, Terrorism and COVID-19
Insurance isn’t static. It changes as events shape the economy and business environment, locally and globally.
The current economic climate, shaped by financial impacts from the COVID-19 pandemic and civil unrest, is exposing businesses to unforeseen risks. People are starting to realize there’s coverage for business interruption, said Pearce, knowledge driven home when Nevada businesses were locked down overnight.
But while COVID-19 certainly showed business owners the necessity of such coverage, there are only a handful of policies that include coverage for the pandemic and its effects.
Most people don’t take the time to read through the coverage exclusions in a policy and understand whether a virus is covered under a specific policy, or considered an exclusion.
“People are becoming, hopefully, smarter about what they’re buying and also realizing the need for having proper coverages, and proper limits, as opposed to just having something in place or finding the cheapest,” said Pearce.
Business as usual in 2020 has been anything but business as usual. That doesn’t mean that additional coverages are being brought forth, but it might mean that state and federal governments will be stepping in soon to address business interruption policies – and their exclusions.
“It’s been shown that, for the bulk of insurance policies, business interruption policies don’t deal with the pandemic issue. They’re considered a limited risk, much like terrorism is a limited risk, or flood is a limited risk,” said Barbara Richardson, insurance commissioner, Nevada Division of Insurance. “But right now terrorism and flood both have a backstop through the federal government and the pandemic liabilities don’t. Congress right now is looking at the pandemic liability issue, in order to possibly have it be treated like the terrorism issue. It’s one of those risks, if it hits you, it’s going to hit you hard, and there isn’t much anybody can do about it. It’s going to spread pretty broadly. That’s why they’re looking at a national backstop.”
Most commercial policies have the risks written out of them. A few companies are now looking to bring back old-fashioned all risk policies which are easier for consumers to understand, are priced as an all risk policies that automatically cover any risk not specifically omitted, or that’s picked up by a national backstop for a commercial liability, Richardson said.
When it comes to covering claims from COVID-19, after the SARS outbreak it became normal for policies to have exclusions for viruses and resultant property damage, and it doesn’t seem likely that anybody is going to leap in to fill that void unless it’s federally backed, much like terrorism is, said Burns.
“The losses that were identified as a result of the pandemic to businesses under 100 employees are estimated to be about $100 billion over two months,” said Burns.
He added, “That wipes out all the capitalization of all the insurance companies for all insurance. There are some things you just can’t price for. A year ago, if I had run around and said you can buy pandemic coverage for $5,000 I would have been laughed out of the city. You can’t price for it and, as a result, it’s tough to provide.”
So what happens when a business owner’s income goes from $400,000 a month to virtually nothing? Coverage is driven by property loss, so if there’s going to be a claim on the business income policy, there has to be a corresponding covered loss on the property, said Pike.
“Well, guess what isn’t covered in a property policy?” Pike asked. The answer is, unfortunately, virus, fungus and micro-virus as well as government actions. So the client who owns a restaurant that doesn’t do takeout and which relies on its in-house liquor sales, and is ordered to shut down through government action, has no coverage for the resulting loss of income.
Why? “Because that’s the entire premise of business income coverage,” said Pike. “In order for business income to be paid, it has to tie back to a covered form of loss on the property form.” Which probably excludes it, just like it excludes nuclear war.
But what if, during the government shutdown and business interruption, a group of protestors begin to riot and burn the building to the ground in the process? That’s a covered cause of loss. The standard property loss form includes riot and civil commotion, and resulting damage.
“So, even though they were closed down, if the building gets broken into and burned to the ground, they now have a covered property loss which then triggers the business income loss,” said Pike.
After 911 property policies put in exclusions for terrorist acts, which are considered acts of war, it prompted such outrage from business owners that the federal government stepped in and created the Terrorism Risk Insurance Act, making the government a backstop to insurance companies. The act mandated that terrorism is covered, insurance companies can charge a premium for it and, if there’s a terrorist attack where policy surpluses are affected by a certain percentage, the federal government will pay on the company’s behalf.
While something similar might be put in place because of COVID-19, at present only a few policies exist that cover pandemic and they’re very expensive, said Pike.
“The insurance industry has never assumed, nor priced their product accordingly, for something of this nature and magnitude,” said Pearce.
Typically after an unprecedented event – especially one that isn’t covered by most insurance policies – federal or state governments will work to broaden coverage or impose some type of aid to businesses and/or the general public.
Which is wonderful, Pearce said. “But you can’t bankrupt the insurance industry by doing this. So you’re probably going to see the federal government potentially stepping in with either a mandatory product of their own or some type of aid.” Past catastrophes have put in place the flood plan, and seen the federal government imposing conditions where insurance companies wanting to do business in certain states are required to provide coverage for specific risks, like wildfires in the West.
With regard to the COVID-19 pandemic, it’s early days yet. Business insurance risk management policies and exclusions will change as industries and the economy change in the wake of the pandemic and civil commotion. Taking the time to understand their business insurance policy and coverage needs will help business owners manage risk in the new economy.