Got You Covered

It was my wintertime mantra: “You either get major snow, or you get major snow warnings. You very seldom get both,” I used to tell the kids as they watched The Weather Channel and considered the likelihood of a snow day event to cancel school.

I was reminded of my forecasting wizardry (well, punditry at least) last weekend with The Coming of Earl, the Big Hurricane (Cat 4 at one point) that fizzled out on its way up the East Coast to New England. The kids were always impressed that, more often than not, Dad’s rule of thumb was more reliable than the official forecast.

Now, before all of the weatherpersons among my audience (both of you) hang me out to dry, let me say that I have learned that forecasting hurricane tracks and force is almost as difficult as forecasting snowfall amounts. And I’m also willing to accept the premise that it’s best to err on the side of caution, which is why school superintendents all over New England apparently have agreed that decisions made at 3:30 a.m. shall be risk-averse. After all, you’re much less likely to get sued for telling the kids to stay at home than for sending them (and their parents) off to school on icy streets and sidewalks.

But no sooner had returning vacationers last week rushed back to the Cape and the Islands to haul their boats and stow their lawn furniture than the false alarm signal began to be heard, despite the efforts of The Weather Channel reporters to generate excitement around heavy rain and 50 mph winds in the Carolinas.

In all likelihood, a significant component of the wind was the collective sigh of relief by home and business owners and, especially, by the insurance companies. My insurance agent, in fact, had emailed to clients a list of defensive storm tactics, prefaced by this not-so-gentle reminder: Please note that property coverage cannot be bound once a hurricane watch has been announced.

That got me to thinking, not about my own coverage, which I think about every quarter when I pay the premiums, but about that of my clients. Where is their exposure, for the whole spectrum of risk, not just storm damage? I began to run down my mental checklist:

  1. Workers’ Compensation – You have employees, you have to have W.C.; it’s the law. Significant penalties if you’re caught “going bare.” Tremendous exposure if you have a workplace accident without it.
  1. Property & Casualty – In my thirty years of working with clients, they’ve never had a fire. But electronic equipment is no match for water – from overhead pipes, from leaky roofs, even from coffee spills. And theft is an occasional problem. Self-insure with a $1,000 or $5,000 deductible, but avoid the big hit by having adequate limits.
  1. General Liability, or “trip and fall,” coverage. Lots of exposure in a retail environment; less so in a quiet office. The difference in premiums reflects that fact.
  1. Auto Liability is obvious, and in most states required, for company-owned vehicles. But don’t forget to bind your Non-Owned Auto insurance for employees (including you) who even just occasionally use their cars on behalf of your business.
  1. Employment Liability – Perhaps the greatest value of this coverage is that your insurance carrier will require you to attest to having implemented a check-list of good employment practices to downsize your risk. One disgruntled employee plus one aggressive attorney can be costly.
  1. Product Liability – It doesn’t require five hundred million eggs with salmonella to create exposure. All it takes is one…
  1. Professional Liability, coupled with Errors and Omissions (E & O) insurance – Can you be sued for giving the wrong advice or for your sales rep’s failure to document fully the terms of sale? For sure.
  1. Directors and Officers (D & O) Liability – The “corporate veil” isn’t always an adequate shield. Your top people can be personally exposed, and one may wonder about the judgment of a director who is willing to serve without coverage.
  1. Loss of Use, a/k/a Business Interruption Insurance (BII) – The storm wipes out your power and you’re out of business for two days out of the twenty working days in the month. Can you claim reimbursement for 10% – of your revenue? Of your gross profit? Or of your net profit? You might want to determine this before the next storm.
  1. Electronic Data Processing (EDP) Equipment coverage can be expensive in the absence of reliable offsite backup systems and a disaster recovery plan. Here again, complying with the insurer’s due diligence check list can result in significant savings.

To cover my own errors and omissions, I ran this list past my good friend and long-time insurance mentor Ford Spalding of Felton Berlin & Erdmann Insurance Services, Inc. , and he reminded me of my own major insurance oversight when I was starting out, all those years ago. I was operating on a shoestring with no money for most of the above. Least of all did I feel exposed to employee theft, given my “unfailing” sense for the character of my employees. That’s when I learned that the low-probability risks can hurt even more than the more common ones (ref: Howe’s Bayou #1, September 2004 ). Ford has “got me covered” ever since.

Alligator Bites

  1. You have the option to insure your office furniture for its replacement cost. Which of the following statements is true?
    1. Replacement cost coverage takes into account the amount of time you owned your office contents.
    1. Replacement cost coverage provides payment to replace your office contents or repair damages as you please, without restrictions on the kind or quality of materials used.
    1. Replacement cost is the amount it would take to replace your office contents or repair damages, without deducting for depreciation.
  1. Business interruption/continuation insurance generally covers all of the following except:
    1. Lost earnings
    1. Computer hardware
    1. Payroll
    1. Utility bills
  1. Which of the following would generally be covered under a standard liability insurance policy?
    1. A wrongful termination claim by an employee
    1. A sexual harassment claim by an employee
    1. An injury sustained by a visitor to your business property
    1. An injury sustained by an employee on your business property
  1. For home-based small business, a typical homeowners or renters insurance policy is adequate to cover the business and its assets. TRUE or FALSE?

Expanded answers to the above (1- C, 2-B, 3-C, 4-False) together with additional questions can be found at the NAIC website .

Source: National Association of Insurance Commissioners

Draining the Swamp

“There’s mostly relief ahead for buyers of commercial insurance. A lot of competition in the weak economy makes it hard for insurers to raise rates. Commercial property and general liability insurance will fall 2% through the first half of next year, at least. Workers’ compensation insurance will decrease as much as 4%, except in CA and NY, where workers’ comp rates are poised to rise.

“But directors and officers insurance rates are headed up for most firms. Financial services firms face the biggest jump. For them, the cost of D & O insurance will climb 10-12% in light of bank failures and more policing by regulators.”

The Kiplinger Letter, Sept. 3, 2010