Commercial insurance programs can be very complex, expensive, and labor-intensive to construct and maintain. All-too-often, organizational leaders find these programs to be an annoyance and in their rush to get them setup or renewed…overlook several very crucial and potentially costly items. Let’s look at these common oversights and their causes.
1. Gaps & Uninsured Risks
The ultimate purpose of insurance is to act as your safety net so when your safety, risk management, and quality control plans break down, there is something there to help offset the financial and operational losses. Unfortunately, a hole in that net can be a huge problem. The protection you thought you had actually isn’t there. This typically results from a few sources.
- Lack of awareness about your exposure to the risk
- Misunderstanding the likelihood and potential impact that risk poses to your organization
- Improper assumption that the insurance product you purchased includes coverage for the risk
This is the main reason why one of the first steps in the Risk Management process is to identify the risks that you face on a daily basis. It also shows us why it is so vital to combine corporate insurance solutions with risk management services to create a 360 degree program for your business or organization.
2. Incorrect Policy Language or Coverage Form
At its’ most basic level, an insurance policy is a contract. Just like any contract, the wording is extremely important. Within the policy are several sections. The ‘Coverage Form’ refers to the language of the Insuring Agreement, Coverage Conditions, Endorsements & Exclusions, and Policy Definitions. Let’s not attempt to put you to sleep with a full explanation of each of these sections but from a 30,000 foot perspective, the language that is included in the coverage form needs to match your expectations. For instance, if you run a manufacturing company but your policy excludes coverage for your products and completed operations…you now have a major gap in coverage because on of the biggest risks you face is a liability law suit related to a faulty product that came off the assembly line. This was a very blunt example. The nuances of the policy wording can get very granular. Not Bill Clinton asking for clarification on the meaning of the word ‘is’, but pretty close. It takes an experienced insurance professional to be able to identify potential language issues and either have them changed or get clarification from the insurance company before the policy is purchased or a claim occurs.
3. Conflicting Coverage
As insurance policies and programs containing various commercial insurance solutions are constructed, an issue can arise where one part of the policy or program doesn’t play nice with another. This can be due to duplicated coverage, multiple clauses that say all other policies pay first, conflicting definitions of words, etc. Solutions for this issue include amending the conflicting sections, simplifying the insurance program by placing coverage with fewer insurance companies, or inserting a clash cover (specific instructions for dealing with conflicts).
4. Under and Over Insuring
How much insurance do we need to carry? It’s an ages-old question that has been asked of insurance professionals for centuries and will likely continue on for centuries to come. The answer is ‘It depends.’
“If you prepare for the worst but hope for the best, you will rarely be disappointed.”
One thing is for certain…the worst case scenario should guide you when it comes to how much insurance you should purchase. Overinsuring occurs when you carry huge limits for a risk you don’t even face or whose likely impact is very small relative to the amount of your insurance limits.
- Underinsurance example: A water treatment facility provides potable water to over 100,000 households in the immediate area. They are currently carrying $1 million dollars per claim for General Liability and Pollution Liability coverage. If all 100,000 households are exposed to high levels of lead or another contaminant in their water, $1 million won’t even scratch the surface of the legal bills, damages, and clean up costs
- Overinsurance example: A handmade jewelry shop purchases a $10 million umbrella policy because their insurance agent says, “You can never have too much insurance.” Is it likely that their bracelets and necklaces will create a liability that exceeds 1 or 2 million dollars? Highly unlikely.
5. Deductible Mismatch
The deductible is the amount you pay out-of-pocket when a claim occurs. There are several reasons that insurance would include a deductible. In short, it is to reduce the likelihood of fraud, gives you an incentive to avoid claims from happening, and reduces the overall cost of insurance because ‘nuisance claims’ are paid by you and not the insurance company.
A deductible mismatch happens when your deductible/s doesn’t line up with your business needs or your organization’s risk profile. Your aversion to risk and business needs may require a low deductible or no deductible at all because your cash flow isn’t predictable or the company rarely has a large amount of additional cash to pay for a larger deductible. Conversely, your comfort level with some amount of risk and organization needs to keep cash on hand to operate and grow the business means a large deductible might be preferred. It would decrease the up front cost of your insurance, inspire you to be more attentive to limiting claims, and allow you to grow faster.
6. Incorrect or Missing Information
Insurance companies can and will deny claims if information is missing from your policy, out of date or entered incorrectly. The reason is because they want to know at all times what they are insuring. The most common errors here are missing entity names, outdated vehicle or building schedules, and data entry errors (vin numbers, addresses, names misspelled, etc.). The root causes here are being unaware that a change needs to be communicated, forgetfulness, or apathy. Potential solutions include software, constant communication, and more lenient policies that allow for intermittent updates without penalizing you for incorrect or missing information.
7. Overall Insurance Structure
To paraphrase John Cusack’s character in the movie High Fidelity, “The making a good commercial insurance program (mix tape) is a very subtle art. Many do’s and don’ts.” The overall structure of the program is its’ foundation. From traditional, first dollar coverage to full blown self-insured programs, the structure must match your organization’s risk tolerance, operational goals, risk profile, and culture. Turning a blind eye to any of these characteristics will potentially result in catastrophe. Building a fully insured program for an organization that requires liquidity and the ability to reinvest its’ cash in growth initiatives will strangle that growth and result in a lot of missed opportunity. On the flip side, building a self-insured structure based on alternative insurance and large deductibles for an organization that isn’t commited to managing its’ risk and minimizing its’ claims can lead to an avalanche of costly losses and take years to unravel the damage. Always take into account your needs and goals when evaluating which corporate insurance solutions and structures will help you realize them.