At first blush the package policies offered by many of the insurers in the commercial insurance market space look really attractive because of all the various extensions of coverage that are automatically included. Its no longer just a policy that insures your building and equipment against the risk of fire or hail damage. Some of the more common extensions are;
- building upgrades
- environmental upgrades
- landscaping and growing plants shrubs or flowers
- business contents away from premises and while at employee residences
- valuable papers
- accounts receivable
It looks great, but what does all this mean? How much of the total amount of insurance would apply to any one of these extensions? Some of it? All of it? Or are there specific sublimits? Do you even need all of them?
The fact is that most of these ‘add on’s’ do have real and important value.
Another truth is that most consumers have no idea what the value or relative importance of any of these extensions are to their particular needs. As an experienced broker, I know that these extensions are what are often referred to as ‘talking points’. That is to say, each one of these extension of coverage needs to be addressed individually and the correct amount of insurance allocated for each.
One of the notable examples from my own experience was a small consulting firm that suffered severe damage to the contents of their rented office due to sprinkler leakage. The stuff that comes out of a sprinkler pipe isn’t just water, and makes a real mess. This particular client had been referred to me by another much, much larger firm that had been an important client to me for many years. The consultant, albeit a very small one-person operation, was an important asset to the larger company who relied upon their essential services.
All they wanted was enough insurance to satisfy the provisions of their lease for the rented office space.
This is a very common scenario and one of the reasons we review lease agreements along with other contract our clients enter in to from time to time. The review of the lease started a cascade of issues as far as risk and assumed liability were concerned. The landlord was responsible for nothing other than providing space within four bare walls and heat. Any risk of loss even if it was due to the negligence of the landlord was pushed back upon the tenant.
We explained this to the consultant and advised them that we recommended a full suite of coverages with specific amounts to expand on many of the ‘add on’s’ as illustrated above. It came at a price higher than the $500.00 online quote they had received for ‘similar’ coverage. Three times a much in fact. They told us they wanted to do business with us but to reduce coverage to the ‘basic’ package as they felt that was all they needed. We responded by saying we were unable to do that and warned them of the potential consequences if they opted for the other quotation. We would close our file and wish them well. (Failing to warn them would open us up to liability for failing to do so even though we had no formal relationship with them. But that’s another story.)
As professionals and Trusted Advisors, we rely on referrals from our existing client base,
so, we always let out clients know what happens to their referrals. In this particular case the response was one of surprise and dismay. They wanted to know the whole story which we of course could not discuss in detail other than to say our advice was not accepted and the consultant was left seriously exposed.
Our client had been with us long enough to become educated on risk and contingent exposures in their supply chain and key service providers. The result? The consultant was asked to furnish a Business Recovery Plan with details of their risk management program and details of how they would finance their risk. They were no longer able to qualify as a preferred vendor.
They came back to us and not only did they take up the offer we had made, but asked us to advise them on the proactive steps they needed to take to mitigate their risk. We did so and for no additional charge, which makes no sense either, but that’s what we do.
Several years later…..
The building suffered a serious failure in the sprinkler system and the consultants’ office was deluged with the mixture of sludge and water from the piping. Everything in the office was rendered unusable. The consequences to our client were minimal with completely appropriate insurance and adequate coverage amounts for the so called ‘add on’s’. The cost of reproducing the paper records alone were ten times greater than the basic amount provided by the extension. The Extra Expense insurance made it possible for the consultant to engage the resources needed to get their physical plant up and running in a new location as well as the temporary space from which the business continued to run. There was virtually no interruption in the business or revenue stream.
We also coached them on the term of their new lease.
This is just one area where the commercial insurance package policies fall short. I should stress that this is not the fault of the insurance companies who offer these products. The opposite is true in that they are striving to offer the most appropriate coverage and service that they can. Its is up to the consumer to make sure they understand the product and how well it meets their needs and risk appetite.
Who should you go to concerning risk and risk financing?
We go to accountants for tax advice and lawyers for guidance in legal matters. Licensed and educated Insurance Brokers should be your Trusted Advisors for mater concerning risk and risk financing. Many people like to go to their lawyer or accountant for this kind of advice which makes about as much sense as taking your Lexus to your barber for service.
This is just one example of the pitfalls of the typical package policy, and this story is just as much for the average inexperienced broker who handles insurance transactions as a commodity instead of a matter that requires close analysis. The reason for this is simple; there is no money in it. On average, premiums are too low to generate enough revenue per transaction to make it worth handling this kind of business. The downside risk for failing to do so is out of all proportion to the percentage of revenue for the average brokerage firm where 20% of the clients generate 80% of the revenue.
Let’s have a look at some of the other policy segments and the various extensions of coverage that in a perfect world would be addressed in more specific detail;
Liability. The big question here is; ‘How much is enough?’
- bodily or mental injury
- property damage liability
- personal and advertising injury liability
- libel and slander
- tenant’s property damage liability
- voluntary medical payments
- non-owned auto
- legal liability for damage to rented automobiles
- contractual liability
- employers’ liability
- employment practices
- errors and omissions (professional liability)
- Loss of profits or gross earnings
- Extra Expense
- Rental Income
- Key Payroll
- Accountants’ fees
- Restricted access to business
- Key supplier
- Mortgage rate guarantee
- electrical arcing
- mechanical breakdown
- computers, photocopiers, production machinery,
- heating and air conditioning,
- point-of-sale (POS) systems and
- refrigeration equipment
- pressure explosions – hot water tanks, boilers
- centrifugal force
I have decided to save the best for last. Crime is one of the most underserved risk segments and I haven’t even begun to talk about Cyber Liability or Environmental. The number of businesses who suffer a crime loss only to learn the basic policy sub-limit is $10,000 or less should be a wake-up call, but for some reason the average business owner does not take up the coverage, or if they have, for an inadequate amount.
- employee dishonesty
- money, securities and other property
- counterfeit currency and money orders
- forgery, alteration, credit cards and automated teller cards
- electronic fraud and funds-transfer fraud
- professional fees
- incoming cheque forgery
In closing I can only repeat my opening comment;
Beware the Package Policy! Yes, the various extensions are important and valuable, but the amounts are basic and only serve to establish a basis for further dialogue.
Thanks for reading and have a great day!