Top Ten Mistakes Businesses Make Regarding Insurance

McNees Wallace & Nurick LLC

10. No Flood Insurance

The standard commercial property policy does not cover flood damage. To be covered for flood damage, a business owner has to purchase a separate flood insurance policy. Flood insurance is not limited to only those businesses located in flood zones. Since flooding can occur when a detention pond overflows, or from run-off on a neighboring property, many business owners suffer flooding following heavy rains even if they are not in a flood zone. If your business is at risk for flood damage, whether it is in a flood zone or not, you should have flood insurance.


9. Buying Only Standard Form Policies

Many insurance policies are sold using a standard form. That means that the standard general liability policy purchased by a small retail business owner is often the same as that purchased by a large manufacturer or a professional business. But, the liabilities faced by such policyholders are often very different. So, even if you start with a standard form policy, make sure that you modify the policy by adding endorsements tailored to your business.


8. Buying Unnecessary Coverages

Most of the commercial liability policies that we review contain coverage for “products completed operations” and many commercial auto policies contain coverage for uninsured and underinsured motorists (UM/UIM). These are both valuable coverages, but only for the right policyholders. If you are a professional business, you are not making any product and therefore liability coverage for making or selling a product is of no value to you. Such coverage may be grouped with other coverage so that there is no additional premium. However, if you are strictly a service industry business and are paying an additional premium for this coverage, you should terminate that coverage immediately and save yourself the additional premiums. UM/UIM coverage is essential for your personal vehicles. However, why should a business pay for insurance coverage that will pay employees additional money if they are injured on the job by an uninsured or underinsured third party in a car accident? In all likelihood, you already pay Workers’ Compensation insurance premiums to cover this same risk.


7. Assuming That a Broker Will Make Sure That the Business Is Properly Insured

Except in special circumstances, the law says that it is the business owner’s responsibility to make sure the business has the types of coverages that it needs, not the insurance broker. While good brokers will, of course, endeavor to make sure that you are properly covered, it is the business owner’s responsibility to educate the broker about the business and to alert the broker to changes that occur from time to time.


6. Underinsuring Commercial Buildings

Many business owners insure commercial buildings for fair market value, not replacement cost value. Especially if your building is older, the cost to replace the building could be several times higher than the fair market value. Most commercial property policies include a co-insurance penalty, which means that the business property owner would be penalized with less coverage in the event of a property loss. In one instance that we handled, the insurance carrier claimed that a $1 million property loss policy would pay less than $400,000 due to the co-insurance penalty. Make sure that your property is insured for replacement cost value, or that you have an agreed-value endorsement on your property policy.


5. Failing to Insist on Using Its Own Counsel

Most standard policies give the insurance company the right to select defense counsel in the event that your business is sued. But, if you want to have greater control over the selection of counsel defending your business, many insurance companies are willing to negotiate an endorsement that gives the business owner the right to select counsel. In most cases, the insurance company selects counsel that it has a relationship with, and has used in many other cases. That counsel may have no familiarity at all with your business. Assuming that they are qualified as litigators in the legal subject being contested, your business may be better served by counsel that is already knowledgeable about your business, and with whom you have an ongoing relationship.  Do not just assume that the insurance company controls the selection of counsel. You have a say in which lawyers represent the interests of your business.


4. Overpaying by Having No or Too Small a Deductible

Generally speaking, the higher the deductible or self-insured retention, the lower the overall premiums for an insurance policy. Most businesses can save 10% or more on overall premiums by simply increasing the amount of the deductible or self-insured retention. This means that the business will be on the hook itself for smaller claims and the initial amounts of larger claims (up to the deductible). But, it will still be protected for larger and catastrophic losses. Businesses should use insurance primarily to protect against large and catastrophic losses, not minor claims which the business can readily absorb on its own. At the right deductible amount, your business should save enough on premiums to pay any minor claims that may arise.


3. Failing to Buy Employment Practices Liability Insurance

Employment practices liability insurance (EPLI) protects a business from employment related claims, such as discrimination and wrongful termination, among many others. Employment claims are among the fastest-growing types of lawsuits in the country. Approximately 60% of businesses have EPLI coverage. By comparison, almost all businesses have general commercial liability coverage. If you have employees, you should consider EPLI coverage.


2. Business Income Insurance Is Lacking

In our experience, many businesses either have no business income loss coverage, or an insufficient amount to cover its business. If you suffer a substantial property loss, or even a substantial computer virus, and the business is unable to operate for days, weeks or months at its normal level, you may sustain significant business income losses. There is insurance coverage for such losses, which will pay you for lost business income, as well as the added expense of, for instance, finding another place out of which to run your business. How much business income loss coverage you need depends upon several factors, including the nature of your business, the amount of revenues generated on a daily, weekly, or monthly basis, and the length of time that it would likely take your business to get back up and running after a significant property loss.


1. Failing to Regularly Review Insurance Coverages

For most businesses, insurance premiums represent their third or fourth highest business expense. Most businesses, however, have far greater knowledge about their facilities, inventory, and employees than they do their insurance coverages. A regular review (every one to two years) is essential. Most insurance brokers are happy to perform an insurance review. Our Insurance Recovery practice regularly reviews our clients’ insurance policies and provides an independent, unbiased view of the scope, amounts, and adequacy of our clients’ insurance coverage. An insurance review is especially valuable for companies that have experienced rapid growth, as their liabilities may be far different now that the company has expanded its operations.


DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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