When assessing a company’s risks, many insurance brokers will just look at the existing policies, duplicate the policies and be on their way. In these scenarios, they’re doing the company a major disservice.
“It may be a cliche, but insurance is like a parachute; you only get one chance to see if it works,” says Rob Wilson, president of Corporate Risk Management Inc., a division of The Wilson Companies. “Businesses need periodic insurance checkups, no different than a regular physical, to catch something before it becomes a problem.”
Smart Business asked Wilson about how businesses can better assess their insurance coverage to make sure it truly reflects their insurable risks.
Is now a good time to review coverage?
Companies always want to evaluate that their policies insure their exposures. But given this economy, now is a time when you should look at how your exposures have changed. That could be on a variety of levels, from your workers’ comp coverage to what suppliers you’re working with and who your customers are. Instead of having three suppliers for the key part that goes into a widget, a company may have to rely on one supplier because it’s more economical or the other suppliers are in financial trouble. If that supplier has a catastrophe at his facility, where does the company get the material to make its finished product? You can insure that loss of income under contingent business income coverage.
Usually, we talk about clients being underinsured concerning physical assets. Today, they may be overinsured. It may be cheaper to rebuild a building than it was two or three years ago when we were in the middle of a building boom. That would cause you to consider reducing the amount of insurance on the building. You could also look at inventory. At one time, your widgets were in demand and you were insuring the inventory for $100,000. That inventory may have little value now, so you could reduce coverage or, better yet, just get rid of the widgets.
Another area to pay attention to is employment practices liability insurance (EPLI). Employees are much more litigious today than they were maybe 10 years ago, and layoffs in a tough economy could lead to more discrimination and wrongful termination suits.
Where should owners begin?
They should essentially begin by looking at their financial statements to see what assets they own and what their potential liabilities are, instead of just having someone duplicate policies, which is often the case. Looking at financial statements can uncover mistakes; for example, a company that has fiduciary liability for its pension plan that claims to be fully funded may, in fact, be only partially funded. This would be enough for an insurance company to deny any claim because of a false statement in a policy.
When looking at the value stated on the financial statements for real property, you have to ask what it’s going to cost to replace property if it’s damaged in a major catastrophe. There may be a huge difference between book value and replacement cost. A crucial element is how accurately these risks are reflected in your policies.
For example, we were just looking at a lumberyard whose policy said that their building had sprinklers when actually there were no sprinklers in the facility. If there were a fire — or even unrelated physical damage from, say, a windstorm — the insurance company would deny coverage because facts were misrepresented in the policy.
The last thing you look at are the existing insurance policies, in case there’s something you might have missed, but more likely to see what corrections need to be made. We had another client — an international company with Canadian and U.S. operations — with an umbrella policy that named the Canadian company but did not actually insure the Canadian operation. They were only getting coverage for that company name for the U.S. exposures. Their multiple locations in Canada were uninsured.
What should owners do to ensure they’re properly covered?
The insurance broker is commission-driven. But if you hire an independent consulting firm to evaluate coverage, it will conduct an objective review to see if you’re overinsured, underinsured, uninsured or have the wrong insurance. The party evaluating a company’s policies should start first with detailed questions about what they do, where they do it, how they do it and what their financial statements contain, all to uncover exposures that they otherwise wouldn’t be aware of. They need to do a physical tour of the facilities to see what’s there so the insurance person can understand the risks to which the business is exposed.
The process should also uncover price scenarios; we uncover numerous mistakes in class codes, incorrect premium charges or wrong rates in just about every area of an insurance program. Sometimes an evaluation results in a refund and other times it may cost a business a little more to do it right.
ROB WILSON is president of Corporate Risk Management Inc., a division of The Wilson Companies. CRM provides risk management consulting services throughout the United States. Reach him at (630) 286-7345 or firstname.lastname@example.org.