How to find and plug gaps in your business insurance Featured

8:00pm EDT October 26, 2010

When people think of their business insurance, they tend to think of property, contents and regular general liability, but they often forget about the dynamic evolution of risks that aren’t covered by most policies.

“With every lawsuit, something else pops up,” says Jonathan Theders, CRA, president of Clark-Theders Insurance Agency Inc. “A lot of times, companies stick with the status quo. They just renew their current policies to keep things going.”

However, blindly renewing your insurance ignores any new potential risks that may have cropped up since your last renewal. Instead, find a proactive broker to help you analyze your coverage for gaps to keep you from running into trouble later.

Smart Business spoke with Theders about how to find and plug gaps in your business insurance coverage.

What are some common gaps companies may have in their business insurance?

Employment practices liability insurance is a big one. Sexual harassment, wrongful termination and failure to promote are all under the employment area but are excluded under traditional insurance.

When people are laid off due to the economy, it could be a very logical business decision. But if the person blames the layoff on another reason and files suit, you still will have legal expenses, even if you didn’t do anything wrong.

Another common gap is data breach or cyber liability. Whether it’s credit cards or patient records, businesses record a great deal of personal information, and they have a duty to protect that data. That area also is excluded by traditional insurance.

Directors and officers is another key gap. When people think of D&O, they think of publicly traded companies, but even tightly held private companies can be affected by D&O gaps in liability coverage.

Pollution liability is another massive gap that a lot of people are not talking about. It’s excluded by nearly every liability policy.

Another area of concern is coverage limits. I recently met with two physicians with high net worth, multimillion dollar homes, tons of fine art and jewelry, and they had less than $1 million in liability protection. One said she’d had the same provider since she was 16 — she’s 40 now. Their coverage hasn’t kept up with their accumulation of assets.

Keeping up is critical for growing businesses. If you were a $1 million company and now you’re a $100 million company, you obviously would have different assets to protect and different liabilities that may occur, and your insurance needs to keep pace.

How can companies determine whether these gaps exist in their business insurance?

One of the most dangerous aspects of insurance is that people have gotten into this bidding cycle in which, 90 days before the renewal, everybody just bids their insurance. When that happens, you’re not really looking at policy language. You need to get out of that normal bidding cycle and work on it well in advance so you’re not pressed for that end result, saying, ‘I’ve got to get this renewal done now.’

If you break that cycle, you can take the time to perform a risk management assessment or risk management audit. Then you can really delve into the issues facing your company. Analyze your exposures. Are they minimal? Could they be self insured? If something happens, how will you cover it?

It’s amazing how many times we go through the insurance policies of competitors and the policies are excluding nearly everything that could possibly happen to a company. Too few people take the time to read their insurance policies until a claim occurs.

What are the potential consequences of having gaps in your business insurance?

A major consequence is an uncovered claim. Some insurance companies put sublimits in a policy where you think you have the full limit, but you don’t. Some insurance policies give coverage, then take it away, then give it back what seems like 12 times in one policy. They are very difficult to read.

You think you have $1 million in protection, but that may or may not be a reality when you go through the form. You may find a sublimit, such as a $100,000 limit for a specific occurrence.

Another consequence could be compliance issues with regard to loan documents and bank requirements. You agree to uphold certain covenants. Any bank commitments you make could be null and void if the proper coverage isn’t in place.

Another issue is that there could be duplication of coverage. Sometimes you don’t realize this special policy you bought for one area automatically covers something in another area. You may end up paying for things you don’t need if you don’t spend the time on a true coverage analysis.

What can be done to plug these gaps?

Use your resources. It could be your insurance broker; that is usually your logical first contact. But also, use your attorney, your internal safety committee, your board of advisers to talk about what potentially could happen to make you vulnerable. Then, match that potential risk with the appropriate coverage to protect yourself.

You have to get to a point where your insurance broker truly understands your company. He or she has to understand your company’s environment and its internal controls. Your broker should be a trusted adviser in the relationship. If the company can’t say, ‘My insurance broker knows me,’ it is in a very dangerous spot.

The broker is the person securing that asset. If he or she doesn’t know you, how can you feel confident that the right coverage is in place? It’s important that you have partners that truly understand you.

Jonathan Theders, CRA, is president of Clark-Theders Insurance Agency Inc. Reach him at (513) 779-2800 or