Insurance education Featured

8:00pm EDT August 26, 2008

If a customer, say, in Australia, purchases your product and suffers an injury caused by your product, will your U.S. insurance policy cover this claim? Or, if you need to meet a client in Mexico and drive over the border with the company car, are you covered if you should have an accident there? If you don’t know the answers to these questions, chances are that you may not know the ins and outs of your insurance policy.

“U.S. auto policies do not cover liability in Mexico, and U.S. product liability policies don’t cover claims that are filed overseas unless they are set up properly, but this is not something business owners typically know unless they learn about how insurance works, either through educating themselves or the hard way — experience,” says Paul Havener, vice president of Aon Global Client Network, a division of Aon Risk Services Inc.

Smart Business spoke with Havener about how business owners can learn about what exactly their insurance policies cover before the worst-case scenario happens.

Why is it difficult to understand exactly what insurance policies cover?

Insurance and risk management are complex fields. Insurance policies are legal contracts that require considerable interpretation. A layperson can’t just jump into the field of insurance without some working knowledge of what all the jargon means. There are exclusions and limitations in all insurance policies, and it is important to understand what these are and what the terminology means. There are also words in an insurance contract that look like everyday words, but mean different things in the insurance field.

What words need to be watched out for?

For example, the term ‘personal injury’ in everyday conversation means someone getting hurt, that is, injury to the body. However, in the insurance business, this term means damage to the character of a person, such as false arrest, libel or slander. The insurance term ‘bodily injury’ is what actually refers to physical injury to a person. If a business owner misunderstands these terms, he or she may think that the insurance covers something that, in fact, it does not.

What are the repercussions of not understanding your insurance policies?

In addition to the risks of misunderstanding the language and, consequently, what is included or excluded, business owners can underbuy insurance and not know they are underinsured until something happens. I’ve seen businesses go bankrupt from a fire or a suit from a liability claim where the insurance purchased does not cover the cost of the claim and the business can’t pay the balance. For example, if a business has $100,000 to spend on insurance, it can do it one of two ways: Buy a $1 million policy with a $5,000 deductible or buy a $2 million policy with a $50,000 deductible. Most small businesses will opt for the lower deductible, but they neglect to think about what a big loss would do to the company. In many cases, a large loss could put them out of business whereas they could probably afford the higher deductible with the higher level of protection.

Is this kind of foresight just for high revenue companies with higher risks?

Generally, the larger the company, the greater its potential for problems. However, small businesses can have big business problems if they are in high-risk businesses or manufacture a high-risk product. The more intricate a business is, the more important it is that someone within the company understands its insurance policies and what they do and don’t cover and not just rely on their insurance agent’s recommendations. In order to properly cover a business, someone within that business needs to possess a working knowledge of insurance and also understand the intricate workings of the company. In a smaller company, the logical person for this task would be an owner or chief financial officer. Many larger companies have risk managers.

What are the basics that a business owner or executive should know about corporate insurance policies?

The first thing is insurance ‘language’ — what all the terminology means in an insurance policy. Next is an understanding of contractual relationships with suppliers, vendors and customers and the risks in these relationships that can be covered by insurance. Business owners also need to learn how to handle claims and control losses as well as to know what is covered and what is not covered by their various policies.

What is the best way to learn how corporate insurance works, other than by experience?

There are trade publications and online services that can provide needed information. Insurance consultants are also a good way to help manage insurance policies. Many insurance companies and brokers/agents also have free educational forums or workshops, some online and some in person. As an example, our company offers a two-day course to executives and business owners who want to learn about business insurance and risk management issues that can affect the companies that they own or for which they work.

PAUL HAVENER is a vice president of the Aon Global Client Network, a division of Aon Risk Services Inc. (www.aon.com), a risk management, human capital and reinsurance-consulting firm. Reach him at (216) 623-4138 or paul_havener@aon.com.