Historically, private business owners overestimate what their comprehensive general liability (CGL) policy covers, and therefore don’t buy the additional insurance they need.
According to the Chubb 2013 Private Company Risk Survey, 44 percent of private companies have experienced at least one claim in directors and officers (D&O), employment practices, fiduciary liability, employee fraud, workplace violence and cyber liability in the past three years. More than half of the executives interviewed mistakenly believed they had some form of coverage under their CGL policy.
As business owners run into a wide range of costly lawsuits, government fees, data theft, criminal activity and employment claims, they must deal with these disruptive issues, which tax their administrative capabilities and put a financial drain on the institution. Until a company experiences an event that isn’t covered by CGL, however, a business owner may not realize where the coverage gaps are.
“They are starting to understand that they have a problem but very few of them actually buy the extra insurance,” says James A. Misselwitz, CPCU, vice president at ECBM.
Smart Business spoke with Misselwitz about where CGL falls short and what to do about it.
What do private business owners need to know about CGL coverage?
- Cover legal liability arising out of bodily injury and property damage, and also advertising injury and personal injury (libel and slander).
- Defend the company from lawsuits rising out of their operations.
- Defend against infringement on a trademark or copyright.
- Defend and litigate publications that involve liable and slander.
However, it doesn’t protect against:
- Wrongdoings of a director or officer of the company.
- Employment-related lawsuits, such as retaliation, harassment or sexual bias.
- The personal liabilities arising out of mismanagement of a pension or 401(k) plan.
- Professional liability risk arising out of services rendered for a fee, such as charging for estimates and quotes.
With D&O liability, why would a privately owned company be affected?
It only takes a marriage, divorce and/or another generation to get involved for a company to become vulnerable. Let’s say a second-generation heir is going through a divorce that isn’t amiable. Now, their spouse may feel like they have a right to an asset that they think is being mismanaged.
Almost all CGL forms exclude cyber liability arising out of social networking and social media, even as defamation and copyright infringement lawsuits increase in this arena. With social media, nothing is as simple as it seems and the ramifications of doing something wrong can be devastating.
In addition, business owners may believe their required ERISA bond covers fiduciary liability. An ERISA bond only protects a retirement plan’s assets from theft. It doesn’t protect the personal assets of fiduciaries who are found in breach of duty, such as making poor investment decisions. For that, you need to buy fiduciary liability insurance.
What’s your advice for business owners who may not have enough coverage?
You need to examine the activities of your company closely, while comparing current insurance policies, so that large holes in coverage don’t crop up. Basically, business owners need to discuss with a knowledgeable insurance broker what risk they can effectively transfer to an insurance company.
But as business owners start becoming aware of areas where coverage is a concern, some still fail to pull the trigger on an up-to-date insurance program. Many think this kind of additional coverage is expensive. However, the marketplace has already responded with insurance companies forming management liability packages that combine risks and lower costs.
The other problem is that some insurance brokers are unable to have an in-depth discussion about these types of coverage. Interview your broker to assess your risks,
and whether or not those risks have been transferred. If you feel your broker is not knowledgeable, then it may be time to call another broker. ●
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When it comes to insurance, many customers feel they have no control over their price, product, how incidents happen, losses, etc. A properly constructed service plan mitigates this frustration.
James Misselwitz, CPCU, vice president at ECBM, says a service plan is something business owners should be asking their broker about upfront.
“They should say, ‘OK, you’ve given me this spiel on all the wonderful things you’re going to do. Now show me how you’re going to deliver it to me,’” he says. “‘Show me how you deliver it to your existing customers, and show me what happens when something doesn’t get done. Give me that blueprint, so I know I can depend on you.’
“There’s no question that somebody who doesn’t follow an active service plan with a broker will ultimately pay the highest premium out in the marketplace.”
Smart Business spoke with Misselwitz about effective service plans that help manage risk.
How do service plans create fail-safe procedures?
Although most brokers use some version of a service plan, many do not monitor and control it. A service plan is a client-driven method where business owners determine, along with a broker or agent, what services they need, how often they need it and who is responsible for delivering it to them.
Some services might be a review of market conditions before renewal; a review of the loss experience and current claim activity; a review of the outstanding reserves on claims that have already occurred; a review of information for the renewal like the current automobile schedule or payroll; and a tentative experience modification factor review that shows the impact of workers’ compensation on your renewal.
The service plan helps manage the insurance throughout each cycle of the policy. Both the company and broker know the expectations, and the plan can operate as a safeguard. When the broker doesn’t complete a claim review at six months, for example, a fully automated, computerized service plan notifies the underwriter by triggering an alert at the brokerage firm. At the same time, executives have a copy of the plan and can ask the broker about it.
What happens when service plans aren’t properly executed?
Things fall through the cracks. The insurance business is a deluge of paper and electronic messages, so it’s easy to lose a due date or report that needs to be run. If companies don’t actively manage insurance with the help of their brokers, they give up control of pricing, coverage, and losses to the whims and vagaries of the insurance companies and marketplace.
For instance, if your company doesn’t have a regular claim review on workers’ compensation activity, you could have a few large claims on reserves. You might not be working on action plans to mitigate those claims. So your renewal comes up, and it’s running a temperature with a poor loss ratio. Your insurer might ask for 40 percent more to underwrite the risk or send out a notification of cancellation. Now, you and your broker are scrambling to put together a response that will allow the underwriter to stay on a reasonable price.
With what types of insurance is a service plan most important?
With a commercial account, service plan diligence is most critical with insurance lines that have loss activity and when there is anticipated change. You want to automatically stay in control of critical items like losses, payroll, premiums, sales, etc.
Also, you need a service plan if there’s an anticipated change, such as a merger or expansion. It’s important to have the right coverage at the inception, as well as coordinating existing coverage so you’re not being overcharged because of overlap.
Why is flexibility key?
As a commercial insurance purchaser, it is important to develop a system with your broker that will deliver the service that you want and need. A service plan is one such system that can help you control costs and deal effectively with change, both in your operations and in the insurance marketplace. While flexibility is the key to tailoring a service plan for each business owner, it is the ability of the broker to audit the process that seems to be the critical element in making the program work extremely well.
James Misselwitz, CPCU, vice president at ECBM. Reach him at (888) 313-3226, ext. 1278, or firstname.lastname@example.org.
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