Are you really covered? Featured

8:00pm EDT June 25, 2009

As a business owner, you have reviewed and purchased insurance policies to protect your business, and ultimately, your livelihood. You feel comfortable with your choices and feel you understand your insurance coverage and what protection is being provided. You set your policies aside until the following year. However, within those policies lurks what is known as “standard policy exclusions.” Unfortunately, most insurance buyers are unfamiliar with these exclusions and without this understanding they leave their business vulnerable to loss.

“A typical situation is finding out you don’t have coverage after an event occurs,” says Laura J. Olson, CIC, CISC, an account executive with GMGS Insurance Services. “The client is then placed in a position where they must pay for the damages themselves, which most likely was not a part of their budget.”

Smart Business spoke with Olson about typical exclusions contained in insurance policies, how to indentify those exclusions and how to determine if they will affect the business owner’s operations and bottom line profitability.

What are some typical exclusions contained in an insurance policy?

There are several common ‘misconceptions’ where business owners assume that coverage is already provided. Unfortunately, in many cases it is not. Some of the areas of concern are as follows:

Property: For business owners to cover their office contents, stock, equipment, buildings, computers and loss of income, they will typically obtain a property policy that contains Special Form or All Risk Perils. Special Form or All Risk covers everything, except for what is excluded under the policy. The standard exclusions that come to mind are earthquake and flood. However, what if a building has sprinklers and an earthquake triggers those sprinklers causing water damage to its contents? Unless the business’s policy is specifically endorsed, no coverage is available.

Automobile: Does the owner have a fleet of vehicles? Do they carry any type of chemical, solvent or other product that could be construed as a ‘contaminant’? A standard auto policy will provide coverage in respect to damage caused by fluids used in the operation of their vehicles, but will not cover materials being transported by them that may spill onto the roadway. Not counting any possible third-party bodily injury or property damage, the clean-up costs alone can add up quickly.

General liability: This policy provides coverage for your premises, operations, products and/or work. A standard general liability policy excludes property damage to your own work. I believe most business owners have not thought of the costs involved. A good example is a roofing contractor that is installing a new roof. They are using hot tar and welding and accidentally catch the roof on fire. The fire is quickly put out, but the damage is done. They will now have to tear out the entire roof, arrange for debris removal, order more materials, and once again start installing the roof. This is easily a $25,000 loss, if not more.

What are the easy fixes to these exclusions?

In each of the above examples, coverage is easily accessible at a low cost either by endorsing an existing policy with the needed coverage or purchasing a separate policy. For example, the roofer could have purchased an ‘installation floater’ to pay for his materials and labor. The pollution liability exposure associated with the transportation of hazardous materials can be provided by endorsement to the business owner’s automobile policy. As for the property, water damage from earthquake sprinkler leakage can be added to a business owner’s policy generally at a reasonable cost.

What are the benefits of being aware of these exclusions?

Business owners may or may not decide to purchase separate coverage for these exclusions, but having the knowledge that these exclusions exist gives them the tools to properly evaluate their overall operating cost and budget for ‘unexpected claims.’ This knowledge and understanding of their insurance policy, what is covered, what they have elected to self-insure, and what exposures are uninsurable are critical components of their risk management program and will certainly aid them in understanding their true net cost.

How do you become educated on these exclusions, and make sure your insurance broker is aware of them?

It is important that the business owner’s broker understand not only the business’s operations thoroughly, but understand the policy forms, terms, conditions and exclusions and how they interrelate to those operations.

Business owners also need to take responsibility and familiarize themselves with how their policy is structured and the exclusions and terms it contains. Their broker may be good at pointing out the exclusions that are attached by a separate endorsement — these are in big, bold letters on the policy and you know they’re not covered. But the other exclusions, such as water damage or damage to your work, are written into the form itself and are often overlooked.

My advice for any business owner is to work with a broker that has been in the industry for a while, has knowledge of your industry, and promotes education through obtaining designations and attending various classes to improve their own knowledge. In most cases, this broker is going to know the policy forms and will be able to service your account more effectively.

Laura J. Olson, CIC, CISC, is an account executive with GMGS Insurance Services. Reach her at or (949) 559-3374.