Business Insurance
Coverage Options
Chapter Four
The particular options that a business would purchase will depend, to some extent, on the type of business. Obviously a manufacturing company would require different coverage than would a retail business. If the buyer is well informed the process of selecting coverage will be easier. However, it can be most difficult attempting to educate a buyer. Therefore, agents must become adept at communication. An informed buyer will be happy with their selection whereas an uninformed buyer may have remorse.
The coverage checklist helps both the client and the agent select the coverage that is needed and may address issues that the client would have otherwise overlooked. It will also help to compare to current policies, if any exist. If a current policy exists, the agent usually wants to see the actual policy. Clients may begin simply stating what they believe they have, but if the client makes an error the agent will not know it unless they have the actual policy. Additionally, as every agent knows, clients often do not have in force what they believe they do. Even dollar amounts of coverage may be misunderstood by the client. If the client states that the policy is not available, it is important that the agent make every effort to obtain the policy, even if this means ordering in a duplicate policy. Only by having the policy in hand can the agent be positive of existing benefits (or lack thereof). It is very important that the agent not reduce existing benefits unless the client is well aware of the reduction. Without a copy of the existing policy this could happen without the agent being aware of it. Such a situation puts the agent and their agency in a legally vulnerable position.
Once the agent can clearly define existing coverage, he or she can then begin to assess whether the existing coverage is adequate, too little or too much for the business needs. To help clarify key issues, reference should be made to the existing policys face page. The glossary should also be consulted for understanding of key terms.
Once the existing policy is clearly understood, key points should be listed on the coverage checklist. Coverage and limits should be discussed with the policyholder. Are the currently insured amounts adequate or have the business needs changed? Answering this question will mean the involvement of the business owner as well as any person who would know the finances of the business, such as their accountant. Assessing the needs of the company may require looking at Workers Compensation Coverage since this impacts the overall business needs.
It is always a mistake to rely solely on the existing policy to determine current insurance needs. This would assume that the existing policy is adequate, which it may not be. Key risk areas may not be addressed in the existing policy, either because the previous agent overlooked it or because the risk area did not exist at the time the existing policy was issued. An agent may easily assume that the business owner knows all of their risk areas, when in fact they do not. That is why the agent who specializes in business insurance is so valuable to the business owner. He or she may bring up insurance issues that the business owner had not considered.
If there are several agents competing for the business, knowledge of the business and the marketplace are very important. Most agents will not have enough knowledge. Therefore, the truly specialized agents will have the ability to highlight key risk areas that most agents overlook. A business owner will be impressed by such thoroughness. Additionally, it may save a business owner from falling prey to financial loss that could have been avoided with proper planning.
A coverage checklist will save both the agent and the business owner time since it zeros in on the key issues. Having a list of all risk areas helps the agent, of course, because it focuses their time on these specific points of coverage. Without one, the agent may find that each time they present their proposal a new element pops up, sending the agent back to the drawing board to incorporate it. This is certainly a poor use of the agents time. It is much easier to sit down first with the business owner and make a list of all concerns. The final price may eliminate some coverage that were initially desired, but at least the agent will have a complete proposal from which to work.
The checklist is a standardized format. This is something that the agent will set up prior to the appointment. The exact format will depend upon the agents specialization, since different types of business insurance will contain different elements of insurance. Standardization of forms helps the agent avoid becoming snared in a trap of complicated discussions that bounce from one subject to another without any real advancement towards a policy.
If the business owner is working with several agents in an attempt to keep his or her costs down, the more organized the agent is the better he or she will appear to the business owner. A person who appears disorganized will also appear incompetent. The insurance buyer will want to feel that his or her agent knows their profession. That is difficult if the agent seems unable to keep organized during the presentation.
If a business is obtaining several quotes, one problem the agent will encounter is the use of different formats. When each agent uses a different format sometimes it is the flamboyant agent that wins out rather than the superior product. That is because the business owner may not be aware of the superior product. If possible, the agent should have the business owner select one standardized format and then put each proposal in that form. It is an easier way for the client to compare apples to apples and then select the superior product.
Property insurance will fall under property, liability, automobile and miscellaneous items. Property insurance protects the client from losses to the buildings, furnishings, tools, equipment, and their inventory.
Deductible Versus Self-Insured Retention
Most of our clients know what a deductible is, so that takes little presentation time. A deductible is the amount that is paid by the insured on a loss before the insurer pays anything. However, another term that the client needs to know is self-insured retention. While we may consider self-insured retention to be the same as a deductible there are actually important differences. Deductibles are paid after the insurance company does the work, which might include finding adjusters and attorneys, handling paperwork, and paying the portion of the claim that exceeds the deductible up to policy limits. If the claim was small, it might mean that the insurer pays nothing because the amount did not exceed the deductible stated in the policy.
With self-insured retention, also called SIR, if the claim is larger than the SIR the insurance company will become involved and take an active role in all the claim functions mentioned in the previous paragraph for deductibles. If the claim is smaller than the stated SIR amount, the insured is responsible for finding claims adjusters, handling paperwork, paying and settling the small claims. So, to recap the difference between a deductible and a self-insured retention plan lies in who handles small claims the insurer or the insured. It is important that the agent explain this to the client since he or she may find it less expensive to accept an SIR over a deductible. The other agent who proposed an SIR plan may fail to point this out.
Many policies offer large deductibles and the consumer has generally accepted the fact that large deductibles reduce the premium amount. Therefore, it is likely that a self-insured retention plan may mean the insured will be handling many small claims over the lifetime of the policy. Of course, if the insured doesnt want to deal with claims under an SIR, he or she can just pay the loss out-of-pocket without filing the claim at all. This would be true even when the loss was greater than the deductible amount. In that case, the insurer would pay the amount over the SIR stated in the policy, but the insured would simply pay their amount out-of-pocket without going through all the paperwork and claim work involved in their portion. If the premium offered a large enough savings, and the business owner understood how an SIR worked, this might be satisfactory.
Self-insured retention plans do tend to offer a savings for the business owner. As a result, even though some of the work falls on the insured, they can be desirable. Obviously, it is a savings for the insurance company since they do not have to find adjusters or attorneys, or handle paperwork relating to the claim when the amount of loss is less than the SIR amount. Even on larger claims, it frees the insurer from handling the initial amount of the claim (the deductible or SIR amount). This savings can be passed on to the policyholder in reduced premiums.
Replacement Cost Versus Actual Cash Value
Replacement cost and actual cash value are the two main property loss settlement methods. Under replacement cost settlements, depreciation is not deducted. In other words, if an item cost $100 when purchased, but has a current value of $50 (actual cash value) at the time of loss the insurer would pay the original cost of $100 rather than the reduced amount of $50. It could be more than $100 if replacement was no longer available for that amount. For example, it may now cost $120 to purchase the same item that was previously purchased for $100. A policy that pays replacement cost is more expensive than one that pays actual cash value. This is not surprising since a claim for $100 is more than a claim for $50.
Actual cash value claims are taking the replacement cost and deducting for depreciation. As we all know, items depreciate rapidly. Claim settlement can be delayed on these policies if the insured and the insurer disagree on the depreciation of an item. For example, WXY insurance company may feel an item has depreciated down to $50 while the insured feels it has depreciated only down to $75. It is unlikely that a dispute would arise over such a small amount as portrayed in this example, but it can and does happen when the amount of the loss is high. Insurers use standardized depreciation schedules but those who purchased the policy often feel that their particular item is worth more for various reasons (how it was cared for, the particular type of item, and so forth).
It is less expensive to purchase actual cash value policies since the insurer pays out less on claims. As a result, it is common for consumers to purchase the less expensive actual cash value type. Even so, this is often a point of contention when a loss occurs. Therefore, it is very important that agents fully explain the difference between the two types of settlements.
Functional Replacement Cost
When the items insured are machinery, production equipment, and other contents of this nature the concept of functional replacement cost is often used. Under this settlement option, when a piece of machinery or other covered item is destroyed, it is replaced with new, state-of-the-art machinery. Obviously, this violates one of the basic principles of insurance, which is indemnity - to be made whole after a loss, or putting back to the same state as it was prior to the loss. Under Functional Replacement Cost the machinery or other item is actually improved with currently used technology rather than the level the destroyed item was at. This gives the insured the opportunity to have a timely settlement loss since it is likely that the destroyed item would be difficult to find and replace if it is outdated. A good example of this would be a computerized item. Since computer technology changes so quickly, something that is only two years old can be vastly outdated. While it might be possible to eventually find the item, it would be much easier to replace at current technology levels since they are readily available.
Normally insurance is not designed to improve the state of the insured item since this might encourage a company to purposely cause a loss. However, in this case it is actually a benefit to both the business and the insurance company since it makes settling the loss much easier.
Coinsurance Versus Agreed Amount
In most types of insurance, a coinsurance amount is encouraged because it can keep premium rates down. However, when it comes to property coverage it is best not to have a coinsurance clause because it could penalize the policyholder if he or she is underinsured.
Coinsurance amounts in a policy do help to keep premiums down, though not by very much in this case. If a coinsurance seems necessary, be very careful that the coverage limits are adequate to meet the coinsurance requirement. For example, if there is an 80 percent coinsurance clause and the buildings replacement value is $100,000 the insured must have at least $80,000 in coverage to avoid a coinsurance penalty. Value is determined at the time of loss, so this type of policy must be continually updated to reflect changes in value. In some areas of the country, this means reviewing the policy every six months.
How does the coinsurance clause penalize the insured in the event of a loss? Since it is directly tied to the amount of insurance carried, an underinsured individual receives less on their claim. Consider Harrys situation in the following example.
Harrys building is valued at $100,000 but because he has not recently reviewed his policy he is only carrying $80,000 of insurance. When he has a loss, the insurer will look at the buildings current value rather than at the amount he has insured it for. If his loss is $40,000 it would look like this:
$60,000
$80,000 X $40,000 = $30,000
If Harry had adequately insured his building it would make a difference in the loss payment of $10,000:
$80,000
$80,000 X $40,000 = $ 40,000
Coinsurance can be applied to both the building and business personal property policies. With coinsurance, the maximum amount a policyholder may receive is the limit of the insurance carried. Carrying the proper amount is very important as the previous illustration showed. Of course, whether there is a coinsurance or not it is important to carry adequate coverage. Even though most claims are not for a total loss, underinsuring is unwise.
Property Coverage Forms
There are several forms, including basic, broad, special, and difference in condition. The major difference between them is the number of perils that are covered.
Basic usually covers the following perils:
1. Fire
2. Lightning
3. Riot and civil commotion
4. Explosion
5. Vehicles
6. Smoke
7. Hail
8. Aircraft
9. Wind
10. Vandalism and malicious mischief
11. Sprinkler leakage
12. Sinkhole collapse
13. Volcanic Action (airborne shock waves and ash only)
Broad usually covers all the thirteen perils listed under basic coverage, but also adds some additional perils:
1. Freezing
2. Falling objects
3. Weight of ice and snow
4. Glass breakage (there may be a limitation listed per pane and per occurrence)
5. Water damage
6. Artificially generated currents
Special form covers everything that is not excluded by the policy (check the policy limitations and exclusions for details). Special form is typically the most comprehensive of the standard policies and the form many agents recommend. It provides nearly complete protection since it covers anything that is not specifically excluded or limited by the policy. Please note that even though a specific peril might be covered, there can be limitations included in the policy (dollar limitations, for example). This means that the insurance company must find exclusion in the policy in order to deny any claim. Covered items, as we said, may have limitations however. Policyholders like this type of policy since it eliminates them having to read their policy to see if a loss is covered. Instead, they can merely check their policy exclusions. The two most common exclusions are flood and earthquake.
It is possible to cover flood and earthquake by purchasing what is referred to as difference in condition. This form is used with the special form to provide the most complete coverage available. However, difference in condition is not necessarily the least expensive way to add those two perils for coverage.
Earthquake Insurance
Not everyone needs coverage for earthquakes. For those who feel they do, it is important to note that most property forms exclude this coverage. As the name implies, earthquake coverage covers damage caused by earthquakes. It may be obtained by purchasing difference in condition coverage or by buying a separate earthquake policy. Some insurers will add earthquake coverage directly to a property policy, but in high-risk zones this is unlikely. The lower the risk the more likely the insurer will add earthquake coverage. The higher the risk, the less likely they are to do so.
It is important to be aware of the earthquake deductible since it is a percentage of the amount of the coverage in force at the time of the loss. If an earthquake damages the building and a fire results, the fire would be covered in the normal manner.
Flood Coverage
The flood definition directly impacts coverage. Most policies define flood as overland traveling of water and associated mud flows. The flooding of a building due to a broken pipe would not be covered under flood coverage. Most flood insurance is purchased from the federally backed National Flood Insurance Program. Most licensed property casualty insurance agents can issue this type of coverage.
Building Ordinance and Law Coverage
It is common for counties and cities to increase requirements on new and remodeled structures for the purpose of safety. When a building is damaged and rebuilt, they must meet any upgraded safety codes. The purpose of building ordinance and law coverage is to cover the increased cost to repair or replace a building that directly results from these new safety ordinances.
The building ordinance and law coverage covers the cost of demolition and the increased cost to reconstruct parts that must be torn down and hauled off. Without this endorsement, the policyowner may not be able to afford to rebuild or repair their property without an additional loan to cover the increased costs. This might especially be true if the building is older or an unusual type of building. It would also be true of buildings in rezoned areas.
It is very important for a quoting agent to investigate this prior to recommending coverage. He or she should pay special attention to:
Rezoned areas. For example, an area that had previously been zoned general but was changed to commercial.
A building that was built more than twenty years ago and has not been updated recently. Such things as sprinkler systems may now be required.
A building with an unusual style. If the original style is to be maintained it often means extra costs since the building material is not of a standard nature.
In some cases, it may be necessary for the quoting agent to have a business relationship with a building contractor for advice prior to estimating rebuilding costs. Contractors may have special insight into building codes, material costs, or other items affecting rebuilding or repairing an insured building.
Glass Coverage
Glass coverage is typically an endorsement added to the main policy. It provides coverage for any glass that the client wishes to insure in their building. Some buildings have huge glass fronts that represent large sums if it must be replaced. The glass is usually covered automatically by the property policy, but only for small amounts, such as $250 per pane. In addition there are usually maximum limitations that would be inadequate in some situations. Many types of buildings need much more coverage than the standard policy provides, especially in retail where the entire storefront may be glass. It is very important that the quoting agent take this into consideration.
Construction or Builders Risk Coverage
During construction insurance is often necessary. On-site materials are often the targets of theft and this can constitute a considerable loss. When applying for this type of coverage, it is important to list any security measures. Such things as fencing, lighting, and security guards are an advantage since it will affect the premium rate favorably if they exist.
Coverage can be written on only the portion of the building that has been completed, with regular updates as construction progresses.
Pollution Coverage
Standard policies exclude pollution. This means that the standard policy will not cover damage done to property from pollution. Liability policies exclude bodily injury and property damage done to others as a result of pollution. All liability policies exclude clean-up costs. There may be a small amount of clean-up coverage in a policy, but usually no more than $10,000. For any meaningful coverage, it must usually be purchased from a company that specializes in this type of risk. These policies may be designed to cover property, bodily injury, property damage to others, or all three. In most cases, there will be a site inspection required prior to policy issue. There will probably be a cost to the client for this inspection, ranging from $2,000 to $10,000 depending on the company doing the inspection. Seldom does the insurer perform the inspection since someone who is qualified to do so must complete it. It is important that the insurer approve the inspecting company. Otherwise, the money for the inspection may be wasted if the insurer does not recognize their report for purposes of issuing a policy. A quoting agent will have a very angry insurance prospect if the insurer rejects an inspecting company used, requiring a second inspection.
Reporting Form Coverage
Reporting form coverage is optional property insurance in which the business personal property coverage limits and associated premiums fluctuate as insurance needs fluctuate. If business personal property fluctuates more than 10 percent per month, or if the business has significant swings in value over the course of the year, it is important to consider this option over a flat limit of coverage. A flat limit would cause the business to be over-insured at times and possibly under-insured at other times. If a loss occurred during an under-insured period the financial loss could be devastating to the business. In addition, paying for a flat amount may not be the best alternative in premium rates.
When using a reporting form, an actual report of values is submitted monthly or quarterly to the insurance company. These reports must be accurate to insure that proper insurance exists at all times. Even though these reports can be time consuming, they are necessary. If values stay primarily the same, except for a couple of months, it may not be necessary to use the reporting form coverage. In some cases, it may be better to use a peak season endorsement on a regular policy form.
Property in Transit
Property policies normally offer little or no coverage for items that is off the premises of the insured property. Therefore, it is necessary to be cautious when property is in transit between insured locations. Both the insured and the agent often overlook this type of coverage. Before this type of coverage is purchased, some questions should be considered:
Who is responsible for the property during transit?
How is the property being moved?
Where is the property going?
What is the propertys value?
Once these questions have been answered, proper coverage can be selected. Two standard coverage forms are generally available, although there may be variances from state to state. One type is cargo insurance and the second type is transit insurance. The right coverage will depend upon the business in question.
Business Income, Extra Expense, and Loss of Rents
Following a loss, it is very important to adequately assess the length of time it would take to resume the business operation. An error can mean the difference between adequately insuring and under-insuring. Combined business income and extra expense insurance is designed to replace the loss of profit and cover the ongoing costs of the business following the loss. All of this type of insurance assumes the business is moving towards repairs to allow a return to normal business operations.
It is not always easy to know how long it would take a company to make repairs (or relocate if that is necessary) and return to normal pre-loss conditions. The agent must rely to some extent on the opinion of the business owner. Most professionals feel that the worst-case scenario should be considered. Actual calculations usually require the business accountants time to complete his or her assessment of what a loss would mean in down time. The accountant would be looking at the income that would be lost. This can vary based on the type of business (including whether or not it is a manufacturing company or a retail company), whether earnings have highs and lows based on seasons, and so forth. It may be possible not to select a coverage limit so that the loss will be covered regardless of circumstances (a pre-underwriting worksheet will still be required).
Some types of business must be able to immediately resume their business despite a loss. This often has to do with their client base that would find it necessary to go elsewhere for services. Once a client moves to another business for their needs, it may not be possible to gain them back. Therefore, the business must immediately continue servicing their clients. This would especially be true if only one or a few clients generated the major income. Extra expense coverage would allow the business to move to a temporary location and acquire any needed equipment. Extra expense coverage pays the expenses necessary to continue operations during the recovery period.
It is also possible to purchase loss of rents coverage. If the business derives all or part of their income from renting space to others, this income would cease if the building were damaged. As long as the damage is from a covered period loss of rents coverage will reimburse the loss until the building is repaired.
Blanket Coverage
While it would be possible to purchase separate policy limits, it is generally preferable to purchase blanket coverage. For many types of business it is unlikely that adequate coverage would be obtained without blanket coverage. It is often possible to purchase blanket coverage and lump the buildings and contents together or just blanket the business personal property at all locations and leave the buildings on a separate schedule.
Manufacturing companies may find blanket coverage especially useful if the product produced moves between locations as part of the production process. It is important that the blanket limit is adequate to provide enough coverage for all of the items that are insured. Usually the amount of coverage purchased is equal to the total combined worth of all items covered by the policy.
Business
Owners Policy (
Many
professionals feel that the Business Owners Policy is one of the best buys
available. They are easy to read and understand,
which consumers find appealing. The
The liability coverage is similar to commercial general liability and contains most of the same types of coverage, plus nonowned and hired auto coverage, which is available as an option for additional premium. Optional coverage may be added for glass, signs, machinery, and employee dishonesty.
Business owners policies are usually purchased for small retail businesses, but some companies may issue policies for larger clients as well. Some carriers have modified the program to include service companies, such as small contractors, wholesalers, and some types of restaurants.
Locations of Coverage
Business insurance policies tend to provide coverage only for losses occurring
in specified territories. Coverage territory is usually defined in the policy as the
Commercial
general liability policies may provide a broader definition of coverage
territory if the loss is from a product the insured business sells or
manufactures. Coverage will be provided in most cases if the suit was
filed in the coverage territory, even if the loss actually took place outside
of the stated territory. It is important for the writing agent to make
note of any operations taking place outside of the covered territory even if
it is on a temporary basis. This should be done before operations begin
in the temporary location in case it is necessary to arrange for foreign
operations coverage.
As every business owner knows, liability is always a concern. Liability involves protecting the business against civil lawsuits and legal liabilities for damages caused to others. Some types of liability are well known, but recent years have also yielded lawsuits for types of perceived liability that would not have been considered, such as the hot coffee lawsuit or those filed against fast food establishments for causing obesity. Any business runs the risk of civil suits for perceived damages, not only from their customers but also from their employees. As a result, it is necessary for companies to be proactive when it comes to defending themselves against potential lawsuits.
General Liability Forms
While it is possible that an agent may run into a pre-1986 liability form, it is our opinion that most liability forms will be post-1986. Prior to 1986 the comprehensive general liability policy was not all-inclusive even though the name might lead some to believe it was. Nearly a dozen areas of coverage were lacking making it necessary to add endorsements to the primary policy. While the old form may still be used by a non-admitted insurer, it is unlikely that most agents would use it.
In 1986 the new commercial general liability policy was introduced. It provided broader coverage that was built into the policy. This form covers:
Personal injury
Advertising liability
Medical payments
Fire legal liability
Broad form contractual liability
Broad form property damage liability
Host liquor liability
Limited worldwide products liability
Incidental medical malpractice liability
Non-owned watercraft liability
Employees as additional insureds
Personal Injury: now built into the post-1986 forms, it has its own limit of coverage per occurrence for losses caused by libel, slander, false arrest, wrongful eviction, invasion of privacy, malicious prosecution, and other similar coverages.
Advertising Liability: This section of the post-1986 policies provides coverage for copyright infringement and misappropriation of advertising ideas. If the business is an advertising agency, publisher, or broadcaster, this type of policy may not be available as part of the primary policy. Generally, such a business must purchase a professional liability policy that specifically pertains to their business liability needs.
Medical Payments: This type of policy benefit is typically very small, perhaps no more than $1,000, for minor injuries that a customer might suffer. It would not pertain to employees or tenants that are on the premises. Such a small amount would usually apply to emergency room expenses for someone who had a minor accident, such as a fall. The coverage does not have a deductible. Advise your clients that any accident victim should be encouraged to seek medical treatment. It may prevent a subsequent lawsuit since the extent of the injuries will be immediately appraised and documented by a medical professional.
Fire Legal Liability: The dollar amount is generally around $50,000 for fire legal liability. It covers fire, smoke, and explosion for the building the client leases or rents if they are legally liable for such damage. The general liability policy will have an exclusion for property in the care, custody, or control of the business owner. If there is a subrogation clause, which is an agreement whereby each party (renter and landlord) assumes responsibility for their own property, this amount of coverage is likely to be adequate. Even so, it is important to assess possible losses to be sure that the amount of existing coverage is adequate. If it is not, additional coverage may be advisable.
Broad Form Contractual Liability: This covers the liability the business owner assumes for insured contracts. What is an insured contract? Usually it includes such things as lease of premises, sidetrack agreements with railroads, easements, elevator maintenance agreements, naming municipalities as additional insured, and any contract directly involved with the insured business.
Broad Form Property Damage Liability: This applies to property damage caused by the business while it is in their care, custody, and control as long as they are not actually working or conducting business on it. Any part of the property that they are actually working on or conducting business on is the responsibility of the business and therefore not covered by this portion of their insurance.
Host Liquor Liability: This coverage provides liquor liability protection for those businesses that do not manufacture, distribute, sell, or serve alcohol. This would apply to the yearly Christmas party where alcohol was served and the subsequent bodily injury and property damage losses caused by the intoxication of the persons served.
Limited
Worldwide Products Liability:
This is an expansion of the territory where the insurance policys coverage
applies. That does not mean that the business has worldwide coverage,
despite the name. It does provide coverage for specified products outside
of the normal policy territory, which are normally the
Incidental Medical Malpractice Liability: When a person is injured on the job site or in the workplace, it is a normal course of action for the business owner or their employees to provide immediate first aid. This coverage is intended to cover the exposure for doing so on the business premises if a lawsuit results from those first aid measures.
Non-owned Watercraft Liability: This is for non-owned boats that are used in the course of a business activity. For example, a company might rent a fishing boat to take potential clients on a business trip. If a lawsuit was filed for an injury that occurred on the trip, it is this coverage that would protect the business.
Employees as Additional Insureds: This provides coverage for employees under their employers liability policy for any bodily injury or property damage the employees cause while performing their normal work-related duties. Employees may have no coverage for this exposure unless their employer provides it. In some cases, it might be advisable to add employees as insureds under the commercial auto policy.
As policies are now issued, the need for endorsements has been reduced. Many of the most necessary coverages are now built into the post-1986 policies. Many of the elements can be excluded if they do not apply to the business or if the business does not desire them.
There is an aggregate limit in the policies that are issued today. That means the policy has a maximum limit it will pay in one year from all the types of coverage it provides. Therefore, each covered loss reduces the amount available for future claims during the same policy year. If one policy year seems to quickly deplete funds due to losses, perhaps it is necessary to increase the aggregate liability insurance limits in the policy. Otherwise, the business runs the risk of running out of coverage.
The general liability policy typically pays for all sums the business is legally liable for as a result of bodily injury and property damage that occurs during the policy period and in the policy territory. The supplemental coverage additionally provides for complete defense and all court costs. The amounts for which the business may be liable include special, general, and punitive damages. The types of damages the policy pays for includes special or specific damages and general damages. Special or specific damages would be such things as medical bills and the costs of repairing or replacing damaged property. General damages would include such things as pain and suffering and the loss of companionship. Punitive damages could be assessed as a form of punishment against the party causing the loss. In some states, insurance is not permitted to pay punishment damages on behalf of the insured because they are considered a form of punishment and the intent is to deter anyone else in society from doing the same negligent act. In those states, the intent is to force the negligent party to pay the sums out-of-pocket.
A general liability policy will not usually cover wrongful termination or discrimination. Those who desire this type of coverage would have to seek an endorsement, assuming one is available. Sometimes an umbrella policy will cover both items. The agent (and insured) should require this in writing, however, to be sure there is no misunderstanding about the coverage.
No policy covers everything and this is also true of the general liability policy. Some types of liability may exist for a particular business that is not covered, except by endorsement. This might include such things as liability resulting from federal legislation regarding the treatment of employees, employee benefits, and employee retirement plans.
If a business provides benefits for their employees, it may wish to add employee benefits liability coverage as an endorsement. Failure to add an employee to established benefit plans at the appropriate time could expose the employee (and therefore the employer) to uninsured losses.
The Employee Retirement Income Security Act of 1974 (ERISA) requires pension fund trustees to comply with specified guidelines and makes them liable if they fail to do so. If a business has employees that are covered by a pension plan, the business or the owner of the business is then considered the plan trustee. Therefore, ERISA liability coverage is certainly advisable.
It is not unusual for a company to hire outside parties to perform certain maintenance or improvement work on their property. Owners and contractors protection is coverage for bodily injury and property damage to third parties by independent contractors who are working for the business on a contract basis (therefore they are not employees of the business). This is generally covered by the general liability policy, but having an additional layer of protection is sometimes a good idea.
There are two primary ways that valid claims are paid: Occurrence or Claims Made. Both occurrence and claims made are used in liability policies. Claims made policies are mostly written for hazardous exposures, which would include professional liability, malpractice, errors and omissions, and volatile risks such as pollution and hazardous products liability. Occurrence form, if it is available, is preferable for commercial general liability insurance. Occurrence forms cover losses that occurred during the policy period, even if the actual claim is not filed until after the policy has expired. Claims made policies require that the claim be filed while the policy is still active.
The type of policy is very important since many types of lawsuits do not happen until years after the triggering incident. This is especially true with liability claims because it often takes years before symptoms manifest themselves. An occurrence policy will not cover any incidents resulting from activities or circumstances occurring prior to the policys effective date, but it will cover incidents or circumstances that happen while the policy was in force regardless of when the claim is filed (even after the policy has lapsed).
If the business can only get a claims-made policy, the owner may want to consider adding an endorsement that provides an extended reporting period since many claims are not reported until years later. Of course this will mean increased premium cost, perhaps as much as 200 percent since the insurance company is then taking on a much greater risk. If a business is switching from one type of policy to the other it is very important that no gap in coverage results.
Deductibles
A deductible is the amount that must be paid out-of-pocket by the insured before any payment will be made by the insurer on a valid claim. Liability insurance policies do sometimes have a deductible. The dollar amount will depend upon the choices made by the insured at the time of policy purchase, but it can be $5,000 or more. It may also be zero if that is what the insured selected. The higher the deductible the lower the premium will be since the insurance company will have less risk on smaller claims.
Deductibles can be per occurrence or per claim. Those that are per occurrence are preferable since any single occurrence may give rise to other claims on the same incident.
Costs of Defense
Most policyholders probably consider liability insurance for protection against anothers claim, but one of the most valuable aspects is actually having the cost of defending oneself paid for. Even if the insured wins the lawsuit, the legal costs involved can be prohibitive.
Defense costs are typically provided in two ways: (1) the defense costs are included in the policy for an unlimited amount paid in addition to any settlement costs, and (2) defense costs are covered by the policy but the costs are subtracted from the amount of coverage that is available under the policy. The second method is referred to as an inside limit. Many professionals feel that insurance clients should choose policies that provide full defense costs and do not subtract them from the policy limit. However, if the insured limits are high enough, many others feel that it doesnt matter which type is chosen. It is only when the insured limits are not adequate that this might make a difference. Ultimately the agent and the insured must decide which position to take.
Some liability policies omit the duty to defend the insured. In other words, the policy does not pay for the insureds defense if they are sued. This type of policy has especially been written for hazardous risks.
Defense costs have typically been covered in liability policies from the first dollar. In recent years, however, we have seen a movement towards a defense deductible, whereby the insured pays the first costs of defense. The point of the defense deductible is not surprising to hold down premium costs.
Payment Approaches
There are usually two approaches to claim payments on excess liability or umbrella policies: pay-on-behalf-of type and indemnity type. When the policy pays on pay-on-behalf-of the insurance company pays all sums the insured becomes legally liable for. The insured does not have to pay the claim or ask the insurer to reimburse payment of claims. Under an indemnity payment system, the insured does have to request payment from the insurance company. Most insureds report preference for pay-on-behalf-of systems since it eliminates the process of requesting claim payment.
Umbrella and Excess Liability Policies
As legal awards in lawsuits began to skyrocket a few years ago, the general business owner became aware that his or her policies might not be adequate. As a result of this realization, many choose to also purchase umbrella coverage, which would pay claims above the limits of other policy types. An umbrella contract will cover over the underlying liability insurance policy and, in some cases, provide coverage where no underlying coverage exists. Usually, with an umbrella policy the insured must first pay a self-insured retention, often around $10,000.
It is also possible to purchase Excess Liability coverage. This type of policy is designed to cover directly over the underlying liability policies. In other words, there must be an underlying liability policy in place before Excess Liability coverage could be applied.
It is important to completely understand any policy of either type since there is no real standardization in place. Some insurers will include umbrella coverage in their personal liability exposures, which would include such things as homeowners, automobile, and hobbies. This is usually done as part of the commercial umbrella contract. In other cases, it may be necessary to take out umbrella coverage as a separate policy. Generally speaking, it is preferable to select umbrella protection over excess liability since it is usually broader and the price difference between the two is not great.
Errors and Omissions Coverage
Many types of professionals (which includes agents and financial planners) have a professional duty or a duty to the general public. When a professional is legally considered to have a professional duty that also means they can be sued for failing to perform as required by their profession. Coverage for such suits may also be called Professional Liability policies, but insurance agents use the term Errors and Omissions (E&O) insurance.
When an agent or financial planner makes an error or omits important information it can have adverse financial results for the client. Unfortunately, the client may not be aware of the adverse results for years after the policy has been purchased. This is especially true for some types of contracts, such as long-term nursing home plans. When the client perceives that damage has been done, a lawsuit often follows. In financial planning, the agent may have acted in good faith, but without a crystal ball, is not able to foresee some adverse events. Even so, the client will only understand that he or she has lost money regardless of the intentions of the agent and despite any warnings or disclaimers that may have been applied.
The general liability insurance policy does not cover restitution it is, in fact, specifically excluded in the policy. It is necessary, therefore, to purchase liability coverage that is created especially for this type of liability. In todays lawsuit prone society only a very unwise agent would go bare the term used to describe an agent who chooses not to purchase professional liability insurance.
Many agents also enter the field of financial planning. This brings with it additional liability. Some in the legal community feel it is a serious conflict of interest when an agent, who earns a commission, is also a financial planner. This is not surprising since it would be very tempting to give financial advice geared towards the sale of insurance products. The best legal advice suggests that one should be either an insurance agent or a financial planner, but not both. That does not mean giving up ones insurance license, but it does mean not selling insurance products to anyone who is purchasing financial planning assistance. Ideally, the agent/financial planner is always putting the needs of his or her client above any commission that could be earned. While we would like to think this is the situation, any realist knows that there will always be those in the industry that is thinking first of their commission and second of the client.
While conflict of interest is a professional liability problem, it is not the only one faced by insurance agents. According to author Cheryl Toman-Cubbage, negligence is the broadest area of exposure for an agent. Negligence involves mistakes the agent made (errors) and a failure to provide all necessary or required information (omissions). Agents may be sued for many things, including the failure to place necessary insurance, failure to obtain proper coverage for the client, failure to properly advise of a companys rejection or lack of coverage, failure to cancel a policy at the insureds request, and failure to fully disclose the nature of a risk. An agent may also be sued for giving unauthorized instructions to the insureds or unauthorized interpretations of coverage (existing in the case of replacement or new policies that are being sold).
Courts have determined that agents are contract specialists. That means that agents are expected to understand the policies they are selling and also the policies they might be replacing. Agents are, therefore, legally liable if they make an error that causes the client financial harm. The example given in the book Professional Liability Pitfalls for Financial Planners: Many property and casualty agents are expected to mention the availability of umbrella liability insurance when they are selling an auto or a homeowners policy. This is not done for the purpose of receiving a larger commission (umbrella policies do not provide agents with large commissions), but rather it is done to protect the agent in the event the insured suffers a loss greater than the amount of liability protection provided under the auto or homeowners policy. By giving the insured the option of getting more liability coverage, the agent is preventing the insured from filing suit against him or her for failing to provide adequate coverage. [1]
Agents and financial planners are not only liable to the clients they serve; they are also liable to the insurers they license with. At this point a distinction should be made between agents and brokers. A broker represents the insured while an agent represents the insurance company. This is so stated in most contracts that agents must sign with the companies they write for. Additionally, knowledge of the broker is not considered to be knowledge of the insurance company, whereas the agent and the insurance company are deemed to have the same knowledge from a legal standpoint.
Why is this distinction important? It could be critical if an insured chose to sue both the agent and the insurer. Ordinarily, if a broker is involved, the insurer can escape liability but it would still be liable when an agent is sued. Even if the agent oversteps their authority the insurance company may still be liable. This typically involves what is called express authority. Express authority refers to the powers given to the agent in the agency agreement or contract. An agent also has certain implied powers. The courts have used the doctrine of ostensible authority to give agents powers that the public might reasonably expect them to have. That doesnt mean that the agents contractually have such powers, but if a client could reasonably expect them to exist, the courts have ruled in the clients favor.
To illustrate ostensible authority:
Martha and Lou own a 60 year old home. They contact a local agent for homeowners insurance. The agent, Tom, places a policy that does not insure any home more than 50 years old. Tom also accepted their premium at the time he placed the policy. As luck would have it, a major storm came through the area the next day causing severe roof damage to Martha and Lous home. This damage would have been covered by the policy they purchased.
Martha and Lou could reasonably expect Tom to know which company to place their business with. Even though he made an error, since he accepted their premium and wrote the policy, both Tom and the insurer are liable for the damage to their home.
Obviously, Martha and Lou could not know that Tom made an error. They would reasonably think that he knew his products well enough to ask the necessary questions and select the appropriate insurer.
The insurer may have recourse against Tom, but Martha and Lou must be appropriately reimbursed for their loss. This is precisely why so many insurance companies require their agents to carry liability insurance.
Agents may also be found liable for civil and criminal statutory violations. This would be an especially serious area of liability since criminal violations can carry a fine, imprisonment, or both, based on the severity of the crime. He or she may have the option of a hearing before the states insurance commissioner rather than appearing in court. There is no guarantee of this, but for less severe infractions the state may feel it is appropriate. In some cases, if the agent voluntarily surrenders his or her license, no further action will be taken.
According to statistics, fraud is the most common crime an agent commits. This can involve many things, including failure to turn in premium (pocketing the money instead), selling policies from companies that he or she is not contracted to represent, or collecting premium in amounts that are not appropriate for the product purchased.
Few agents commit serious enough crimes to warrant jail time. Surrendering the license to sell insurance along with restitution of funds may solve most cases. However, it should be noted that the severity of the punishment is not always predictable. In one state, an agent was sent to prison for five years for failing to turn in premium while in another state a similar case merely surrendered their insurance license.
Those who advertise themselves as financial planners face the greatest liability risk. Few states have any regulations regarding who may be a financial planner. Therefore, many agents have advertised themselves as such without any real education or experience in such matters. The term covers a broader range of activities than those performed by an insurance agent, which is why they are exposed to a greater risk of lawsuit.
We are
now seeing more and more states enact financial planning legislation as
consumers have registered an increasing amount of complaints.
Most of the financial planning field has been self-regulated. Several professional designations exist that provide education, though not necessarily experience, in financial planning. Many of these professional designations also include education in ethics. Most of us consider ourselves ethical, but these education courses specify how an individual should perform in specific circumstances.
Most lawsuits happen because a client is dissatisfied with the results of the planners work. In other words, the client feels he did not have the financial rewards that were promised. The loss may well be due to circumstances beyond the planners control but that will not matter to the dissatisfied client. Whenever possible, it is vital that financial planners document all transactions, giving details of what was discussed and the following actions that were taken. These notes should be kept indefinitely since lawsuits are often initiated not by the client who knew what had been discussed but by their heirs who do not and may feel that they were not appropriately provided for.
There are five areas of concern for the financial planner:
Omissions are very difficult to fully avoid. The planner may believe they have fully covered all areas and still leave out something that only time reveals. Omissions can be anything from failing to provide the client with a prospectus to failing to explain the risks involved. In some cases, risks may become apparent that did not seem to exist at the time of the recommendation. Additionally, as every agent has experienced, clients do not always remember the details of their discussion with their agent or planner. This is why it is so important to document each meeting and get the clients signature or initials on each item.
The second risk to the planner failure to detect a problem can result from not providing the client with a comprehensive data-gathering form. If the planner does not fully comprehend the clients situation, he or she may not realize a danger exists. Therefore, it is very important that planners use some type of information gathering form and keep it in the clients file for future reference. The information should be updated regularly. Even if an information form is used, if the planner is not actually well versed in estate planning he or she may overlook important aspects of the clients situation.
The third area, inappropriate or unsuitable advice, is most likely to happen when the investment is speculative carrying risks that the client is either not aware of or does not fully understand. Obviously, the client will only be unhappy when this results in loss of financial standing. If the client makes money, then the advice will seem better than if the client loses money. An agent should not suggest any type of risky investment, whether the client understands it or not, if the client is not in a financial position to absorb a loss.
The fourth category of liability is failure to disclose a potential or real conflict of interest. Some seem pretty obvious, such as suggesting any type of investment in which the agent has a direct interest (such as a general partner, for example). Other areas of conflict may not be as obvious. One instance that could result in a conflict would be taking on a husband and wife as clients knowing that they were in the process of or planning to divorce. If the agent or planner put them as a couple into an investment that could not easily be divided equitably a lawsuit could result. This could even affect any life insurance policies that might be taken out at this time. A pending divorce does not mean that no policies or investments should be sold, but rather it is very important that full disclosure exist. A wise agent will have each party sign or initial what was discussed and how the decisions were made.
Finally, the fifth element, recommending investments that result in a financial loss, is a common reason for lawsuits. Again, as previously stated, only a loss results in legal actions. Obviously a client who gains financially would not sue. When a client loses money, he or she wants to blame someone and the only party they can legally blame is the one who advised them to invest the agent or financial planner. The investment itself typically has disclaimers to protect them from lawsuits, except in the case of fraud. Any time an investment is suggested that contains risk (which is virtually any type) the agent or financial planner must be sure to fully disclose all aspects and then document that disclosure. Such documentation must be kept indefinitely since the agent or planner has no way to know when a suit might be filed.
There are some precautions that the financial planner can take:
All agents and financial planners have a fiduciary duty to their clients. The fiduciary duty is the most basic duty owed to a client. It means that the professional has special skills or expertise not held by the general public. It is the fiduciary duty of each professional to put the needs of the client before his or her own needs or desires. The agent or financial planner must always act in the best interest of their client. In fact, it has even been determined that fiduciary duty includes keeping current on education, whether such education is mandated or not. Most states do mandate some type of education, but even if that is not the case, the professional is bound by their duty to obtain education in the field they are working in. If the education offered by schools specializing in industry education is not sufficient, then the agent or planner has the fiduciary duty to seek it out through publications, journals, or other industry-related avenues.
Serving as a Director or Officer
If an agent or financial planner or one of their clients serves as a director or officer of a corporation or a nonprofit company, a special type of liability may exist. The individual can be liable for damages caused by negligence in the performance of assigned duties. A person in this situation would obtain directors and officers liability coverage. Even closely held corporations, such as those most likely to involve the agents own company, should consider such protection since claims can arise between close associates.
Underground Storage Tanks
Such things as gasoline, diesel fuel, and chemicals may be stored in underground tanks. Each state mandates how these tanks must be maintained for safety. When a business or an individual owns a storage tank he or she is responsible for any leakage and resulting pollution even if he or she has followed all state requirements. If the tank is used for a purpose other than storing heating fuel for personal use, the owner must show proof of financial responsibility to a federal Environmental Protection Agency (EPA) inspector, or an Occupational and Safety Health Administration (OSHA) inspector.
A leak from a tank storing gasoline, fuel or chemicals can cause extensive damage and pollution. It can be very costly to clean up. No standard insurance policy covers pollution damage from a storage tank. Coverage must be obtained under a special policy from a company that specializes in this type of insurance contract.
Auto Coverage
It is not unusual for a company to own or operate motor vehicles of some kind. However, even if a company does not own or lease any vehicles there can still be risk involved.
Coverage Symbols
Each type of coverage listed in a policy declarations page of the business automobile policy will have a numeric coverage symbol ranging from one through nine. These specify exactly which vehicles are covered by the policy and how they are covered. All policies may not necessarily use these symbols but they are a good way to easily see the type of coverage purchased.
Symbol 1: Covers any automobile, which includes private passenger cars and business-use pickups, vans, trucks, and non-owned or hired autos.
Symbol 2: Covers any owned auto.
Symbol 3: Covers any owned private passenger vehicle. Coverage for business semi-trailers or trucks does not exist.
Symbol 4: Covers owned autos other than private passenger vehicles.
Symbol 5 and 6: These are only used to refer to no-fault and compulsory uninsured motorist coverage. This would not apply in all states. Agents should know if it applies to the states they write business in.
Symbol 7: This provides coverage only for those autos specifically described in the vehicle schedule listed in the policy and showing a premium charge for the coverage for each vehicle. If no premium is listed for a vehicle, then it is not covered by the policy. This is a commonly used symbol since this is a common type of coverage.
Symbol 8: Provides coverage for vehicles that are leased, rented, hired, or borrowed, as long as they do not belong to any of the companys employees.
Symbol 9: Covers vehicles that are not owned, leased hired, rented or borrowed that are used in the business, including those owned or operated by the employees.
Some of the symbols will be seen more often than others since some are more commonly used than others.
Symbol 1 is ideal for liability coverage since it covers any automobile. The next most generous combination would be 2, 8, and 9.
If the business is a garage, the symbols used will be numbers 21 through 31 rather than 1 through 9. Trucking companies that only haul goods for others will have symbols 41 through 50.
Uninsured and underinsured Motorist Coverage
Most states mandate that drivers carry insurance of some kind, but that doesnt mean that everyone complies. In some geographical areas statistics show that one in four do not have any automobile or liability insurance. If the individual does not carry insurance it is likely that he or she also could not pay the damages they caused another through an accident. Therefore, it may be a good idea to carry uninsured and underinsured motorist coverage.
If an individual were in a work-related vehicle, accident injuries would be covered by workers compensation. If it were not a work-related vehicle the uninsured motorist coverage would cover bodily injuries. In some states, it is possible to purchase optional uninsured motorist coverage to provide limited coverage for damages to the vehicle caused by an uninsured driver.
Underinsured motorist coverage, as the name implies, covers damages above the amount of coverage owned by the at-fault driver. This coverage is typically companion coverage to uninsured motorist coverage. Underinsured motorist coverage applies only to bodily injury and not to vehicle damage.
Coverage for Rented Vehicles
Although many automobile policies cover the insured driver in any vehicle they are legally able to operate, this should not be assumed without first examining the policy. Before renting any vehicle, the insured should specifically check their own policy for details. Many professionals feel the insured should ask for written confirmation from their agent before renting a vehicle. Business package policies may provide coverage for hired autos, which would include rented vehicles. However, this is not guaranteed. If it is not part of the insurance contract, it may be a good idea to purchase coverage offered by the rental agency.
If the commercial auto or business insurance policy included hired autos coverage for liability, then it is likely that there is coverage for vehicles rented by the business as long as they are only used for business purposes. That is why many companies no longer allow their employees to take business vehicles home. There may not be coverage for accidents that happen between work and home or home and work since the individual is not on company time. A vehicle that is rented for non-business use may not be covered by the commercial auto or business insurance policy. If the driver does not have his or her own personal auto insurance policy, there may be no coverage at all, unless coverage was purchased from the rental agency. If use will be connected to the business, most professionals would recommend that the individual buy the maximum coverage offered by the rental company. To get the necessary coverage through the business, it would need to add drive-other-car coverage. This can be added by an endorsement to the business auto policy. The drivers that are to be covered must be specifically named. This type of endorsement is often used when employees are furnished with non-work cars as part of their job (such as salespeople who will also be using them for personal driving) or when the vehicle is a company perk (such as might be provided a company president).
When one rents a vehicle they are always asked if they wish to purchase insurance from the rental company. The coverage is quite expensive by industry standards, but even so there are circumstances that would warrant purchasing it. This would be the case for a person who did not have personal insurance, for example. If the auto renter is not certain whether or not their commercial auto or business insurance covers the rental it is prudent to take the coverage offered by the rental company as a safety precaution. If coverage was included in their commercial auto or business insurance package then the renter will have purchased something they didnt need, but if he or she was not covered and the car is totaled the cost will be far greater.
Many of todays credit cards automatically provide insurance on rented vehicles. If there is not coverage in a commercial auto or business insurance package, then it makes sense to simply carry such a credit card, eliminating the need to purchase coverage from the rental company. However, it is very important to fully understand the coverage provided by the credit card company. Since auto insurance is not their main business function, it may well be inadequate. The time to know this is prior to an automobile accident not after it happens.
Garage Liability
Garage liability provides bodily injury and property damage liability for businesses that operate a garage, which would include repair shops, auto body shops, and brake and oil shops. Garage liability provides bodily injury and property damage liability for the garage, as well as coverage for claims from defective work and products. It is important to note that the faulty work itself is not covered, just any damage that results from it. For example, if brakes were incorrectly repaired resulting in an accident, the damage from the accident would be covered, but not the improper brake job.
Garage Keepers Liability
If a business routinely has control or care of their customers vehicles (valet service at a restaurant, for example) they would likely purchase garage keepers liability coverage. This coverage is liability for physical damage to customers vehicles in the care, custody, or control of the business or the employees of the business. Coverage limits are typically stated in a per-vehicle limit and there may be a maximum dollar amount per loss. Coverage will be either direct or legal and primary or excess.
Direct coverage pays without regard to the legal liability for damage.
Legal coverage will pay only if negligence is proven.
Primary coverage pays without regard to the customers own insurance policy.
Excess pays only after the customers personal insurance is exhausted.
Direct primary coverage is best, with legal excess paying the least. Direct primary coverage will be more expensive than legal excess since the insurer assumes greater risk with plans that pay more often or greater benefits. Customers are more likely to be satisfied if the business assumes responsibility for claims rather than expecting the customers policy to pay first.
Actual Cash Value or Stated Amount
Actual cash value policies pay for replacement costs less depreciation. That means that even though an insured is paid for their loss it may not be adequate to actually replace the item.
For example:
Janets television was stolen. Her insurance company took the cost of the item and deducted depreciation. Since her television was five years old, once depreciated, the amount she received from her insurer was not enough to actually replace it, so Janet had to add money out of her pocket to be able to purchase a new TV.
Claim settlements are often based on the market value of the item. Stated amount coverage is used to establish a higher than normal value due to some characteristic of the item or some pertinent information that might make it more valuable. This usually applies to blue book values where items have a specified value based on age. If the insured kept the item in excellent condition he or she may feel that negates the normal depreciated value since it would have brought a higher selling amount if it were sold. Stated amount coverage establishes the maximum value of the item. At the time of loss, it is then possible the item could be repaired or replaced for less than the stated amount, and therefore the owner would not receive the maximum coverage limit. Even with stated amount coverage, the owner will never be paid more than the amount for which the item can be repaired or replaced with like kind and quality or the stated amount, whichever is smaller.
Accessories
Accessories would include car phones, radios, special stereos and other vehicle accessories. Unless they were factory installed, special vehicle accessories are not usually insured. Coverage for accessories are not typically very expensive, but the insured will need to provide specific information, including make, model, and serial numbers of all items to be insured. Receipts may be required.
There always seems to be something needing insurance that just doesnt fit neatly in with regular policies. Miscellaneous coverage does not fit neatly into categories, but it is important nonetheless. Because these are usually items that are outside of the mainstream insurances, they can be easily overlooked until a loss occurs and the insured finds out he or she is not covered.
Crime Coverage
Crime insurance insures the loss of money and property through the illegal acts of others. It might cover the acts of employees or the general public, depending upon the policy form used. There are many different forms and policy types for crime coverage. There are usually three main areas of coverage available:
Burglary is defined as someone breaking into the business premises. Robbery is defined as placing the owner or their employees in fear of bodily harm. Theft is defined very broadly as stealing by almost any means, including burglary and robbery. There may be subcategories in some policies. It is always important to note what would not be covered. For example, safe burglary and robbery would only cover personal property if the items were stolen from the safe or if the premises were burglarized. Loss of money and securities are not covered by the form only loss of business personal property. In order to have money and securities insured the business must purchase the theft, disappearance, and destruction crime form. It provides very broad coverage, but it only applies to cash and securities. It would not be appropriate for all business operations.
Employee dishonesty is a major area of loss for many types of business. Bonds are often purchased to cover this type of loss. Employee dishonesty coverage will cover the loss of money and business inventory or property due to the dishonest acts of employees. This coverage may be purchased for specified employees (a bookkeeper, for example) or it may be purchased as a blanket form to cover all employees for theft of money or property. The fidelity bond can allow a business to blanket all employees for one sum or to cover only specified positions or employees.
It is not unusual for the selling agent to hear a business owner say that he or she does not need this type of coverage because all of their employees have been with them for years and are very loyal. It should be noted, however, that some of the largest losses paid out by bond companies each year are due to the ingenious methods long-term loyal employees have devised to swindle their employers.[2]
Business owners can choose miscellaneous coverage forms for things like forgery, alteration, extortion, and all types of lesser-used coverages.
Boiler and Machinery Coverage
Few boilers experience accidents, but when one does explode the financial loss can be tremendous. All subsequent damage from a boiler explosion is excluded under the property policy. In order to have such an event covered it is necessary to purchase boiler coverage. Although only a few insurers write this type of coverage, they give some of the best and most needed service in the industry. These insurers inspect boilers and machinery and offer maintenance and operational information. The cost of boiler and machinery coverage is very reasonable. The inspection, a valued and useful service, is typically provided at no additional cost. The policy covers the damage to the business property, the damage to the property of others, and the increased cost to expedite parts to repair the boiler.
The use
of boilers is declining in
Inland Marine Insurance
Although the name seems at odds with itself, inland marine insurance is coverage for physical damage to items that are considered easily transportable. It obtained its name from the custom of insuring goods under an ocean marine policy while they were aboard a vessel for transportation. Once it became financially feasible to transfer goods across land rather than by sea, the policies adapted to cover this inland transportation, calling the contracts inland marine insurance policies.
The
growth of personal property in
While the property is located at the residence, insured items can be protected against most risks by forms of protection within the traditional areas of fire and theft insurance. These policies were mostly named-location and named-perils coverage. The need for broader coverage and off-premises protection led the public to the inland marine insurer.
The types of items insured under inland marine coverage can include many things, including items of the transportation and communication industries, such as bridges and radio or television transmission towers. These policies are often called floaters or floater policies. The list of insured items is huge and the forms used may not be the standard forms. Insurers have a great deal of latitude in both coverage and pricing. The items covered may be either personal or commercial.
Inland marine insurance suffers both moral and morale hazards. The fact that the property covered by inland marine insurance is often of high value, mobile, difficult to identify, and readily convertible into cash attributes to this. These characteristics make this line of coverage particularly susceptible to both moral and morale hazards. In a time of financial stress, the insured may claim a theft in order to receive cash, even though no theft occurred. Carelessness may also be a factor when the insured feels no compulsion to protect their possessions because insurance exists.
We have previously discussed moral hazards, but what is a morale hazard? A distinction is often made between the two (moral and morale), although other references may simply combine the two. Specifically, morale hazards include laziness, disorderliness, and lack of concern for others or property, whereas moral hazards actually involve only fraud or dishonesty, situations reflecting a persons moral code. Since morale and moral are often combined under moral hazard there is often no distinction made in articles and journals.
The majority of inland marine coverage is written on an actual cash value basis. In ocean marine insurance, policies are usually written on a valued basis. Inland marine coverages are written on a valued basis only when the value of the insured property can be ascertained in advance of a loss and when the valuation would be difficult or even impossible following the loss. This is often the case when art objects are insured.
It can be difficult to determine whether some losses are from ordinary wear and tear or from an insurable risk. Notwithstanding the exclusion of wear and tear losses, rips and tears, cigarette burns, spotting of clothing, and so forth presents a very difficult adjusting problem. The use of a deductible clause eliminates most of these borderline cases. Small frequent losses also become costly to adjust, so having a deductible keeps premium rates lower. Additionally, if the insured must pay a deductible, he or she is more likely to avoid moral hazards.
Many inland marine contracts are written without coinsurance requirements. This is especially true of the personal coverages and less true of commercial property. Coinsurance provisions are difficult to apply on household effects because it is hard to determine the values of furniture and clothing.
Inland marine insurance is usually provided on a worldwide basis and the perils covered are the special perils that may be referred to as all risk, although there will be some exclusions in most cases.
Ocean Marine Coverage
Another type of coverage for items in transit is ocean marine insurance. This usually applies to items being shipped overseas. The coverage can also include air transportation, however. Coverage may be effective from the shippers dock to the recipients destination dock and all points in between.
Electronic Equipment Coverage
These policies that have been developed to insure electronic equipment, including computers, peripherals, even telephone systems and stored data. If items, such as computers and all stored data, are insured under one of these forms it gives the advantage of broad coverage and the ability to choose exact amounts of coverage desired. The insured can add coverage for extra expense that will provide funds to rent a replacement until the damaged item can be repaired or replaced. It may be necessary to add business interruption coverage to the electronic equipment form to make sure loss earnings and extra expenses will apply to property losses.
Every agent that works with business insurance should utilize some type of checklist. The following is an example of such a list:
Part 1 Building Coverage
General Information
(Use one page for each insured location)
Street address:___________________________________________
Building Coverage limit: $_________
Deductible: $__________
Forms, Options, and Endorsements
Yes No Blanket Coverage
Yes No Replacement Cost
Yes No Coinsurance (Percentage: _____)
Yes No Agreed Amount
Yes No Special Form
Yes No Broad Form Only
Yes No Basic Form Only
Yes No Signs Included (Limit: $_____)
Yes No Antennas Included (Limit: $_____)
Yes No Earthquake (Deductible: $_____ Limit: $_____)
Premium: $_______
Yes No Flood (Deductible: $_____ Limit: $_____)
Premium: $_______
Yes No Difference in Conditions Form
Yes No Course of Construction/Builders Risk (Limit: $_____)
Yes No On-site Building Materials Covered
Yes No Building Ordinance Coverage (Limit: $_____)
Yes No Glass Schedule (Limit: $_____)
Yes No Glass (Deductible: $_____)
Yes No Pollution First Party Site Cleanup (Limit: $_____)
Total Premium for Building Coverage: $_________
Part 2 Building Coverage
General Information
(Use one page for each location)
Address: _______________________________________________
Owned Business Personal Property (Contents) Limit: $_____
Business Personal Property of Other Limit: $_____
Deductible: $_____
Forms, Options, and Endorsements
Yes No Replacement Cost
Yes No Functional Replacement Cost
Yes No Coinsurance (Percentage: _____)
Yes No Reporting Form (Maximum Limit: $_____)
Yes No Peak Season (Maximum Limit: $_____)
Yes No Special Form
Yes No Broad Form
Yes No Basic Form
Yes No Property in Transit (Limit: $_____)
Own Vehicle: Limit: $_____
Non-owned Vehicle: Limit: $_____
Yes No Loss of refrigeration (Limit: $_____)
Yes No Off-Premises Power Failure (Limit: $_____)
Yes No Earthquake (Deductible: $_____ Limit: $_____)
Premium: $_____
Yes No Flood (Deductible: $_____ Limit: $_____)
Premium: $_____
Total Premium for Business Personal Property Coverage: $____
Part 3 Miscellaneous Property Coverage
Electronic Equipment Coverage
Yes No Replacement Cost Valuation
Yes No Functional Replacement Cost
Yes No Hardware/Equipment (Limit: $_____)
Yes No Media Coverage (Limit: $_____)
Yes No Business Interruption (Limit: $_____)
Yes No Extra Expense (Limit: $_____)
Total Premium for Electronic Equipment Coverage: $_____
Miscellaneous Property Coverage
Yes No Accounts Receivable (Limit: $_____)
Premium: $_____
Yes No Valuable Papers (Limit: $_____)
Premium: $_____
Yes No Installation Floater (Limit: $_____)
Premium: $_____
Yes No Scheduled Equipment (Limit: $_____)
Premium: $_____
Yes No Rented Equipment (Limit: $_____)
Premium: $_____
Yes No Transportation (Limit: $_____)
Premium: $_____
Yes No Motor Truck (Limit: $_____)
Premium: $_____
Yes No Fine Arts (Limit: $_____)
Premium: $_____
Yes No Bailees (Limit: $_____)
Premium: $_____
Yes No Dies, Patterns, & Molds (Limit: $_____)
Premium: $_____
Yes No Ocean Marine Coverage (Limit: $_____)
Premium: $_____
Total Premium for Miscellaneous Property Coverage: $_____
The following (part 4) should be given careful consideration because this coverage is often set up incorrectly.
Part 4 Business Income, Extra Expense, and Loss of
Rents Coverage
(Use one page per location)
Business Income
Yes No Will the insured get actual loss sustained for twelve months for business income? If not, specify coverage that is provided, including any limitations.
Extra Expense
Yes No Will the insured get actual loss coverage for twelve months for extra expense? If not, specify coverage that is provided, including any limitations.
Loss of Rents
Yes No Will the insured get actual coverage for twelve months for loss of rents? If not, specify coverage provided, including any limitations.
Total Premium for Business Interruption Coverage: $_____
Part 5 Commercial General Liability Coverage
Coverage Limits
Policy Aggregate: $_____
Products and Completed Operations Aggregate: $____
Personal and Advertising Injury: $_____
Per Occurrence Limit: $_____
Fire Legal Liability: $_____
Medical Payments: $_____
Forms and Endorsements
Check one: Occurrence Claims Made
If Claims Made, Retro Date: __________
Is Extend Discovery Reporting Date Offered? Yes No
Length At No Cost: _____ Maximum Length and Cost: _____
Special Liability Exclusions: _________________________________
Rating Basis
Payroll
Amount: $_____ Classification: _____ Rate: _____ Premium: $_____
Sales
Amount: $_____ Classification: _____ Rate: _____ Premium: $_____
Area
Amount: $_____ Classification: _____ Rate: _____ Premium: $_____
Yes No Minimum Earned Premium (Amount: $_____)
Yes No Additional Insureds (Premium: $_____)
Deductibles
Yes No Bodily Injury Deductible (Amount: $_____)
Yes No Property Damage Deductible (Amount: $_____)
Yes No Per Claim
Yes No Per Occurrence
Yes No Self-Insured Retention (SIR) (Amount: $_____)
Liability Coverages Included
Yes No Discrimination/Wrongful Termination
Yes No Owners and Contractors Protective
Yes No Defense Costs Inside Limit
Yes No Defense Costs Outside Limit (Limit: $_____)
Yes No Broad Form Property Damage
Yes No Contractual Liability
Yes No Host Liquor Liability
Yes No Incidental Medical Malpractice
Yes No Non-owned Watercraft Coverage
Yes No Limited Worldwide Products Coverage
Yes No Employers Stop Gap Coverage
Total Premium for Commercial General Liability: $_____
Miscellaneous Liability
Yes No Directors and Officers Liability (Limit: $_____)
Premium: $_____
Yes No Professional Liability (Limit: $_____)
Premium: $_____
Yes No Punitive Damage Coverage (Limit: $_____)
Premium: $_____
Yes No Employee Benefits Errors & Omissions (Limit: $_____)
Premium: $_____
Yes No ERISA Fiduciary Liability (Limit: $_____)
Premium: $_____
Yes No Liquor Liability (Limit: $_____)
Premium: $_____
Yes No Pollution Coverage (Limit: $_____)
Premium: $_____
Total Premium for Miscellaneous Liability: $_____
Any section above that is marked no needs special attention paid to it. The agent should establish whether or not this leaves the insured with loss exposures.
Part 6 Umbrella/Excess Liability Coverage
Limit of Coverage: $_____
Self-Insured Retention (SIR): $_____
Yes No Concurrent Expiration (Expiration Dates: _____)
If claims made liability form, retro date (mm/dd/yyyy): _________
Yes No Extended Discovery: _____ Length At No Cost: _____
Maximum Length and Cost: _____ / _____
Yes No Umbrella Form
Yes No Excess Only
Yes No Following Form
Yes No Worldwide Coverage
Yes No First Dollar Defense
Yes No Defense Cost Inside Limit
Yes No Defense Cost Outside Limit (Limit: $_____)
Yes No Premium Subject to Audit
If subject to an audit, what are the terms?
Yes No Premium Subject to a Flat Charge
Yes No Pay-On-Behalf-Of
Yes No Indemnity
Yes No Coverage for Acquisitions
Yes No Discrimination
Yes No Aircraft or Watercraft Owned, Non-owned
Yes No Professional Liability Covered
Yes No Personal Umbrella/Excess Included
Yes No Punitive Damages
Total Premium for Umbrella/Excess Liability: $_____
Part 7 Automobile Coverage
Liability (Liability pays other people for bodily injury or property damage the insured caused, when he or she is legally liable to pay the injured party.)
Bodily Injury Each Person
Coverage Symbol: _____ Coverage Limit: $_____
Bodily Injury Each Accident
Coverage Symbol: _____ Coverage Limit: $_____
Property Damage Liability
Coverage Symbol: _____ Coverage Limit: $_____
Combined Single Limit
Coverage Symbol: _____ Coverage Limit: $_____
Medical Payments Limit (PIP if in a No-fault State)
Coverage Symbol: _____ Coverage Limit: $_____
Uninsured Motorist (Uninsured motorist and underinsured motorist covers all persons in the insureds vehicle for injuries to their bodies caused by someone with no insurance, or coverage limits that are too low to cover the damage they caused.)
Bodily Injury Each Person
Coverage Symbol: _____ Coverage Limit: $_____
Bodily Injury Each Accident
Coverage Symbol: _____ Coverage Limit: $_____
Uninsured Property Damage/Waiver of Deductible
Coverage Symbol: _____ Coverage Limit: $_____
Underinsured Motorist
Bodily Injury Each Person
Coverage Symbol: _____ Coverage Limit: $_____
Bodily Injury Each Accident
Coverage Symbol: _____ Coverage Limit: $_____
Physical Damage Coverages (Comprehensive is the broadest coverage and the one that the insured will most likely want for all their private passenger vehicles. Pricing will be based on specified perils from trucks, but comprehensive coverage is always the best choice.)
Yes No Specified Causes of Loss
Coverage Symbol: _____ Coverage Limit: $_____
Yes No Comprehensive (OTC)
Coverage Symbol: _____ Coverage Limit: $_____
Yes No Collision
Coverage Symbol: _____ Coverage Limit: $_____
Yes No Actual Cash Value
Yes No Stated Amount (Limit: $_____)
Miscellaneous Automobile Coverages
Yes No Employers Non-owned Auto Liability
Yes No Employees as Additional Insureds
Yes No Hired Auto Liability
Yes No Hired Auto Physical Damage (Limit: $_____)
Yes No Drive Other Car Coverage
Drivers: _____________________________________________
Yes No Rental Cars Liability
Yes No Rental Cars Physical Damage (Limit: $_____)
Yes No Rental Reimbursement (Limit: $_____ per day)
Maximum Dollar Amount: $_____
Yes No Phones, Radios, Stereos, Electronics (Limit: $_____)
Yes No Towing (Limit: $_____)
Yes No Coverage for Customized Vehicles (Limit: $_____)
Yes No
Total Premium Automobile Coverage: $_____
Garage Liability
Bodily Injury Each Person
Coverage Symbol: _____ Coverage Limit: $_____
Bodily Injury Each Accident
Coverage Symbol: _____ Coverage Limit: $_____
Property Damage Liability
Coverage Symbol: _____ Coverage Limit: $_____
Total Premium for Garage Liability Coverage: $_____
Garage Keepers Liability
Yes No Direct
Yes No Legal
Yes No Primary
Yes No Excess
Maximum Coverage Per Vehicle: Limit $_____
Maximum Coverage Per Occurrence: Limit $_____
Yes No Collision (Deductible: $_____)
Yes No Comprehensive (OTC) (Deductible: $_____)
Yes No Specified Causes of Loss (Deductible: $_____)
Yes No Coverage for Cars Held for
Total Premium for Garage Keepers Liability Coverage: $_____
Part 8 Miscellaneous Insurance Coverage
Boiler and Machinery
Yes No Boiler and Machinery (Limit: $_____)
Objects Covered: _________________________________________
Yes No Business Interruption/Extra Expense (Limit: $_____)
Total Premium for Boiler and Machinery Coverage: $_____
Crime Coverages
Crime coverage is often overlooked, yet it can be the cause of major loss for some types of business. At least employee dishonesty should be considered if no other type. Employee dishonesty is typically written on a blanket basis, meaning it pays only the limit shown for a loss, regardless of the number of employees involved.
Yes No Employee Dishonesty (Limit: $_____)
Yes No Forgery or Alteration (Limit: $_____)
Yes No Theft, Disappearance, & Destruction (Limit: $_____)
Yes No Computer Fraud (Limit: $_____)
Yes No Other Crime Coverages (Limit: $_____)
Total Premium for Crime Coverage: $_____
Other Coverages
Other coverages recommended for the insured:
Total Premium for Other Recommended Coverages: $_____
The Business Insurance Coverage Checklist is never going to be ideal for every type of company. Each company may bring its own special needs and concerns. However, the checklist does provide the agent with a form on which to base some conclusions regarding their insurance needs.