- Buyer's Guide
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The purchase of insurance has historically allowed business owners the opportunity to accept a known expense (premium) and avoid the unknown expense of an uninsured loss. Now, more than ever before, it is important to use your premium dollars wisely. While it may be tempting to reduce coverage to save on a premium, it’s not wise to give up too much for too little. Review your insurance portfolio regularly to be sure you continue to have adequate coverage, especially when changes and improvements are made to the business.
The purpose of this article is to provide you some guidelines for helping you to protect your assets and your livelihood.
The necessary costs
While no one likes to be told they have to do something, some of your insurance premium is mandated by your obligations to others. For example, do you have a loan or lease on any of your buildings, business personal property or automobiles? If so, the lender or loss payee probably has included in your agreement a requirement that you provide coverage for the property in the event of loss or damage. Property insurance, therefore, will be required.
In these times when bankruptcy seems to be the nemesis of many business owners, and the headache deluxe of most lenders, small deviations from the firm policies requiring insurance to protect the assets that have been used as collateral are disappearing as lenders tighten down. Keeping track of the coverages is even more critical than in most economic cycles and certainly more important than the not so distant past of hurry up loans and easy lending practices. A few of the things you can do to help manage this expense include:
• Review your limits of insurance to be sure they are adequate to protect the property at risk. Too much or too little insurance at the time of a loss can be the make or break issue for staying in business or getting back into business.
• Check your policies to see if the coverage provides replacement cost coverage or if it offers only Actual Cash Value (ACV) protection. In effect, the replacement cost coverage will eliminate the depreciation in value of older equipment. Since many in our business are not choosing to replace older equipment with new equipment, it is harder and harder to find good used equipment — especially when you need it in a hurry at the time of an insured loss. It may cost a little more in premium to purchase adequate limits of insurance to meet insurance to value (explained below) requirements but in the long run if you experience a larger loss, you will reap many times over the benefits of being able to procure new equipment to replace your current equipment.
• Is there a coinsurance or insurance to value requirement that could penalize your settlement in the event of a loss? If you have too little insurance at the time of the loss, you may be paid in proportion to the amount of coverage you purchase when compared to the value of the damaged equipment at the time of the loss.
• Are any of your locations considered vacant by the definition in your policy? If so, are you aware of any exclusions or penalties that might effect how your loss, if any, would be paid? Most insurance contracts today include two definitions of vacant — one for the building owner and one for the tenant. Each requires the stated percentage of the location be occupied and equipped to the extent that it is able to operate in a normal manner. Gone are the days when a building was merely unoccupied if there were some personal property still on premises — even though it was not being operated as a business. Today by definition, a building is vacant and subject to the penalties outlined in the insurance policy if it is not equipped for regular operation.
• Review your deductible (the amount you will need to pay out-of-pocket) in the event of a loss — The higher the deductible, the lower the premium. However, be certain you are not accepting a deductible that will put you into financial distress if you have a loss. One of the unfortunate trends is to raise the deductible to take advantage of short sighted savings in initial premium dollars without concern for the extra out of pocket costs in the event of a loss to meet the requirements of the deductible clause. If you don’t think you can afford the insurance premium today to keep the deductible at a manageable level, how do you expect to afford the additional out-of-pocket costs in the event of a loss.
Consider these additional coverages
Business Income insurance will become an even wiser use of your insurance dollar in difficult times. If you are having trouble making ends meet when you are operating and generating a positive cash flow, imagine how difficult it would be to meet your ongoing financial obligation to yourself and others if you were to be out of business because of an insured loss.
With business income/extra expense coverage, the insurance company in the event of a loss to your property, would step into the shoes of the money machine and continue the income flow in accordance with the terms of your policy until you are able to rebuild or relocate in a reasonable period of time and return to the same level or income as you enjoyed before the loss.
Automobile Liability, General Liability and Workers’ Compensation will be the other coverages that you will want to monitor and keep in place but do so in the most cost effective method. The coverages for general liability and workers compensation may involve estimated exposures.
For example, the workers’ compensation premium is a percentage of your payroll. If you have downsized and will have lower payroll, you may want to check with your agent to determine the estimated payrolls that were used to calculate the premium and see if the insurance company can reduce the estimated premium accordingly.
Current trends in rates are about flat. If you reduce the exposures, the initial outlay may be less. Remember, however, these coverages are subject to audit so you ultimately pay for what you use. In other words, don’t underestimate your exposures as a cost saving mechanism because you will face an audit premium that will be due at about the same time as your renewal premiums; therefore further upsetting the balance of cash flows in and expense outflows.
The General Liability may be included with your property premium or it can be rated on the number of bays you have, the gross receipts you expect or other measures. Your agent will be able to tell you if there are estimates involved, than can be revised to reflect a more accurate picture of your exposures to loss much like the rates for workers compensation.
The bottom line on Automobile Liability, General Liability or Workers’ Compensation is that you should resist the temptation to cancel any of these coverages because you don’t have to buy them. When the economy is faltering, unfortunately, there is often times an increase in claims for damages and/or injuries that may be less than obvious. You as a business owner or operator may be faced with the costs of defending such allegations whether or not the claim is groundless.
Sleep on it
It has often been said, “The most important thing you buy when you purchase insurance is a good night’s sleep.” Do not complicate your business stability plans. When it is difficult to find the funds for routine maintenance and other issues; it is statistically factual that claims increase. Less insurance and less maintenance and routine repairs done when it is obvious they are needed add up to headaches for you, the business owner, injured consumers and the economy in general.
This is not the time to reduce your limits of protection from unknown financial exposures. General Liability and Automobile Liability reductions especially would not reduce your premiums significantly, even if you were to go to minimum limits which may be required by your state laws.
If anything, higher limits coupled with tough business choices regarding staffing, hours of operation, and similar business decisions will create an environment with better results and greater cash reserves that will enable you to continue operating now and be poised for the upturn that is expected in the near future.