This is a very valid question given that very often when we speak with executives, they question what insurance coverage they have—and why they need it at all. We often buy insurance simply because that is what we have done in the past. In other cases, it may be because someone such as a lender or customer is requiring it. It’s important to understand that insurance is meant to finance risk. As such, it is a valuable exercise to consider the risks you want to mitigate with insurance and make sure you are purchasing the coverage that will help you a achieve that goal.
A simple example: Property Insurance is often purchased to replace the building, and Business Interruption Insurance to pay for lost profits while the building is being rebuilt after a disaster occurs. However, for most companies, the real goal is to retain their clients that might leave if they cannot be provided with services or products while facilities are being rebuilt. Therefore, a more focused approach is to work out a plan to continue providing your services or products during your rebuilding process, and purchase Extra Expense coverage to cover the extra expenses incurred to implement this plan.
Business leaders must also consider the ramifications of expanding litigation and legal system abuse. Unfortunately, this increases the chances of being sued even if you are not at fault. Defending these cases can be expensive. Insurance is a strategy to pay for the cost of defense as well as any damages for which you may be liable.
Flood is another example of risk that is changing so we may need to alter our normal response to planning for flood as well as how we think about purchasing this coverage. Flood is typically only purchased in high-hazard flood zones like low areas near rivers and lakes. The world today is dominated by short periods of extreme rainfall that creates run-off and short-term flooding in areas that normally do not flood. Many more people are at risk that were never at risk before. Questions to ask: Are you in the path of rainwater run-off? Do you have methods of reducing the impact of flood? Should you purchase the Flood Insurance coverage?
Many businesses rely on controlled environments that, if they fail, can create loss. Some examples include cleanrooms that can take months to recertify if the environmental controls systems fail; or crop/food/livestock storage areas in which the food or animal could perish if the environmental controls systems fail. The leading risk for environmental control systems failure is human or computer error. Both are excluded from standard business interruption insurance. An insurance solution is to seek coverage that is customized to include these causes of loss, thereby protecting those specific risks.
Most liability insurance is based upon providing coverage when you cause property damage or bodily injury. But what if you cause financial harm only? That is where coverage such as Professional Liability and Directors and Officers coverage can be an important consideration.
Insurance names are not always what they appear. The name General Liability Insurance would suggest it covers General Liability. That is not the case. Many things are specifically excluded in this policy. It is important to understand if these exclusions are relevant to you and your business. For example, imagine a business that owned a truck that was used solely on its property. Owners often believe they do not need to purchase Automobile Liability coverage because their vehicle is not being registered and used on public roads. Many GL policies exclude the liability associated with vehicles that are meant to be driven on public roads. So, if an employee were to accidentally run over someone on the property, the loss could be excluded on the GL policy.
According to FEMA, 40 percent of businesses never reopen after disasters and another 25 percent fail within one year. The U.S. Small Business Administration found that over 90% of companies fail within two years of being hit by a disaster. These are truly alarming statistics that imply that companies can do better at risk management planning.
No matter how knowledgeable and experienced your insurance broker is they cannot provide you with the most effective risk management solutions without working closely with you to understand the specific risks associated with your business, your plans to mitigate that risk and your priorities in financing the risk either directly or with insurance.