What You Need to Know Before Your Business Insurance Renews

Transcription

1 What You Need to Know Before Your Business Insurance Renews by Scott Kirby Shopping for commercial insurance is easy when prices are falling. Need to save money? Need broader coverage? Get another quote. But the insurance market is like the stock market it goes through cycles. When prices begin to get firm and start to rise, you need to be an informed insurance consumer in order to get the protection you need at the right price. The Insurance Review Process Short of qualifying for an insurance agent s license, what s a business owner to do? The answer is: be prepared. Preparing for a commercial insurance renewal is no different than preparing for any other professional task. It takes forethought, planning, execution and follow up. So, let s get started. Speaking of starting, start early. It may seem over anxious to begin 120 days before renewal, but there s a lot to do. The first 30 days should be spent interviewing and selecting insurance agents or companies to work with, evaluating all the exposures subject to loss and providing information to the agent for applications. The next 60 days belongs to the insurance companies. The underwriters will price your account, seek clarifications on your application and perform inspections of your business. The last 30 days are yours to evaluate proposals, decide a course of action and bind coverage. When reviewing companies and policies, the first step is to obtain currently valued loss information (commonly referred to as loss runs or loss reports) for each of your policies for the last five years. If you skip this step or do it half-heartedly, everything else you do will be a waste. A loss run is like a job cost card for every policy. On it, insurance companies record accidents (known as occurrences in the insurance business); what they ve paid for the accidents (paid losses); what they think they may pay in the future (reserved losses); and what they ve paid

2 lawyers and outside adjusters to service accidents (expenses). This information is used to calculate a loss ratio. For a close estimate of your loss ratio, simply divide the sum of losses and expenses by the premium paid. An insurance company uses the loss ratio to evaluate current and prospective policyholders. The company wants profitable clients and prospects. If you have a 30-percent loss ratio and the company you apply to has a 55-percent loss ratio, your business enhances their profitability and makes you a desirable account. So now that you have your loss runs, and have reviewed them with your insurance agent and feel confident you re a good account for any insurance company - what s next? Identify and quantify your company s exposures and rating basis. OK, in English: figure out what you have to insure your exposure -- and what variables the insurance company will use to charge you the rating basis. Exposures are the things you can lose to disaster. A building is an exposure, as is inventory. The insurance company calculates premium using a rating basis. Sales, payroll and square footage are examples of rating basis. Let s look at some common exposures and how to approach them. Buildings The building s insured value should be the replacement value, not the market value. Figure out how much it would cost to rebuild using the same quality materials. The value should include the building, improvements and permanently installed equipment. Don t include the value of the land. Don t under insure, as you will leave yourself exposed to a coinsurance penalty and a share in losses. Don t over insure either or you ll waste your money. If you re unsure about the value, your insurance agent may have software to provide an estimate. If your building values are high, invest in professionally prepared replacement cost estimates. Business Personal Property Office furniture, raw material, finished goods inventory and computers are all examples of business personal property. The value insured should be the replacement cost, which is what it would cost to buy the items all over again. You say you could buy it used and save money? Fine, but adjust the valuation clause from replacement cost to

3 Actual Cash Value. You can buy a lower limit, save some money and not get hurt by the coinsurance clause. Business Income and Extra Expense Business Income and Extra Expense payments is an important coverage area that typically does not get the attention it deserves. Many companies purchase adequate coverage for buildings and personal property but still go out of business because they did not buy, or buy enough, business income and extra expense coverage. This vital coverage pays the bills that continue after a fire destroys everything else. In addition to paying continuing expenses, it will pay for extra expenses that can help you get back to business faster. If that s not enough, it also pays profit you would have earned had there been no loss. Inland Marine There are property exposures in every business that do not fit neatly into the building and business personal property insurance forms. For those, we use a myriad of Inland Marine Forms. Examples include customer s property, valuable papers, glass, accounts receivable, tools and mobile equipment. The list goes on, but the point is that you should be able to detail every asset, even if you expensed it upon purchase or fully depreciated it. If it s immaterial, don t insure it. Commercial Auto Insurance For some businesses, commercial auto insurance can represent half or more of their total insurance cost. For the insurance business, this is where we find a large amount of claim frequency and severity. Commercial auto insurance protects the public against driving mistakes and also protects your investment in vehicles. Buying smart is your best bet. First, understand almost the entire premium is based on 1) the garage location of each vehicle 2) the weight of each vehicle 3) the use of each vehicle 4) the driving radius of each vehicle and 5) the new cost of each vehicle. If any of these variables are wrong, your premium is wrong. Individual driving records do not affect the premium, but should not be ignored. If you have drivers that have had problems with careless driving, accidents, or other factors, many companies will not accept the account, at any price. Also, it s just a matter of time until a severe claim occurs which could make the purchase of reasonably priced auto protection difficult and in future years.

4 Here s an exercise I recommend to my clients and prospects. Look back over the last three to five years and add up how much money you ve paid for physical damage (comprehensive and collision) insurance and compare it to what you ve collected from your policy according to your loss runs. Talk about an eye opener! At a minimum, I bet you ll raise your deductibles. If you have personal vehicles on your commercial insurance policy, get them off. Personal vehicle policies are much broader than commercial policies. I know there are tax issues to consider and that s not my forte, but I strongly recommend personal vehicles be insured on personal auto policies. Commercial General Liability Liability premiums are based on payroll for contractors and sales for manufacturers. If these figures fluctuate wildly from year to year, take that into account when you prepare your applications. Too often the figures are understated. An audit is prepared after the first year and the audit bill comes due at the same time you re trying to pay for the renewal. Then, to add insult to injury, the insurance company endorses the renewal policy based on the results of the audit. Now you have a renewal bill, an audit bill and a change endorsement bill, all for big dollars. The best approach is to make a realistic estimate of payroll and sales. Then each quarter, check your actual results to your estimate. If you overstated your estimate, expect a refund at the end of the policy term. If you understated, then set some money aside or correct the figure while you still have a few payments left. It is far better to add a few dollars to your installment bill then to get hit with a large additional charge. Workers Compensation and Employer s Liability Although workers compensation and employer s liability are quite expensive for manufacturers and contractors, such coverage is pretty straightforward. I know there are people who try to avoid this coverage by calling their workers independent contractors. My only comment is that come audit time, every single one of them better have provided a certificate of insurance documenting they have coverage. If not, you will get an audit bill. Commercial Umbrella/Excess Liability The question is how much insurance is enough? The answer falls somewhere between the levels you currently have and How high is up? At a minimum, you should purchase an umbrella policy with a $1,000,000 limit. The umbrella will require minimum underlying limits for all your primary policies (general liability, product liability, auto, employer liability). Purchase the minimum required limits and then evaluate the benefit of

5 higher limits by adding million dollar layers. For most businesses, the higher layers of excess liability coverage will cost substantially less than increasing underlying limits. A word of caution: If the umbrella policy requires a $500,000 minimum limit of commercial auto liability insurance and you re carrying $300,000, you have a problem. A $200,000 problem to be exact. The umbrella will not respond until you pay the $200,000 gap. How to Save Money To save money or at least to avoid overspending, watch the following items: Misclassifications Workers compensation rules do not allow for the division of payroll (unless you are a contractor), meaning an employee who does two tasks can t have his or her payroll divided among classifications. The entire payroll will be lumped into the highest rated category. If you re not satisfied with the classifications attached to your business and you re certain you re right, request an inspection from the state workers compensation commission. Your agent can help you, but the Commision s decision is final. Mistakes in the Worker's Compensation Experience Modifier The experience modifier is a statistic calculated by the Workers Compensation Rating and Inspection Bureau. It compares a business claim history over the last three years to what was anticipated for its governing class, say electricians. The modifier affects premiums. If there is a mistake in the modifier, there is a mistake in the premium, and mistakes are easy to make and hard to detect. In fact, 52% of all modifiers are wrong! It takes a very knowledgeable agent to find abuses in your calculation and get them corrected. Dividend Plans As the insurance market becomes tighter, the availability of dividends and managed care credits will be harder to come by, but they won t go away entirely. The larger your premium, the better your experience modifier, and the better your claims experience, the more options you will have. If after all of your review, you re still not satisfied that you have saved enough or that your coverage is not broad enough, you can invite your insurance company to conduct a loss control review. The insurance company s loss control department exists to save the insurance company money by identifying weaknesses in a business that may lead to loss. They won t

6 come out to every business, but if your premium is large enough and your relationship strong, most will welcome the opportunity to provide this service, and it s free. Please contact our Protection Team at KHT Insurance if you have any questions - we can help. (817) or (800) [email protected]