When assessing a company’s risks,
many insurance brokers will just
look at the existing policies, duplicate the policies and be on their way. In
these scenarios, they’re doing the company
a major disservice.
“It may be a cliche, but insurance is like a
parachute; you only get one chance to see if
it works,” says Rob Wilson, president of
Corporate Risk Management Inc., a division
of The Wilson Companies. “Businesses
need periodic insurance checkups, no different than a regular physical, to catch
something before it becomes a problem.”
Smart Business asked Wilson about how
businesses can better assess their insurance coverage to make sure it truly reflects
their insurable risks.
Is now a good time to review coverage?
Companies always want to evaluate that
their policies insure their exposures. But
given this economy, now is a time when
you should look at how your exposures
have changed. That could be on a variety of
levels, from your workers’ comp coverage
to what suppliers you’re working with and
who your customers are. Instead of having
three suppliers for the key part that goes
into a widget, a company may have to rely
on one supplier because it’s more economical or the other suppliers are in financial
trouble. If that supplier has a catastrophe
at his facility, where does the company get
the material to make its finished product?
You can insure that loss of income under
contingent business income coverage.
Usually, we talk about clients being
underinsured concerning physical assets.
Today, they may be overinsured. It may be
cheaper to rebuild a building than it was
two or three years ago when we were in
the middle of a building boom. That would
cause you to consider reducing the amount
of insurance on the building. You could
also look at inventory. At one time, your
widgets were in demand and you were
insuring the inventory for $100,000. That
inventory may have little value now, so you
could reduce coverage or, better yet, just
get rid of the widgets.
Another area to pay attention to is
employment practices liability insurance (EPLI). Employees are much more litigious today than they were maybe 10 years
ago, and layoffs in a tough economy could
lead to more discrimination and wrongful
termination suits.
Where should owners begin?
They should essentially begin by looking
at their financial statements to see what
assets they own and what their potential
liabilities are, instead of just having someone duplicate policies, which is often the
case. Looking at financial statements can
uncover mistakes; for example, a company
that has fiduciary liability for its pension
plan that claims to be fully funded may, in
fact, be only partially funded. This would
be enough for an insurance company to
deny any claim because of a false statement in a policy.
When looking at the value stated on the
financial statements for real property, you
have to ask what it’s going to cost to
replace property if it’s damaged in a major
catastrophe. There may be a huge difference between book value and replacement
cost. A crucial element is how accurately
these risks are reflected in your policies.
For example, we were just looking at a
lumberyard whose policy said that their
building had sprinklers when actually there
were no sprinklers in the facility. If there
were a fire — or even unrelated physical
damage from, say, a windstorm — the
insurance company would deny coverage
because facts were misrepresented in the
policy.
The last thing you look at are the existing
insurance policies, in case there’s something you might have missed, but more
likely to see what corrections need to be
made. We had another client — an international company with Canadian and U.S.
operations — with an umbrella policy that
named the Canadian company but did not
actually insure the Canadian operation.
They were only getting coverage for that
company name for the U.S. exposures.
Their multiple locations in Canada were
uninsured.
What should owners do to ensure they’re
properly covered?
The insurance broker is commission-driven. But if you hire an independent consulting firm to evaluate coverage, it will
conduct an objective review to see if you’re
overinsured, underinsured, uninsured or
have the wrong insurance. The party evaluating a company’s policies should start first
with detailed questions about what they
do, where they do it, how they do it and
what their financial statements contain, all
to uncover exposures that they otherwise
wouldn’t be aware of. They need to do a
physical tour of the facilities to see what’s
there so the insurance person can understand the risks to which the business is
exposed.
The process should also uncover price
scenarios; we uncover numerous mistakes
in class codes, incorrect premium charges
or wrong rates in just about every area of
an insurance program. Sometimes an evaluation results in a refund and other times it
may cost a business a little more to do it
right.
ROB WILSON is president of Corporate Risk Management Inc., a division of The Wilson Companies. CRM provides risk management
consulting services throughout the United States. Reach him at (630) 286-7345 or [email protected].
