If a customer, say, in Australia, purchases
your product and suffers an injury caused
by your product, will your U.S. insurance policy cover this claim? Or, if you need to
meet a client in Mexico and drive over the
border with the company car, are you covered if you should have an accident there? If
you don’t know the answers to these questions, chances are that you may not know the
ins and outs of your insurance policy.
“U.S. auto policies do not cover liability in
Mexico, and U.S. product liability policies
don’t cover claims that are filed overseas
unless they are set up properly, but this is not
something business owners typically know
unless they learn about how insurance
works, either through educating themselves
or the hard way — experience,” says Paul
Havener, vice president of Aon Global Client
Network, a division of Aon Risk Services Inc.
Smart Business spoke with Havener about
how business owners can learn about what
exactly their insurance policies cover before
the worst-case scenario happens.
Why is it difficult to understand exactly what
insurance policies cover?
Insurance and risk management are complex fields. Insurance policies are legal contracts that require considerable interpretation. A layperson can’t just jump into the field
of insurance without some working knowledge of what all the jargon means. There are
exclusions and limitations in all insurance
policies, and it is important to understand
what these are and what the terminology
means. There are also words in an insurance
contract that look like everyday words, but
mean different things in the insurance field.
What words need to be watched out for?
For example, the term ‘personal injury’ in
everyday conversation means someone getting hurt, that is, injury to the body. However,
in the insurance business, this term means
damage to the character of a person, such as
false arrest, libel or slander. The insurance
term ‘bodily injury’ is what actually refers to
physical injury to a person. If a business
owner misunderstands these terms, he or
she may think that the insurance covers
something that, in fact, it does not.
What are the repercussions of not understanding your insurance policies?
In addition to the risks of misunderstanding
the language and, consequently, what is
included or excluded, business owners can
underbuy insurance and not know they are
underinsured until something happens. I’ve
seen businesses go bankrupt from a fire or a
suit from a liability claim where the insurance purchased does not cover the cost of
the claim and the business can’t pay the balance. For example, if a business has $100,000
to spend on insurance, it can do it one of two
ways: Buy a $1 million policy with a $5,000
deductible or buy a $2 million policy with a
$50,000 deductible. Most small businesses
will opt for the lower deductible, but they
neglect to think about what a big loss would
do to the company. In many cases, a large
loss could put them out of business whereas
they could probably afford the higher
deductible with the higher level of protection.
Is this kind of foresight just for high revenue
companies with higher risks?
Generally, the larger the company, the
greater its potential for problems. However,
small businesses can have big business problems if they are in high-risk businesses or
manufacture a high-risk product. The more
intricate a business is, the more important it
is that someone within the company understands its insurance policies and what they
do and don’t cover and not just rely on their
insurance agent’s recommendations. In order
to properly cover a business, someone within that business needs to possess a working
knowledge of insurance and also understand
the intricate workings of the company. In a
smaller company, the logical person for this
task would be an owner or chief financial
officer. Many larger companies have risk
managers.
What are the basics that a business owner or
executive should know about corporate
insurance policies?
The first thing is insurance ‘language’ —
what all the terminology means in an insurance policy. Next is an understanding of contractual relationships with suppliers, vendors
and customers and the risks in these relationships that can be covered by insurance.
Business owners also need to learn how to
handle claims and control losses as well as to
know what is covered and what is not covered by their various policies.
What is the best way to learn how corporate
insurance works, other than by experience?
There are trade publications and online
services that can provide needed information. Insurance consultants are also a good
way to help manage insurance policies. Many
insurance companies and brokers/agents
also have free educational forums or workshops, some online and some in person. As
an example, our company offers a two-day
course to executives and business owners
who want to learn about business insurance
and risk management issues that can affect
the companies that they own or for which
they work.
PAUL HAVENER is a vice president of the Aon Global Client Network, a division of Aon Risk Services Inc. (www.aon.com), a risk
management, human capital and reinsurance-consulting firm. Reach him at (216) 623-4138 or [email protected].
