Business Insurance

If there is one benefit from the real estate bust that occurred over the past year and a half, it is that the cost for replacing your home of business may have gone down.   While it would affect your total assets, it could drive your property insurance costs down.

There are typically three different ways to look at property value:

  1. Market value - the amount of money you can expect to receive when selling the property under the current market conditions.
  2. Replacement value – the cost to replace any of the structures should a total loss occur.
  3. Use value – the amount of income your company would lose if the structure became uninhabitable or unusable for a set period.

Property insurance is based on the value of the structures on your property and the cost to replace them.  You might ask h0w this is different than the purchase price or estimated selling price?  The important factor is the value of the land.  Land will not burn up, blow away and with the exception of erosion if you are on the bank of a stream or lake will not be lost in a flood, so you have a foundation to rebuild on, or funds from a sale of the land.

With the implosion of the real estate market, it is possible that the value of your property has dropped, and you may be over insuring your property.   This could have occurred because the property was improperly valued initially (based on market value rather than replacement value), established an incorrect modifier to determine replacement value, or incorrectly estimating inflation modifiers when renewing the insurance programs over the course of several years.

In order to be sure that you are being properly covered, I suggest you have an appraisal completed on your property.  The small cost of having a certified commercial property appraiser can be recouped in reduced premiums, and proper coverage in the even there is a claim.

The property appraiser will be able to provide information on the Market and Replacement values.  These values go directly towards the true value of the property as well as the repair or replacement costs associated with to the structure.

The Usage value is something that would be identified by your organization and depending on the role of the structure can be part of your business continuity program, or a separate policy/program to replace rental income generated from the structure if the building was leased to others.

Please note that Personal Property such as copiers, computers, phones, and desks  is different from Real Property that the basic property package coverage and, while it may be rolled into the entire package, requires a separate declared value.

Once you have completed a certified appraisal, you will probably want to continue with this practice every 3 – 5 years.  This will make sure your coverage keeps pace with actual costs, and reduce the risk negative impact from co-insurance clauses in the event of incorrectly valuing the replacement costs to low.

Over the past several years I have seen and read that the price for purchasing some insurance policies has been dropping.  This can be attributed to the reduction of natural disasters, aggressive pricing from the carriers to gain market share and better management of risks to reduce the probability of a claim.  At face value, this is a very good thing.

However, in some cases, the cost of the insurance policy is being reduced because of changes to the policy that reduce the risk and subsequent costs to the insurance company.  These changes can be as obvious as increasing the deductible, reducing the amount of coverage, or exclusions of specific conditions from coverage to “hidden” changes resulting from the quality of customer service.

If these changes are part of the overall risk strategy of your organization and agreed upon prior to requesting the quote, this is a good thing.  If they are not, signing the contract without carefully considering the ramifications of the changes puts your company at a higher risk, and increases your total cost of risk.

In an article published by Risk and Insurance titled,”The Costs Creeping into Property and Liability Policies“, Philip Glick pointed out some of the changes in coverage that can leave a business with a greater exposure.   In addition to the changes listed above, one of the common “hidden” ways of increasing the premium is requiring the uninsured property value be established at replacement cost rather than an agreed upon amount, thus increasing the amount of the premium.  If the insured does not accept this demand, the underwriter can impose a very steep co-insurance penalty to the renewal policy.   Another stealth way of increasing your total cost of risk is  focusing on more stringent Loss-control  requirements (such as sprinkler system and Worker’s Compensation loss control programs).  If the organization is not compliant at a later inspection, your company will be required to put the programs into place or face cancellation penalties and loss of coverage.

It is imperative for you to carefully read and compare the proposed policy against the current program and identify where there are changes in the program.  I have typically established a spreadsheet outlining the coverage, exclusions, and requirements that have been established in the contract.  

Additionally, documenting the loss control requirements as part of the insurance company’s quote will allow you to identify potential issues and costs prior to binding the coverage.

Another trend identified by Glick is the additions of restrictions on additional insured as well as potential slow down in the claims process.  These types of issues not only affect your bottom line, but the reputation your company has with your suppliers and customers. 

Identifying these types of issues requires the careful monitoring of the claims and requests provided to the insurance company to identify trends that can affect your company and raising concerns when a slowdown or change in the quality of service happens.   It’s also important to document the strategies, time lines, documentation requirements and expectations for claims that may be filed.  This agreed upon process will help speed the claim process along and can be used as a measurement for quality purposes.

I had an experience like this when my main insurance broker presented a proposal for an area that was currently serviced by another provider.  Promising that the policy exceeded the current coverage at significantly lower prices, they pushed for immediate acceptance of their program and the cancellation of the other policy.

When I completed a side by side comparison of the current and proposed policy I found that the proposal provided significantly less coverage to our owner operators and could leave some of our contractors exposed to additional risk.  It took some significant negotiations to bring the proposed policy up to an acceptable alternative to the current policy while still maintaining a reduced price.

It’s the first day of 2010 and between the parades, football and food, I wondered what new years resolutions are on the minds of Risk Managers.   If you haven’t put together this years list, here are 5 suggestions for the coming year.

1.  Increase the awareness of Risk in your organization- In my experience, many decisions are made based on best case scenario, or what will put more money to the bottom line.  While this philosophy works very well, in many cases the decision makers do not realize the total extent of the upside and the downside to the organization.  It’s important to be aware of the risks and rewards to be sure that the decision is based on what is best for the organization as well as making sure that the reward is appropriate for the amount of risk that is involved.

2.  Monitor the credit health of your suppliers as closely as your customers - The roller coaster ride the economy has taken over the past 18 months have shown the vulnerability of all businesses.  The success of your organization may be tied to goods, services and material from an upstream supplier, and if that supplier is at risk of going out of business, the interruption to your supply chain may be a devastating blow.  Monitor the “health” of your suppliers as carefully as you monitor your own Accounts Receivable.  It may just help identify a stress point in your supply chain.

3.  Review your organizations risk tolerance- If you have already taken the initial steps to determine your company’s tolerance of risk, do a follow up to make sure that the mood and thoughts of the company has not changed.  If you haven’t established the risk levels your company is willing to endure, I would suggest completing the process.  Identifying the risk tolerance of an organization provides a benchmark to measure the risks that new proposals, ideas and opportunities present when green-lighting a project.  It helps determine the amount of insurance coverage your company may require, or which alternatives should be put in place to manage the risk at hand.

4. Review contracts and agreements for inappropriate risk transfer or lack of protection – Many contracts can call for you to take on additional risk, or require your company to maintain an inappropriate or unnecessary level of insurance coverage.  In my years of creating and establishing business relations with vendors and customers, I have found that many smaller companies do not fully understand the agreements they are signing and may not realize the full scope of the contract.   The clauses in the fine print and away from the unit price, can call for stiff penalties for errors, responsibility for damages that are not associated with the product or service you select, insurance coverage requirements (including the amount of coverage needed and the naming of the customer as an entity on the policy) and/or minimal reimbursement for the loss or damage to your product.  Reviewing the entire contract and accounting for all the bits and pieces of risk help you to determine if the price or payment is appropriate for the risk that is taken.

5.  Review of your insurance agent(s)/broker(s) and other Third Party Administrators - Your insurance agent, broker or third party claims administrators (TPA’s) are important partners to your business.  They represent you and your interests to the insurance companies and work to maintain or reduce your total cost of insurance.  Typically you will have contracts with the insurance broker and the TPA’s that outline the expectation you have of them for the fees you are paying.  Make sure that a review is periodically set up to measure how well they are doing both in managing your costs as well as looking for cost reduction opportunities.   Remember that there is nothing that would prevent you from placing your business out for proposals on a regular basis to make sure you are receiving the appropriate service for the appropriate price.  However I would put out a few caveats related to the RFP process.  First, make a determination of what is needed and craft the proposal very carefully to establish the core requirements and how these requirements are responded to in the proposal.  You need to be able to compare apples to apples and keep the ancillary issues, ideas and proposals separate so they do not cloud the comparison (they come into play after the core issues are reviewed).  Second, I would suggest that an RFP is not issued every year, unless the quality of service is unacceptable.  You should provide a sufficient window to allow the service provider to build a track record showing the quality of service as well as show stability when working with the insurance companies.  Third, remember that an RFP is not a sign that the current provider is unacceptable, and you do not need to make a switch. 

6.  Build better relationships with other departments to better understand the operational risks they are facing -  This one probably goes back to our first resolution, but the better relationships you have with other departments, the better understanding you will have with the overall operation of the company and in turn the potential risks that could pop up from unexpected places.

7.  Subscribe and read to a business or industry related magazine, e-zine or newsletter  - I am continually amazed at the number of ideas and new opportunities I find in Business Week, Fast Company, Wired, and Bnet.  They are sources of inspiration and thoughts from different industries and business areas that can be modified to fit my organization or spur on new ideas, products and services. 

8.  Update your disaster recovery and business continuity plans -  These plans are the things that minimize the oops in operations.  The plans are not just for IT service outages, but for any unexpected incident that can cause an interruption in your business.  Make sure you review the plans annually to adjust for any changes in personnel, operational locations or new impact areas.

There you have it, a listing of 8 resolutions for 2010, and I am sure there are many more out there.  Please feel free to contribute your suggested resolutions for 2010.

Wishing you a Safe, Healthy, Happy and Prosperous 2010.

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