Privacy Liability

If your business stores personal information, you have a responsibility to guard it. More often, we're hearing in the news about stolen, misplaced, or poorly guarded personal information. The employee that had backup tapes stolen out of a car, the misplaced laptop, and even the dreaded "targeted attack." Patient records, student records, credit card information, even employee information is all at risk. '

To make it more challenging, many states now have mandatory disclosure statutes. So after the company becomes aware of circumstances that could have lead to a disclosure (even if it isn't likely) they are required to notify every affected person and may be required to offer free credit monitoring. To make it more cumbersome, these laws are changing rapidly and are not uniform from state to state.

And to top it off, the breaches can be staggering. University of Florida had an incident potentially disclosing information on 107,000 people. The cost of a mailing alone to that group is large.

Privacy liability insurance not only offers some protection against the suits and pays for mandatory disclosures, but the claims team has experience with these incidents. The brain power of a privacy liability claims team is as valuable and faster than hiring a special consultant. The claim team costs are also not counted against the policy limit.

As we move to make more information accessible, safeguarding it becomes even more important. Privacy / network security insurance can offer protection for a quickly and stealthily increasing exposure.

Broker and Insurance Policy Value

People are always talking about the commoditization of insurance and the future of independent brokers. I believe that brokers will always play a role in certain insurance. However, brokers add cost to insurance, so clients have to see value. Some do see value, some will never see value (or perhaps there isn't much) and some are in the middle and can be pushed either way.

It's always tempting to compete on price. Everyone understands money in their pocket, and it doesn't take much expertise as an agent or broker to do it. And if you compete on pure price and nothing else, the broker will eventually get squeezed out of the transaction.

Those that have moved to buy their insurance online believe that they don't need professional help to buy insurance. And, in some cases that's true. The people who buy state minimum auto insurance for their 20 year old junker car don't care about claim service or higher policy limits.

And I think for low claims frequency accounts this will always be an uphill battle. People are bad at preparing for the 100 year flood, but much better at preparing for the storms that come every year. If you have an insurance policy that you haven't had a claim on in at least five years, it feels more like protecting against something that will never happen. You're apt to keep buying it at bottom dollar, if at all.

However, the larger accounts that have a few claims every year, tend to care about more than price. They know they need a broker to help navigate the waters. Perhaps even risk management consulting. For them, the cost of the policy isn't the only cost. It's also the dollars they recover from first party claims, minimizing third party claim payments, claims reps that care, nuanced coverage that fits unique exposures, choice of council and 100 other things.

It's easy for me to sell value and knowledge to my clients that have the storms. The challenge comes to show value to the smaller clients. And that's why those clients end up with policies that don't cover everything or an agent that doesn't understand the exposures....they want bottom dollar. For these clients, until they have a claim, the policy is a commodity.

A good broker takes on clients that have a real need for his services. He adds something to the transaction in exchange for what he is paid. Those are the brokers that understand the coverage available, the difference between carriers, and have the risk management experience. There will always be room for anyone providing a service with real value.

Friday Break

Ok, so believe it or not being an insurance broker can actually be pretty amusing sometimes. You hear lots of great stories, and some people tell some whoppers. Today's story is from my personal lines days some years ago. I call it, the man with 14 cars.

When I started in this office, the man, let's call him Mr. X, and his wife had 2 cars and two children. These children may have been teenagers, we're not entirely sure. One day Mr. X calls the office to add a third car. As I always did, I asked him if there was now a third driver in the house. And he said that it was just going to be a spare car for the winter. (That isn't all that uncommon, especially if your primary car is a sports car, especially nice, or rather old and prone to break downs.) So, I added the car and took his payment. No big deal. Until, two weeks later, he did it again. And like the first time, no new drivers. And a third time, and a fourth until over the course of about three months Mr. X had 14 cars in his household and two drivers.

Now I know what you're thinking, maybe he just likes to collect cars. I've never met anyone who likes to collect Honda Civics and Mercury Sables, but maybe he's the first. The agent in charge of the office wasn't too concerned with investigating, because Mr. X paid for 14 cars, on time, every month, usually in person. And that's where Mr. X started to get a little cavalier about it. At first, he would run into the office while someone, driving his car, who we knew wasn't his wife, was sitting in the driver's seat. Then, Mr. X couldn't be bothered to make the payments himself at all. At least 5 other people, who all claimed to be Mr. X's brothers or sisters came to the office, driving one of Mr. X's cars, to make his payments for him.

Insurance agents are people too. Mr. X, you weren't fooling anyone. Now, I have no idea exactly what Mr. X was running with his fleet of vehicles, but it must have been something good. Maybe he had a nice little car rental business, or maybe none of his family could get car insurance. Who knows.

But before you go and pull such an obvious and funny scam as Mr. X, think about it. You might just end up providing me with more material for my blog.

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How do I know if I'm paying too much?

Everyone wants to get the best deal on everything that they purchase. That means striking a balance between price and quality. With insurance, quality is measured by what is covered and the claims process. A good broker can help show you the difference in quality between policies, but what about price?

Most people stay with one broker and insurance carrier for many years. Their premiums may go up or down over time, but what others pay may have shifted much more. Every few years, if you have an independent agent, you should ask them to market your policy. In my agency, most of our clients are on a three year marketing cycle. This means, that if our client asks or not, we shop multiple insurance carriers for alternative quotes. We also market if the insured asks, or if we feel a premium increase is unjustified.

There is such a thing as over marketing. If you pay more than $15,000 for business insurance annually, your account is usually reviewed by an individual underwriter. This is a real person, with a name, a face and a memory. If you market your account every year, it develops a reputation with those underwriters that quote it repeatedly, and they start declining to quote, or may not put in the time to give you the best pricing. This goes doubly so in niche writing areas, like social service, fire protection, security, et cetera.

Unless you have an agent that only writes with one carrier, most independent brokers will be able to bring you three quotes. Your independent broker is your advocate and your adviser, you need not sever that relationship to check to see if you're getting the best deal. Now, if you are unhappy with your broker, that is a separate discussion.

If you have a large account (say over $50,000 in annual premium) and you have some losses every year, there is another quick way to see if you are getting a fair deal. Check your loss ratio, that is divide total losses by total premiums, over a few years. If the ratio is under 40% you may be due a decrease, if it is 40-60%, your coverage is priced about right, and if the loss ratio is over 60%, your coverage may be underpriced. Now that is only a rule of thumb and there are many other factors which enter in to this. Also, it's not a good rule of thumb for lines which only have large, catastrophic claims, and very infrequently, like umbrella coverage.

With just a little work, you can make sure you get the best deal.

Setting Liability Limits

At some point in purchasing insurance, everyone has to choose a limit of liability. Even in personal auto insurance you have to choose a limit. Some people take "state minimum" or they ask the insurance agent to tell them what they need. And for many people, I can understand why this happens. Most people don't have a good handle on what a limit of liability is or why they should care. The limit of liability is the most the insurance company will pay to a claimant on behalf of the insured. It may or may not limit the cost of legal defense as well.

So why does it matter? When the insurance company pays the policy limit, it doesn't magically make the insured not liable for additional losses. For example, someone is insured in a fatal car crash, and the insurance company pays the policy limit of $50,000 to the deceased's spouse. That does not end the claim, the family is free to sue, and may receive a judgement well in excess of $50,000. They could then place liens on property and garnish wages until the judgement is paid.

However, most plaintiffs only want to bring a suit if they think that they can recover something. Which is why when someone driving a cheap car without insurance and damages your car, your insurance company may not pursue the driver. The insurance company doesn't think that they will be successful in extracting any money from the guilty party. There is likely nothing to take. Those with nothing to protect are generally judgement proof, and only carry what the law requires, at most.

So, how does one set a liability limit? I advise my clients to take three items into account.

1. What is the maximum probable loss?

2. How much insurance do I need to protect my assets?

3. What is reasonable and customary for others in the same position?

For example, Jim runs a medium size seafood wholesaler. He owns his building and has business assets of about $750,000 including fixtures, inventory, cash and receivables. Wholesalers similar to Jim carry at least $1,000,000 in general liability, and some carry as much as $5,000,000. A maximum probable loss is somewhat more than $1,000,000 (think salmonella poisoning). Jim wants to protect his assets, and make sure that no one incident can end his business. I would most likely recommend a $2,000,000 limit of liability. This balances the exposure, his assets to protect, and the practices of other similarly situated businesses.

So $2,000,000 is going to cost twice as much as $1,000,000, right? Actually, $2,000,000 won't cost that much more than $1,000,000. In many cases the second million of coverage will cost as little as 20% as the cost of the first. This is because losses under $1,000,000 are generally more likely than losses between $1-$2 million.

There are a number of pieces to balance, but as an informed consumer, you don't have to let someone else choose for you.