My business doesn’t own a car, why do I need auto insurance?

Many business owners think just because they don’t own a vehicle, they don’t have any exposure to auto liability. Often, even businesses that do not own a vehicle need auto insurance, specifically hired and non-owned auto insurance.

Any time an employee is driving a vehicle, even their own, on “company time” or for a business purpose, the employer is exposed to liability. This is due to vicarious liability, the concept that one can be responsible for the acts of another. This is commonly referred to as the master/servant rule or respondent superior “let the master answer.” Because of this rule, employers are often responsible for the actions of their employees, even when the employer did not direct them to do something. If the employee drives their personal vehicle for a business purpose and is responsible for damage, the business is just as responsible. Cases are even more clear cut if the employee was in a vehicle rented primarily for business. For instance, when the employee is attending a conference and rents a vehicle.

The answer to this is hired and non owned auto insurance. For most small businesses, the insurance carrier writing the package policy or the “BOP” business owner’s policy, is happy to include the coverage. Most of the time, hired and non owned auto liability insurance is only a few hundred dollars per year, and is a worthwhile addition to your insurance program.

Insuring Vacant Buildings

Vacant buildings, especially recently, are a fact of life. There are a few things that everyone should be aware of with insuring vacant buildings, especially going into the winter.

A vacant building is any building, which contains no furniture, fixtures or equipment and is not used on an ongoing basis. It also has not been used for at least 30 days. Vacant buildings are prone different risks than occupied ones. They have higher rates of vandalism and theft of building property. Vacant buildings also have higher rates of frozen pipes because they are frequently not winterized.

There are real consequences for insurance on vacant buildings. If you do not tell the insurance company that the building will be vacant and you have a claim, payouts are often reduced by 15% and there is no coverage for loss by damage in the course of a theft or vandalism. Also, frozen pipe claims are generally excluded when the pipers were not drained or the building was not heated.

If you do tell your insurance company that a building is vacant, they may choose not to renew the policy. If there is a plan to re-occupy or dispose of the property, than the insurance company is likely to grant a "vacancy permit" which gives most coverage back on a vacant building and eliminates the claim payment penalty. If you happen to have a number of buildings, most companies have standards for vacancy percentages. Alternative insurance is available specifically for vacant buildings. These policies are easy to obtain, just ask your current broker.

It's best to have a plan for your vacant property. Even hold for 12 months pending market improvement then list for sale is better than not offering a plan to use the property. And while you hold the property, there are some things that you can do to minimize your risks. If it is a residential property, make it appear occupied. You could put some lights on timers, leave some furniture in the home, or install some "staging furniture" (made entirely from cardboard). At the very least, drop by the property on a weekly basis, keep the lawn mowed, and in the winter drain the pipes if the building will not have heat.

With a little time and effort, you can really minimize the chance that you will take an uninsured loss on a vacant building.

If you just need the insurance - call my office today - 312-566-9700.

Property Insurance Limits in a Declining Real Estate Market

It wasn't that long ago insurance agents were explaining to property owners and mortgage brokers that they didn't need an $800,000 homeowners policy on a 2000 square foot house, even though that was the market value. Property insurance valuations can be done on three valuations, replacement cost (what it would cost to rebuild), actual cash value (replacement cost less depreciation), or agreed value (a fixed number agreed with the underwriter).

The vast majority of property insurance is written on a replacement cost basis. The idea is that if there was ever a total loss to the building, most people would want the ability to rebuild. Replacement cost includes the increased (or decreased) cost of updated building methods and includes the cost of construction to current building codes. Replacement cost is not market value. Market value is what someone is willing to pay for the building and the land in its current state. Replacement cost does not include the value of the land, which can not be destroyed. Just a few years ago, in the booming real estate market, replacement cost was usually less than the market value of the home. Insurance agents were constantly explaining to insureds that just because their house appraised for double purchase price several years prior does not mean that the insurance value needs to be increased. This fight was often lost with the mortgage company with the processor saying over and over again "we need to insure the mortgage value" or "that's not what the appraisal says." Many homes went over insured, and premiums were inflated.

Now most homes have declined in market value. Especially in urban settings, market value of the home is now replacement cost. So what's a homeowner to do? Well, it depends on your objective. If there was a significant loss would you rather rebuild at the same location, or take one of the comparable properties on the market at a lower cost? If you would want to rebuild, you need to make sure the insurance policy limit covers the cost to rebuild. Sometimes that can be found on an appraisal, but most mortgage companies don't require it to fund the loan, so it's often not done. If it wasn't done, your insurance agent can help you determine a replacement cost for you. This number could be higher than the purchase price.

If you would just buy a new home for market value (assuming it's still less than replacement cost), than you would want to insure your home for actual cash value. This is the replacement cost of your home, less depreciation, and is closer to fair market value. The cost per thousand of insurance is slightly higher, but the overall policy cost can be much less. As always, don't let someone else make your choice. Your mortgage broker isn't interested in protecting you and your insurance agent doesn't know what you want. Both replacement cost and actual cash value are good options. In light of deflated home values and foreclosures, evaluate all your options.

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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.

What is a "soft market" and what does it mean to the consumer?

You may have heard that insurance is in a "soft market." A soft market means that insurance rates in one or more areas are declining. For a number of years, we have been in a soft market and in general, property and casualty rates have been declining, with a few notable exceptions.

What does this mean for the consumer? It means that the consumer has more options, because more insurance companies are competing more vigorously for business. This could lead to lower prices, better terms, and better availability of insurance. If you have had the same policy for at least three to five years and have not received any discount on the same exposure (same gross receipts or property value) than it is time to evaluate your options. Talk to your broker, ask them why your rates haven't gone down in several years. If they can't give you a good answer, talk to another broker. You have options today that did not exist five years ago.

But why are rates better today then they were some years ago? Insurance and reinsurance companies have a surplus of capital. Quite simply, more people want to invest in insurance companies than are required. As long as there are surplus dollars chasing static decreasing premiums, rates will fall. Rates will fall until the extra surplus dollars are driven out by unacceptable returns.

Most of the decreases are cyclical, and will turn into increases at some point in the future. The only decreases here to stay are those that are driven not by surplus capital, but by lowered underwriting costs (company efficiency) or fewer claims.

Enjoy the savings while they are here. Indicators show rates won't be going back up for at least another year...if not longer.

What is subrogation?

Sometimes the topic of subrogation comes up with a claim and people aren’t quite sure what it is. Subrogation is the process through which an insurance company makes a payment either to their insured or on their insured’s behalf, and than tries to recover that payment from a more culpable party.

Many people have seen the subrogation process work but may not have heard the term. Most everyone has car insurance, and many people have been in an accident that isn’t their fault. When someone is not at fault in an accident, they can go to their own insurer and collect under their collision insurance. But since they aren’t at fault, their insurer will try and recover from the responsible party. A claimant might never realize this happens, but for the fact that they get a refund check for their deductible if the insurer is successful in making the responsible party pay.

So why should a business owner care about subrogation? Well, there are a number of reasons. First of all, if the business paid a deductible, they could receive that back. Secondly, and possibly more importantly, subrogated claims are not used when calculating policy loss ratios. Policy loss ratios are simply a calculation of losses paid divided by premium charged. Low loss ratios lead to favorable renewals and discounts; high loss ratios lead to higher rates and even non-renewals.

Sometimes a business owner might not want subrogation to occur against a particular party for some business reason. For example, a nonprofit may have a below market lease as a quasi donation. Most insurance policies grant the insurer the right to subrogate at their discretion without your explicit consent. To prevent subrogation, this must be negotiated in advance with the carrier and a small additional premium may be charged. In fact, some landlords or clients may require a waiver of subrogation before letting a business operate at their location.

As usual an ounce of preparation is worth a pound of after the fact damage control.

I serve liquor and fundraisers and events, does my organization need liquor liability?

I get this question all the time. Sometimes when I get a new client they even show me an annual liquor liability policy someone sold them for serving liquor at a quarterly event.

The simple answer is yes, if you serve liquor you should have liability insurance to cover it, but you probably already have it. Liquor liability suits are generally for bodily injury or property damage caused by a person who was served liquor at your event. Well, bodily injury and property damage is the definition of a commercial liability claim. So wouldn’t the liquor liability be covered in my commercial general liability policy? Probably. The standard commercial general liability policy contains an exclusion for liquor liability only if you are “in the business of manufacturing, distributing, selling, serving or furnishing alcoholic beverages.”

In the business means just that. If you own a bar, you need a separate policy. If you run a homeless shelter that has two galas a year, where you sell alcohol to guests either as part of the ticket price or by the glass you are not “in the business of selling alcohol.” Coverage would apply. The same holds true for holiday parties for your staff, coverage exists.

However, not everyone has the standard policy. Some people have an absolute liquor liability exclusion or they have a special event exclusion. Ask your agent and check your policy. But if you have a few special events a year that don’t include a very large unique event; your agent never should sell you a policy with a special event exclusion. You will end up paying much more in coverage for each event. Also, unless there is a very specific reason, no agent should sell you a policy with a more restrictive liquor exclusion than described above.

The short answer is yes, you need liquor liability, but you probably don’t need a separate policy for it.

What does an insurance policy being auditable mean?

Auditable insurance policies means the premium listed on your policy is estimated and won't be finalized until an audit at the end of the term.

All insurance policies are based on certain ratable elements. Those are the key pieces of information that determine how much you pay. For property insurance, the cost is based on the total insured value. It may even be printed on your policy in cost per $100 of insured property value. If you buy a new building, under most policies you have to schedule the building, pay and additional premium, and the insurance company raises your limit.

You don’t notify the insurance company, and there might not be coverage. But it doesn’t work like that with liability insurance. On a general liability policy or a workers compensation policy, the carrier agrees to defend you against claims. They rated you at the beginning of the policy on payroll or possibly gross sales. You pay a premium based on the estimated sales or payroll at that time. If you sell more goods, or hire more staff, you aren’t required to call the insurance company and list them on your policy. Clients and staff names aren’t listed on a normal liability policy or workers compensation policy, anyway.

But what if the business shrinks over the year? Well, with an audit at the end of the policy term some of the premium can be returned. If the business had more sales than estimated or more payroll, then the insurance company had more risk then they anticipated. In that case a bill is generated and additional premium due.

All workers compensation is auditable. Some general liability is auditable, particularly contractors, wholesale, and manufacturing. Professional liability and executive liability (directors & officers, employment practices & fiduciary) is never auditable. Check your policy, so you know what’s coming. And if your business is growing, ask your agent if you can get a non-auditable general liability policy. You could save a lot of money.

What happens to stolen property recovered after insurance paid a claim?

This question comes up from out clients time to time. A client has something stolen; a car for example, and the insurance company pays the claim. The insured buys a new car with the insurance money. A month later, the police find the stolen car. Except for a broken window and needing a new ignition it’s in pretty good shape.

So what happens? Does the insured have to take it back? But they have a new car already. Do they have to give back the insurance money? I’m always able to alleviate a lot of stress when I tell my client that it is their choice. They can keep the money and the insurance company keeps the car, or they can give back the money, less the cost of repairs, and take their car back.

With a car, almost everyone keeps the money. But this holds true for any property claim. Let’s say it was a piece of art that was stolen, not a car. Then, many more people will return the money and take their artwork back.

So if you ever find yourself in this situation take a breath and remember it’s your choice. You don’t have to give back the money and no one can make you take your recovered property back. But you can if you want to.

When does my non-profit need insurance?

A lot of people ask me this question. And there are a few easy answers, and then a lot of grey area. Non profit organizations, most commonly 501c3 corporations, the legal rights and duties of a for profit corporation. They can have employees, sign contracts, own properties, be sued, and most other things than any other business can do. This means that they in general would need insurance when any other business would.

There are a few very clear cut times. Sometimes the state requires you have insurance, like if the organization buys a vehicle, or if it required for a permit. Insurance could be required by a contract the organization signs. But if you’re just starting out, neither of these may apply to you.

While it’s a good idea to have property insurance if the non profit owns something of value (even if it’s been donated) there is rarely a requirement to insure it unless a bank loan is secured against it. So when do you have enough property to insure, and is it worth the money? Non profits are never running short of things to spend money on, but never have the donations or program revenues to buy everything everyone would like. If the operations of the non profit require certain property (like a building, or computers, or anything tangible), and that property could not be quickly replaced out of current funds without severely affecting operations; then there is a need for insurance. Put a little more plainly, if you own something that you need, that you can’t afford to quickly replace, it’s worth insuring.

Liability insurance works a little differently. Often, liability insurance is required by a third party like a grant maker, landlord or the like and the decision is made for the organization. But when it is not, you have to weigh the cost against the value. Liability insurance protects against some of the costs of certain demands for money and lawsuits against the organization. So if the likelihood and severity of these demands outweighs the cost of the insurance, than the choice to buy insurance is easy.

However, when an organization has no employees, and only as much money as people donate, it’s tough to spend on anything but direct program services. So, what makes a suit more likely? If the organization is perceived to have something worth expending resources to stop or take, a suit is more likely. It costs money to file a suit. But for causes of principle, people what that money back in a judgment.

When there is no other reason to buy liability insurance, the basic advise is purchase it when you feel you have assets worth protecting. We go through a very similar discussion with our larger insured’s when looking at limits. Does the likelihood of a lawsuit of that magnitude outweigh the cost of the insurance, and what assets does my organization have at risk?

What is Directors and Officers Insurance?

Non-profit organizations have very vastly different insurance needs then the average business. Non-profit’s do not generally have owners, shareholders or investors but are run by a board of directors. These board members guide the nonprofit in fulfilling its mission and are responsible for the financial solvency of the organization. If board members fail on either of these fronts they can be found personal liable. This means personal assets including but not limited to savings accounts, college funds, checking accounts and investments can all be won in a civil suit. It is essential that a nonprofit protects its board members from lawsuits and financial assessments. Directors & Officers insurance will pay for attorney fees, court costs and settlement up to the limit. This protects board members from having to use savings to defend themselves from frivolous and not so frivolous law suits. Directors and officers insurance is often combined with employment practices insurance and fiduciary insurance and is referred to as executive liability.

Directors and Officers Insurance has three basic parts; direct coverage for individual directors and officers when the organization is unable to defend them, reimbursement to the organization for indemnity of directors and officers and “entity coverage” for indemnity against similar claims made against the entity itself

Many different parties can bring a suit that would be covered by directors and officers insurance, including donors, clients, vendors, contractually joined entities, or other aggrieved parties.

Unlike some other kinds of insurance, there is no standardized directors and officers insurance policy. Most insurance companies write a few basic policy forms for sizes and classes of organization, and then “endorse” or add extra pages changing specific terms as needed. Differences between policies include everything from the definition of a “claim,” who is responsible for hiring and instructing defense council, your rights if you do not agree to a settlement as well as coverage amount.

It is unwise to compare policies based on price alone because the type of coverage can swing wildly between carriers. Remember, even the most fantastic, committed board member can be sued.
Things to discuss with your insurance broker:
1. What is important to your organization?
-Do your board members have a lot of assets? Do you want to control whether the insurance company settles? Do you want to use your organization's attorney?

2. What sort of lawsuits do you see in your organizations future?
-What does your organization do? Do you have high risk employees? Do you have a high risk clientele? Are you dealing with a lot of money? Do you have one large donor? Many smaller donors?