Each year, your property insurance renews. And chances are, each year you receive a copy of your updated policy – which features information about changes to your policy and premiums, including new exclusions.
Do you read it, or like many people, do you just file it away in the folder marked “insurance”?
“That policy always comes loaded with those pages of fine print mentioning the changes, and your eyes start to cross while you’re reading it, so you figure it’s fine,” says Kathy Doukas, owner of KMD Risk Management Consulting in Newton, MA. “But you need to be looking at it closely. You need to ask your broker every year if there is something you should be adding or if there is something on that policy you don’t need. If you haven’t asked the cost to replace the building in awhile, it’s time to look at it. If you have been carrying the same limit of insurance for the last 20 years, it is probably too low.”
Defining Your Needs
So how much insurance is enough? Experts at the Insurance Information Institute (III) in New York City say it depends on your business. Defining your business is important for accurate representation of your firm when seeking or updating your insurance policy, says Loretta L. Worters, vice president of communications at III.
“Defining the type of business helps you and your agent or company representative decide what types of coverage you’ll need,” Worters says, offering up several points to consider. Are you a small business? A small business is defined as having a size that is 99 employees or less. Are you a woman-owned business? This business type is defined as a business that is owned and controlled (51 percent or more) by a woman or women. Are there special insurance needs for these types of businesses?
Aside from personal business property, you’ll also need to consider if you require liability insurance, business income insurance for the building, boiler and machinery, human failure, employee protection, and management protection, among others, Worters points out. Your agent is there to help you consider these issues and should be more than just a name in your Rolodex.
“Once a year as a reminder, and certainly every couple of years, take a good look at your policy,” Doukas stresses. “If the legalese is overwhelming, sit down with your agent.”
Types of Policies
Insurance companies selling business insurance offer policies that combine protection from all major property and liability risks in one package, Worters notes. They also sell coverage separately. It depends on the needs you and your agent have outlined.
“Larger companies might purchase a commercial package policy or customize their policies to meet the special risks they face,” Worters says.
One package purchased by small- and mid-sized businesses is the business owners’ policy (BOP), which has been created for businesses that generally face the same kind and degree of risk. BOPs include:
Property insurance for buildings and contents owned by the company. There are two different forms: standard and special, which provides more comprehensive coverage.
Business interruption insurance, which covers the loss of income from a fire or other catastrophe that disrupts the operation of the business. It also can include the extra expense of operating out of a temporary location. It compensates for lost income if your company has to vacate the premises as a result of disaster-related damage covered by your property insurance policy, such as fire. It covers profits earned, based on your financial records, had the disaster not occurred. It also covers operating expenses, like electricity, that continue even though business activities have come to a temporary halt. It is not sold separately. It is added to a property insurance policy or included in a package policy.
Liability protection, which covers a company’s legal responsibility for the harm it may cause to others. This harm, Worters explains, is the result of things that a company and its employees do or fail to do in business operations that may cause bodily injury or property damage due to defective products, faulty installations, and errors in services provided.
The inclusion of business interruption insurance can make packages quite attractive, Worters points out.
“Business interruption insurance can be as vital to your survival as a business as fire insurance,” she notes. “Many people would never consider opening a business without buying insurance to cover damage due to fire and windstorms, but too many small business owners fail to think about how they would manage if a fire or other disaster damaged their business premises so that they were temporarily unusable. A business that has to close down completely while the premises are being repaired may lose out to competitors. A quick resumption of business after a disaster is essential.”
BOPs do not cover professional liability, auto insurance, workers compensation, or health and disability. “You’ll need separate insurance policies to cover professional services, vehicles, and your employees,” Worters explains.
Chances are you’ll also need separate policies to cover such things as flood damage, mold damage, earthquake damage, and possibly (if you are in a major metropolitan area) terrorist attack losses. These items are frequently excluded in most property insurance policies, including business owner package policies.
“The insurance industry took some heavy hits and took some steps to protect itself,” Doukas says, with respect to these and other policy exclusions. “It’s important to know what your policy doesn’t cover. Look at your exclusions and think about which ones really matter to you and which ones might affect you. If you have an exclusion that fits your business, you might want to see if another carrier will provide it or give you a better deal. Terms and conditions will vary within a carrier by account and also from carrier to carrier. Everyone has their own hot buttons.”
Find out from your local government office or your commercial bank whether your business is located in a flood zone. Also ask around to find out whether your location has been flooded in the past. Government projects to map flood zones may be slow to keep up with new devel-opments, Worters says.
If you need to buy a flood insurance policy, contact your insurance agent or the National Flood Insurance Program, (888) CALL-FLOOD or (www.fema.gov.nfip) on the Internet.
If you are in an earthquake-prone area, you’ll need a special earthquake insurance policy or commercial property earthquake endorsement. Earthquake policies have a different kind of deductible: a percentage of coverage rather than a straight dollar amount, Worters notes. If the building is insured for $100,000 with a 5-percent deductible, for example, in the event of an earthquake, your business would be responsible for the first $5,000 in damage.
“Remember that business interruption insurance, which reimburses you for lost income during a shutdown, applies only to causes of damage covered under your business property insurance policy,” Worters says. “If your business premises are shut down due to earthquake damage, you’ll need to have earthquake coverage to make a claim under a business interruption policy.”
Under the Terrorism Risk Insurance Act of 2002, only businesses that purchase optional terrorism coverage are covered for losses arising from terrorist acts; the exception being workers compensation, which covers injuries and deaths due to acts of terrorism.
Also, bear in mind that an event has to cause $5 million in damages to be certified as an act of terrorism.
“You have to make a conscious decision about it,” Doukas says.
A concentrated focus on terrorism coverage issues post-9/11 gave the insurance industry the perfect chance to slip mold exclusions into policies, says David J. Dybdahl, president of American Risk Management Resources Network LLC, which operates offices in New York City, Chicago, and Los Angeles.
“The big news for property managers is that the mold exclusions that were added to virtually all of their insurance policies last year blew out a lot more insurance protection than any of them realize,” Dybdahl says. “The mold exclusions added to the property owners’ policies enhance the chances the facility manager will be sued for damages as well.”
The answer to this dilemma is environmental insurance. Environmental insurance policies have roots in liability insurance but also provide coverage for such things as restoration expenses and business interruption. Dybdahl notes that an “off-the-shelf” environmental policy should be modified to provide coverage for mold-related damages with the addition of mold, fungus, and microbial matter in the definitions of a policy’s “covered pollutants.”
One thing to keep in mind: “Any coverage you can get in an environmental policy can be expensive, and the coverage will be thin,” Doukas points out. “It’s a good thing to also have policies and procedures in place to contain moisture and get any wet areas dry quickly instead of wasting money.”
Dybdahl agrees, adding, “You need to address that mold is a hazardous material. Water in buildings is bad news. If you’re paying attention to it, you can keep water out of a building.”
In fact, underwriters typically demand that some form of mold risk management program be in place within a facility before they will issue a policy that covers mold-related damages.
It’s important to remember that an insurance policy is simply that: insurance. It does not replace ongoing diligence and building maintenance.
“Insurance isn’t the only way to protect yourself from bad things that happen,” Doukas says. “It is your financial backstop if nothing else works. Fortunately, most of us go through life and nothing ever happens. When something does, you find out what you really have. You find out what your agent can and will do for you and what your insurance policy really means.”
Robin Suttell (firstname.lastname@example.org), based in Cleveland, is contributing editor at Buildings magazine.