Will Your Insurance Back You if Disaster Strikes?

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Hf 0402 69

Hf 0402 69


Each night when you leave your shop, you double-check that all flammable materials are securely stored or disposed of, set the security system and lock the door. You're careful and you're prepared—so you think. But if a fire destroyed your business tonight, would you be left holding nothing but a bag of ashes? Likemost business owners, you expect your insurance company to respond by offering rapid compensation after a fire, flood, wind damage or burglary. Unfortunately, your insurance company may have other ideas. After receiving your claim, your carrier may:

  • weasel out of paying by citing contract loopholes
  • deny coverage for many items until you prove ownership and loss 
  • drag the procedure out for months before cutting you a check.

Whatever the tactic, the result is the same: costly delays that not only keep you from quickly re-launching your business, but may even trigger bankruptcy.

Here's some good news. You can take action now to smooth the transition should disaster strike. Indeed, you have a plethora of resources at your disposal. To get a handle on the best ones, we interviewed a veteran insurance adviser who works with businesses around the country. Daniel C. Free is president and general counsel of Insurance Audit &Inspection Company, a 97-year-old Indianapolis-based consulting firm. He is also president of the Society of Risk Management Consultants.

The root of the problem, according to Free, is that business owners fail to perform due diligence in assessing the financial stability of their insurance carriers. "If you have a policy with a weak carrier, your claim may not be settled in a timely manner," he says.

It's even worse if your insurance company goes belly-up, according to Free. "If your carrier becomes insolvent, you may have to rely on your state's guarantee trust fund, which is financed with money paid by insurance companies licensed in your state." When an insurance company goes under, claimants turn to the trust fund for a partial recovery on the amount they would have gotten from their carrier. Note that "partial" is the operative word. You are limited to a certain dollar amount. Free says, "In brief, you will wait a long time for a partial recovery."

A financially sound carrier is critical for both property and casualty coverages. In case of fire, theft or other property damage, a financially weak carrier will nit-pick your claim and look for any reason to avoid coughing up money. On the casualty side, you face a different risk. A lawsuit for physical injury can be filed many months or years after an incident. If your carrier has gone out of business you may be out of luck, because your new carrier will not cover lawsuits for incidents that occurred before you took out the new policy.

Free offers an example. "Suppose you have an automobile, and one of your employees has an accident she doesn't tell you about," Free says. "The injured party has a baby, the baby has problems and the physician relates it back to the accident. You have to be sure that the insurance company will be around to indemnify you for a claim. Solvency becomes more important if a claim has to be defended sometime down the road."

So the risk in choosing the wrong insurance company is high. Most business owners just pick a carrier with a name that "sounds solid," pay their premiums, and hope for the best. You can do better than that. Here's how.

Show me the ratings

Six major ratings services offer assessments of the financial health of insurance carriers. The oldest rating service is A.M. Best, which still rates insurance carriers exclusively. Some of the others also rate corporate bonds.

"I recommend looking up your carrier in all of the ratings services, rather than just one," says Free, who favors A.M. Best for its longevity and specialization. Each service uses a different formula for assessing financial stability, so one may catch a problem the others miss. Indeed, if you see a big discrepancy in the ratings, find out what's causing it.

Keep a couple of things in mind. First, most ratings services charge carriers for coverage. For the larger ratings services, the fee can range from $15,000 to $45,000. You want to consider whether such charges may favorably skew a rating. Second, new insurance companies are not rated until they are in business a number of years. This is so the ratings services can assess their historical records.

Ratings can change. Make sure your broker checks your own carrier's ratings throughout the year, and informs you promptly of changes. "Avoidance of surprise is the big thing," Free says. "Your broker should inform you promptly if a carrier's ratings fall below your standard."

Ask your state's insurance department for reports. This is an important source that's easily overlooked. All insurance companies certified to provide insurance in a state have to file annual financial reports with the state insurance department. Just as important, many states provide reports on how many complaints have been filed against the carrier. Often, states calculate "complaint ratios." These figures are calculated by dividing the number of complaints by the number of policies outstanding. The higher the ratio, the greater the problem.

Complaints can also be clues to solvency problems. For example, if a large number of complaints have been filed because a company was late paying claims, it can mean the firm is having financial difficulty. Also ask for a record of any disciplinary actions that have been taken against your prospective agent, broker or insurance company. Finally, ask your state insurance department if your carrier is licensed to do business in your state. If not, you will not have access to the funds in the state guarantee fund if the insurance company goes bust.

Keep in mind that some states maintain more comprehensive records than others. To find the contact information for the insurance department in your state, visit www.insure.com/states. When you select your state in the menu, the resulting page will have information including address and phone number. This site is also an excellent place to get answers to insurance questions in general.

Does your broker know your business?

That takes care of insurance carriers. Now, how about brokers. After all, your business relies on them for decisions on what risks to cover. To find out if a broker is knowledgeable, ask for the names of current customers and then call them.

"References are more important for brokers than for insurance carriers," Free says. That's because you generally only contact an insurance company when you have a claim, and your satisfaction level at that time may differ substantially from that of other clients, for a variety of reasons. But you work with a broker regularly throughout the year, so you want some feedback from other clients about the broker's responsiveness, reliability, and expertise. Find out how other businesses like the broker. Does the broker take an interest in the business and resolve claims promptly. When interviewing other clients, ask: How responsive was the agent following a loss. Did the agent pitch in to help you negotiate with the adjuster? Or were you left on your own? How long before your renewal time did you get new quotes? Did the agent give you a last minute unpleasant surprise?

Know-how is particularly important. Pick a broker who has other clients in your industry. This indicates the broker knows your risks, can suggest coverage sto manage those risks, and knows which carriers specialize in your industry.

The broker should be willing to come to your business location and review everything to make sure you get covered properly. The broker who shrugs off a site visit may be indicating you are too small to be bothered with.

Avoid selecting a broker because of a famous company name. "The broker who works best for you may not be with a large company," Free says. "You may get a lot more attention out of someone who is smaller." Avoid being a small fish in a large pond. Likewise, you don't necessarily need a national firm unless your locations are scattered across the country. If you operate regionally or locally, look for a broker who is familiar with the carriers in your area.

Whether the broker is large or small, make sure you hook up with a knowledgeable and conscientious staff person. "Is the person a senior individual with experience, or a new person who has just come in with the agency?" Free poses.

Perhaps most important is the broker's enthusiasm. "The crowning thing is the quality of service you get on a day-to-day basis," Free says. "The broker needs to understand what you do and what you want."

Be proactive when managing your broker. Free suggests coming up with a wish list, sorting the items by importance, then giving the result to the broker as a written contract. "Unless you are explicit, the broker has to guess what you want," Free says. Consider including items such as: coverage only with carriers with top ratings; response to all requests within three days; proposals 60 days prior to renewal date; monthly meetings to discuss risk management issues; reviews of open claims on a periodic basis; site visits to various facilities for loss control; and reduction of premiums.

Free suggests you put in writing to the agent the following stipulations: "You insist that your coverage be placed with insurance companies with A- or better ratings with the A.M. Best company. Also, the agent must notify you if the carrier receives a reduction in its rating. This puts the ball in the agent's court."

One of the biggest dangers is that smaller brokers may not stay on top of the financial solvency ratings of insurance companies. You need to make sure that your broker does so. "Larger brokers know they can get sued for placing a client with a carrier that goes insolvent," Free says. "The smaller broker may not be as diligent."

You will want to obtain some assurances of financial stability on the part of your broker. "There have been many cases where brokers have had solvency problems and pocketed the premiums paid by insureds," Free says. "All of a sudden the policyholder finds out the insurance company never got paid."

While these suggestions will help you select a good broker, be on the alert for the No.1 bugbear of the insurance field: Your relationship with a broker can change overnight when the firm participates in the great merger wave now breaking over the insurance brokerage industry at all levels. When brokers merge, the policyholders often lose. Merged firms tend to lay off technical people who were valued contacts with clients. And larger brokerage soften start to ignore smaller clients who no longer fit into a revised strategic plan.

"Sometimes the new boss wants more sales," Free says. "The pressure is on to sell more business and not necessarily to service what the firm already has. The policyholder gets squeezed." The result: you no longer have access to that broker contact who really understood your risks. Requests for account service start taking two weeks instead of three or four days. Responsiveness to claims slows to a crawl.

Given the dangerous minefields along the path to risk management, it's clear that the prudent business owner must do more than pick an insurance company with a household name. This article has highlighted some of the most important factors to check. Take them to heart and when disaster strikes, you will hold the golden key to profits instead of a bag of ashes.


It could happen to you

So now you’re thinking: All this advice about finding a reliable insurance carrier is great, but who has the time to do the research and legwork? It may not seem like a priority now, but as soon as disaster strikes and you’re at the mercy of the insurance company, your efforts will seem well worth the time. This is something Sheila McSwain and her husband, Michael, of Cincinnati, Ohio-based McSwain’s The Hardwood Floor Store Inc. learned last year when their offices, which they had recently moved into, were flooded in July with two feet of water and sewage. Their showroom on the second floor of the building was spared, but their offices and a room housing roughly $35,000 in recently reconditioned machinery, including big machines and edgers, was not.

After suffering approximately $125,000 in damages, the McSwains were not ready to purchase replacement machines or office furniture until they received a check from their insurance company. Unfortunately, the insurance carrier did not want to issue a check without seeing machinery receipts, which Sheila McSwain said were either destroyed in the flood or tossed years ago because the machinery was that old.

As an alternative to supplying the receipts, the carrier asked them to figure out and document the value of every item of machinery destroyed. After Michael had done that, his wife said the insurance company then wanted them to figure out the cost of rebuilding each machine. This was not a realistic option, Sheila says, because not only would the cost of rebuilding the machines be more than replacing them, but also because small, rusted parts inside the machines would prevent them from functioning as they should.

Next, to provide a qualified, third-party opinion, the McSwains had a representative from a machine manufacturer verify in a letter the damage and the cost of replacing the machines. Yet the insurance company was not satisfied. The McSwains then had to document the difference in cost between rebuilding and replacing the machinery. Still, they received no check. Next, the McSwains had to create documentation with a picture of each item with the cost of replacement next to it. But this did notget them any further, either. Finally, the insurance company wanted to know how much money the McSwains could get for the machines in their current, damaged condition. The McSwains gave that figure to the insurance company, and that is all the insurance company awarded the McSwains. In the end, after jumping through hoop after hoop with little justification given for each task, the McSwains estimated they were reimbursed only a third of the value of the machinery. Sheila says this made it impossible for them to replace the machines.

Before issuing a check, however, the insurance carrier also wanted receipts of replacement office furniture and supplies. But replacing most items before receiving a check was not an option, so they fought for months for the money they needed to rebuild their business. Finally, in December, more than five months after the flood, the insurance company sent them a check for approximately $60,000.

Sheila McSwain said that her company is currently looking for a new, reliable insurance carrier by asking local competitors if they are satisfied with their insurance and by getting referrals from other business owners. They are also considering keeping copies of all important documents in a second, off-site location, or perhaps in plastic bags on higher ground.

Though her outlook is optimistic, Sheila says the company is still in the process of recovering. “It hit us pretty hard,” she says. But, equipped with everything they have learned, they will be prepared if disaster ever strikes again.


Tips from a distributor in the know

Now that you’re convinced it is worth the time and energy to find a reliable insurance carrier and broker, there is still more to know. Following are some suggestions from an industry distributor who has suffered two major disasters in the past.

1. When you need to file a claim, have your broker recommend an adjustor to represent you. Adjustors will contact you after your company suffers a fire or other damage, but these adjustors may not be reliable. An important note: This adjustor representing you is not the insurance company’s adjustor. Just as in a trial, where both sides have their own lawyer, when you file a claim, both you and the insurance company will each have your own adjustor. And though it may be frustrating to pay an adjustor, the distributor we talked to says a good adjustor is an invaluable, sound investment.

2. Barter with the adjustor over the percentage of the claim he receives. He may say he gets 30 percent, but you can usually lower that percentage to 5 to 10, depending on the size of the claim. The bigger the claim, the smaller the percentage the adjustor will accept. Make sure the agreed-upon percentage is in writing.

3. When you purchase insurance, be sure to get insured for the replacement value of your inventory, building, equipment and office essentials—not the cost you incurred in purchasing the insured items. The cost of replacing damaged or destroyed items may be significantly more now than when you first purchased them 20 years ago.

4. Keep all receipts and other crucial items such as a Rolodex in metal, fireproof filing cabinets.

5. If needed receipts are lost, destroyed or tossed, contact the companies you bought the items from, and they will issue you duplicate receipts.

6. If your business is completely destroyed, insurance companies will generally reimburse you for the inventory that is on your books. If your inventory is more than what was on your books, you will not be completely reimbursed. If only part of your company is damaged, the insurance company will then investigate the damage to each item, come to your company to collect them and then sell them on their own.

7. Though you’ve heard it before, the importance of finding a reliable insurance company cannot be overstated. “You may pay more for your insurance,” the distributor says, “but if you have a problem, it’s worth it.”

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