Business Insurance



Left: Cars left flooded by Hurricane Fran at a Raleigh shopping mall

Cover Your Gaps
After tragedy strikes is the wrong time to
learn about holes in your business insurance

By Suzanne M. Wood

It's been three years since one of the most devastating hurricanes in history tore through North Carolina but many businesses only recently have recovered from the ravages of Fran. Some companies found themselves underinsured or inadequately covered and had to borrow or deplete reserves to rebuild or regroup. Surprisingly, there were only a few business casualties — mainly among the hardest-hit, flooded-out or undercapitalized firms — and most Fran-affected companies live on to tell about it, especially if they were well-insured.

Now hurricane time is upon us again, and the news isn't good. The National Weather Service predicts an especially active hurricane season, with at least nine hurricanes, four of them intense. Instead of panicking or, conversely, assuming that those who suffered before will be spared, business owners should use this time to evaluate their insurance needs. And while storms and other violent acts of God make the headlines, more commonly it's the humdrum fires, thefts, burglaries, liability suits and auto accidents that bring a business to its knees and owners to the brink of bankruptcy. Because only two kinds of business-related coverages are mandatory — workers' comp for companies with three or more employees and auto liability for companies that do any driving — business insurance can be even more confusing than homeowners'. So with one ear cocked to the weather reports, run through the following guidelines to make sure your company is adequately covered for any eventuality.

Get to know an agent or broker you trust.

Admittedly, Jean Griswold's business is unique. She runs a mobile mammography unit that serves women for whom it would otherwise be too inconvenient or expensive to get cancer screenings. Charlotte-based Metrolina Outreach Mammography (MOM) visits textile mills, poultry farms, corporate centers, and the homes of elderly, low-income and uninsured women in the Carolinas and southern Virginia.

So when Griswold's 38-foot van slipped from the towbar of a wrecker as it was being towed in for a transmission problem in Charlotte, there was much more at stake than property damage and potential loss of income. The rush-hour accident was relatively minor, but it doesn't take much of an impact to ruin $200,000 worth of sensitive X-ray equipment.

Griswold turned to her independent agent, Jim Dunville, vice president of BB&T McPhail Bray Insurance in Charlotte. Together with two colleagues, Dunville worked with Griswold and her carrier, Travelers Insurance Co., to get her multiple claims settled and her van back on the road.

Due to an unfortunate ambiguity in Griswold's policy and bickering among the carriers — including the insurer of the tow truck and the insurer of the tow-bar part — it would be 40 days before MOM was up and running again. Griswold could hardly contain her frustration at how slowly the process moved.

“At this point I was screaming at everyone,” says Griswold, recalling the May 1998 accident. “McPhail Bray and Travelers stepped into the breach and worked hand in hand with us every step of the way to get us back on line as quickly as possible. They felt they had a responsibility to the women we serve to help get us back in operation as quickly as we could.”

During the claims process, Dunville and his staff contacted Griswold almost daily, made calls on her behalf to Travelers' office in Hartford, Conn., helped her go over records and assisted in perhaps the most complicated part of the process: Finding new equipment to replace the damaged unit.

The last few years have been a soft market for the insurance industry, due to more competition and better underwriting, notes Pam Aycock of Aon Risk Services, a national broker with offices in North Carolina. Prices have fallen from 10 cents per $100 of coverage to about half that, she says. While most individuals and companies still buy their insurance from brokers, independent agents or “captive” agents — those who represent only one insurer — more and more cost-conscious customers are buying products direct from the carrier, via phone, mail or the Internet. And that trend is likely to intensify as e-commerce becomes more popular and secure.

But while eliminating the broker or independent agent from the equation gives a company more buying power, sometimes the cost savings isn't worth sacrificing service. That's of course the position of agents and brokers, who say the professionalism and expertise they bring to the table on behalf of their clients should be considered an important management tool.

“There's a reason we have to be licensed and have to take continuing education credits each year,” says Van Wyck Webb Jr., president of Dupree & Webb Insurance in Raleigh, an independent agent. Just as many company owners highly value their outside accountants and lawyers, they should consider their insurance agents members of their success team as well, notes Webb. “You spend a lot of time with your CPA, you spend a lot of time with your attorney. You ought to spend some time with your agent so he can do the job you need him to do.”

Webb and other industry insiders say the best way to choose an agent is to rely on recommendations from respected colleagues and then carry on interviews. The top prospects likely will be the most experienced (ask for resumes), the most conscientious and the most respectful of questions potential clients have every right to ask. The agent should know the industry, be able to provide you with financial stability and service information about various carriers, and have some experience with companies of roughly your size and type.

“Our business is a service business,” says Webb. “We sell, sure, but if we don't service what we sell, we're not going to be in business very long.”

Examine your policy for gaps and holes.

For many business owners, it's the letter they most fear receiving. But thousands will get the news this year that they are being sued. And for some, anxiety will be tinged with regret over not buying enough liability coverage.

“With liability, you never know what it's going to cost,” notes Randy Wall, owner of Rochelle Insurance Agency in Knightdale. “Most of them (business owners) concentrate on their property — that's a known quantity. But if you've only got $100,000 in liability and you get a letter from a lawyer saying you're being sued for damages in excess of $10,000, it doesn't take much to eat up that $100,000.”

Insurance experts note that even though most judgments are awarded to plaintiffs, the legal fees it costs to fight the suit are often calamitous to an underinsured or undercapitalized company.

Wall says many business owners don't realize how inexpensive it is to increase their liability limit. For instance, someone with a policy that has $300,000 in coverage can, for maybe $60 a year — or 15 to 20 percent of the current premium — boost that amount to $1 million, a much more comfortable realm for most companies except the very smallest. One way to make that extra coverage more affordable is for a company to increase the deductible on its property policy and transfer the savings to pay the higher liability premium. Of course, just how much liability insurance a company needs depends on its exposure — a hospital, day-care center or even the corner convenience store needs much more coverage than a three-person graphic design firm that doesn't have walk-in traffic.

Then there are companies who don't consider “time-element” insurance — an umbrella category that includes business interruption coverage. They may have a standard package or “Business Owner Policy,” (BOP), but it doesn't address their business' unique needs, notes Ronnie Chamberlain of the Raleigh office of Erie Insurance Co., a Pennsylvania-based insurance company that writes property, casualty and other business insurance. Certain businesses may need the following coverage, which can be added as endorsements to some business policies:

Peak-Season Endorsement: What happens when a big toy store has a fire in December, when its inventory is the highest it will be all year? Because its property insurance limit is based on yearly rather than monthly inventory values, a company subject to seasonal sales swings could take a big hit if a loss occurs during its peak season. It could increase its total coverage, but a less-expensive approach is to buy an endorsement that provides extra coverage for just the busiest months. A good insurance agent can help a firm decide if it needs such an endorsement.

Building Ordinance Coverage: You're a fan of historic preservation and have bought a turn-of-the century house to serve as the new headquarters of your small printing company. Not long after you move in, a fire guts the structure and you suffer a total loss. You prepare to rebuild, only to find out that the payout you received from your insurer, based on the market value of the house, won't be enough to cover the cost of meeting current building codes or regulations such as Americans with Disabilities Act compliance.

“I feel like a lot of agents miss it (seeing the need for this coverage) and a lot of business owners miss it,” says Chamberlain. “Ninety-five percent of business agents don't sell it, but it's not an expensive product.”

While Chamberlain admits it doesn't apply to most suburban business owners, it is something owners of coastal property should also consider, given the stricter codes in place there.

Debris Removal Coverage: When a building burns to the ground or is pulverized by a downdraft or funnel cloud, a company may know it can rebuild, but first it's got to haul away the rubble. Who's going to pay for that service? Not the insurance company unless it's specified in the policy. Businesses that don't want to fund that expense themselves can buy an endorsement worth $10,000 that will cover most debris removal.

Civil Authority Insurance: You own a store or dental practice in a strip shopping center that has only one entrance. If there is a major traffic accident or hazardous-waste spill and all roads leading to your place of business are closed by the authorities, will you be able to recoup the income you will lose if no one can get to your store for a day or so? A civil authority endorsement will pay for operating expenses during the shutdown. “The chances of this happening are slim,” Chamberlain concedes, “but the losses can be great.”

Business Income and Extra-Expense Endorsement: If neither of these provisions are covered by your current policy — and many standard policies do include one or both to some degree — you should consider adding them, notes Chamberlain. “If you have a fire and are closed for 60 days, you can't afford to lose your employees, and they can't go without income for that long,” he says. “This endorsement will cover net income and continuing expenses including payroll.”

The “extra expense” part refers to coverage that will help a business minimize disruption to its operations by setting up shop elsewhere. It will pay for such things as the difference between the lease on a more expensive temporary location and the current rent and the moving costs to haul belongings and equipment to a new site. Relying on business interruption coverage alone without taking into account extra expenses can be risky for companies that don't have reserves on tap to cover such contingencies.

Finally, there's a relatively new insurance product that's creating a buzz in the industry and among many executives. It's a type of business liability coverage called Employment Practices Liability Insurance, which can cover financial threats to a company arising from discrimination or sexual harassment claims. The discrimination can be anything from racial, age-related, sexual orientation to physical handicap (including failing to comply with ADA regulations). But it's sexual harassment that gets the most attention and exposes many companies to the most risk. In 1991, there were 6,883 sexual harassment claims in the country. Six years later the number of claims had more than doubled, according to the Equal Employment Opportunity Commission. In 1997, about 20 percent of those claims were decided in favor of the plaintiffs, resulting in damages of almost $50 million.

Only about 50 percent of Fortune 500 firms carry the coverage, and that number is even lower among smaller firms.

“Any company that has an employee” should consider EPLI coverage, says Robert L. Ludwig, president of Accordia of North Carolina, an independent agency. Although only about 5 percent of his clients currently carry the coverage — it's still relatively expensive — more and more are talking about it. The policy covers such costs as court fees, defense fees and settlement or damage costs up to the liability limits of your policy.

For a company of 100 employees with a liability limit of $1 million, an EPLI policy runs about $4,000, according to Travelers Insurance Co.

Firms with few employees who decide to go with EPLI insurance will often work with their carriers to minimize personnel problems that could lead to litigation. For those firms who simply can't afford such coverage, investing in training and continuing education for the person who handles personnel matters is a good idea. At the very least, small firms should establish a sexual harassment policy, either in consultation with an attorney or guidebook that many employer or trade associations market to members.

Then there are those business owners whose policies don't have coverage gaps because they don't have policies, period. “The biggest mistake small businesses make is failing to realize insurance is very reasonable,” he says. “A CPA or attorney with 1,000 square feet and one employee thinks he can't afford the $300 to $1,000 for insurance, but if he has a fire, how is he going to afford $30,000 (to pay for his losses)?”

Consider a risk management plan.

Running a company, like living, is full of risks. Insurance is for those who can't afford to pay the cost of those risks, and most of us fall into that category. But for some businesses, there's more to insurance than looking at the books and determining how much would be needed to replace computers and monthly receipts.

“Our primary objective is to protect balance sheets and income statements from physical and business risks,” says Patrick Truluck, vice president in the Chapel Hill office of the Willis Corroon Group, the third-largest insurance broker in the world. “We either eliminate exposure or transfer risk, and in cases where it can't be transferred we mitigate risk through claims management techniques. Our goal is to keep the dollar value of the claim as small as possible.”

For companies that can afford the fees, risk-management services (offered by large brokers, specialized consultants and some insurance carriers) may be worth it if their insurance bills are proportionately high and their exposures numerous.

Truluck's company works with mainly large companies on all its “exposed” areas, such as worker training and safety practices (to reduce worker's comp claims and premiums), the physical plant itself (to reduce fire and other property losses), company procedures, practices and public interactions (to mitigate general and product liability suits) and transportation needs (to reduce workers' comp, liability and property claims).

He says there's been a change in the way business owners approach insurance. “It used to be, `I pay the premium, you pay the claim.' Now the attitude has moved to a holistic risk management, or analysis of big risk. I feel this approach will become more common as the insured becomes more active in risk management.”

Taking an active role in risk management is especially important for smaller companies who can't afford to hire employees — such as safety and loss experts — or even outsource those functions. Good independent agents can and should advise clients of their areas of vulnerability and help them decide which areas to insure and which to prepare to fund themselves.

In many cases, it boils down to taking responsibility and using common sense. If a company is located in a high-risk fire area, heeding the fire marshal's advice after an inspection or seeking out a free consultation from the fire department can mean the difference between solvency and bankruptcy. It could mean better screening of employees by hiring a part-time human resource manager or boosting morale using inexpensive but creative incentives such as free sodas, employee of the month awards, birthday recognitions or casual Fridays.

For many companies, the time it takes to plan for most eventualities is well worth the effort. Agent Jim Dunville says that even joining forces with a friendly competitor can come into play. Something as simple as making a deal to share office space or similar equipment should a disaster befall either company can make all the difference to a business owner's peace of mind, even if she has plenty of coverage.

In the case of MOM's Jean Griswold, though, a sharing arrangement just wouldn't have been practical since her services and equipment are unique. But now MOM is less vulnerable — and accessible to even more women. Griswold has plans to add another van to her fleet and recently opened an office in Chapel Hill, where she hopes to base another MOM van this year.

COPYRIGHTED MATERIAL. This article first appeared in the July 1999 issue of the North Carolina magazine.

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