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There are alternative risk management techniques that an organization can use in confronting their exposures to risk of loss. Self-insurance is one of those alternative risk management techniques that can be used. Basically this is where the organization retains the risk themselves versus transferring the risk.
The retention that the organization retains can be planned or unplanned depending upon the exposures to loss. While these plans can result in reduced cost of risk, there are risk management services that must now be provided internally versus through the transfer process. An organization that goes the self-insured route must provide lost control and engineering services. Along those lines would also entail inspections, surveys and safety audits. Claims handling, claims payments, and auditing the entire claims process would also be of service that the organization would have to take on in order to be self-insured. Finally, the funding to pay for the retention losses that need to be paid needs to be adequately funded.
There are advantages and disadvantages of going to the self-insured route with regards to insuring your exposures to loss.
• An organization typically will see their cost of insuring their risk via self-insuring, is lower and improves the cash flow but if there are catastrophic losses it very well could put the organization in a financial bind.
• A self-insured organization that must now take on the loss control and engineering services may find renewed interest in safety, loss prevention, and loss reduction attitudes within the organization.
• That renewed safety interest can be very positive and have a great effect on the company but it also takes a great deal of time, effort and resources to put those services in place.
• Doing risk management services internally can distract from the core focus and mission of the organization.
• If the organization is too small they might not have the expertise to manage and run this type of alternative risk management strategy.
• One way to deal with all these added services that must be maintained in a self-insured program would be to outsource them. You could have a third party administrator (TPA), that could administer and/or perform all services that are needed for this program.
The bottom line is that if all things are equal, what the organization is saving by going to a self-insured plan versus a fully insured plan is that they are not paying for the insurance carriers profits nor for any commissions that are payable in that transaction. It varies from industry to industry and from carrier to carrier but typically you’re looking at about 25 basis points, or 25%, that represents the carriers profit and/or any commissions that are paid. One of the main points to keep in mind is that by the time you internalize all these processes, services, and administration systems that need to be in place for self-insured program if you’re not realizing the 25% savings you might be better off staying in a fully insured program. In a fully insured program all of the claims, auditing, actuarial accounting, audit team, lost control, etc. services are included within the insurance premium for no additional charge. There are also tax ramifications in a self-insured program. Payments for insurance premiums are tax deductible as they are paid whereas self-insured plans are not tax-deductible until a loss or claim is paid. Many things need to be considered before the organization jumps from a fully insured program to a self-insured program.
Liability
insurance is the foundational insurance policy for every small business
owner. Most business owners are primarily concerned with protecting their
assets from fire theft vandalism etc… Liability insurance will directly and
indirectly protect these assets as well as most all of your assets from losses
from lawsuits and claims. The commercial general liability insurance policy is
typically the name of the type of insurance policy used countrywide for both
large and small businesses.
Sometimes this coverage can be within a package to policy
which covers liability, property, loss of income coverage, Worker’s
Compensation, and other coverage. This policy can also be written standalone,
meaning it can be the only coverage that you purchased. Specifically this
policy covers you and your business from bodily injury and property damage
claims from third persons. These claims must be of an accidental nature and not
intentional, as intentional acts are not covered. At a bare minimum this policy
will cover your liability claims for premises only. This is very basic coverage
and is usually not in your best interest to have premises only liability
coverage. It is much more prudent to also expand the coverage for your products
and/or completed operations exposures. These latter coverage can be on or off
premises depending on the services that you are providing and the products that
you are selling. If the industry that you are in tends to be more of a high
risk industry from an insurance underwriting standpoint, many times the
underwriter will only issue a liability policy for premises only. While this is
better than nothing, it will more often than not leave gaping holes in your
insurance coverage.
Typically the liability
insurance policy is written with an occurrence limit of let’s say $1
million and an aggregate limit of $2 million. Usually whatever limit you pick
for the occurrence is doubled for the aggregate limit. Underwriters will
sometimes issue your policy with the same occurrence limit as you have for the
aggregate limit. The danger in doing that is that if you have one dollar of
claims paid out you will no longer have the million dollar coverage. The
aggregate limit represents the total amount of coverage that is available in
your policy year. Any claims that are paid out during that year reduce the
aggregate. So if your aggregate limit is the same as your occurrence limit any
claims that are paid start reducing not just your aggregate limit but also your
occurrence limit. This can cause havoc with your certificate holders as if you
have any agreements promised to have certain insurance limits they will be
reduced if you have any claims paid. Liability insurance is just the start of
building your insurance portfolio. It is the primary building block for
crafting a comprehensive and complete insurance portfolio for your small
business. There are many enhancements and additional coverage that can be
added to this policy as appropriate for your exposures to loss. We have further
articles explaining these enhanced coverage on our website.
It is important to be clear and concise as to exactly what you are trying to build within your insurance portfolio. There are many venues in facilitating effective communications with your insurance broker. The traditional brick and mortar approach is that of face-to-face meetings. While this is by far the most popular mode of communicating your insurance needs and desires they can also be the most time-consuming and least effective.
Dialing for quotes on the telephone is probably the second most popular way about obtaining proposals for your general liability insurance. This too can be time consuming and a lot of effort that has to be put into it to coordinate the calls callbacks and the passing of information.
Another communication tool that you might consider in your toolbox is that of communicating your insurance needs and desires via the Internet. If you can hook up with an insurance broker on the Internet that has specific templates for you to complete that can quickly return accurate proposals to you that can be a tremendous timesaver as well as put money back into your pocket. What tends to happen in face-to-face meetings and in telephone conversations is that the communication is usually random and not focused and organized to get the job done. A commercial insurance proposal website that is template driven and user-friendly takes the subjectivity and randomness out of the communication. Since you as the business owner are in putting in the data you know very clearly and accurately what you need and want. There is less chance for error if you are inputting the data versus trusting somebody on the other side of the conversation to accurately transcribe your conversation. Once you have a detailed proposal in writing, then would be the appropriate time to have telephone conversations with the broker fine-tuning the proposal. Although if you’re dealing with a responsive Internet insurance broker this can easily be done via e-mails versus telephone conversations. Probably one of the biggest advantages of procuring your insurance over the Internet is that you can do it on your time and not at the whims of some broker’s timetable. So as you are considering going out into the marketplace and obtaining insurance proposals, it would behoove you to expand your communication toolbox to also encompass an Internet commercial insurance quote.
Once you have decided to expand your search to the Internet it will make your search much easier if you have in mind what type of Internet broker you’re looking for. Almost all of the brick-and-mortar insurance brokers have a presence on the web. That does not mean that they are an Internet broker and have the expertise in doing business electronically solely over the Internet. Seeking out an Internet broker that is fast… secure… and easy in the insurance quoting process will probably suit most small business owners. So as you decide to add other communication tools into your insurance quoting toolbox having specific goals as to what kind of Internet broker you’re looking for will make the process very smooth and very profitable for you.
Almost every business no matter the size should have the appropriate business insurance in place. While the cost of insurance and the breath of coverage of insurance can vary depending on your company size, the basics of procuring insurance are pretty standard across the board.
Usually the foundational pillars for business insurance would be that of providing coverage for liability, loss of income, property, and protecting your employees. The small business owner might only need the liability coverage if they have a home based business. When you go into the marketplace to solicit your business insurance quote you might as well address the four pillars of insurance upfront so that you can plan your budget accordingly. If you decide that you only need the one pillar of liability insurance you at least know the cost for the other basics of insurance as your business expands in the future.
One of the many caveats in procuring business insurance is that you should not assume that the broker understands the nuances of your industry and/or your specific business. Many small business owners are under the incorrect assumption that by not disclosing all of their exposures that they will have coverage for those exposures in the future. It is generally true that the less exposures your company has the premium will be less; it will not necessarily be in your best interest to fail to disclose all of those exposures. Failure to disclose and/or to conceal those exposures could void your contract or at the minimum not provide the coverage that you are seeking in the future. Identifying all of your exposures to risk within the four insurance pillars of liability, property, loss of income and protecting your employees is tantamount in crafting the proper business insurance quote for your company.
As we indicated at the beginning of this article while premiums and coverage can vary greatly for small and large businesses that procuring the insurance is basically the same process for all size companies. If you are a small business owner, resist the urge to only get a general liability insurance quote. Getting quotes for the four main areas of insurance exposures might protect the entirety of your assets in the long run. If you start out with a more complete insurance portfolio proposal, you can always pair down the coverage for just the general liability coverage. There are at least two advantages of getting a broader insurance portfolio proposal in the beginning. The first advantage is that it helps you as the owner think about what you’re putting at risk by not insuring all aspects of your business. The second advantage of getting a broader proposal is that it will force your broker to assess the totality of your exposures and place your coverage with the appropriate carrier. This can pay big dividends for you in the future because if you’re placed with the wrong carrier in the beginning, and as you expand, the carrier might not be able to expand with you in your growth. Knowing the process can help you obtain the best possible premiums for your business.
Having an effective risk control or better known as lost control program in place can help you get the best small business insurance pricing in the marketplace. The goal of risk control and/or lost control is simply to reduce and/or eliminate the frequency and severity of claims and losses the company might be facing. Sometimes small business insurance packages include underwriting requirements that demand that frequency and severity exposures are under control. This can take on many forms such as requiring the insured to have safety devices in place, safety plans formally written and in place and a follow-up claims inspection review process in place. When seeking to provide lost control programs in place engineering designs must be at the forefront in designing a safe work environment. The implementation of safe workflow procedures requires comprehensive education of all employees that are involved in the operations. Identifying the hazards and increased liability conditions is the first step.
Management at all levels must be involved in the loss control process.
Once the typical hazards are identified within an organization, communicating those hazards to operators and employees is crucial to loss control safety. Reviewing and analyzing past claims and lost history for your company and for other companies within your industry can be helpful in identifying industry norms. The communication process in the loss control plan must flow both from the top and from the bottom to top of an organization. If upper management does not take suggestions, comments and/or complaints from front line workers, the lost control plan is doomed at the get-go. Even though small business insurance packages tend not to be complex contracts it is still important to have a behind-the-scenes risk control loss prevention plan in place where appropriate for your business and industry. Motivating both upper management middle management and the frontline workers can and will be your biggest challenge. Besides the identification of the hazards to potential losses and having a plan to deal with those potential losses, the follow-up to any and all claims also needs to be a part of the risk control plan.
In order for you to receive the most competitive price for your best small business insurance portfolio, the formal, detailed risk control plan must be in place. Submitting this document along with your application will ensure the best pricing available for you. Before an insurance company releases a price for a new small business insurance potential client, the underwriter most certainly will be looking for lost control systems that are in place before they will give their best pricing.
In summary some of the key risk control characteristics that we have looked at include: engineered design operations and workflows for safety; education for management and employees at all levels with regards to the risk control plan; effective communication systems in place that allow information to flow from top to bottom and bottom to top within the organization. Finally, motivating all people within the organization to follow through on the risk control plan is essential.
There was an interesting article in the Harvard business review about stress testing in the financial sector. The article’s main point was that stress testing is going to spread into many other industries besides financial services. That made me think about the average small-business owners commercial general liability insurance coverage as to whether or not it could stand a stress test. Small business insurance packages are just that, template packages. The general liability insurance coverage that you purchase may or may not respond to the stress of a claim. The insight for today is to do some worst case scenarios to stress your current insurance portfolio to see if they can withstand a major claim.
Risk based capital or RBC, is used extensively in the financial services industry. When you as a small business owner are thinking about purchasing new small business insurance, you can borrow some of the technical tools that are used in calculating RBC.
Just like in RBC where you look for opportunities for improvement. Likewise, when purchasing commercial general liability insurance coverage you can also look for opportunities for improvement. In the testing for RBC you can change the numbers to do what if scenarios. Doing what if scenarios in your insurance portfolio can also help you in predicting your total cost of insurance.
- First of all you will need to identify the major drivers;
- and components which will factor into the pricing of your insurance portfolio. Such as your carrier, broker fees, sales, payrolls, and past claims.
- Look for opportunities of improvement throughout this matrix.
- Finally, you will be able to project the potential impact your company’s strategies will have and the affect it will have on your ability to obtain cheap business liability insurance in the market place.
Risk based capital, RBC, protocols, can be helpful in predicting your total cost of insurance.
Below are some legal foundations and general scope of coverage and operations liability exposures. This area provides the basis for a typical small business insurance plan. When you as a business owner, compare a small business insurance plan in the marketplace, you need to make sure that these fundamental coverage are included in your proposal.
1. Premises liability coverage.
This basic building block coverage provides protection from accidents that occur on the premises that are owned, lease, or rented by that person or organization that is insured. The coverage are typically protection from claims that arise from bodily injury and property damage.
2. Operations liability coverage.
This provides coverage from accidents that away from the premises and they arise from an individual’s and or company’s ongoing operations or services away from the premises.
Premises and operations liability is usually based upon negligence, but can sometimes be based upon contractual liability or strict liability depending upon the situation. An individual and a Corporation can be exposed to the other liabilities that are as a result of operations from autos, aircraft, watercraft, employee liability, etc., which are unique and distinct from the premises and operations liability. There are other insurance policies provide protections for these exposures.
3. Exposures from products and completed operations.
The best small business insurance portfolio should also include coverage from your exposures of products and completed operations. A small business insurance plan would have gaping holes in their insurance protection without this coverage being included also.
This coverage provides protection from claims that arise out of the products that you sell or distribute. This coverage also provides protection from the services that you have completed and/or work that you have done for your customers. Claims usually arise from the manufacturer, or the distributor, or from the retail sales of your product. Depending upon the products that you manufacture or are selling, you may have increased liability exposures it depending if your products or covered under the strict liability provisions that are in place in most state statutes.
Getting the best small business insurance coverage in place can sometimes be a challenging task. If you compare your small business insurance proposals and specifically look for this type of coverage in the quotes, you can prevent gaps in coverage.
This coverage will provide protection if your product was defective and causes bodily injury and/or property damage to third parties. Sometimes the coverage can be extended to provide coverage if the product has become dangerous that has not yet caused bodily injury or property damage.
Completed operations coverage provides insurance protection from your legal responsibility on the services that you have a provided and/or that you have completed. If your workmanship, the parts, and/or the services that you have performed become defective and cause bodily injury or property damage, the completed operations liability coverage will provide the needed protection.
In summary, a small business insurance plan should include the premises liability, operations liability, products and completed operations liability coverage. These are foundational coverage that should be reviewed by you and/or your risk manager. This simple checklist can protect you from uncovered losses in the future.
If you are going to compare small business insurance proposals, the automobile liability exposures should be a part of this plan. Auto liability exposures typically deal with the ownership, use, or maintenance of automobiles. The use is more than just driving the vehicle. It also includes the loading and unloading of the auto.
The best small business insurance coverage will include some provision to at least cover automobile liability exposures. Auto liability is normally based upon negligence. Some states have no-fault laws which provide benefits to claimants without the need to prove fault.
Small business insurance packages will usually provide coverage for general liability, property, and auto liability. While you can ensure all of these coverage individually, it is almost always cheaper to insure them together as small business insurance packages.
In regards to auto liability, the employers are vicariously liable for the acts of their employees or volunteer workers within the scope of employment or volunteer work. Sometimes auto owners can be held liable for negligent entrustment. This would be a situation where you loan your automobile to a person who is unfit to drive. Some examples of this would be to loan your car to a child, someone who is drunk, or to an unlicensed person.
Some states hold the registered owner of the vehicle liable while there is negligent use by other parties if they have given permission to do so. Indeed in some cases, getting your permission to drive the auto will invoke liability for the registered owner. If you as the owner of the auto provide a car that is defective, this can also trigger negligence on your part.
The automobile liability coverage cover bodily injury and property damage that arise out of a covered accident. Upon injury coverage can provide protection from injuries to third parties in the other vehicles. Upon injury coverage can also be extended to cover bodily injury claims from passenger’s vehicle if you are found to be negligent. The property damage portion of the coverage would pay for all property damages to vehicles and any other property that was damaged in the accident, up to the limits that you purchase.
When you compare small business insurance coverage in proposals, it is important to have coverage for your auto liability exposures include. Most small business package policies only include the general liability and property coverage. Cost to have the auto liability coverage is generally less than $200 premium.
In summary, for less than a dollar a day you can normally add coverage to your insurance policy to provide the gap coverage from your auto liability exposures. Remember that a vehicle can compute liability to you even though you are not personally driving the auto. Also maintaining and fixing your auto can also create auto liability exposures during that process. Finally, the use and operation of the vehicle most certainly will create auto liability exposures that need to have coverage. The use and operation also includes the loading and unloading of your autos, your vans, and trucks. Negligence can be imputed from a variety of situations with regards to auto liability.
Your small business insurance quote should all include coverage for contractual liability. Contractual liability usually arises from any breach of a contract or some kind of hold harmless indemnity agreement. Not all carriers offer this coverage and there are many exclusions even if the coverage is issued.
Breach of contract. This typically is when you are someone within your company fails to produce some task that was promised. The claimant/plaintiff can bring damages against you for this breach of contract. They may also seek a remedy of specific performance which means that you could be required by the court to perform the task that was promised and you failed to perform. Usually general liability insurance does not cover these types of breaches. The appropriate insurance form to use for this type of breach would be a performance bond. Liability insurance for small business can be endorsed to cover contractual liability bodily injury or property damage claims. A general liability insurance policy will respond to these types of claims, if properly endorsed.-
Hold harmless indemnity agreements. These agreements will obligate the indemintor to pay certain claims or losses that have been contractually assumed by the Indemnitee. The agreement to have these clauses creates liability for the Indemnity for contractual liability and normally the small business insurance providers will provide coverage for this exposure. Some states prohibit hold- harmless agreements and they are not enforceable in those states. The vast majority of the states will enforce the typical hold harmless indemnity agreement. The contractual liability coverage will sometimes require small-business workers compensation insurance that has both hold harmless indemnity agreements for jobs that you’re performing. Many times the insurance carriers will make a charge for providing this agreement in advance.
If you are required to have small-business errors and omissions insurance with a hold harmless indemnity agreement that can sometimes be problematic. Small business professional liability insurance is covering you as the individual and your company and its typically not extended even to cover others even if you agreed to a hold harmless indemnity agreement. Contractual liability agreements versus contractual liability insurance coverage can be worlds apart. While you as the client can, if you agree to, sign any contractual provisions that you so desire, that does not necessarily mean that the contractual liability coverage with your insurance policy will respond to each and every contract provision that you’re signing. There is normally very little charge with regards to premium for this coverage so it would behoove you as the client to make sure that you have this coverage included in your insurance portfolio.
Breach of contract and hold harmless indemnity agreements can both play an important part in your overall insurance coverage design; at the very least have them included in your small business insurance quote. If you know that normally breaches of contracts are not covered in your insurance program while hold harmless and indemnity agreements typically are covered can help you in the negotiating of all of your contracts. You can save money in the long run if you know where your coverage starts and stops.