Volume 2, Issue 1
Sharpening the Focus Church Conference
January 29, 2011
8:00 a.m. – 3:00 p.m.
New Hope Int’l Worship Center
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From Liability to Stability: Insuring your Small Business
Any business is exposed to a variety of risks. A smart business owner will take the necessary steps to mitigate risk, and a valuable risk management tool is insurance. Insurance is vital for the survival of small businesses.
In many cases, insurance is not required for a business. However, this should not be used as a reason to forego the purchase of business insurance. A business may have need of insurance if there are company automobiles, employees or if it is a condition on a loan. No business is immune to natural or man-made disasters and potential liabilities.
Insurance is needed to survive a catastrophic or unforeseen loss, something that many of us in Louisiana know about. Insurance is designed to provide protection for losses that have the potential of closing a business.
The key to recovery from any disaster, natural or man-made, is preparedness. Preparedness is knowledge about what to have and what to do to protect a business.
Consider these two areas that can affect your business in a dramatic way.
1) What would happen to a business if the owner were disabled or injured for six months to a year? To the unprepared small business owner, an illness or accident resulting in disability could be devastating. Disability insurance can replace a percentage of a policyholder’s income in the event of an accident or illness. Consider the following facts: According to the Disability Management Sourcebook (1999), severe disabilities increased 400 percent over 25 years affecting persons ages 17 to 44. The report also stated that before age 65, one in seven people will become disabled for five years or more. Today, these statistics are still relevant and the need to insure to mitigate the risk is still as important as it ever was.
2) We live in an increasingly litigious society. For small businesses in particular, the chances of getting sued for professional liability are greater than ever. However, most small businesses with the notable exception of health care and real estate are not aware of how to construct an insurance portfolio that will mitigate the risks of such litigation. To construct the proper insurance portfolio to protect a business, the owner needs to consult an insurance producer.
Business owners need to make sure that they are properly insured to protect their businesses. Each policy can be built to address the individual needs of a business. It is important to know all that the business does and requires so that a proper discussion with an insurance producer about coverages will address all the needs of the business.
Base Policy (Business owners Policy – BOP)
Section I: Property Coverage – this portion of the policy is a must to protect the company's assets. This coverage will limit the liability (that portion the business is responsible to pay) and can cover a variety of losses (review the policy for covered perils). This coverage is broken down into three sections:
- Coverage A (Building)
- Coverage B (Personal Property of the Business)
- Coverage C (Loss of Income)
Section II: Liability Coverage - This coverage provides protection to the business, up to policy limits, if the actions or inactions of the insured result in a legally enforceable claim for bodily injury, property damage or personal injury. Included are coverages for 1) non-owned automobiles used by the business in its normal operations (owned automobiles are excluded); 2) host liquor liability where the business is having a social gathering. For example, liability at an office party would be covered, since this social function is incidental to normal business activity (excluded would be operation of a liquor store on the premises of the business); 3) fire and explosion legal liability, where the insured is renting business space in a building. If a fire or explosion from business operations is proven to be of negligent origin, the insurer of the owner of the building has subrogation rights against the business; 4) products, for which completed operations coverage is provided. Excluded from Section II coverages are professional liability, owned automobiles of the business, operation of airplanes and other aircraft, workers' compensation, liquor liability (other than that served as a host at business social functions), and off-premises operation of boats.
To this base policy, there are a variety of coverages that can be added according to needs. Some of these additional coverages are as follows: Business Vehicle; Workers' Compensation; Food Contamination; Business Interruption; Outdoor Signs; Mechanical Breakdown; Burglary and Robbery; Key Employee; Professional Liability; Disability; Errors and Omissions; Spoilage; Employee Dishonesty; Kidnap and Ransom; Extra Expense and Employee Practices Liability. This is not a comprehensive list, but simply a list of some of the additional coverages that are available. If there is a need that does not fit into one of these coverages, discuss the need with the producer.
Insurance companies will calculate the payout in one of two ways in the event of a loss, based on the type of policy purchased.
What is "Replacement Cost"?
The term "replacement cost" is defined or explained in the policy. Simply stated, it means the cost to replace the property on the same premises with other property of like kind and quality used for the same purpose. This applies unless the limit of insurance or the cost actually spent to repair or replace the damaged property is less. Refer to the policy for the exact definition and explanation of replacement cost.
What is "Actual Cash Value"?
The term "actual cash value" is not as easily defined. Some courts have interpreted the term to mean "fair market value," which is the amount a buyer would pay a seller if neither were under undue time constraints. Most courts, however, have upheld the insurance industry's traditional definition: the cost to replace with new property of like kind and quality, less depreciation. Courts have varied in their rulings as to whether or not depreciation includes obsolescence (loss of usefulness as a result of outmoded design, construction, etc.).
Replacement Cost vs. Actual Cash Value (ACV)
Payment based on the replacement cost of damaged or stolen property is usually the most favorable figure from the owner’s point of view because it compensates him or her for the actual cost of replacing property. If a camera is stolen, a replacement cost policy will reimburse the owner the full cost of replacing it with a new camera of like kind. The insurer will not take into consideration the fact that three rolls of film were used in the camera every day for the last two years, causing a considerable amount of wear and tear.
In contrast, actual cash value (ACV), also known as market value, is the standard that insurance companies arguably prefer when reimbursing policyholders for their losses. Actual cash value is equal to the replacement cost minus any depreciation (ACV = replacement cost - depreciation). It represents the dollar amount one could expect to receive for the item if it were sold in the marketplace. The insurance company determines the depreciation based on a combination of objective criteria (using a formula that takes into account the category and age of the property) and subjective assessment (the insurance adjuster's visual observations of the property or a photograph of it). In the case of the stolen camera, the insurance company would deduct from its replacement cost an amount for the wear and tear it endured prior to the time it was stolen.
So What's the Difference?
The only difference between replacement cost and actual cash value is a deduction for depreciation. However, both are based on the cost today to replace the damaged property with new property.
Recoverable depreciation usually refers to monies held back for repairs. The insurance company holds back the "recoverable depreciation" until proof that repairs have been completed is received. This proof usually comes from the contractor. However, proof may be accepted by the insurance company from the claimant with certain documentation requested by the insurance company provided by the contractor.
Disasters typically not covered by property insurance
- Flood – NFIP (www.floodsmart.gov)
- Earthquake damage (may be able to buy back coverage)
- Terrorist attacks (may be able to purchase optional Terrorism coverage)
How can I save money when buying insurance?
- Shop around.
- Choose a higher deductible (If you can afford it).
- Buy package policy.
- Work closely with producer or broker.
- Ask about ways to prevent losses (may get discounts for certain items).
Protecting a small business from risks is the foundation of success for a business owner. Take the necessary time to investigate your business insurance needs with your insurance producer, your industry association, and your peers. It could be the most important decision to your business's survival.
|Careers in the Insurance Industry |
Insurance is a stable yet enterprising industry that can provide a wealth of advancement and career opportunities. The field of insurance rarely experiences a major downfall, even during tough times such as the economy is in now. This is primarily because individuals that are in business always need insurance to offset the potential loss of income or property. Most of this demand is the need for risk management, which is basically to shift the burden of the cost from the insured to the insurance provider. There are many careers and areas of specialty in the field of insurance, such as producers, risk management, actuaries, adjusters, and underwriters.
Many insurance careers involve selling contracts, primarily those that cover health, life, disability, and long-term care or property and casualty insurance. Insurance producers, or producers as they are known throughout the insurance industry, must be licensed to sell different types of insurance. Most specialize in one particular area, but some are licensed to sell multiple lines. Many producers also provide financial planning services such as retirement and estate planning.
Risk management works on behalf of the insurance provider, which has necessitated the need for insurance jobs that focus on determining the risk of insuring specific individuals or entire groups. Actuaries are also a major factor in the field of insurance. Actuaries are business professionals who deal with the financial impact of risk and uncertainty. They provide expert assessments of financial security systems, with a focus on complexity. Actuaries mathematically evaluate the likelihood of events and quantify the contingent outcomes in order to minimize losses both emotionally and financially. Since many events such as death cannot be avoided, these are helpful measures to minimize the financial impact. In 2010, a study published by a job search website CareerCast ranked actuary as the #1 job in the United States (Needleman 2010).
Among other career paths in insurance are claims adjusters. They determine whether a party claiming a loss due to property damage, bodily injury, etc., is owed a payment under an insurance policy and what amount the claim should be paid. Most insurance claims adjusters are employees of insurance companies, but some are independent consultants who represent claimants. Claims adjusters investigate insurance claims by interviewing the claimant and witnesses. They also consult with the police, check hospital records and inspect property damage. (In order to do this job you must have the knowledge to complete the preparation of a property damage claim).
There is another insurance career that also provides a form of risk management. Underwriters set the cost of insurance premiums based on determining how much of a risk the individual or business is to the company. There are also insurance inspectors who are called loss control specialists. Many insurance jobs specialize in providing customer service to consumers. These representatives are usually the first point of contact between the customer and the insurance companies. These representatives must be familiar with many different facets of insurance because of the direct contact with consumers.
In order to perform these jobs, the appropriate education is necessary. Training can take days, weeks, months or even years. There are many ways to learn how to do well in insurance related jobs, such as learning from peers and picking up tips and organizational abilities from a senior employee. Continuing educational classes are required for most once in the business. Skills needed are good communication skills, positive qualities, such as being able to articulate information that informs the listener about details. Communication skills are essential to a producer who is selling insurance to companies or consumers. If you possess these skills, the insurance field may be for you.
New Year’s Resolutions
By now, many people have made their resolutions. Some have decided not to even do them, and others may have already started breaking their resolutions! Whatever category you may fall in, it is not too late to start or add to your list.
The Office of Consumer Advocacy suggests the following be added to all New Year’s resolutions:
- Make time to review ALL insurance policies. Be clear about coverage limits, deductibles and exclusions.
- Meet with your insurance professional to discuss any changes you have made in your life or with your property within the last policy period.
- Learn an insurance company’s claims process before there is a need to make a claim.
- Make a note of when premium payments and/or installment payments are due. Missed payments can lead to cancellations.
- Make necessary inspection, wellness and auditing appointments.
- View the Louisiana Department of Insurance website (www.ldi.la.gov) to find informative consumer brochures, consumer alerts, upcoming events and other useful information.
- Find out when and where the Office of Consumer Advocacy will be doing outreach in your area.
- Subscribe to and share the Office of Consumer Advocacy newsletter.
Clarissa A. Preston, CIC, APIR