Behind the Walls of your Insurance Program
A question to all business owners: What is more valuable, your home or the viability of your business? I would suspect that the financial stability of the company would prevail, after a very difficult thought review. While both purchases are very important, in many cases, individuals undergo a much more extensive due diligence process when buying a home than most buyers of commercial insurance.
Over 5 million homes were purchased in the United States in 2014. Billions of dollars worth of commercial insurance coverage is purchased every year. It is safe to say that the majority of both transactions followed a similar pattern: Find an agent. Conduct a quick summary of what you need/want. Find a product that fits those needs and look for the best price for the options.
Now, let’s compare the purchase of commercial insurance to the process of buying a home. Imagine you are buying a home. Your real estate agent finds two identical looking homes, both providing the same utility space-wise, and both in reliable neighborhoods. In fact, they look exactly the same. A walkthrough produces no visible signs of trouble. However, one house is $20,000 less expensive than the other. Your agent says it is a real deal.
What do you do? Do you take the savings and run? The homes are the same, right? Four walls, a roof, a door…they even threw in a wine fridge. Think of the savings! Of course, you have to live in this asset, and it is a considerable amount of money, so you go ahead and pay for a thorough inspection.
It’s a good thing you did. Upon inspecting the house, it is discovered that while the house looked fine, it would not have performed as you expected. In fact, it is discovered that the foundation has a significant crack, the attic lacks any insulation, and any attempt to plug in the wine fridge would be futile since the electrical wiring had been stripped out of the walls. All in all, your $20,000 savings would have turned into an additional $100,000 in expenses. The two houses were not at all identical!
Let’s walk through a commercial insurance purchase. Imagine you are buying commercial insurance for your $10 million company. You receive two proposals from two agents. They both craft proposals from A-rated, reliable carriers and they both cover the same exposures. However, agent #1’s proposal is $20,000 less than agent #2’s proposal. How do you really know which proposal to accept? Do you take the “savings” and hope for the best? All policies are the same, right? The limits are the same, the exposure units are the same- it is “apples to apples,” right?
Where is the inspection opportunity for commercial insurance? How can you be certain you are not purchasing a product without a solid foundation? Is it a claim or an “inspection” that discovers that agent #1’s proposal includes restrictive “notice and knowledge” language? Do you pay extra mid-term to endorse the correct “Additional Insured” form? Do you spend additional money to pay your own attorney to shadow the “panel” attorney due to unfavorable defense provisions?
To summarize the decision pitfalls, will your $20,000 “savings” end up costing you an additional $100,000 in costs? Will the savings result in the loss of the business?
For many business owners, insurance expenses are a significant portion of their annual budget. It may not be as significant as a house is to most individuals, but this expense is incurred year after year. When it is put to the test, the viability of the company often hinges on proper policy performance. Business owners must take great care in the purchase of insurance. The wording of the contract is as important as the electrical wiring of your house- what you don’t know may hurt you and your business.
by Todd Piersol