Contract or Commodity?
Do you agree that we live in a litigious society? Do you feel compelled to put things in writing when establishing a position or making a deal? Have you ever marveled at how a few well-placed words in a contract can completely change the way the document is interpreted? Do you find yourself skeptical of long, written contracts as a result? Do you make sure that your professional advisors read and understand all contracts related to your business? Have I already asked too many questions?
Most business owners would answer “yes” to many of the previous questions. As a result, they either make it a point to understand contract language or they surround themselves with professionals who can interpret for them. They apply this diligence to articles of incorporation, joint venture agreements, employment agreements, vendor agreements, and all sorts of other matters affecting their business. However, there is one contract virtually all business owners sign without it ever being fully explained to them. This particular contract can be very impactful, as its primary purpose is to protect the business’ balance sheet. I am referring to the collective contracts that comprise their business insurance program.
I should ask one more question before proceeding. When is the worst time to find out that you have entered into a contract that contains language preventing you from fulfilling your expectations of said contract? Well, it’s when you need it the most, of course. And who do you blame when this contract fails to perform as intended? Well, your attorney, I would suspect. Okay, that was two questions and I answered them for you, but they set up the remaining thoughts of this article. Shouldn’t you expect that your insurance agent, your trusted risk advisor, actually reads and understands the insurance contract you sign? Shouldn’t we (now is a good time to disclose that I am an insurance agent) be expected to negotiated the absolute best “contract” available, not just the lowest price? Too few of us even try. Too few of us who do try actually know how to execute such a mission. To illustrate this point, let me just point to a few common practices that seem to be accepted in our business:
“The Apples to Apples Quote”
Name any business contract where one side dictates the terms and definitions and the other side only reads the list of schedules before proceeding. This happens all the time when business owners sign an annual contract with insurance companies. The attorneys for the insurance companies fill page after page with definitions, exclusions, carve backs, and other provisions that impact the performance of the policy when it is needed the most. However, many buyers focus solely on the schedule of items or liabilities covered, the deductibles, and the premium requested. Proposals are often spreadsheeted to compare “apples to apples” but the items on the spreadsheet only tell a part of the story. Make sure your apple doesn’t contain the proverbial worm.
“The Last Minute Renewal”
This is a cousin of “Apples to Apples” in that it is an example of treating an insurance contract with much less reverence than many other business contracts. I will use an analogy to drive this point home. Suppose you own a business for which you lease 25,000 square feet of office space. Your five year lease expires March 1 and your landlord shows up on February 28 with a renewal contract. First, you would never have let it get that far down to the wire. Second, I would bet that you would read every word of that lease agreement to make sure nothing was altered or amended that is punitive to your interests. Would you simply look to see that the square footage was the same and then look at the rate or would you inspect, or ask your agent to inspect, the terms and conditions of this major expense? Somehow, the insurance contract is treated differently. Sure, you need much more lead time to leave your office than you do to move your insurance, but we still seem to accommodate last minute decision pressure and a very cursory review of the terms.
“The Carrier Blame Game”
Sit back and enjoy this classic deferral of responsibility. A client experiences a claim. Terms of the insurance contract, unbeknownst to the client, explicitly preclude the client from any recovery from the claim. Agent blames the carrier when a claim isn’t covered. Client retains the agent but moves their insurance business to another carrier due to the “poor claims service” of the old carrier. Yes, carriers can be tricky and there will always be terms and conditions with the insurance contract. However, who encouraged you to sign the contract? Who alleged that they understood and approved the contract? Your agent. There is not a contract in existence that covers every possible contingency. Not every claim you ever experience will be covered. There will be times when the claims process falls into a grey area and requires you and your agent to battle for recovery. However, for the most part there should not be any major surprises for a policy holder. Exclusions, restrictive language, and other details should be reviewed thoroughly by the agent and explained to the client at each and every renewal.
These are only a few examples of how the insurance contract is under-respected in the general business world. Perhaps the reason is that the buyer never wants to use the insurance. Maybe they never have used it. Yet, how often does a business partner want to use his buy-sell agreement? He may not plan to use it, but he still wants it to be the best possible agreement for his interests? Did the often cited XYZ Manufacturing want or expect their plant to burn down after 25 years with no property claims? Did AB Consulting plan for their oldest and, incidentally, worst employee to sue them for wage and age discrimination after they kept him on far past his usefulness? No. No one expects to experience the unexpected. That’s why we create insurance contracts. Make sure yours will perform as expected when you need it.
by Todd Piersol