Lisa Parry Becker, vice president of an independent insurance agency in Langhorne, Pennsylvania, recounted a computer hacking incident a longtime client suffered recently. It sounds almost like a thriller novel, with a race against time and a little bit of nail-biting.
The client had purchased a cyber liability policy, but just before renewal, the carrier required the small business to beef up its computer security with multi-factor authentication log-in for all employees. But the employees were pushing back on the extra tedium, and the company kept putting off the upgrade.
Then, with just days to go before the policy would have been non-renewed, one employee’s email was breached and the associate was hit with a ransomware attack.
Fortunately for the client, the intrusion was limited to the one worker, and the business immediately (finally) instituted multi-factor authentication for everyone associated with the firm. “Things really came to a head,” Becker said. “But we got it done. We got it renewed.”
Small Biz Cyber Gap
Other clients have not been so lucky. Without cyber insurance, another local business was hacked and it took the services of two attorneys, weeks of anguish and negotiation, and, in the end, thousands of dollars down the cyber drain, said Ryan Parry, treasurer of the 120-year-old Parry Insurance agency.
The Parry agency may be ahead of the curve on cyber issues. When the COVID pandemic forced employees to work from home, using their home computers, the firm purchased new laptops within six weeks and set up heightened security protocols. But other agencies and small businesses across the country have not taken similar steps, despite the growing threat of cyberattacks on small to medium-sized companies.
Ransomware attacks against industrial organizations worldwide jumped by 87% in 2022, the cybersecurity firm Dragos Inc. reported. For small businesses, cyberattacks were up 40% in a year, according to a 2022 cyber report from Coalition, a cyber insurance provider.
And ransom demands to unlock a company’s data have escalated to $1.8 million, on average. Overall, the average cost of a data breach is about $151 per record, said a report from Big I, the national association of independent agents. With just a few thousand records at risk, the cost could easily climb above $1 million.
But a 2022 survey by Big I found that only about two-thirds of agencies see a need for having cyber protection for their own firms. Just 33% — a smaller percentage than was reported two years earlier — have a written data security plan.
“If a commercial customer’s agent doesn’t even believe it’s that important, odds are the customer doesn’t have cyber protection,” said Chris Cline, executive director of Big I’s Agents Council for Technology.
Leasehold Coverage Gap
Cyberattacks are not the only potentially devastating coverage gap facing businesses and agencies as employees return to the office in a changing economy. One area that has been greatly overlooked is leasehold interest coverage, which protects against the loss of favorable office lease terms, said Chris Boggs, vice president of agent development, research and education at Big I.
“Few people seem to know about how important leasehold interest coverage really is,” Boggs said.
The expensive scenario now facing companies all over the United States is this: As COVID-19 forced many firms to abandon their brick-and-mortar office buildings, landlords were stuck with empty spaces and few rent checks coming in. In the last year, as businesses thought about returning to the office, some landlords and property managers offered favorable lease terms to lure more firms and their workers back to the physical realm.
But lease contracts often contain an escape clause that allows building owners to raise prices if the building is damaged in a fire, storm or other event that forces tenants out while repairs are made, Boggs explained. When the lease is renewed, it’s often at a much higher rate. And with rising U.S. interest rates, buying or building an office may be more expensive than at any time in the last two decades.
The costs of losing a favorable lease can be quite painful. If a business was enjoying a lease at $10 a square foot on a 20,000-square-foot building, for example, then sees the rent jump to $15, that’s an extra $100,000 a year in operating costs, Boggs explained in a recent white paper.
Leasehold interest coverage protects the business in that type of scenario and will cover the difference between the old lease and the new one. But few businesses and insurance agents know it’s available.
“I don’t think there is [another] coverage that is not only not understood by really good insurance people, but they don’t even know it exists,” said Virginia Bates, a producer, insurance educator and advisor, and head of VMB Associates in Melrose, Massachusetts.
“When I bring this up, I get a lot of deer-in-the-headlights looks,” she said.
Carriers, which have largely moved agent interactions to an online interface, don’t often mention leasehold interest coverage, she said. And some agents report that in hard or distressed markets like Florida, carriers don’t want to touch it.
“The issue we are running into is finding a carrier willing to offer it,” said Karyn Roeling, with the Seibert Insurance Agency, in Tampa, Florida. “Which seems silly because you’d think carriers would want to protect clients adequately.”
In Tampa and other parts of Florida, where a hyperactive litigation environment has been blamed for 10 carrier insolvencies in the last two years, many commercial customers have been forced to go with excess and surplus lines carriers.
“The majority, if not all, of those markets do not offer this coverage as an option to even quote,” Roeling said.
In some parts of the country, commercial and industrial rents have soared in recent months — by 40% in the Tampa Bay area — as the economy clicks along and more space fills up, especially in warehouse and industrial sites, Roeling said. So, when businesses are faced with losing a favorable lease, they’ll really feel the pain if they don’t carry leasehold coverage.
When LHI coverage is available, selling it to clients does require some understanding of economic trends, the commercial rental market, and some math, Bates said. Premiums depend on the type of business, size of the commercial space, and more.
By most measures, the coverage is considered a bargain for companies, she noted. Premiums are usually front-loaded, based on the exposure at the beginning of the lease, which requires some explaining to the insured, she said. The Insurance Services Office, a subsidiary of Verisk, has produced guidelines on premiums.
On the other hand, agents who don’t offer LHI policies aren’t often blamed: Failure to offer the coverage is rarely part of a claim against an agent’s errors and omissions policy, Bates said. “The insureds and lawyers must be just as unaware of it.”
An evolving economy and a changing climate are creating other challenges for small businesses, along with opportunities for agents and insurance brokers. As affluent homeowners have moved to the suburbs, many U.S. cities are finding they don’t have the tax base to maintain aging infrastructure, including water systems with sections that can be well over 100 years old.
That means that water-dependent businesses, such as restaurants, bistros, hair salons, and others, must shut down or lose customers when water is shut off. Jackson, Mississippi, and Memphis, Tennessee, are two recent examples of municipalities with struggling water-supply systems where small companies have been impacted.
Many small and mid-sized businesses’ business interruption policies don’t cover lost revenue that results from a city’s water maintenance issues, however. That has created a chance for more agents and brokers to offer endorsements that will cover a wider variety of business interruptions.
But only if they’re aware of the coverage and its availability.
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