While you may answer the question posed in the headline by saying that most of your commercial customers have business interruption coverage, the issue here is not whether they have the coverage, but whether they are “properly protected.” In reviewing claims statistics for 2010, errors and omissions claims arising from problems with business interruption continue to happen. The problem can involve a multitude of areas, including not having the coverage at all, not having the right type of coverage, customers not understanding the coverage they have or not having the right amount. Let’s look at each of these.
While professional agents understand the need and the value for their customers to have business interruption coverage, I will go out on a limb and state it is questionable whether they truly understand the intricacies of this coverage and the options to consider. There is no doubt this coverage has complexities to it and thus it is important that agents and agency staff understand the types and how they work.
This coverage is designed to cover the loss of business income/profits if normal business operations are disrupted by a covered physical damage loss to property. How many of your commercial customers don’t have this exposure? Probably not a lot. The overwhelming majority have some type of business interruption exposure.
An effective approach to handle this with your customers is to use an Exposure Analysis Checklist. This tool will enable you, by SIC code, to get a firm handle on all the business interruption forms that might be applicable to your customer. Each of these forms is fully defined with extensive explanations regarding issues for you to consider.
When an agency buys a book of business or one of your producers takes over an account via a broker-of-record letter, it is critical you don’t just renew the accounts “as is,” because duplicating the prior agent’s mistakes does not isolate your agency from liability should a customer have a claim not completely covered by their policy. This is now your responsibility. So, if the customer did not have any business interruption coverage, this is a great opportunity to show the value you provide by evaluating their exposure and making a coverage recommendation. The Exposure Analysis tool is especially helpful in this situation.
If, after recommending business interruption coverage, your customer does not want it for whatever reason, get their declination of coverage in writing. This documentation is invaluable should an E&O claim arise in this area.
Not the Right Type of Coverage
As you will note from the Exposure Analysis Checklists, there are many forms available and thus it is important to ask the customer various questions to better understand their exposure and which form and limit will achieve the desired result. Questions such as:
- Can the business operate at a temporary location rather than suspend operations?
- Could your client’s business be interrupted because of a loss at one of its suppliers?
- Would the customer suffer a loss if one of their service providers — electrical, fuel, water, heat, refrigeration, communication, etc. — suffered a loss?
- Is there a need for extra expense insurance?
- Are there any new state Ordinance or Law requirements or code upgrades that could delay the customer from getting back in business?
Not Understanding the Coverage
As mentioned previously, Exposure Analysis Checklists will provide complete definitions and issues to consider. Here is a sample:
Business Income Including Extra Expense — “This coverage is used to insure against loss of business income (including any continuing normal operating expenses) that you sustain due to the necessary suspension of your business operations. To be covered, the suspension must be caused by a direct physical loss of or damage to property at the premises described in your policy and for which a business income limit of insurance is shown. Under this form, extra expenses are included and rental values can be added as an option. An extended period of indemnity provision is also included to provide coverage after you resume operations until your business returns to normal levels of activities, up to the time period specified in the form.”
It goes on to provide the following detailed information: “ISO’s Business Income Including Extra Expense form (CP 00 30) requires the insured to choose between three coverage options; business income including rental value, business income excluding rental value and rental value only (extra expense coverage is included in all three)” and so on.
Including this type of information on your proposals will definitely help your customer understand the coverage.
You also want to provide, if applicable, explanations such as:
- Co-insurance percentage – a frequent issue in E&O claims.
- Waiting periods – These can be fairly common with different periods of duration. Any losses incurred during the period directly following an event will not be covered. Try securing coverage without a waiting period.
- Specific clauses that could impact the settlement of a claim — including any exclusions/limitations/war clauses, etc.
Not the Right Amount of Coverage
In many cases, because the current coverage was based on a projection made last year —and especially with the changes in the economy — there may be, and probably are, circumstances where the coverage and limit from last year is no longer adequate. A projection of your client’s sales needs to be factored into the correct limit for the upcoming year. It is highly recommended that you work with the customer’s accountant to ensure calculation of the right coverage amount. Bottom line: business interruption is definitely not a coverage you want to renew “as is.”
As noted by the following claim, when you move an account from one carrier to another, do not reduce any coverage, unless agreed to in writing by the customer.
The agent failed to duplicate coverage for loss of rents when coverage was switched to another carrier. The prior policy contained coverage for loss of rents and it was the agent’s intent to include loss of rents on the new policy. The carrier paid for the physical damage to the building, but disclaimed the loss of rents.
Business interruption is an extremely important coverage. Your customers must understand where property coverage ends and business interruption coverage begins. Take the necessary time to ensure your customers know the importance of business interruption, how it works and what coverage form best fits them. This education will go a long way toward selling more insurance while, at the same time, minimizing the possibility of an E&O claim being made against your agency.
Pearsall, CPCU, ARM, is president of Pearsall Associates Inc., a risk management consulting firm specializing helping agents protect themselves. He is also a special consultant to the Utica National Agents E&O program. Phone: 315-768- 1534. E-mail: firstname.lastname@example.org.
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