September 2014

Excess liability policies layer over underlying coverage like commercial automobile or general liability. These policies can be written as follow form, self-contained, or specific and aggregate.

Follow form excess policies do not broaden underlying coverage; they simply follow the form used by the primary carrier. These policies create a higher limit of liability than the primary carrier is willing to risk.

Self-contained excess liability forms independently define limits and conditions of coverage. The primary coverage dictates no terms of coverage to this form of excess, so the excess liability policy may be broader or more narrow than the primary.

Specific and aggregate excess policies resemble reinsurance more than excess coverage. These policies usually cover above self-insured retention, very common in workers’ compensation self-insured or captive programs.

The specific excess policy addresses individual claim retention amounts. The excess pays over a prescribed individual loss.

The aggregate excess policy covers over a total claims retention amount, whether it occurs in one claim or one hundred.

The umbrella liability policy broadens underlying coverage to provide first dollar, less retention, coverage above underlying primary policies. For example, umbrella policies broaden general liability and automobile liability to worldwide coverage rather than the territorial restrictions of business automobile policies.

How do these distinctions help protect your business?

Choose the correct form of excess to fit your budget. If standard primary automobile and general liability represent the biggest exposures to loss for your company, a few million in excess liability might be cost effective.

If the sources of loss just cannot be predicted in your business, or if your business is international in scope, umbrella liability will be a better buy.

It’s possible to combine two or more of these policies. Perhaps you want four million of excess and one million of umbrella.

Adequately high liability limits require some planning. Talk to your insurance professional and iron out the details.

Have you ever compared premium quotes only to discover the policies had different deductibles, limits, or even a different audit basis? Confusing, isn’t it?

Premiums do not compare easily, nor do they necessarily reflect costs of your risk profile. Lower premium is not always your best bet. If it were, going without any insurance would be every company’s default position. But, uncovered risk puts companies out of business every day. So, how do you know the right amount to budget for insurance? You don’t, so budget for risk, and from that, buy insurance.

As a business owner and entrepreneur, identify and assess your risks. Uncovered liability risks, like driving vehicles or manufacturing a product, can destroy your company. Running out of postage will probably not slow things down. You prioritize and decide what liabilities you want to assume and what liabilities you want to transfer.

For example: automobile physical damage. How large is your fleet, how predictable is this loss? If you have one executive new vehicle with financing, you’re going to buy insurance to cover it; just think deductible versus premium. If you have twenty similar vehicles, say panel trucks, and the fleet is paid for, you may consider not insuring the physical damage for collision or other perils. Why? Because you’re just paying a fee to bank the money while you do the claims legwork anyway. Your drivers can reduce your risk through defensive driving techniques and not drinking, texting or using cell phones. Keep the premium, accept the risk.

How about your products in transit? Is the value in one load big enough to ruin your company financially? Or do you ship relatively small amounts by common carriers. The former requires insurance, the latter, self-retain the loss.

Okay, you’ve thought through your process. Now, in plain English, tell the agents what you want covered. Employee safety and health, if my products cause harm, if my car hits someone, this type of list. Then, how much per incident are you willing to pay? First $1000 of any loss, that type of decision. Now, choose a number or some percentage of your annual gross and limit all claims to that amount; the most you’re willing to pay for all claims, including insurance premiums. Let the agents design around these parameters and compare these programs.

The best predictor of future behavior is the past. Maybe, but it’s at least helpful to review the past with an eye towards improvement.

Reviewing losses can be tricky. Insurance company analysis utilizes an “exposure unit”. Sometimes an exposure unit is one thousand dollars in sales, one hundred dollars in payroll, square feet of a building, one hundred dollars of value, or per person. The important idea is to compare relative risk and loss rather than absolute quantities.

Chart your losses, particularly insurable losses or claims made or paid. Now chart payroll, number of employees, sales, goods manufactured, units manufactured, or any other reasonable business data points.

Compare the trajectory of the charts. Does the pattern of losses mirror one of the other statistics? For example, does your workers compensation losses trend with payroll, sales, number of employees, or even square footage of your business?

Some claims history is explained by firing one employee, maybe a bad driver. Don’t ignore the fact that a bad driver got through your screening system. Make sure that leak has been plugged before thinking the problem is resolved.

Other claims may be reduced by a larger work area. Perhaps employees were just too crowded to work safely. That would indicate resolution, but think in terms of square foot per worker as a crowding issue in the future.

When you find your unexplained losses and the closest statistical trend, let’s assume claim dollars and gross sales, than forecast the business statistical trend and the claims amount.

This chart will also predict your insurance costs.

Use the same format to hindcast claims. Start now and project into the past. How much error is in this prediction? If it’s close year-to-year, it should be a good indicator of the future.

Start thinking about why these two data sets mirror. Do claims rise as you push to meet demand? Do you over-staff to meet demand and some employees lose focus? Are your claims about products not being quality checked at a certain volume? Once diagnosed, any loss control issue can be resolved, and pay you dividends. Ask your loss control service for help on these issues.

Your property has adequate and appropriate coverage against fires, windstorms, collapses, even airplane strikes. What happens to the income loss during renovation?

Some companies spread this risk by maintaining two or more manufacturing plants, or the business can be handled through remote offices temporarily. How about your business?

Let’s assume you lose your main building for six months. Will the income loss be devastating? Will additional costs and expenses continue and drive you to the brink of bankruptcy?

Indirect losses can include production costs, extra expenses to operate, even extra expenses to deal with an unfamiliar supplier because your main source just burned down.

Review your sources, suppliers, infrastructure and determine the value of these items to your income stream. Do you absolutely need your physical plant, or would it be relatively easy to rebuild elsewhere? What net income would you lose while rebuilding? What expenses would continue regardless?

What are the critically important resources? Do you have a supplier who would be impossible, difficult, or costly to replace? How about your power supply. Do you have alternatives, or is this a one-source problem?

Each of these issues are a source of extra expense, loss of income or loss of net income exposures. Normally, this coverage is added to a fire coverage or even included in a business owner’s policy. Check with your agent and find out what options you have.

Take some time to prepare an emergency plan for your business. Your loss control service provided by your insurance company can help.

In the plan, begin with onsite issues like critical need machinery, buildings, equipment, or personnel. Move off campus and consider suppliers, power sources, customers, transporters, raw materials dealers, or retail outlets.

Anyone indirectly serving your company or buying from your company is a potential indirect loss. Suppose you’re the supplier and your biggest client burns to the ground, cutting off six months worth of sales. Do you have a contingency plan?

Emergency planning followed by insuring these potential losses can save your business.