07/ 21/ 2004
by Vicki Gerson
It's the letter you dread: you've been contacted by someone's attorney. For many small-business owners, the threat of a lawsuit keeps them up at night, even when they know they’re running the safest operation around. In our litigious society, doing everything right may not protect you from a claim.
Insurance is one tool you have to protect yourself from claims made by customers, employees and the public at large. Each business has its own unique characteristics, which are indicators of the types of claims they are most susceptible to incurr. Even if your company has done nothing wrong, the costs of defense and the ability to properly prove your innocence is a costly endeavor.
In a 2004 survey released by NFIB, 30 percent of small-business owners ranked the cost and availability of liability insurance as the second most important problem to them compared to a 2000 survey, where only 11 percent of small-business owners felt this was a critical issue.
Insurance cost and availability are an ongoing concern for all businesses, but small companies are especially susceptible to the unforeseen changes in insurance market conditions and contractual and legal obligations placed upon them. How will you respond if a customer slips and falls on your premises or is injured by your product? What if you are sued for personal or advertising injury without insurance?
Most small businesses will buy general liability or commercial general liability coverage as part of a commercial package policy or business owners policy. This insurance may also be purchased separately. Policies issued by various carriers are not guaranteed to use the same forms (policy language or coverage), but are basically designed to provide insurance protection for bodily injury or property damage for which your are legally liable.
"As with all policies, know the coverage provisions, limits, policy exclusions, terms and conditions," said Phil Kuhn, a partner at Emerald Insurance Services in Alsip, Ill. "Typically professional liability/errors and omissions, intellectual property/trademark, employment related practices, as well as a host of other potential loss causes are not addressed in the standard business liability policy."
After two years of a hard insurance market, meaning higher prices and greater restriction on availability, some sectors are again seeing a level of competition. This takes the form of at least some potential rate relief and greater availability. However, not all sectors are benefiting from these changes. What can you do to maximize their ability to obtain insurance and control your costs?
Insurance companies evaluate a business based on a number of factors. In addition to your company's claim history, the industry you operate within is evaluated. Carriers look at the potential severity (large losses) as well as frequency (number of claims) that they believe an industry or company is likely to have. Characteristics such as length of time in business, experience, financial stability, laws within your state of domicile as well states of operation, your products or operation, sales methodology and your own analysis and proactive approach to controlling the businesses exposure to loss are a few variables carriers review.
"Managing one's own risk is a fundamental ingredient of successful insurance marketing," Kuhn recommends. "A comprehensive risk management approach allows you to identify the components of the risk in your specific business and your industry in general. You want to provide your broker with the tools needed to help obtain the best coverages competitively. Ask your broker, current carrier or outside consultant for assistance in developing a risk management team in your organization. You want less risk and better insurance prices than your competitors after all."
One aspect many small to mid-size businesses overlook is risk transference. No major company Kuhn is aware of fails to transfer risk wherever and whenever it can. What does that mean in practice? At a minimum, ask your subcontractors to name you on their policies as additional insured on a primary/non-contributory basis. Ask the manufacturers of the products you sell or your suppliers of component parts to do the same. Verify the adequacy of their limits and follow up every year. You may believe they will balk at your request, but you will probably find they are doing it for your competitors. Review your contracts to verify that you are passing on risk where appropriate and that the contracts you are signing are not conferring liability for which you are unprepared.
You should analyze your operations for ways to avoid unreasonable risk. Can one part of your operation be affecting your overall operation negatively? Can it be outsourced or even discontinued to the benefit of your overall company operation? Understand the total cost of risk to your organization and the various means of controlling your exposures. And of course, follow recommended safety procedures. Create a safety manual tailored for your industry to protect your employees and your bottom line.
General liability premiums typically are based on sales, payroll, area or -- in the case of office-only exposures they may be flat-rated by class. The higher the risk, the greater the rate. A manufacturer may pay $3 per $1,000 of sales, or on $10,000,000 of sales the premium would be $30,000. Another company manufacturing a less "risky" product or one with better documentation, loss control measures and appropriate risk transfer mechanisms in place might pay $1.50 per thousand of sales, or $15,000. Contractors' liability premiums are typically based on payrolls. Be aware, initial premiums are based on the sales and payroll estimates you provide prior to policy inception. Should actual sales/payroll be greater, the carrier will ask for additional premium. You are usually entitled to a refund if the sales or payrolls are less than estimated.
"The bottom line is anyone can need liability protection; anyone can be sued. Do not risk more than your can afford to lose and don't risk a lot for a little," Kuhn emphasizes. "A general liability policy is most likely your first step in providing for protection for your business. Discuss its limitations with your broker as well as steps you can take to make your company more attractive in the marketplace. Remember, it's your assets you are protecting."
