By Diane M. Calabrese / Published August 2023
A promise made. A promise kept. That’s the understanding between an insurer and an insured. Make that a formal understanding or a contract. Insurance mitigates the financial loss from an incident such as theft or property damage. It reduces or negates out-of-pocket expenses.
Insurers operate on the principle of shared risk. They pool sums of money (premiums) from the many and expect to have to pay out only to the few. In the process they make some profit, and rightly so because their business is pooling risk.
Insurance works well as long as risk remains manageable. Catastrophic events have a way of throwing an unanticipated number of insured into the incident category, and payouts may become so large they test assets.
Hurricanes along the Gulf Coast and fires in California and other western states in recent years have strained the reserves of insurers—so much so that some of the biggest names in insurance in the United States have stopped writing new property damage policies in those regions.
Other insurers have taken a different path by limiting the kind and amount of insurance an insured party can purchase. In many states property owners cannot purchase replacement-level policies. Also, insurance only kicks in after the insured party pays the first $10,000 or $20,000.
Navigating the insurance market is complicated, yet going without insurance is not an option for a licensed business. Requirements for business licensure vary by state, but a general liability policy is a near-universal requirement.
The best way to match insurance needs to insurance requirements is to work with an agent who knows the industry. That’s the recommendation given to us by Tom Svrcek, president of CSC Insurance Options and Joseph D. Walters Insurance in Belle Vernon, PA.
“Most newbies to the business flock to multiple social media groups for information on insurance,” says Svrcek. “It’s confusing for these people, thinking that power washing contractors know all about insurance. This is not the case.”
Bypass confusion. “Find an expert that knows power washers,” says Svrcek. “Only a few understand the coverages needed, and years later when a claim occurs, they find out the hard way what needs to be covered.”
No one wants to find out what they needed after the fact or after the incident(s). That makes it important to seek assistance from an insurance-industry professional with deep expertise.
Svrcek has another recommendation for members of our industry. That is to find and trust one expert. “Otherwise, you’ll have to talk to three agents every time you need a certificate,” he explains. [Many jobs require proof of insurance—of more than one sort—as a precondition to submit a bid.]
Working with an insurance professional who knows our industry also cuts down on the possibility of redundancy or omission. “You could get less than what you need, or some coverages could be more than you need,” explains Svrcek.
An insurance professional with specific industry knowledge can keep the insured apprised of changes. The professional can also recommend ways that policies might be better configured.
It’s not true of everyone, but most people do not evaluate their insurance coverage annually. Just as at home they may have coverage they no longer require, they may also have coverage they no longer need in business.
The biggest mistake those seeking insurance make is “not finding an expert.”
Those with very deep pockets may forego certain types of insurance that are not required for business licensure or driving, but the options vary by state. In reality, insurance is the best mechanism for protecting against unexpected, costly events.
Without insurance, one accident, natural disaster, or lawsuit could wipe out a business. Worse, in some instances financial liability could spill over from the business to personal assets.
The objective of every manufacturer, distributor, and contractor ought to be the same: obtain required and optimal coverage for the best rate. Again, that’s where an expert helps.
This section began with the mention of an insurance industry in flux thanks to insurers pulling out of some states because it’s so difficult to balance or pool risk. Another factor is also affecting insurers everywhere and that’s fraud.
Every instance of a policyholder making an exaggerated claim adds to the instability of the insurance marketplace. All insured parties have a responsibility to be honest in reporting losses.
According to FBI statistics, as much as $6 billion of the $80 billion dispersed by the federal government to aid reconstruction after Hurricane Katrina (2005, Gulf Coast, $100 billion in damages) was lost to fraud. There was $34.4 billion paid in insured losses across 1.6 million claims, which illustrates the level of underinsurance or excessive damage—a bit of each.
Insurers are constantly assessing and reassessing their exposure. The more accurately their clients report their profiles (type of work, equipment, hours, etc.) to them, the more precisely they can craft policies that sustain the insurer and protect the insured.
Giving an insurer false information about the type of work being done can cause a policy to be voided. Even if a contractor works at an elevated height only once a month, the contractor is still working high up.
Each state operates its own federally mandated workers’ compensation insurance program. Every business owner must participate in the program. The federal government also mandates unemployment and disability insurance coverage.
Depending on size (50 or more full-time or full-time equivalent employees), employers are either required or encouraged to participate in the provision of health insurance through the Affordable Care Act (ACA). The encouragement applies to businesses with fewer than 50 employees.
There are many programs that assist small business employers in the pooling of resources to offer health insurance and also offer credits to them for doing so. See the SHOP [Small Business Health Options Program] at the Healthcare.gov website.
The prerequisite for a business license in almost every state is a general liability insurance policy. The coverage in such a policy protects an owner from financial loss should there be an incident that involves bodily injury, property damage, medical expenses, libel, slander, defense against lawsuits, and settlement bonds. But that’s the long list, and there are differences state to state.
Some states peg the amount of general liability a contractor needs to the type of contracting, such as residential or commercial or both, and per occurrence amounts. Certain jobs will require a specific amount of liability insurance. An insurance professional with industry experience can give a contractor written proof of insurability that enables the contractor to bid. If unsuccessful, the contractor need not actually purchase a higher level of liability insurance, such as $2 million instead of $1 million.
In addition to general liability insurance, manufacturers, distributors, and wholesalers may carry product liability insurance. If a defective product causes injury to a purchaser, the insurance can help cover the financial loss.
Injury can be construed very broadly under newer prescriptive measures such as Proposition 65 in California, which requires all potential carcinogens to be listed on products sold in the state (wherever they are made). If harm (a cancer) can be linked to a carcinogen in a piece of equipment or chemical, product liability may be pursued, and insurance coverage will be needed.
Manufacturers, distributors, and wholesalers may have property and physical assets that should be insured. Commercial property insurance covers the owner in the event of loss or damage from natural disasters, civil disobedience, and vandalism. It parallels homeowners’ insurance.
And in parallel to homeowners’ insurance, commercial property insurance typically excludes flood coverage. Policies for flooding must be purchased separately, generally through a FEMA [Federal Emergency Management Agency] program or a state pass-through. Earthquake insurance must also be purchased separately almost everywhere.
Coverage for everything from business interruption (e.g., a serious storm takes out power for an extended period) to errant employees (e.g., workplace violence) can be purchased from insurers, but the cost for special coverage may be prohibitive.
Short of covering every conceivable risk, a business owner must cover the most likely risks and cover them correctly. A mistake that some owner-operators make is using their vehicle for business and insuring it as though it is a household vehicle. Make certain a truck, car, or van used in business is insured as a business (commercial) vehicle.
A professional insurance agent can spot gaps in coverage that an insured owner might miss. That’s why assessing and reassessing (at least annually) insurance coverage with an expert is so important.
The concern about bank solvency that hovers over our nation mid-2023 also extends to insurance solvency. When we read a news article about another insurer refusing to write new policies in some places, we know there’s an imbalance in risk pooling. It’s a reminder that every business owner has a role to play in assessing risk, obtaining coverage for the risk, and should an incident occur, reporting it with complete accuracy.
Stability in the insurance marketplace (like bank solvency) contributes to a vigorous economy. We can all assist with promises made and kept.