Feature Stories - February 2005

Insurance:

The First Order of Business

by Ruth Furman

When it comes to insurance, what’s a business owner to do? As you weed through direct-mail offers delivered to your mailbox, drive past agencies that seem to pop up in every strip mall, and delete e-mail from potential insurers who "understand your needs," you begin to feel lightheaded.

"How much coverage do I need? Do I need to supply workers’ comp insurance? Which carrier is best? How do I compare quotes? What will happen if I don’t get coverage?" Unfortunately, the answers are not as straightforward as the questions. But, there are techniques that will lead you to the light – and out of the "liability labyrinth."

How Much is Enough?

It would be ideal if determining your business insurance needs were something you could calculate easily, look up in a book or find on a Website. Although it isn’t that simple in the real world, the good news is, help is never far away. Determining how much insurance – and what kind – is appropriate for your business can be accomplished with the help of an insurance agent. Eamon Springall of Orgill/Singer & Associates, Insurance & Investments, suggests business owners work with insurance companies or independent agents to identify internal and external business exposures, or risks. While both a small retailer and a contractor must be insured, the coverage levels will likely vary.

A key factor in determining overall coverage is related to payroll projections. Employers who significantly underestimate payroll to secure low-policy premiums may be in for a big surprise if auditors come calling. Springall stresses making accurate payroll projections.

Eric Springall, also of Orgill/Singer, echoed these sentiments. He knows all too well what can happen when an employer underestimates payroll, citing a firm with under-reported payroll that went belly-up when it took on a risk its insurance policy did not reflect.

According to Greg Pike of McFadden Insurance, the fundamental purpose of insurance is to help business owners regain the position they were in prior to a loss. "A building and its contents – tangible items – need to be insured," Pike said. "Everyone is in business to make money, so insurance must protect the income stream as well as the building. We look at how we would protect a client for the six months he may be out of business, including continued operating expenses and payroll, to be sure he doesn’t suffer a loss financially as well as to his physical property."

Twenty Questions

Business owners should listen for key questions from their insurance agents: "What is your net income… your normal operating expenses… your payroll… your leased building’s rental value?" They are questions Yiorgo Aretos recommends every business owner should be prepared to answer when considering insurance needs. Aretos, the owner of Sonio’s Café & Rotisserie, rebuilt his Las Vegas restaurant after it was destroyed by fire in 2003.

"I advise business owners to consult private adjusters with the prospective insurance policy before signing, so they can see where weak or arguable points exist for their particular situations," Aretos said. "It’s a major help to see your policy from the other side – the way your policy will be seen when you switch from being an asset to a liability in the eyes of the insurance company."

While insurers view policyholders either as assets or liabilities, Tom Kerestesi of Cragin & Pike said policyholders typically view insurance as a commodity, where "the cheapest guy wins," or view their insurance agent as a business advisor providing a valued service, similar to a CPA, attorney or architect. To choose the best product at the best price, he advises business owners to work with independent insurance agents who represent multiple carriers.

"Find out how each company is set up for claims handling. Is it done locally? Above all, be sure you like and trust your agent. Your agent is your advocate," he said. Orgill/Singer representatives advise selecting an agent with expertise in business exposures and the commercial insurance market. It is also wise to investigate insurance programs available through industry groups and professional associations.

Joel Jarvis, producer/agent for Kaercher Insurance, recommends researching insurance companies and developing possible loss scenarios prior to meeting with an agent. "Look beyond cost and explore your coverage," he said. "Think about some potential losses. While the easy ones will be covered by general liability, ask tough questions about what’s covered," he said. For example, ask if mold is covered. Ask if fire by your own fault is covered.

And – like receiving a doctor’s diagnosis – Jarvis encourages business owners to get a second opinion on recommended coverages. "You can ask another agent to look over your insurance and make sure you have appropriate coverages. Another idea is to ask a competitor or colleague about their insurance, including why they have certain coverages. This is a good way to determine if you have enough," he said.

While every business is different, industry experts surveyed by Nevada Business Journal suggest business owners meet with their insurance agents annually and keep them regularly updated on changes within the business structure that may impact coverage. "We can’t insure what we don’t know about," Eric Springall said.

Workers’ Comp: Not Optional

Unlike other coverages, business owners have little wiggle room when it comes to workers’ compensation coverage. In fact, it’s mandated by state statutes that define parameters and cover employees for loss of income and medical expenses for work-related injuries. For business owners who choose to go without, fines and shutdown can result.

According to Douglas Dirks, president and chief executive officer of Reno-based Employers Insurance Company of Nevada, which also has an office in Henderson, workers’ compensation rates in Nevada have declined steadily since the privatization of the former SIIS (State Industrial Insurance System). "Businesses in Nevada continue to benefit from private-sector competition in workers’ compensation coverage," Dirks said.

While workers’ compensation coverage is mandated, Eric Springall feels employers are at risk if they simply accept the mandated coverage and don’t explore additional coverage for workers’ compensation in order to protect themselves against being liable for third-party action.

For employers who don’t purchase workers’ compensation insurance, the damages can be devastating. Ann Nelson, executive vice president, strategy and corporate development, Employers Insurance, recalls a manufacturing plant in Douglas County that exploded and burned. The owner never purchased workers’ compensation insurance and the consequences were unfortunate.

Business owners are advised to seek workers’ compensation specialists who have a strong familiarity with the state and an AM Best rating of A- or above.

Calling All Contractors

Despite the construction industry’s steadfast efforts to change laws, construction defect insurance continues to be a prickly thorn in the side of residential contractors. "The question is not ‘if,’ but ‘when’ you are going to be pulled into defect litigation," said Pike.

While liability insurance costs are rising for most contractors, Steve Holloway, executive vice president of the Associated General Contractors Las Vegas Chapter, said legislation passed in August 2004 attempted to put a stricter definition on what constitutes a construction defect. The new law offers contractors an opportunity to make repairs before getting insurance companies involved.

"Construction defect litigation was getting wild. With the new legislation, claims have to be more specific – hopefully eliminating some creative lawsuits," Holloway said.

While some legitimate construction problems exist, Kerestesi said construction defect coverage is an ongoing problem causing a lot of litigation. "The Legislature recognized the problem and tried to address it because it was getting so far out of control," he said. According to Kerestesi, it’s too early to tell if the Legislature’s corrective measures will reverse the industry problem. He advises companies to start early when planning for their insurance needs.

"Pay very close attention to terms and coverages provided. There is a great variety and disparity of terms and conditions between insurance products for contractors and owners of multiple-occupancy residences," he said.

Holloway advises construction firms hit with a construction defect issue to consult with their attorneys to determine that a complaint is specific and valid before contacting the insurance company. He also suggested contractors determine if they are covered under umbrella policies taken out by the project owner or developer. Education from industry groups such as Associated General Contractors and others can help educate business owners about construction defect insurance.

The Right Resources

To ensure you purchase and maintain the right type of insurance for your business, consult professional associations, colleagues, agents and even Websites such as myownbusiness.org, which lists "Top Ten Do’s and Don’ts" regarding business insurance. Nevada’s Department of Insurance Web site (www.doi.state.nv.us) features a wealth of information and links to helpful resources for business owners in Nevada. Another site, nvinsurancealert.com, includes information about choosing an insurance company and also points out known insurance scams and red flags to be cautious about.

There is obviously a lot more involved in purchasing insurance for a business than signing on the dotted line. As a business owner, your goals should be to minimize risk, get the best protection possible at the most attractive rate, and establish a relationship with an agent who can become a true partner in your business growth. While there is no easy formula for business owners to purchase and maintain the right type of business insurance, getting educated can lead to the ideal insurance coverage for your business.

Top Ten Do’s and Don’ts of Business Insurance

DO'S

1. Bring an insurance agent into your start-up process and have policies in place.

2. Consider using an insurance agent who can handle all your insurance requirements.

3. Include excess liability "commercial umbrella" coverage for your business.

4. Use a broad form of business property insurance.

5. Consider a health insurance policy to recruit and keep good employees.

6. If you have employees, consider carrying employment practices liability coverage.

7. Maintain a clean and safe environment in your workplace.

8. Include your tenant improvements in your property insurance policy.

9. Increase all your insurance coverages appropriately as your business grows.

10. Consider maintaining a buy-sell agreement with your partners, funded by life insurance in the event of the death of a partner.

DON'TS

1. Do not consider self-insuring any part of your workers’ compensation risk.

2. Don’t fail to recognize regular employees as employees and not contract workers.

3. Don’t overlook ongoing employee training on maintaining workplace safety.

4. Don’t feel you can’t afford insurance; you can’t afford not to have it.

5. Do not deal with contractors who cannot furnish insurance certificates.

6. Do not permit your insurance policies to lapse for non-payment of premiums.

7. Do not deal with insurance providers with substandard ratings.

8. Do not fail to provide your insurance provider with a complete picture of your risks.

9. Do not go "uncovered" (uninsured) in any category of insurable and significant risk.

10. Don’t overlook flood or earthquake insurance if in an area of high risk.

Ruth Furman
Ruth Furman is a freelance writer based in southern Nevada.