Have You Checked Your Insurance Lately?

Shop owners can save money, increase their coverage, and reduce their risks if they know what to look for in a business insurer.

If you're like most small business owners, you probably cringe whenever the topic of insurance comes up. While it's hard to run a business without insurance, many shop owners and managers would rather spend their time on more important tasks like technical problem solving or even finance, training, and marketing.

According to one veteran insurance-industry observer, "the issue of buying business insurance gets a priority somewhere below taxes, buy slightly above supply ordering." Unfortunately, insurance is not a like-it-or-leave-it proposition. It's a fact of business life, especially when it comes to your company's long-term growth and survival.

CUTTING TOOL ENGINEERING Magazine conducted a reader survey in the April issue on liability insurance. The results reveal some insight into the insurance habits of the metalcutting industry and may open a few eyes.

Survey Results

Shop owners and managers have switched insurance companies an average of three times during the last 10 years. Insurance industry observers claim that it's common for most companies to evaluate their coverage once every three years.

Two-thirds of respondents (67%) say they carry liability insurance. However, one-third (33%) of the shop owners responding to the survey say they don't have liability coverage. That's a rather alarming statistic, but one business-insurance expert claims that he sees "more people underinsured than over-insured." Fortunately, only 15% of the respondents claim they have been involved in a product-liability lawsuit.

Despite the scarcity of first-hand experience in the metalworking industry, the topic of product liability strikes a nerve with many shop owners and managers. "We must get reform on this soon or the crooked lawyers will have all manufacturing exiting the U.S.," warns a Pennsylvania-based shop owner with four employees.

"It's too bad some people try to get rich by not exercising good common sense when using certain products, then hurting themselves and suing the manufacturer," adds a shop owner in Texas who has five employees. "Lawyers benefit the most, not the manufacturer or the so-called 'victim.'"
The exclusive CUTTING TOOL ENGINEERING survey provides some other interesting nuggets of data. For instance, only 26% of respondents have any commercial vehicle exposures, while 65% use the insurance provided by common carriers for their transit exposure when shipping products.

Respondents claim that the majority (73%) of their sales is manufactured to their customers' specifications. Only 27% of respondents provide installation for any of their products. Three-quarters (76%) of respondents' sales are comprised of fabricated parts, while 24% of sales are complete machines.

Almost one-half (41%) of survey respondents export some of their products. If shops export, an average of 26% of their sales leave the U.S. A smaller number of respondents (29%) import some of their products. Most of those respondents (80%) do not provide insurance for imported items.

Buying Tips

The insurance market is extremely competitive today, with many different options available. "It's very price competitive, but the buyer is king," says Larry Heischman, president, Insurance Cost Reduction Services Inc., a Novato, CA-based consulting firm. "Shopping around pays great dividends. Staying with the same company year after year suggests the renew-as-is syndrome, wherein you could be missing some dramatic price savings or increased coverages."

Although the buyer holds the reigns, the entire insurance-purchasing process can be a very intimidating experience, especially for small business owners. "It's a very confusing industry, mostly because of the language," admits Heischman, who is the co-author of The Buyer's Guide to Business Insurance (Oasis Press, Grants Pass, OR).

Heischman defines liability insurance as, "A policy that protects you against monetary losses due to liability from your negligent acts or failures to act. Liability coverage pays third-parties-it doesn't pay the insured," he points out. "Liability insurance is a very broad area, and there are many different liabilities out there that require multiple policies." For instance, there's property-damage liability insurance, bodily-injury liability insurance, and employment-practices liability insurance.

Warning Signs

Jim Pearson, a Denver-based lawyer who specializes in risk-management issues, recommends reviewing insurance coverage annually if your business is growing. Otherwise, every two or three years should be satisfactory.

No matter how often you evaluate your business insurance, there are three benefits that can be gained by changing insurance companies:

• Reduction of premiums. 
• Enhancement of coverage. 
• Better service.

Heischman and other experts believe you can be alerted to problems relating to your insurance coverage if you know what to look for. "Having concrete alternatives puts you in the driver's seat when the time comes to negotiate your renewal," claims Heischman. So, if any of the following conditions exist, he says you should start looking for a new insurance company:

• Your agent is probing for price sensitivity near expiration (e.g., the agent asks if you are "aware of any lower-price alternatives"). That may indicate a lack of confidence in the competitiveness of the current agent's price.
• There's been rising insurance prices or insurers withdrawing from the field. 
• You've filed a significant claim or suffered a series of smaller losses. 
• Your premium has risen over previous years. 
• Significant changes in your operation have occurred. 
• Your agent pays less attention to you than before.
• Your agent says, "It cannot be done."
• Your agent is slow to respond to your requests.

In order to find a reputable insurance agent or broker, the New York-based Insurance Information Institute (III) recommends talking to your peers and finding out what companies insure other shops. Be sure to get two or three different opinions about how well those insurers serve the market. If you belong to a trade association, find out if it sponsors an insurance program-most organizations do. The III also says it's a good idea to make sure any agent/broker you deal with is knowledgeable about your business's particular insurance needs and methods to reduce exposure to loss.

Many business owners are attracted to large insurance companies with well-recognized brand names. But, according to the experts, size of an insurance company is less important than financial risk. "You definitely want to avoid a company that's undercapitalized," warns Pearson. "If you're hit with a large lawsuit, that kind of an insurer may not be able to pay claims or defend itself. Always look for stability. Claims handling and customer service are important factors to consider."

"It pays to shop around," claims Pearson. "Some people are sold things they don't need. It always helps to ask lots of questions, and be sure to talk with a broker who reps a variety of insurance companies."

"If you're a small company, you'll probably get your best service from a small broker," adds Heischman. "It pays to be size wise." He recommends doing some basic homework before deciding on a new insurer. That means doing research on the company's insurance industry ratings.

A.M. Best Co., Oldwick, NJ, rates insurance companies by size using a 1 to 15 scale (1 = smallest; 15 = largest). The company also rates insurers on quality starting at A++ and trailing downward. "Most business contracts will dictate that you use an insurance company that's size 6 and A- or better," says Heischman. "If an insurance company is rated as size 5, C+, it's sitting on some very shaky ground."

Important Questions to Ask

In order to avoid insurance headaches and hassles down the road, you need to ask the right questions upfront before signing any paperwork. Make sure you address the following issues:

• What is the procedure for handling claims (e.g., who does it and how long does it typically take)?
• Exactly what is covered under the type of policy you are considering and what is not covered?
• Who is covered under your policy or policies?
• Do you have a "claims made" or an "occurrence" type of policy? A claims made policy insures only against accidents that occur during the policy period that are reported within the required time periods. An occurrence policy insures against a loss even if the claim isn't reported during the policy period, as long as the claim is made during the statute of limitations period prescribed by state law. Commercial general-liability policies are usually written on an occurrence basis (the trigger for coverage is the date when the loss occurs).
• What will the insurance company do in the event of a claim?
• Will an independent adjuster or a company adjuster handle the claim?
• What are the policy's limits (i.e., the dollar amount of insurance coverage provided by a policy) and how does each apply?
• How is the premium calculated? Can it be paid in installments?
• What kind of risk-management services does the company or agent offer?
• Does the insurance company insure other businesses like yours?

Pitfalls to Avoid

Two of the biggest insurance mistakes small business owners make are not shopping very effectively and paying more for coverage than they should. Buying insurance can be a very time-consuming process, but you must be prepared to shop. "Many people don't take the time to check with other brokers and confirm their findings," says Heischman. "Most business owners tend to rely on only one agent or broker to make their insurance decisions."

Quite often, small business owners fall into the trap of thinking "insurance is insurance." As a result, they end up using the same agent or broker they buy home, life, and auto insurance from. According to Heischman, Pearson, and other experts, that approach is asking for trouble, because it's not a good idea to rely on only one agent.

If you want to streamline your insurance shopping, consider these additional suggestions that will help empower you during the selection process:

• Ask your current insurer for a copy of your loss runs before looking for insurance. Loss runs are reports generated by insurance companies that display losses incurred, including dates, categories of losses, causes of losses, and the amounts.
• Provide a copy of your specifications. "Insurance is an industry that demands specifications," says Heischman. "Insurers want to know a lot about your company, such as 'What do you do?' and 'Who are your customers?' It helps a lot if you can write up a short description of your company that's similar to a marketing plan."
• Carefully review all exclusions in a policy to make sure your company's operations are covered. "What's not covered in a policy can be very confusing," warns Pearson. "You must be able to understand what they're talking about."
• Policies should cover one-year time periods. The days of the three-to-five-year policy is a thing of the past.
• Don't change any existing insurance until you're assured that you can get the new coverage. There's a tendency for some agents and brokers to say, "Sure, no problem, I'll get that for you." Make them prove that you have the coverage.