Mistake: Inadequately insuring computer systems. Although the system may be adequately insured when it comes to replacement costs of hardware and software, the cost of reconstruction of data is frequently not appropriately covered. If this is an issue for your business, you should have EDP coverage. Also, the key is to have proper backup, off-site storage of data and provision for alternate data processing.

Mistake: Paying insufficient attention to Worker’s Compensation. Companies are either passive about workers’ comp, relying on the insurance company to handle everything; or aggressive, treating employees with suspicion and creating an adversarial environment. Neither approach helps to control either losses or costs.
      BEST: Workers’ compensation is an issue for organizations of all sizes. Small businesses must concern themselves with obtaining coverage, not only managing it. Institute the company’s own loss-control policies, procedures and training. Establish an effective claims management program adapted to its own needs. These things can be done with the help of your workers’ comp insurance carrier -- they want to help.

Mistake: Misunderstanding deductibles and self-insurance. The purpose of insurance is to protect against unexpected losses. When expected losses are also covered, the insurer charges for the amount of expected loss plus overhead and profit. It is far more cost-effective not to insure expected losses, such as damage to company-owned automobiles. Among other cost savings, the company has the use of the premium dollars until there is a need to repair a vehicle. STRATEGY: Protect against unexpected or catastrophic losses with insurance policies having high deductibles. The amount of the deductible should be based on how much the company can afford to self-insure on smaller or expected losses.

Mistake: Carrying inadequate catastrophic liability coverage. Most companies are under insured when it comes to liability limits. The key here is to have ample umbrella coverage, especially if the company is involved in public services. The organization does not have to have “deep pockets," it just has to be perceived as having “money." Don’t overlook potential costs for legal defense, not only for the company but its owners, officers and directors. All of them will be named in suit therefore all of them should be covered.

Mistake: Not having enough business interruption coverage. Companies usually underestimate the true length of business interruption after a loss. EXAMPLE: It may take 2 years to rebuild, order and install new equipment and reopen operations. Yet, to operate at full capacity may take much longer. Be careful when considering this coverage. ADDED TRAP: The formula used by insurance companies to calculate business interruption differs from that used by accountants. It is extremely rigid because it is the same for all companies regardless of their industry. The company should have an insurance expert explain the requirements of the formula. Failure to do so could result in inadequate coverage.

Mistake: Failure to use “blanket” insurance coverage. Companies with more than one location should take advantage of what is called “blanket” insurance. If the company has one location valued at $50,000 and one at $75,000, it could buy blanket coverage of $125,000. If either location was lost, the company would be covered, even for losses well above the stated value. EXAMPLE: If the $50,000 location had a $60,000 loss because it had just received $10,000 in new equipment. The company would be fully covered, instead of losing $10,000 as it would if the locations were insured individually.

Mistake: Not disarming the co-insurance clause. This a valuable, usually overlooked option to increase insurance coverage at a very reasonable cost. HOW IT WORKS: Insurance companies will pay 100% of all commercial claims up to policy limits providing the company has insured at least 80% of its value. But if the company covers less -- 60% of the value -- it will be penalized. In that case, the insurance company will pay 6/8 of the claim. The company can get a co-insurance waiver clause to waive the 80% requirement by meeting the insurance company’s requirement of filing annual reports on the value of the company’s insured assets and paying a nominal waiver fee. The company can also obtain an Agreed Value policy.

Mistake: Not keeping up-to-date records on replacement costs for all plants, machinery and equipment. Guesswork isn’t good enough if equipment is damaged and an insurance claim is filed. The insurance company will want to see detailed documentation for the values the company reports.

Mistake: Not having adequate Officers and Directors Liability coverage. Most companies do not focus on the cost of defending their officers and directors from law suits. Our society is a litigious one. Regardless of whether or not there is a real cause for a law suit, a defense must still be provided and legal fees can make the premium cost appear small.

This is not a comprehensive list of potential insurance problems, but it does cover the most neglected areas. As a CEO or Managing Officer, you must ask your Insurance Professional if these issues have been addressed and any other potential problems considered. The idea is not spending more premium dollars but spending the time to make your Agent aware of your concerns.