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
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
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
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
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
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.