Choosing the right insurance for your business

Imagine a worst possible scenario: Fire destroys your business tonight. Or someone slips and falls on your premises and files a lawsuit. Will your insurance company pay fully and promptly?

You may think so, but have you performed due diligence to make sure your carrier has the financial stability to pay off a serious claim? Just as important, will it pa y your full recovery amount or attempt to cut its losses by nickel and diming you to death? And how quickly will it process your claim? Will it delay payment just when you need the cash to pay your bills?

It's easy to avoid answering such questions. After all, no one likes to think about insurance until things go wrong. But recent headlines about the collapse of the huge and supposedly financially secure American International Group (AIG) are bound to give businesspeople cause for concern about the health of their own insurance companies.

That's prudent, according to those in the business. "If you happen to get caught in a gray period just before or after a carrier goes out of business, claims are a nightmare," says insurance consultant Scott Simmonds, Saco, Maine.

Carriers that go into receivership are taken over by the state in which they are incorporated, explains Simmonds. That can mean a freeze on the carrier's claims-paying ability until another company picks up their contracts. And that means you don't get your money when you most need it for paying your bills.

Due Diligence

Protect yourself by finding out if your carrier is financially strong and will likely be around when your claim is filed.

Let's take on the second part of the equation first. Longevity can be as important as financial strength. "Property and casualty insurance is what is called 'occurrence based,'" explains Daniel C. Free, president of the Indianapolis-based Insurance Audit and Inspection, a risk management consulting firm that helps companies assess insurance carriers. "That means the policy you buy today will respond to claims that happen today but that you may not find out about for several years down the road."

Free offers this example: Suppose an individual slips and falls at your business but does not report it right away. Maybe two years from now that person comes back and says the fall turned out to be worse that he thought. "Any claim will need to be handled by the insurance company that was in force when the accident actually occurred, even if you have switched to a new carrier since that time," says Free. "If the company is teetering on the brink now, what happens when they are gone?"

A carrier's longevity can even affect your insurability. "Like many businesses you may have life insurance to cover partners for buy-sell agreements," says Simmonds. "Suppose a year from now one partner develops a heart condition and then five years later the insurance company becomes insolvent. You may have a tough time replacing your policy."

Longevity, of course, depends on financial strength. So that brings us back to the fundamental question: Just how sound is your carrier? To find the answer check the company's ratings with the traditional assessment agencies such as A.M. Best and Standard and Poors. (For a list of these agencies see the sidebar: "Using the Ratings Agencies.")

Unfortunately, even the ratings agencies don't provide the last word on financial stability. Bear in mind that none of them issued any warnings about AIG before it collapsed. The fact is agencies tend to "grade high," since they receive fees from insurance carriers for the privilege of being rated.

Get Assistance

It's clear that assessing the quality of your insurance carrier is a little more difficult than looking up a grade on a Web site. But you have limited time to spend ferreting out information. What can you do? Turn to third parties who follow the field and know the inner workings of insurance carriers.

Be aware, though, that not every outside adviser is unbiased. Insurance agents can be good sources of information and guidance. Agents who are employees of insurance companies, though, often offer advice skewed toward the companies that pay their salaries. "It's better to use independent agents when shopping for insurance," says Robb Greenspan, senior executive vice president at The Greenspan Company, a public adjuster in Encino, Calif. "They can sell multiple products from various insurance carriers and thus will be able to better match your policy with your needs."

You can find a certified agent near you by searching the Web site of the Chartered Property Casualty Underwriters (CPCU) Society at www.cpcusociety.org. Another source is the Independent Insurance Agents and Brokers Association, at www.iiaba.net.

It's wise to augment the advice of an agent with that of a consultant who specializes in the arcane aspects of insurance policies. Consultants can provide guidance that is both detailed and unbiased. "It's good to obtain advice from a fully licensed, certified financial planner who does not push products," says Kevin O'Brien, certified financial planner, registered investment advisor and owner of Peak Financial Services, Northboro, Mass. "You want your consultant to identify the strengths and weaknesses of various insurance carriers. Sometimes the solution to an insurance problem is to go back to your agent and shop things around. Consultants can help do this." You can find a consultant through the Society of Risk Management Consultants at www.srmcsociety.org.

Consultants enhance but do not replace agents, who bring their relationships with the market to the table, points out Simmonds. "If a broker has a great relationship with Chubb, for example, we will get better coverage and pricing from that individual than if we go through an agent that never works with Chubb."

Prompt Payments

Agents and consultants are good sources for addressing the reliability issue. But don't overlook a third source: public adjusters. Normally you only bring them in after you file a claim to help you negotiate with your carrier, but you can also capitalize on their expertise when you are shopping for policies. "Before signing up with any given insurance company, you can call public adjusters and ask for their insights," says Greenspan. "How does the company respond from a claims standpoint? Does the carrier pay claims promptly, or use any available excuse to draw out the process? And do the carrier's adjusters try too hard to whittle down the amount paid?"

The downturn in the economy makes this doubly important, since insurance carriers are tempted to hold onto cash as long as they can. "The longer insurance companies can draw out the claims process the longer they can float the money, earning themselves more interest," says Greenspan. "The result is that some of them take ridiculous positions when it comes to responding to claims." This is particularly common in claims that are over $50,000, adds Greenspan.

Be Prepared

No one expects disaster to strike. But if it does, having a robust insurance policy can save your business. "Every year some insurance companies go out of business," says Simmonds. "Their clients are severely impacted. Claims go unpaid, cash values are lost and annuity payments are reduced or cut off. Policies have to be replaced in a rush, resulting in lower coverage and higher premiums. It's not a fun time."

Will Your State Help?

What if your insurance carrier goes belly up before you file a claim? How will you recover your loss? There are protections available under state insurance guarantee laws. Insurers pay into a guarantee fund to which policyholders can turn if their insurance companies become insolvent.

Unfortunately, there are limitations as to how much is paid out and who benefits. "State guarantee funds offer only limited protection," says insurance consultant Scott Simmonds, Saco, Maine. "Although every state is different the typical fund will cover only up to $300,000. And some states provide no coverage with guarantee funds if your assets are over a certain amount."


Using The Ratings Agencies

Ratings agencies are in the business of assessing the financial stability of insurance carriers. Check out the Web sites below for the ratings on your own carrier.

One caution: Most agencies are paid by the insurance carriers, which calls into question the level of bias they bring to their ratings. "The ratings agencies have compromised themselves in the past few years," says Kevin O'Brien, certified financial planner, registered investment advisor and owner of Peak Financial Services, Northboro, Mass. But he does point out an exception. "I like Weiss Ratings much better than the others because they are unbiased to a large degree." Reason: the carriers do not pay them. Almost 90 percent of insurance companies receive a rating of "Very Good" or higher at A.M. Best, according to O'Brien. By comparison, only 29 percent received a "Good" or higher at Weiss.

A. M. Best Company: www.ambest.com
Fitch Ratings: www.fitchratings.com
Moody's Investors Services: www.moodys.com
Standard & Poor's: www.standardandpoors.com
Weiss Research: www.weissratings.com

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