The Failure and Opportunities of Insurance Done Well

The three most important commercial insurance policies to write and to write with exacting quality are applicable liability policies such as general liability and employment practices liability insurance, cyber and perhaps most important, business income. A building can burn down, an extremely rare event, and the business can be up and running fairly quickly in many cases. The loss of the building will not likely bankrupt the company. The loss of the resulting income is what will bankrupt the company.

I have been doing errors and omissions (E&O) audits and teaching insurance classes for almost 30 years. Knowledge of business income (BI) has deteriorated with the rise of selling business owners policies (BOPs) and actual loss sustained (ALS) limits, and adequate knowledge of BI was never that great from the start. Almost every business will suffer a BI-related loss at least once, if not multiple times. Less than 2% of businesses will suffer a fire loss. Many will never suffer any material property loss outside of auto. What, then, is more important? BI or regular property?

BI is complex. Its complexity is why agents do not understand it or sell it well. The plaintiff bar has recognized this lack and has literally created a new, small niche industry for expert witnesses who study BI forms. I have taken many of the classes — they are excellent and taught at a higher level than 90% of the BI classes I have seen offered for insurance agents. The difference in quality is significant.

Most producers with whom I speak, instruct and audit focus mostly on the BI worksheet if they sell something other than ALS. In either case, I find few producers placing adequate focus on the time elements. ALS works in many cases and avoids the producer having to work their brain on the worksheet. However, it fails to automatically address the time elements. The brain must still be used to address the time elements.

Additionally, regular BI coverage is limited to specific named perils. I have found that more than 50% of agents know much of anything about contingent BI coverage. Contingent BI is extremely important. I have also found that around 98% of agents know little about BI that protects intellectual capital, brand value and specialized types of civil authority. If COVID has taught this industry anything and if the carrier powers that be are listening, it is that not offering coverage for civil authority may protect the industry at one level, but raises the question for business owners of, “What value is insurance if it is not going to protect me from factors completely beyond my control?” Is that not what insurance is supposed to do?

Obsolete

I was talking recently with a small business owner who described how he had lost 50% of his revenue last year due to an unexpected, last minute regulatory change that passed without material public notice. Insurance, when done well, protects businesses from the unexpected. Originally, it was designed to protect against ships sinking, and then Ben Franklin’s insurance company was designed to protect against fires.

Insurance policies for ships sinking and fires obviously still exist and are quite robust. But those perils are hundreds of years old. Regulations and industry practices have mostly eliminated these perils relative to exposure (excluding wildfires). If the industry wants to continue insuring what was most important 200 years ago and for which coverage pales in importance to the perils businesses are facing today, the industry will soon find itself obsolete.

Brokers and carriers each have their part to do. If carriers continue to focus on what the economy was decades ago and increase deductibles so high that people do not have coverage for what is important, the industry will become extinct. Evidence of its declining importance abounds, especially at the traditional carrier level.

Carriers must do their part and come up to speed by insuring what is important. Running away from physical damage because the virus did not physically damage the surface is great reasoning in a historical sense and because the industry clearly did not price or reserve with any anticipation of such coverage. But to not provide or offer such a coverage is an abdication of opportunity and social value. These perils are what people and businesses need coverage for today.

A more historic and simpler example is that in hail states. People need coverage for hail damage. Right now, hail deductibles and rates are so high in many states that people are self-insuring large portions of probable losses. No one needs insurance companies or agents in this space.

I understand the need for higher deductibles and higher rates, but what makes absolutely zero sense is how carriers refuse to offer reasonable credits for hail proof roofs. The carriers’ approach to hail mitigation are ludicrous to the point that agents and consumers have lost faith.

An insurance company is only as good as the faith people have in it to pay claims. If people see a company that is only interested in charging higher rates for less coverage (higher deductibles count as less coverage), but not willing to provide reasonable credits for risk mitigation, no other message can be discerned other than that the insurance industry is greedy and unconcerned. What a brand!

For those not familiar with how bad it is, a carrier refused to provide hail coverage on a building that was concrete on all six sides.

Agents must do their part, too. That begins with truly learning business income at a deep level versus the cursory level that currently exists with around 90% of the agents I meet. Business income is like a suit. The suit needs to be tailored to fit the client. Off the rack business income solutions might address some issues, but the fit will be poor, and a poor insurance fit means uncovered claims and E&O claims.

Determining BI

Business income is a coverage that requires careful determination of what the clients’ needs are going forward in the event of a loss. It is not a “look back” coverage like most property policies. Looking forward requires the sometimes complex matching of the income calculation with the correct time element choices. One without the other is almost pointless.

People selling ALS almost never seem to adequately understand the time element aspects of ALS. In many cases, this results in insureds buying more insurance than they need, and in other cases, purchasing much less insurance than they need. ALS is often a very poor fitting coverage solution. It is so poor fitting that it really does not qualify as a “solution” in many cases.

Additionally, some really good contingency business income forms exist but are never offered. This is especially true of the specialized contingency BI forms for perils like civil authority. An agent asked me not long ago something like this, “But this is really hard, and I have to know a lot to sell BI correctly. Why can’t it just be simple?” Because if it were simple, no one would need an agent and every business would be a clone of every other business.

Simple is not reality. Simple is science fiction. Make the effort to be better than the competition by learning what your clients need you to know. Insurance has so much potential to provide relevant protection if carriers and agents will each own up to their social responsibilities and opportunities to insure what is relevant rather than what used to be relevant.

Burand is the founder and owner of Burand & Associates LLC based in Pueblo, Colo. Phone: 719-485-3868. E-mail: chris@burand-associates.com.