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20 terms you need to know when purchasing or renewing commercial insurance

For many business owners, purchasing insurance is a foreign concept. Like many industries there are terms only the insiders know and they frequently use when discussing the policies. Here is a list of 20 terms that will give you a leg up the next time you are purchasing or renewing your commercial insurance policy.

20 commercial insurance terms to be aware of the next time you look to buy small business insurance.

Insurer – a person or company that underwrites an insurance risk; the party in an insurance contract undertaking the risk to pay compensation.

Insured – a person or organization covered by an insurance policy.

Peril – the possibility that you will be hurt or killed or that something unpleasant or bad will happen. exposure to the risk of being injured, destroyed, or lost.

Premium – An amount to be paid for an insurance policy. It is an amount paid periodically to the insurer by the insured for covering their risk.

Deductible – A deductible is the amount you have to pay out-of-pocket before the insurance company will cover your remaining costs.

1st person liability – First person liability is for damage that is done to you or your business. A good example of this would be a commercial property insurance policy. This policy covers the damages to you and your property. It does not cover the damage to another persons’ property or if they are hurt on your property.

3^rd person liability – Third person liability is liability that you or your business has to other third parties. Third parties can include customers, vendors, other businesses or anyone who may be harm by the actions of you or your business.

Claims-made policy – A policy written on a claims-made basis means that if the insurance is in place when the claim is made, but not when the occurrence took place than the insurer responsible for the claim is the insurer when the claim is made. This is common for professionals like a lawyer or an engineer. In these professions a claim is frequently filed months if not years after the occurrence takes place. At that time the insured may have coverage with a different company and there may be some discrepancy between who is responsible for the claim.

Occurrence based Policy – A policy written on an occurrence basis means that the insurer responsible for the claim is the insurer who was in place when the occurrence took place. If an engineer works on a house and there is a problem with the house years later than the insurer responsible for the occurrence is the insurer that was in place when the occurrence took place.

Endorsement – an endorsement is a document attached to an insurance policy that amends the policy in some way. An endorsement may add, remove or alter the scope of coverage under the policy.

Negligence – Negligence in relation to insurance means a person or business did not demonstrate appropriate amounts of care or responsibility for a particular situation. The failure to take appropriate precautions can cause you to be considered liable for the damage. This can also be referred to as the failure to use a degree of care considered reasonable under a given set of circumstances. Liability policies are designed to cover claims of negligence.

Named Insured – Any person, business or organization who is specifically named as an insured on an insurance policy. This is different from entities who although unnamed may fall within the policy definition of an insured.

Ordinance or Law Coverage – Coverage for loss caused by the enforcement of an ordinance or law regulating construction and repair of a damaged property. Older structures that are damaged may need to be upgraded in regards to electrical, plumbing, venting, etc. A typical commercial property insurance policy does not pay for these additional cost. This policy is an endorsement on top of your commercial insurance policy and will cover the additional costs needed to bring the new building up to date.

Hammer Clause – A ‘Hammer Clause‘ is a provision within an insurance policy that gives the insurer the right to settle for an undisclosed amount and if the insured does not agree to the settlement than they take on some or all of the risk. In some cases, the insured takes on all of the risk, but in many cases it is 70/30 or 50/50.

The Assigned Risk Provider (Also known as the pool or the state fund) – The assigned risk provider applies to workers’ compensation coverage. It is the provider of last resort within each state for businesses who cannot obtain coverage on the open market. The business may not be able to obtain coverage for a number of reasons. Typically, it is because of the small size of the company or because of their loss history. The Assigned Risk Provider offers coverage at a higher rate and typically once you are in the pool you must stay in the pool for 2-3 years.

Business Owners’ Package (BOP) – A business owner’s policy, commonly referred to as a BOP, combines several lines of coverage built into one policy. They are often better suited for small business owners because they offer targeted coverage options designed for specific types of businesses within certain industries. They are usually less expensive then purchasing coverage separately because the business is purchasing multiple policies for liability, property, commercial auto, etc.

Artisan Contractor – This term refers to businesses in several different industries. It includes many occupations that involve skilled work with tools at the customer’s premises. Carpenters, plumbers, electricians, roofers and tree surgeons are some professions that would be included in this group of businesses. Also included are diverse other skilled service providers, such as interior decorators, piano tuners and exterminators.

Loss History – Loss history is a documented history of damages or losses connected with a given asset. It is a way for the insurance carrier to determine the amount of claims your business has against an insurance policy. They use it to determine how much premium to charge or if they are willing to take on the risk altogether.

Inland Marine Insurance – Inland Marine Insurance is property insurance for property that is likely to be in transit over land. Many inland marine coverage forms provide coverage without regard to the location of the covered property; these are sometimes called “floater” policies. As a group, inland marine coverage forms are generally broader than property coverage forms.

Umbrella Coverage – The umbrella policy serves three purposes: it provides excess limits when the limits of underlying liability policies are exhausted by the payment of claims; it drops down and picks up where the underlying policy leaves off when the aggregate limit of the underlying policy in question is exhausted by the payment of claims; and it provides protection against some claims not covered by the underlying policies, subject to the assumption by the named insured of a self-insured retention (SIR).

Insurance policies are not all created equal

Taking the leap of starting your own business is never an easy one. Whether you are a weekend warrior looking to pick up some extra income or branching out all on your own; you are taking a risk and putting yourself out there. this is something that most of the population could not fathom, but you are truly the future of our economy.

Most new businesses determine a budget, buy tools/equipment, set up a website and plan for all the business to come in. Insurance tends to be a side note that you know you will need to check off your list, but far too many too not take this aspect serious. Many new business owners seem to look at insurance and attempt to find the cheapest price they can find. This is a mistake that can lead to financial disaster for your business. Here is why this method of thinking can get you into trouble:

When you are a new business a few things tend to be very common. You generally know what kind of work you want to d. You might or might not have an idea of what work you are not willing to do. You also might have only a few employees, but you probably don’t know how much you’ll pay them. On top of that who knows how much sales you will have your first year. When you are shopping for a General Liability Insurance Policy these are all things you need to know. Before picking up the phone to call an insurance agent, here are a few things you need to keep in mind when comparing quotes:

Compare the Total Premium but also the rate being charged

Many companies will quote based on minimum premium. For an owner only company this might keep you at this level and not be a problem. Once you start adding employees or increase your operating space, other coverages might be necessary. The rates could increase much faster with one company as your company starts to grow. Talk with your insurance agent about these types of things so you have a ball park idea of what to expect down the road.

Look at the Exclusions on the Policy

As a general rule no insurance policy covers everything. All insurance policies will have some sort of exclusion. These exclusions outline a “hazard” that the insurance carrier will not be responsible for covering. This is very important to know, so you can avoid these exposures. Especially since your business will be on the hook for them. A lot of times they are exclusions for a reason. It is not typically for a carrier to strip down the policy just for a cheaper price. Most of the time these inclusions are in higher hazard areas. In the past these areas have cost insurance companies big and they are attempting to limit the risk they take. Taking this approach in your business operations can help you decide what work are not willing to do. It is usually easiest to make changes early on in your business as opposed to later down the road. Knowing these exclusions is important to minimizing the risk to your business and helps you determine what amount and type of risk you are willing to take in your daily operations.

Occurrence or Claims Made?

General Liability forms are written on either an Occurrence or a Claims Made basis. Occurrence is typically going to be more expense. If it is even available. Claims Made Policies limit the reporting period that you can report a claim to be covered under your policy. Professional Liability policies are typically offered only on Claims Made basis. If Claims Made is your only option, one of your main priorities should be making sure you don’t have a lapse in coverage. A lapse in coverage can leave your business vulnerable for much more than you may think.

Compare rating factors

Depending on the policy type, your type of business and coverages being offered; rating factors could vary into what determines your premium. Here are a few variables that can drive the premium though:

Square Footage: The amount of space for your building, the amount occupied and the amount of retail space can directly impact pricing of your liability policy. This is especially important for retail businesses. As well as General Liability, it can also impact your Commercial Property Coverage.

Payroll: Payroll is a direct rating factor for all Workers Compensation Policies. It also is a primary rating factor for most Contractors General Liability policies as well. Getting help to anticipate what your payroll will be should be something a decent agent can help you with.

Employee Count: Employee Count can be a direct rating factor for some General Liability Policies. It can also be a determining factor for Employment Practices Liability Insurance Policies. In some cases full time vs part time can make a difference as well.

Property Value & Valuation Type: The amount of Value, Reinsurance rule and Valuation type can all impact your pricing for your property coverage. If the Valuation is Replacement cost vs Actual cash value, than the coverage is very different. This is because of how the claim will be paid and the amount your business is insured for. If the valuation amount is not sufficiently covering the amount of property you have this can leave you not receiving the full value you lost in the event of a claim. This is something that is much better to compare when choosing an insurance policy than hashing it out with your insurance carrier when its too late and you have a claim.

Gross Sales, Garaging Zip Code, Location Address: These are a few other of many variables insurance carriers will look at in quoting your insurance policies. Sometimes they are direct rating factors but on most policies they can be a gauge for determining your pricing.

There are many factors to consider when determining which policy and coverages are right for you. There are less expensive policies that don’t cover as much, and there are also Cadillac plans that might cover more than you are looking for and many options in between. The key to take from this is not that you have to go with the Cadillac or to take the cheapest option, but make sure you are comparing the correct variables to know you are choosing the right option for you and knowing what you are covered for and what you are not covered for.

Claims Made General Liability

Claims made General Liability (GL) Policies cover claims that arise from injury or damage occurring during the policy period and reported to the insurer during the policy period. Claims arising from events outside the policy period or claims reported to the insurer outside the policy period are not covered unless special coverage is purchased or arranged with the insurer. This is done by purchasing a tail for a specified extended reporting period.

Claims Made Vs. Occurrence Insurance Policy

Generally once you have a claims made policy, its best to either keep going on with claims made policies. If you were to switch to an Occurrence Policy, this could leave a potential hole in covering claims if they were to arise. Most of the time a claims made policy will be less expensive at the beginning. If you have to purchase an extended reporting tail these can at times be just as expensive as the original policy themselves.

Here is a quick example of how they work both good and bad:

You own a Convenience Store and you have just finished up mopping the inside. A customer comes in and slips and falls. They get up and seem to be ok. You check on them and they tell you everything is fine so they leave and you think nothing else of it. Your claims made policy expires the next month and you switch to an occurrence policy. All of a sudden, 2 months later you hear from the person that slipped inside your store, and they are claiming a back strain due to the fall. They state that it has effected their work performance, life etc.

Since the claim has now been filed outside of the policy period and you have switched to an occurrence policy, you are now exposed to not having coverage for the claim. If you did not purchase extended reporting period or tail coverage, then, you will potentially not have coverage for the claim. If you decided to purchase the extended reporting period coverage, then you should be fine and the insurance carrier will cover the claim. It’s always important to discuss what type of general liability coverage is best for your company with your agent, not only in the short term but the long term as well.