In a perfect world, insurance buyers would understand their products just as well their insurance agents. This would save a few headaches for everyone involved, and it would probably streamline the process on all ends. However, the reality is that most business owners don’t understand the extent of the insurance products they purchase. Then again, no one should expect them to.
Insurance products are highly complex vehicles. Few business owners have the time to invest in becoming experts in the field or in the products they purchase. Even the best insurance agents spend years learning about the products they sell, many of which change frequently as the economy changes.
That being said, no business owner should simply buy a product without understanding the most important aspects regarding what it does and does not cover. In truth, a highly skilled insurance agent should never let them, either. Here’s where there can be a gap between how much insurance a business purchases and how much it actually needs, showing why educating business owners on the extent of their insurance really matters.
False Perceptions of General Liability Are Common
Many customers tend to believe their insurance covers more than it actually does. This situation could probably be applied to any insurance product, but general liability policies are often the most frequently misunderstood by buyers.
See also: What to Expect on Management Liability
To put it simply, far too many businesses are purchasing less insurance coverage than they should. In a sense, many are taking a huge gamble, believing their risk exposure is less than what it actually is or that their preventative measures, such as employee training, can shield them from those risks. While risk prevention definitely helps, it’s ultimately far from the bulletproof shield many companies think it is. Most companies do it to help themselves get a better rate on their insurance, while maintaining the false perception that their general liability coverage protects them against a multitude of risks not actually defined in the policy
As a company scales in size, so, too, does its likelihood of experiencing losses related to cyber liability, employee fraud, fiduciary liability, directors and officers (D&O) or workplace violence. Yet many companies seem not to realize their exposure.
This would, of course, be less troubling if companies were purchasing policies that actually covered those kind of risks. Overwhelmingly, they’re choosing to avoid those insurance products altogether. According to Chubb’s survey
on private company risk, non-purchasers believed their general liability policy covered:
- Directors and Officers Liability (65%)
- Employment Practices Liability (60%)
- Errors & Omissions Liability (52%)
- Fiduciary Liability (51%)
- Cyber Liability (39%)
Businesses aren't failing to purchase enough liability coverage because they’re unnecessary risk takers. Most, it seems, simply have false perceptions about what their general liability will and won’t do.
A small business may think its general liability policy covers a server hack. Yet, lo and behold, when a server gets hacked and the ensuing liability claims start pouring in, that small business may quickly find itself underwater. In fact, the U.S National Cyber Security Alliance found that
the 60% of small companies went out of business within six months of a cyber attack. This seems extreme, but the average cost for a small business to clean up after a hack is $690,000, according to the Ponemon Institute. How many small- or medium-sized businesses can easily absorb that kind of cost without insurance coverage? Not many.
Similarly, mid-sized companies may believe their general liability policy covers directors and officers, leaving the company with unnecessary risk
exposures should an incident occur. If, for example, a company begins operating internationally and fails to effectively meet one of the federal regulations governing its industry, a general liability policy won't help protect the company from impending lawsuits. Any directors held personally responsible may find their own personal assets at risk. Given what we learned from the Chubb survey, it’s quite likely that most directors may think they’re fine with the minimal coverage they receive from a general liability policy. A costly mistake, to be sure.
Who’s to Blame?
We’ll leave the finger pointing aside for now and settle on this: The customer is always right, but he’s not always well-informed. As every insurance agent knows, the amount of time it takes to fully understand an insurance product can be extensive. Business owners, in general, lack the time to invest in fully understanding the products they purchase. It should come as no surprise, then, that misunderstandings arise over what general liability policies actually cover and what risks they simply won’t mitigate.
See also: ISO Form Changes Commercial General Liability
Insurance agents have a responsibility to use their knowledge to help business owners better understand and sift through those misconceptions. More needs to be done to help decision-makers understand what they are and are not getting from their insurance.
Helping businesses better understand the ins and outs of their general liability policy is a win-win all around.