July 2, 2013
Hiring Your Insurance Advisor
Purchasing insurance is a very serious consideration for the preservation of your business capital and should never be just about price.
Hiring an insurance advisor to handle your insurance is a critical necessity for a business owner. While many business owners know this, unfortunately, others default to a personal friend, a relative in the insurance business or the sales person that is friendly and wants to save you money. While there is not really anything terribly wrong with this (after all, you should work with someone you like), it is often better to work with someone you respect. That respect should be based upon experience and knowledge. The problem with that sentence is that since you do not understand insurance in all of its complicated glory, how do you select your broker?
Well, nothing is a perfect science, but if we put aside personalities for a little bit, there are some basics that you can follow that will help you make an appropriate decision based upon facts and then can factor in the personalities.
Some Basic Truths
First: Interview a prospective insurance agent/broker and qualify them according to your own needs.
Second: Insurance is a large portion of your annual expenses.
Third: You have a significant potential for uncovered losses that can put you out of business or cause you to lose capital and/or assets.
Fourth: All insurance policies are not created equal.
Fifth: There is no such thing as coverage for every type of loss.
Any insurance broker that starts the conversation by offering to reduce your insurance premium should be shown the door — immediately. If that is all they have to offer, move on.
It's All About Price, Right?
Purchasing insurance is a very serious consideration for the preservation of your business capital and should never be just about price. Every agent/broker will attempt to get the lowest possible premium so that they are competitive. Many businesses have purchased insurance only to find out at the time of a loss, that the insurance was inexpensive because it did not provide proper coverage. Although agents and brokers are licensed, there are great differences of education, knowledge and market understanding among them. An insurance advisor that is at the top end of that scale is an invaluable resource to you and your business.
For illustration purposes, here's a classic example: An underground water pipe breaks and the business owner has to remove a significant portion of paving as well as the pipe and replace both. The cost is $500,000. The insurance coverage placed by their insurance broker paid not a dime. Why? Underground pipes and pavement are often excluded types of property. Here's the pitiful part: Coverage can be provided for these items and at no additional premium (the limit of insurance, however, must include these values).
It is important that you understand which losses you are insuring and which losses you are retaining. A knowledgeable insurance advisor will help you identify your normal as well as unique exposures to loss, offer coverage and, most importantly, be able to explain that coverage in terms that make sense to you as a business owner without a lot of insurance techno-babble.
Think about the many complexities of various contracts you enter into. Insurance is another contract that is just as complex and detailed as your other business agreements.
Keep 'Em Honest
If you are sending your insurance out to quote to “keep your insurance agent honest,” get another insurance agent because clearly you do not trust your current agent.
You should have a trusted advisor that has demonstrated their skill and depth of knowledge, who understands you and your business by asking for information and providing insurance or other risk guidance to you on an ongoing basis. If your business generates significant premium, interview competing agents and select one in addition to your incumbent agent and obtain a coverage review and quotation every three years.
You should create a Request For Proposal in order to provide the same information about your company to each competing broker. Assign them insurance markets. Allow your current advisor first choice for their top three or four insurance companies and have the competing broker identify the three to four insurance companies they will be using. The competing broker cannot use the same markets as those of your current broker. Your current broker should always bring their proposal to you after the competing broker.
Don't Shoot Yourself In The Foot
Never provide one broker's proposal or reveal information to the other. If the competing broker brings significant coverage issues and solutions to the table that your current advisor has never talked about, then perhaps you need to reevaluate your choice. One of the business practices that is the most aggravating to insurance professionals and is just plain wrong is to send everything that a competing broker has developed as risk exposures and solutions over to the existing broker by the owner. If the exposures are significant and the coverage analysis has been performed and specifics given to you, why would you do this?
Let's see if this makes sense: Give someone else's work to the person that has been mishandling your coverage and tell them to fix it. That is not buying insurance based upon real solutions — that is simply buying insurance either from someone you like or because you think they are the cheapest game in town.
Ask And Tell Policy
The relationship between you and your insurance advisor must be based upon proper communication. Tell your broker everything about your business and ask questions about your insurance program. Never assume that “your agent is handling” it. Ask your insurance advisor to become involved in contract negotiations or buy-sell agreements before you sign them. Their job is critical to your continued viability as a business: standing between you and your loss of capital and assets. As President Reagan famously said: “Trust, but verify.”
|Agent||Places your insurance coverages through an insurance company with which they have a contract (called an agency appointment). An agent legally represents the insurance company to the buying public. Note that in some states, the state regulations use the term “producer” and may encompass both an “agent” and “broker” in a legal capacity.|
|Independent Insurance Agent||Often represent many insurance companies with which they place insurance. Although legally representing the insurance company, they also represent the insurance buyer and have a different status than agents that represent only one company.|
|Broker||Places your insurance coverages with one or more insurance companies. A broker legally represents the insurance buyer to the insurance company and is not required to have a contract with any insurance company. A broker can go directly to certain insurance companies or may access insurance companies through a surplus lines broker.|
|Surplus Lines Broker||Also known as a “wholesaler”. This is a company through which difficult lines of insurance are written. State laws control how the insurance delivery scheme is enacted. Your broker goes to the wholesaler who places your coverage through an insurance company. The insurance company could be “admitted” or “non-admitted”. You will pay fees to both and these should be completely disclosed to you, in writing. The premium for a non-admitted insurance company does not include taxes and fees; those must be disclosed in writing along with the actual premium.|
|Insurance Market Access||The type of insurance professional that has the widest market access is an independent insurance agent who is also licensed to act as an insurance broker. Although the license name varies by state, the critical question is: Can you only write business through insurance companies with which you have a contract or do you have access to a wide variety of insurance companies directly or through surplus lines brokers? This allows the widest insurance market access to properly transfer your exposures on a competitive basis.|
|Insurance Consultant / Risk Manager||An independent person who works exclusively for the hiring party. This person will provide guidance for managing your risk and will work directly with your agent/broker (or prospective agent/broker) for proper insurance placement. An independent consultant should never actually place your coverage. This person should create insurance specifications that are extensive, provide those to your agent/broker and review the insurance placed and received for conformance. Verify that your consultant does not, in any manner, receive payment or share in the commission from the insurance agent/broker. This creates a conflict of interest and the consultant is no longer acting exclusively for you. A consultant should also never promise to reduce your premium and receive a fee for doing so. This also reduces the altruistic nature of the relationship.|