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April 21, 2017

When Not to Trust Your Insurer

Summary:

Don’t expect insurers to guide you to the answer that is best for you on business interruption values. They have a different agenda and process.

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What is your insurance company telling you about your business interruption values?

In preparing annual business interruption values and exposure analysis for clients, we have noticed several red flags that indicate something may be wrong with how these values are being reported to the insurance company. It’s not so much what the insurance company is telling you about your business interruption values, but what it is not telling you.

Here are three red flags insurance companies are waving by not saying anything:

Great Rates – “We are paying a lot for insurance, but we are getting a great rate!”

Beware, great rates for property policies have the potential to be misleading. The business interruption values are one of the many variables in determining rates. If you are over-reporting your values and the insurance company realizes it, your rate will appear better than others reporting more accurate values. Sure, a better rate may sound like a win, but it may just mean that the insurance company is calculating your values for you. Just as you wouldn’t trust a car salesman when he says you’re getting a great deal, you shouldn’t rely on the insurance company to do the same.

See also: How to Assess Costs of Business Interruption

Free Services – “Our insurer analyzes our values for free.”

The insurance company may actually offer to calculate your values for you – for free. Everybody loves free things, right? Unfortunately, the insurance company will use a benchmark approach to underwriting your risks combined with COPE data and any other information you provide. The result will likely be a higher business interruption value that is not representative of your exposures. When your story is vague, the insurance company will make assumptions about your business based on what others are doing. Let all of your hard work creating incident response plans, business continuity plans and other contingency plans pay off where it can have a direct effect on your premiums.

No Resistance – “The insurance company accepts what we give them for BI Values.”

Watch out – if there are no questions or pushback on your values, that can mean one of two things: 1) you have done your values perfectly and they require no explanation, or; 2) you are reporting higher values than what your insurer is calculating. If you have done your values perfectly, congratulations on being one of a kind. More likely, the insurance company has calculated your values at a lower level than you have. If this is the case, wouldn’t you want to know?

At the end of the day, no one is more qualified to value your business interruption risks than the people who run your company, but you have to know the criteria being applied and how to apply them. Underwriting is a mysterious process, so it’s better for your bottom line to take the mystery out of it by bringing clarity to your business interruption values. If you leave it up to the insurance company, chances are that the number is going to be higher than it should be.

Don’t expect insurers to guide you to the answer that is best for you. They have a different agenda and process. They will categorize and group your risks based on some information, but if you do not provide what they need, they will default to general assumptions. You may get lucky and end up with a reasonable assessment of your risk. Or you can have a say in your luck by matching your opportunity with preparation.

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About the Author

Christopher B. Hess is a partner in the Pittsburgh office of RWH Myers, specializing in the preparation and settlement of large and complex property and business interruption insurance claims for companies in the chemical, mining, manufacturing, communications, financial services, health care, hospitality and retail industries.

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