Why You Need an Annual Insurance Review

Paige Dawson suspected that her Dallas, Texas-based marketing firm, MPD Ventures Co., was being overcharged for workers’ compensation insurance. But it wasn’t until signing on with a new insurance agency that she confirmed it. Some of her employees, it turned out, were being misclassified. In reviewing her coverage, her new agency found the error, fixed it and saved Dawson some money in the process.

Dawson’s experience is a telling example of why companies should review their business insurance programs annually. Errors made at the time of purchase can carry over for years if unexamined, costing companies money or leaving them exposed to overlooked risks. Even if they do a good job the first time around, circumstances can change.

“People get complacent,” says insurance broker Susan Combs, president of Combs & Company in New York City. “We’ve reviewed people who’ve had policies in place for 15 to 20 years with the same coverage they had when they were working out of 500 square feet with one computer, a desk and some Ikea bookcases. Now they’re up to 25 people with workstations and other equipment, and they have no idea how underinsured they are.”

Or overinsured. Recently, Combs’ firm reviewed the insurance program of a technology company that, under the terms of its contract with a large bank, had been carrying a $3 million errors and omissions policy as well as an excess liability policy. But the bank had since opted not to renew that contract.

“Since the bank was the only one that had been requiring them to maintain those high limits, we advised them to cut back to $1 million of E&O coverage and drop the umbrella policy altogether,” Combs notes. “It’s saving them about $8,500 a year.”

Most small businesses understandably start out with very basic insurance programs, usually a general liability policy and a commercial property policy. They are sometimes sold together as a “business owner’s policy.” But as companies grow, other types of insurance become important. Some of the most overlooked types of insurance, says Darren Beck, CEO of Business Insurance Now, a Web-based insurance agency headquartered in Allen, Texas, are these:

- Umbrella or excess liability insurance: For claims that exceed standard policy limits.

- Professional liability insurance: Covers mistakes in service provided by the insured, and typically pays the fees of defense attorneys.

- Workers’ compensation insurance: Required in many states once a business employs a certain number of people; provides payment for medical expenses and lost wages when employees are hurt on the job.

- Employment practices liability insurance: Provides coverage for HR issues such as violations of discrimination, harassment and termination laws.

- Hired and non-owned auto insurance: Protects a company if an employee causes an accident while driving a rented or personal vehicle.

When you conduct your annual insurance review, be sure to ask your agent or broker whether you need any of those policies, and why. As part of the process, Beck adds, be sure to consider the following issues:

- Revenue. Have your company’s annual sales increased or decreased? The more business you do, the greater potential liability you face.

- Location. Have you moved, added or closed locations? Rates for your general liability or business owner’s policy could change depending on whether your total square footage has increased or decreased, where your new facilities are located, or what class of building you’ve acquired.

- Business property. Have you purchased or eliminated equipment, computers, furnishings or other property? You may need to increase or decrease your commercial property policy limits.

- Travel. Are your employees on the road more in rented cars than in their own cars? If so, you may need “hired and non-owned auto” coverage.

- Workforce. Has the size of your workforce increased or decreased, do you have high turnover, or are you using more contractors? The size of your workforce can dictate whether you need workers’ compensation insurance. If you have a lot of turnover, you’ll probably want employment practices liability insurance in the event you are sued for wrongful termination.

- Services. Are you offering new types of services, or has the makeup of your service mix changed? You may need to add endorsements to your general liability policy to cover certain types of work — or change carriers if your existing insurer isn’t comfortable with the associated risks.

- Clients/customers. Are you serving new industries, or has the makeup of your customer set changed? Some professional liability insurers do not like it if your business is overly concentrated in servicing certain high-risk industries.

If you haven’t been reviewing your insurance coverage each year, it makes sense to start now. There’s little to be gained by carrying the wrong types or amounts of insurance — and much, potentially, to be lost.

A former reporter and editor for Dow Jones, where he wrote for The Wall Street Journal and Barron’s, Randy Myers is a contributing editor for CFO and Corporate Board Member magazines.