Byword: training and education

No one is born with an innate understanding of business income,

equipment breakdown, or captive insurance … .

By Cheryl Koch, CPCU, ARM, AAI, ACSR, AFIS, and Mary Belka, CPCU, ARM, ARe, RPLU, CIC

It’s human nature to fear the unknown, and particularly so when that unknown comes in the form of a big, scary monster. Everyone knows you should fear a dragon. After all, it can breathe fire and melt you in an instant, until a little boy named Pete comes along and that dragon becomes a gentle, magical friend.

People are afraid of ogres because they are portrayed in folklore and myth as cruel, violent, and even cannibalistic. But Shrek? Although he’s a loner and lacks certain social graces, he’s as lovable as anyone.

Flying monkeys? Well, okay, no one really likes flying monkeys and most of us were right to grow up terrorized by them.

The point is, it is a perfectly natural reaction to avoid certain people, animals, or situations because we fear they could harm us. The same is true in the insurance industry. People avoid talking about some topics because they fear they will not sound knowledgeable or that they will misspeak and somehow cause harm to others.

There are many topics in insurance that are confusing to both consumers and their agents. As such, they may be avoided or glossed over in the sale or purchase of insurance, often to the detriment of both the seller and the buyer.

Business interruption insurance

Enter exhibit one, the big, hairy monster we now mostly refer to as business income coverage. We weren’t taught to fear it, but many insurance professionals do because they feel they lack sufficient expertise about the topic. Insurance carriers long ago recognized that agents had stopped having these conversations with their clients and sought another option. That’s when the business-owners policy (BOP) was created.

The single, most intoxicating feature of the BOP was that it automatically included business income coverage, and the agent didn’t even have to help the insured determine the limit to purchase because there was no limit—it was actual loss sustained (ALS). Unfortunately, that was a gross misinterpretation of the way the coverage would actually apply in the event of a loss.

To sell it as simply “ALS” was to imply that the insurance company would pay the loss with no regard whatsoever to how much was being paid. It would have been foolish for insurance companies to offer such an important coverage with no dollar limitation, so it was decided generations ago that the “limit” on business income coverage would be time rather than dollars.

On most BOP policies, while there is no limit in terms of the amount of money that could be paid, there is a provision that states that coverage for the business income loss sustained by the insured be limited to a certain period of time, generally 12 months from the date of the loss. Some insurance carriers will offer an option to extend the limit to 18 or 24 months, for an additional premium, but there is still a limit.

Unfortunately, we often see proposals that agents have provided to prospects and clients that simply insert the phrase “actual loss sustained” where a limit would be shown or, in some cases, “unlimited.” The latter makes our blood run cold, as we have seen those documents entered as exhibits in lawsuits brought by disgruntled agency clients following losses where coverage was limited to a certain—exceeded—period of time.

Equipment breakdown insurance

This is a coverage that dates back to the mid-1800s with the founding of the Hartford Steam Boiler Inspection and Insurance Services Company (HSB), now owned by Munich Re. Standard property insurance policies had always contained exclusions for certain types of explosions and losses due to mechanical breakdown of machinery or equipment. This created a need for a different type of insurance that became known as “boiler and machinery” but is now referred to as equipment breakdown (EB), a title that basically describes the essence of the coverage. Although the need for this coverage is nearly ubiquitous and it was always very easy to obtain and not very expensive, agents and brokers had basically stopped providing it or even making a recommendation for coverage.

 As they are wont to do, insurance companies stepped in and set up reinsurance arrangements with HSB so they could offer the coverage as part of their standard property insurance policies. Unfortunately for agents and policyholders, the limits the property carriers were willing to provide were relatively low, perhaps $100,000, $50,000 or even less.

While these types of losses are seldom frequent, they are often catastrophic, and the sub-limits in property policies often proved to be inadequate. So, a noble effort on the part of the insurance company became an errors and omissions exposure to the agency.

Captive insurance and alternative risk financing

As the insurance marketplace hardened over the last several years, buyers were faced with large, unexpected premium increases coupled with reductions in coverage and a basic lack of availability of certain types of coverage or adequate amounts of insurance. The last time the insurance market was this restricted was four decades ago—before the time when current insurance professionals were even in the business (ourselves excepted) and prior to the time most of the agency’s clients were even in business.

On March 24, 1986, Time magazine’s cover story was titled “Sorry, America, Your Insurance Has Been Cancelled.” That crisis, largely driven by liability insurance issues, forced many insurance buyers to seek protection for non-traditional sources, some of which included high levels of retention combined with excess or reinsurance coverage, group self-insurance, or captive insurers and other types of risk financing alternatives.

Unlike with today’s insurance market, most of those alternatives were brought to insurance buyers by their agent or broker. In today’s environment, these solutions are often being proposed by the current agent’s competitors. When asked why they didn’t present some of these options to their clients, many agents tell us it’s because they didn’t feel well-versed enough in these topics to discuss them. So, the agency lost a client because rather than face the dragon, they ran from it.

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The solution

If you are a frequent reader of our column, you probably already know what we’re going to propose as a solution to these three examples of topics that we see agents avoid discussing: training and education. No one is born with an innate understanding of business income, equipment breakdown, or captive insurance. The list is longer than you think!