An Insider’s Guide to
Buying General Liability
Insurance in Texas
Common Traps to Avoid
Chris J. Baumli, CIC 10/11/2011
Know What the Insiders Know!
The subject of business insurance can be a very complex one. After all, you are buying a contract and each one is unique with different terms, conditions and exclusions.
How do you know if you are getting the right contract that will actually protect your business the way you need it protected?
How do you know if you are paying too much?
Add to this the fact that if you buy the wrong policy it could cost you more on the front end. Or worst case, could provide inadequate coverage which could result in your business failing.
Given that, it can be a little intimidating spending money on something you know very little about. (And frankly if you’re not an insurance professional and have some semblance of a life, you probably don’t want to know too much about it!)
So how do you slice through all the noise and make this a comfortable process that you know is going to be done right? It pays to do a little research and arm yourself with some insider information. Here are some quick talking points to bring to the table in your general liability insurance buying process.
The Price On The Quote Isn’t Always The Price
You End Up Paying…
There are many factors that go into the premium calculation of a General Liability Insurance policy. Often times a quote that looks great on the front end looks very bad on the back end.
Most General Liability policies are auditable. This means that if the information the agent used to calculate the up-front “estimated” premium is different than the actual data at the end of the policy period, then you can get a bill for additional premium due. Ouch! This is one surprise you want to avoid!
It’s easy to be smart with the right information
To make sure you are not sideswiped with a nasty surprise a few months down the road, here are a few things to check:
Premium Basis – Premium Basis is an indicator of the size of your risk
and is roughly associated with the size of your company. Typically your company’s gross sales or payroll is used as the premium basis. General Liability premiums are calculated by multiplying the Premium Basis by the Rate minus
Credits. (There are other factors used as well, but these are the most common
and are sufficient for this discussion). Just make sure you know what the premium basis is and that it is the same on each quote you review.
Rate – Rates are affected by many factors such as your loss history, loss history of the industry as a whole, number of years in business, financial stability of your company, and your insurance history. Having policies cancelled for non-payment, for example, can preclude you from getting placed with a licensed carrier which can often force you into the surplus lines market. This in effect means higher rates and less coverage for you.
Risk Classification – Rates are in large part by determined by the
classification of your business operations. Again if your submission is rated with an inaccurate or less expensive classification, a quote can appear to look better than it really is. This can cause problems during an inspection or audit and more importantly could result in unpaid claims.
Endorsements – In many cases you will have contracts with customers or
a landlord that require you to add them as an Additional Insured or grant them a Waiver of Subrogation on your policy. Some carriers will include a blanket Additional Insured endorsement and will not charge for a these endorsements, but others can charge anywhere from $100 to $500 for each time you need an endorsement! Know what you are buying!
What are you actually buying? An insurance policy is a contract. Period.
Each can have significant differences in terms, conditions and exclusions.
Unfortunately the perception of insurance has been commoditized in large part by the big advertising budgets of insurance companies targeting consumers. Go into this with your eyes open. Either do business with someone who specializes in business insurance or take a crash course in insurance contracts.
Licensed (Admitted) Carrier - There are two types of property & casualty
carriers in Texas. A Licensed or Admitted carrier is one that is licensed to do business in Texas and has had their policy forms reviewed and approved by the Texas Department of Insurance. Licensed carries have many uniform policy provisions and typically write policies for less hazardous industries. They typically offer the best rates and coverage, but are picky about the businesses they will write. If you can get placed with a licensed carrier, that’s where you want to be. If you do get placed with a licensed carrier, make sure you maintain a consistent insurance history. If, for example you were to cancel your policy for non-payment, you might not be able to get written with a licensed carrier in the future.
Surplus Lines Carrier - Surplus Lines carriers serve a useful purpose in
the Texas Insurance market. They typically write higher hazard and specialty lines of insurance for those businesses that can’t get placed with a licensed carrier. Being placed with a surplus carrier isn’t necessarily a bad thing. There are many quality A-rated companies who write surplus lines business in Texas. Understand, however, that since their policy forms are not reviewed or approved by the Texas Department of Insurance, that they can include some very restrictive exclusions in their policies.
Exclusions – Some policies have similar exclusions, but there are also
situations where there are significant differences between policies. It is a smart idea to understand the scope of what your policy will cover and what it does not. This is where a Certified Insurance Counselor can be of assistance as some of this policy language can be a little dense to wade through.
Carrier’s Financial Rating – Make sure you are doing business with a
financially stable Insurance Carrier. There are several independent rating
agencies that assess the financial stability of insurance carriers. www.ambest.com is a good place to start. Be very careful about doing business with a carrier that has less than an A- rating. In most cases an agent’s E&O Insurance will not cover him for errors if they recommend a substandard carrier.
Occurrence vs. Claims Made – Although most General Liability Insurance
policies in Texas are written on an Occurrence form, there are policies that are written on a Claims- Made basis. A lot of these claims-made policies appear to have a great price on the front end, but can leave gaps in coverage if the policy isn’t kept in force past the statue of repose for a given incident.
Why are you buying General Liability Insurance?
There are typically two situations that trigger a business to procure General Liability Insurance.
Contractually Required - The first is you are contractually required to have
it by someone you are doing business with: A landlord, a customer, or manufacturer to name a few. In this case, it’s a good idea to get all of the insurance requirements to a Certified Insurance Counselor to review. In many cases, these insurance requirements are outdated and not relevant. Often, some of these requirements can even be negotiated or eliminated all together. Just make sure you have this done before you sign the contract! Don’t stop there. Just because your landlord wants you to have certain insurance policies, doesn’t mean you have the right ones that will protect YOU. Get a risk assessment done to educate yourself and make sure your business is protected.
Protect your Business – The second is that you want protect yourself
from unexpected liabilities. General Liability Insurance is typically a good starting point for most businesses, but it is critical that you understand the rest of the potential risks that your business faces. In some instances you might face more significant exposures that are not covered by General Liability Insurance. Have a Certified Insurance Counselor do a risk assessment so you are educated on the best ways to manage the risks your business faces and understand where to allocate your insurance dollars.
Where should you buy General Liability
Insurance in Texas?
Stand outside and throw a rock and chances are you will hit the front steps of an insurance agency! So what should you look for when selecting a business insurance agent? (The answer is no longer a plaid jacket and bad comb-over).
Believe it or not, there is a new breed of Insurance Counselor that understands small business risk and how to help their clients mitigate it in practical, inexpensive ways. Here are a couple of ideas to consider:
Agency Focus – If I need brain surgery, I’m hopefully not going to have it
performed by a proctologist. There is a significant difference in skill sets of an agency that primarily writes homeowners and personal auto insurance from an agency that focuses on protecting businesses and exclusively writes business insurance. Ask how much of an agency’s book of business is comprised of business insurance versus personal insurance.
Independent Agent Vs. Captive Agent - An Independent Agent has
access to multiple carriers and can often give you an objective viewpoint about a particular carrier’s strengths and weaknesses. A captive agent is typically required to sell insurance from one company if that company writes that type of insurance.
Agent Certifications – Who is protecting your business? The process to
become a licensed insurance agent is frankly not a rigorous one and there is a low barrier of entry into the insurance business. In my opinion this is a big reason that 43% of business that suffer a serious claim, (be it a fire, natural disaster or a lawsuit) actually go out of business! It is very important that you do business with an agent that has advanced certifications such as a Certified Insurance Counselor (CIC), or a Certified Property & Casualty Underwriter (CPCU).
Insurance Carrier Status – Do a quick bit of homework on who you are
dealing with. The Texas Department of insurance is a great resource for
checking out licensing status, complaints, and other information. https://apps.tdi.state.tx.us/pcci/pcci_search.jsp
Risk Identification – Is General Liability Insurance even what you need?
In many cases General Liability insurance might not even be the coverage that protects you from your most severe or most frequent exposures. A Certified Insurance Counselor should be able to identify a range of exposures your business faces and educate you on the best way to mitigate those risks.
