What is your insurance company saying about your BI Values?
One of the services we provide to clients is the preparation of annual business interruption values and exposure analysis. In doing so, 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 coverage or business income, but what they are not telling you. By proactively examining your reported business interruption exposures, you will have a clearer picture of your potential loss period, loss income, and the required continuing expenses and fixed expenses that can arise following a claim. Plus, having proper interruption insurance and business interruption insurance in place ensures you’re not over- or under-insured, which can significantly impact the premiums you pay.
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 reported 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. The same caution applies if your insurer is factoring in extra expense or ordinary payroll coverage incorrectly, as these elements can affect how your overall business interruption reporting is viewed. By carefully assessing your loss business interruption exposures, you can avoid the trap of paying high premiums due to inflated values.
Free Services – “Our insurer analyzes our values for free.”
The insurance company may actually offer to calculate your business interruption loss 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 coverage value that is not representative of your exposures. When your story is vague, the insurance company will make assumptions about your interruption coverage or contingent business interruption risks 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. By having a solid handle on your loss income, payroll coverage, and extra expenses, you ensure far more accurate interruption reporting that reflects your true exposures.
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 interruption business values at a lower level than you have. If this is the case, wouldn’t you want to know? This discrepancy can directly impact your business interruption losses if a claim arises. Having accurate business interruption reporting makes it easier to recover during a loss period, covering continuing expenses, fixed expenses, and any other extra expenses incurred. Understanding your interruption loss in advance prevents unpleasant surprises when processing a claim through business interruption insurance.
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 it. 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 reported 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. Overstating your contingent business or contingent business interruption exposure could unnecessarily inflate costs, while understating could leave you vulnerable in a time of crisis.
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. By maintaining thorough interruption business interruption data and accurate reported values, you can take control of your business interruption business risks and avoid guesswork by the insurer.
