People buy insurance so that when they have a covered claim they can get paid for their loss.  However, as surprising as it may seem many people give up their rights under their insurance policy because they don’t want to file a claim.The reasons for doing this vary greatly:

• Some people don’t want to file a claim because they don’t believe the person making claim against them deserves payment and their afraid if they file a claim their insurer will pay an undeserving claim.
• Others don’t file claims because they’re afraid their insurance will go up in price.
• Others are busy and just put off filing claims.
• Still others feel anxiety about the claim and put off the claim because they don’t want to think about it.
• Others feel they can handle the claim better than the insurance company because they know the circumstances of what happened better.

Regardless of which of those reasons a person may have for not filing a claim they’ve made a mistake.  Late reporting or non-reporting of claims can result in the insurer denying a claim because their rights have been compromised.

If the claim involves a crime such as theft, burglary, vandalism or other crime, insurance policies require that a report be made to police authorities as well as to the insurance company.

When you have a claim you’ll need to cooperate with the insurer if you want your claim handled properly.  That means preventing further damage if you’ve got property that’s damaged by a fire or other perils.  You’ll also be required to let the claims adjuster and other insurance representatives inspect the damaged property and your financial records relating to the damaged property.

If the claim is a liability claim, you’ll need to forward all legal documents you receive to your insurer so that they can properly file various notices with the court and the other party.  You’ll also likely be required to supply documents that relate to the claim and possibly to attend depositions and other court hearings.

As a practical matter keep the claim number and the adjuster’s phone number handy while your claim is being processed so that you can contact the insurer as needed.

“The quote I got from my broker indicates that the insurer is a ‘Surplus Lines Insurer’.  What is a Surplus Lines Insurer and why does it matter?”

Surplus Lines Insurers, also known as ‘Non-admitted Insurers’ are insurers that specialize in providing insurance for exposures that most regular insurers do not want to provide.  Regular insurers, which are also known as ‘Admitted Insurers’, are insurers that have filed as such with the State Department of Insurance in your state and have had their rates and policy language approved by the Department of Insurance.  Admitted Insurers policies are also subject to your state’s ‘Guarantee Fund’ which bails out bankrupt insurance companies.  Surplus Lines Insurers’ policies are not subject to Guarantee Funds so that if the insurer is not financial able to pay claims, the claims will go unpaid.

Surplus Lines Insurers often will write types of policies that admitted insurers won’t, or cover people that have significant previous claims, or provide insurance for classes of business that admitted insurers won’t.  However, Surplus Lines policies are often subject to MANY more exclusions and SERIOUS limitations than standard policies are.  Likewise, premiums are likely to be higher.  Surplus lines policies are also subject to policy fees and taxes that admitted policies are not.  While most Admitted Insurers will allow directly billed installment payment plans, Surplus Lines insurers want to have the entire estimated premium paid in advance.  If a policyholder needs to make payments in installments, premium financing is usually the only option.

In some states, it is illegal to offer a Surplus Lines policy that is lower in price than an Admitted policy providing similar coverage.  Likewise some states make it illegal to offer a Surplus Lines policy if there are Admitted Insurers willing to offer coverage.  These administrative rules have been put in place because where an admitted insurer is willing to offer the coverage the insurance consumer is nearly always better off buying the coverage from an admitted insurer.

Because state guarantee funds don’t apply to Surplus Lines policies, it is critical to make sure that any Surplus Lines insurer quoting is stable financially, otherwise you may find that in the event of a claim there is no money to pay the claim or even if there isn’t a claim your customers may be unwilling to accept a certificate of insurance issued by a financial weak insurer.

There are some Surplus Lines Insurers that quote low premiums while adding some oddball extra coverage, that few people if anyone at all would buy, to get around the rules that prohibit offering such policies at lower than Admitted insurers.  Don’t be fooled by that approach.  Even if technically not a violation of the law, you’ll still be subject to all the downsides of a Surplus Lines policy.

If you’re in the cleaning business and you do exterior windows above 3 stories or you do floor waxing at grocery, drug or other locations with large tile or linoleum floors you probably should be insured with a Surplus Lines insurer.  Likewise if you had several losses or if you use a lot of subcontractors you may find that Surplus Lines insurer are willing to provide coverage for you even if Admitted insurers will not.

“My customer says that I have to supply them with a certificate of commercial auto insurance.  I carry personal auto insurance on all my vehicles.  Why isn’t that sufficient?”

Simply put, a personal auto policy doesn’t provide the same type of coverage or cover all the same types of vehicles that a commercial auto policy does.  When you are working for a customer and driving onto the property they own or lease or may interact with their employees or customers in the parking lot of the building where you are to work, they want to be sure that if one of these people are injured or property is damage as the result of your being at the site with your vehicle to work for them that your policy will pay any resultant claims.

“But won’t my personal auto policy cover such claims?”

It might, depending on the situation, but it might not to.  And that is why the customer wants a certificate of commercial auto insurance.  Here are some examples where many or most personal auto policies will not cover.

• You use a vehicle other than a car, pickup or panel van.  Remember your customer doesn’t want to have to know ever type of vehicle that you might use or obtain after he starts dealing with you.  The customer just wants to know that you’re insured and losses you cause will be paid for by your insurance.
• You have an employee that uses his vehicle in your business.
• You rent a vehicle that you use in your business.
• Someone is hurt loading or unloading your vehicle.
• You tow a trailer or contractor’s equipment with your vehicle.

These and other situations can create uncovered claim situations when a vehicle insured on a personal auto policy is used in business operations.

But even aside of what your customer requires, since the above situations can create uncovered claims, you also may be left uncovered if you rely upon your personal auto policy to cover these situations for your business use of autos.

Likewise if you have truck mounted contractor’s equipment, your personal auto policy is unlikely to cover damage to that equipment but a commercial auto policy can if it value of the added equipment is declared to the insurer.

There is another reason to carry a Commercial Auto policy if you have employees.  If your employees drive your vehicle in the business and they have an accident, it you have the vehicle insured on your personal auto policy your personal insurance will likely go up on all your personal vehicles, that is if your personal auto insurer agrees to renew your personal auto policy after they get stuck paying a claim for an employee they didn’t even know was driver on your policy.

The way to avoid problems is to obtain a commercial auto policy for vehicles used in your business.

“I work out of my home and have a homeowners’ policy.  Won’t my homeowners’ policy cover my home based business exposures?”

What we can say with certainty is that homeowners’ policies are not designed to cover business exposures.  While often they provide some minimal coverage, it is totally inadequate for most home based businesses.

Here are some areas where homeowners’ policies deal with business exposures.

• No coverage is provided for losses arising from employee exposures
• No coverage is provided for losses away from premises
• No coverage is provided for product liability exposures
• No evidence of any commercial insurance is provided by homeowners’ insurers
• Very limited coverage is provided for business property on premises and even less is provided away from premises.
• If you operate out of a detached outbuilding, a garage for example, you’ll lose the coverage on that outbuilding because business use of a detached building voids coverage on the detached building.

Other problems that you’ll experience trying to rely upon your homeowners’ policy to provide business coverage is that any losses that are covered and are related to your business operations will count as a claim on your personal policy and you may cause your homeowners insurer to non-renew your policy.

If you have property related to your business that is hazardous such as chemicals or flammable liquids, hazardous machinery, etc. your insurer may choose to void your policy for increase of hazard.

Most homeowners’ policies have low limits of liability insurance.  So someone hurts themselves at your home while there for business you may find that your liability limit is insufficient under your homeowners’ policy.

Homeowners policies require that you declare your business operations to the insurer so they can decide whether the exposure is one they want to accept before providing insurance.  If someone hasn’t done that and a loss occurs you may get an unwelcome surprise at claim time.

Homeowners policies typically don’t provide contractual liability coverage related to business exposures.  So your business contract that you sign which have contractual assumptions, from the lease on your computer or copier, to customer contracts and vendor contracts may all be uninsured.

Clearly the message to take away is that homeowners policies don’t adequately insure business exposures.

“If that’s the case why do they provide any coverage for business operations at all?”

The limited coverage Homeowners policies provide was designed for an employee who might bring some of the business personal property he uses in his business home at night.  Also some people may teach painting or music out of their home and the homeowners policy is typically designed to cover minimal business exposures like that.

“All my workers are subcontractors.  How can I avoid having to pay premium at audit time on my Workers Compensation policy?”

The simplest and most fool proof way to avoid owing Workers Compensation premium at audit on the work of subcontractors is to always obtain a certificate of Workers Compensation insurance from your subcontractor.  A Workers Compensation certificate will be regarded as proof by the auditor that the worker was an independent contractor and not an employee unless other evidence demonstrates it to the contrary.

“But my subcontractor’s don’t have employees and don’t carry Workers Compensation insurance.  Is there anything else I can do?”

Yes, but the alternative steps are more involved and may not always be enough to demonstrate that the worker is an independent contract and certainly won’t keep you out of problems if they have others work with them or for them, for example their family member or even friends helping out when they are sick or on vacation.

Be sure you create a subcontractor file to show to the Workers Compensation auditor that contains the following:

• A copy of a written contract with the subcontractor
• A copy of the subcontractor’s business license
• A copy of the subcontractor’s business card and professionally printed invoice
• A referral list of other customers the subcontractor has
• A copy of the subcontractor’s yellow pages or Internet advertisement
• The location of the subcontractor’s office outside of his home
• A photo of the advertisement on the side of the subcontractor’s vehicle
• A copy of the subcontractor’s current certificate of liability insurance

The purpose of the above items is to demonstrate that the subcontractor is in business for himself and offers his services to the public at large.

Also, make sure that the subcontractor set his own time, uses his own methods, buys his own materials and uses his own equipment and has the opportunity to make or profit or have a loss on the job.  A key factor is that you are not controlling the subcontractor’s time or work methods.

Be sure to keep such files up to date!

While the above steps are not fool proof they will go a long way to avoiding having to pay Workers Compensation premium under your policy for what you pay to them.

For example, a classification limitation exclusion on CGL policy would limit the operations to only the declared operations.  So if there was a classificaion limitation exclusion on your policy and you had declared operations as a janitorial services but you also do carpet cleaning at locations where you didn’t perform full service janitorial service, there is a real question as to whether you’d have coverage.  Other exclusions to be concerned with on CGL policies  include exclusions of specific operations, exclusions that apply to the work of subcontractors, and products exclusions.

For some operations the pollution exclusion can become very important.  For example, if you’re using a large container of a particular chemical in your work and that container spills, you probably won’t be able to rely upon your CGL policy to cover it.  Pollution coverage is available but it’s expensive and has large deductibles.

Some exclusions are standard on CGL policies but you still need to be aware of them.  One example is what is known as the “work performed exclusion”.  The work performed exclusion is designed to remove coverage if you damage property that you are working upon due to the work being performed incorrectly.  Historically this has been viewed as a “business risk” and thus uninsurable.  The thought process was that if people could insure “sloppy” workmanship, there would be a tendency to do sloppy work and have insurance cover the consequences.  However, in recent years some insurers have been willing for an additional premium to provide some level of property damage for workmanship.  Thus it is important to know whether your policy covers this exposure or not.

Another exclusion that some insurers place on CGL policies is for contractual liability.  Standard Commercial General Liability policies typically cover liability of another for bodily injury and property damage to a third party assumed in a written contract.  Such contracts are normal parts of business today and most business people enter into such contracts.  So if your policy excludes this coverage it is important to know it.

Lastly, some exclusions can be “bought back” for an additional premium.   If your CGL policy contains an exclusion for “contractual liability” you may be able to buy the coverage back for specific contracts.

Knowing what is and is not excluded from your insurance policies can help you to decide whether to buy excluded coverages back or decide not to assume exposures which are excluded by your present insurance policies.  It can also help you decide which policy to purchase, since some agents will initially offer you a lower cost policy full of these exclusions.

“Why do insurance policies have so many exclusions?  If insurers don’t want to cover anything why don’t they just sell something other than insurance?”

If that’s the way you’ve felt you’re not alone.  But as strange as it may seem, policies with exclusions are better than those without them!  You’re going to have to follow me through this one.  Some policies cover very few perils (a peril is a hazard or source of loss).  An example would be a simple fire policy that covers just fire and lightning.  The basic fire policy has virtually no exclusions at all.  If a fire loss occurs, with few exceptions such as arson by the insured, or heat damage by a fire inside of a stove causing scorching to something outside the stove, virtually all other causes of fire are covered, even a fire caused by an earthquake, volcano or flood.  However, what if a tornado damages your house?  What about if you have a vandalism loss or a tree limb falls on your house?

None of those losses are covered by the standard fire policy.  The broader the policy the more exclusions are necessary to accurately define what is and what is not covered.  Some policies previously known as “all risk” policies and now more often referred to as “open peril“ cover all perils except those excluded.  Such policies also transfer the responsibility to prove what caused the loss from the insured to the insurer.  That means that if no one knows what caused the loss but the property definitely had a loss and was covered on a “open peril” type policy, coverage applies.  To show just how broad the coverage is on such open peril policies, when I first started in the insurance business we had a customer whose child dropped a cannon ball in a toilet, breaking it.  There was no exclusion in the policy for that and so the policy paid.

The concept works the same whether you are discussing property insurance, as noted above, Commercial General Liability Insurance or even Auto Insurance.  The broader the basic coverage, the more exclusions will be built into the basic policy form.

A second reason why there are so many exclusions is that the policy you buy is customized for a particular exposure to be insured.  As an example the Commercial General Liability policy has an automobile exclusion.  If it didn’t, liability arising from automobiles would be covered under that policy, but automobile policies are designed to cover autos.

A third reason why exclusions are in various policies is because not every customer has the same exposures and it isn’t fair to charge someone needlessly for exposures they don’t have.  For example, some carpet cleaners take customer’s goods to their location to clean them.  When they do this, they are acting as a Bailee (a person with whom some article is left, usually pursuant to a contract).  But other carpet cleaners never take customer’s goods away from their customer’s premises.  So the Commercial General Liability has what is known as the “care, custody and control” exclusion so that no charge has to be made for an exposure most don’t have.  The carpet cleaner that has that exposure can buy a Bailee policy to cover it.

A fourth reason policies have exclusions is that some exposures just aren’t or shouldn’t be insurable.  For example, war, nuclear reaction and pollution are so serious loss types that most policies don’t cover them.  Additionally, certain types of exposures shouldn’t be insured because it works against public policy.  For example if someone could insure against faulty workmanship, many businesses wouldn’t use care in their work and just turn faulty workmanship claims over to be paid by insurers.  Then everyone’s insurance would go up and you wouldn’t have good quality either.

So as disagreeable as the idea of having exclusions is, they are in and of themselves not bad ideas.  Just make sure that you understand what is excluded and why and if you need to buy special coverage for exposure you have, it’s probably available under a separate policy.  Sometimes though, exclusions can be a bad thing.  Next week I’ll review some significant exclusions that could just be lurking at the back of your current insurance policy…

“Someone said that I need special insurance if I take customer’s goods to my location to clean them.  Is that true?”

Actually it is true.  Your Commercial General Liability policy isn’t designed to cover that exposure.  Consider the reason why.  Imagine a firm that does fire/damage water damage cleanups and does “pack outs” for property in building’s that have sustained fire and water damage.  Such a firm may have tens of thousands or hundreds of thousands of dollars of customer’s goods at his location to clean.  A sofa that he gets $100 to clean may be worth $8,000.  A liability insurance policy which is rated on cleaner’s payroll doesn’t properly reflect the exposures that such a firm would have by storing large values of customer’s good for weeks at a time.

Commercial General Liability insurers therefore exclude coverage on this type of exposure from their policies so that they don’t have to charge everyone more for an exposure that most of their insureds don’t have.  Businesses that have this exposure cover it with what is known as a Bailee policy.  A Bailee is someone that holds property belonging to others.  For example dry cleaners who have the garments of their customers in their care for cleaning are bailees.

Bailee policies are rated based on the total value of customer’s goods at any one time in the care of the bailee and the fire rate of the building in which the property is stored.  Additionally, if the bailee will be transporting the property to and from his location an endorsement is available for a small premium to add coverage while in transportation.  If the cleaner is concerned about damaging the property by cleaning it an endorsement can be added for an additional premium known as the “processing extension”.

If you take customer’s goods to your location to clean or service them this is an important coverage to add to your insurance.  You can reduce the cost by increasing the deductible and by making sure your property is alarmed for fire and burglary.  Also make sure that your vehicle is always locked when not being driven.  Some of these types of policies have what is known as a “locked vehicle warranty”.  On a policy that has a locked vehicle warranty, if the property is stolen from a vehicle there is no coverage unless there are marks of forced entry to the vehicle.  Always locking the vehicle is important whether or not your vehicle has a “locked vehicle warranty”.  Stolen property will upset your customers and you’re sure to have a deductible on any bailee policy.  Likewise your rates will like go up in the future if you have claims.  So always, always lock your vehicle!

Many cleaning services express similar sentiments, especially in these hard economic times.  However, taking that viewpoint may prove to be more costly than the premium to buy liability insurance.  There are two major reasons it may prove more cost not to carry liability insurance than to carry it.

First, the jobs that have the highest profit potential will require evidence of insurance.  If you’re not carrying liability insurance, the high profit jobs will go to someone else who is.   Even where someone doesn’t require a certificate of liability insurance, the janitor that does carry the coverage is usually given preference over another janitor who pricing is similar who does not carry the coverage.  However, to get that advantage you’ll need to let your customers and potential customers know you carry liability insurance.  For your customers the most effective way to do that is to have your insurer send them a certificate of insurance.  For your potential customers, just carry a copy of the declarations page of your policy and let them know that if they give you the job you’ll have your insurer send them a certificate of liability insurance.

A second major reason it may be more costly not to carry liability insurance is the potential for a claim.  Someone slips and falls on a floor you mopped, trips over your cords, or leaves the water running in a sink when you leave the premises you have the potential for a very large claim.  If a serious claim occurs and you don’t have liability insurance, you may end up losing your home and any other assets you have.  If you don’t have liability insurance you’ll almost certain lose your customer.  Then think of how the uncovered claim is going to affect whether others want to do business with you.  Especially if you live in a small community, work may get around about the claim and the fact you weren’t covered and that can interfere with your getting additional jobs.

“But I’m very careful, none of that would happen to me.”

We all like to believe that we’ve done the right thing when it comes to handling our business.  However, we aren’t in control of everything.  We had a client that cleans vacant apartments.  The water to the apartment was turned off.  Our insured cleaned the sinks, floors, etc. to get it ready for the next tenant though they had to bring the water they needed in with hoses from an outside faucet.  When the apartment was ready to rent the water to the apartment was turned back on.  One of the faucets in the apartment was in the on position and since our insured was the last one in the apartment a claim was made against him when the water overflowed and damaged that apartment and the one below it.  The damage was more than $50,000.  He was sure glad he had liability insurance.

How: Get every work order signed before you begin work and put wording on your work order, usually on the back but referenced on the front, in which the homeowner or building owner waives the rights of his insurer to collect from you for damages that show up after cleaning.

Why: Insurance policies have terms that say that the homeowner or building owner shall do nothing AFTER loss that impairs the rights of the insurer to collect from the responsible party.  By having the work order always signed before you start, a work order that has such a provision in it will in most cases prevent the homeowner’s insurer from trying to collect for damage from you.  If damage shows up after cleaning, it can be explained to the homeowner or business owner that if you are responsible for the damage, that responsibility is limited to the value of the used carpet (ever bought used carpet before? Its kind of  like buying used underwear…you could, but no one really wants to, so it’s not worth much).  The homeowners policy or commercial building policy likely has replacement coverage and will pay new for old.  Then once the policy pays the insurer will see about collecting from the responsible party.  After the homeowners’ policy has paid and the insurer tries to collect from the carpet cleaner a copy of the signed work order with the “waiver of subrogation” on it usually makes the claim go away.

How: While you’re at it, add language on the work order where the homeowner or building owner agrees that the personal property on the premises cleaned is NOT in your care, custody or control.

Why: If personal property is damaged and the your insurer tries to apply the care, custody or control exclusion to the claim, a copy of the work order can be sent to them and that usually will resolve the problem.

How: The attorney can also put language on the work order where “to the degree covered by insurance owned by the customer” the homeowner or building owner agrees to defend and indemnify you for any “bodily injury” or “property damage” arising out of your work which injures or damages property belonging to non-residents of the premises being cleaned.

Why: If the homeowner allows a plumber on to the premises and the plumber trips over your hoses and gets hurt and files a claim against you, the homeowners’ or building owners’ insurance can be called on to pay for injuries to the plumber.  Standard homeowners and businessowners policies include “contractual liability” which would cover such a contractual assumption of the liability.

While these steps don’t eliminate the need for carpet cleaners to carry insurance, they can certainly keep you out of a lot of trouble.  But remember to always get your work orders signed before you start a job!