Not knowing what your business’s insurance policies actually cover and do not cover can lead to serious regrets.

There is no way to avoid risk when running a business. Whether arising out of employee terminations, injuries, defective products, data breaches, professional liability, or other matters, it is an inevitable reality that at some point, during the lifecycle of a company, a liability claim will rear its ugly head and the business’s insurance company will have to be notified.

Insurance claims can be the source of great aggravation for business owners. Paying deductibles, the risk of increased premiums for the next year, dealing with insurance representatives, adjusters, and insurance company lawyers can be a huge headache and sometimes feel the business feeling like it is fighting on two fronts – defending itself from the liability claim while warring with its own insurance company to get coverage and minimize out of pocket losses.

Living through an insurance claim often leaves permanent marks, and many business owners often make adjustments to avoid repeating the outcome going forward. So what tend to  be the top 5 regrets?  Here’s a summary.

#1 – Knowing What the Business is Actually Paying For (and Getting) in Insurance Coverage.
One of the greatest mistakes business owners can make is that assuming that they are covered against risks for which there is, in reality, little or no coverage. Insurance companies love to offer creative policies or policy packages with catchy names which in reality only cover very limited risks or risks that have an extremely remote chance of occurring. Because it is not always clear how insurance coverage fits with the business’s day to day activities, operations, risk, products, and services, it is a great idea to have a simple review done of the policies being paid for by the company to identify if the business is overpaying or left bare for certain types of risks.

 #2 – Taking Greater Care with Renewal Evaluations.
Businesses grow. Product lines and service offerings expand and change. Most businesses adjust their operations every year to respond to the market, consumers, or other factors. It is equally important to make sure that the evaluation of the business’s activities are performed with care during the renewal process. The renewal process is intended to give the business a time to review what it is doing and not doing, and therefore, what its risks may or may not be. Speeding through the renewal simply to keep the same rate and not cause any changes can be a mistake if the failure to disclose material activities results in the coverage being voided. Insurance companies also love to accuse businesses of providing incomplete or inaccurate information, accusing the business of making “misrepresentations” just so coverage can be voided.

 #3 – Knowing Who Your Friends Are
Companies who have lived through the insurance claim process often learn late in the process that, despite what a flock of representatives, adjusters, or claims examiners may say, they are definitely not a friend of the business and the insurance company’s interests and incentives completely contradict those of the business. When faced with a liability claim that has to be reported to its insurance company for coverage, the business usually wants the matter handled properly, quickly, and the claim paid so it can get back to business without unnecessary distractions or out-of-pocket loss.  Insurance companies, on the other hand, are based on business model that essentially bets that it will make more money in premiums from the business than it will ever have to pay out – that’s how insurance companies make money. Paying claims necessarily reduces the insurance company’s bottom line. As a result, insurance companies employ teams of employees in their coverage departments to find reasons to deny claims. Business owners should keep these realities in mind and deal with insurance companies cautiously. Often, insurance companies, under a guise of being friendly and soliciting information about the claim are really looking for facts to help them make a coverage denial.  Businesses should thus be extremely careful in providing the insurance company with the information it is requesting, and if possible, work through lawyers to ensure that insurance company is not setting the company up for a coverage denial by using the information provided by the company against the company.

 #4 – Understanding that the Agent/Broker’s Word Isn’t Gospel.
Insurance brokers and agents are a frequent source of trouble when it comes to a business’s understanding of the coverage it is getting (and more importantly, isn’t getting). Brokers and agents earn income through commission on the sales of insurance policies, so there isn’t any real incentive for brokers and agents to be honest in telling business owners how much coverage really exists, or whether the coverage being provided is worth the premiums being paid. The reality is that no matter what the agent/broker says, emails, or represents, they have no real power to change, expand, or add coverage under the policy.  This, coupled with the fact that many agents/brokers prefer to communicate on the phone rather than in email or in writing, makes it generally difficult for the business to argue that they were misled by the agent/broker’s representations on the nature or type of coverage purchased, if it turns out later on that there is a coverage gap for a significant liability claim brought against the company.

 #5 –  Understanding the Ultimate Effect of Aggregates, Limit, Caps, and Deductibles.
Many a business has also been burned simply because no one at the company fully understands the effects of aggregates, limits, caps, and deductibles. Consider the example of a business that installs iPhone charging outlets in cars for a fee of $100 per installation.  This type of business may end up in horrible circumstances if its insurance policy does not contain a cap on aggregate deductibles, limiting its overall deductible obligation. Here’s why: assume that the outlets are defective and cause a unique type of damage in each car), that 5,000 installations were performed,  that the cost of repairs to fix the defective charger are $900 and the company’s insurance deductible is $1,000.  Under these circumstances, the insurance company will probably take the position that the business must pay a $1,000 deductible for each defective installation, and because the cost of repair ($900) is less than the deductible, the company essentially has no insurance coverage for the defective installation. Multiple that times the number of defective installs ($5,000), and the company will suffer a $450,000 loss – none of which the insurance company will likely cover, simply because there were no caps on deductibles. Had the company had a cap of let’s say $5,000 of deductibles, then it would pay deductibles for the first 5 ½ repairs, and then it would satisfy its aggregate deductible obligation, causing the insurance company to cover the rest, assuming no other coverage defenses are asserted by the company. The difference to the company would be $445,000 – a sizeable amount that could make or break any small business.

AXIS Legal Counsel offers representation to business clients in numerous insurance coverage disputes where insurance companies wrongfully fail to defend lawsuits brought against policyholders, or wrongfully deny coverage, even after collecting years of premiums from their policyholders.  AXIS exclusively represents policyholders in its insurance coverage practice and assists businesses challenge the often uninformed and wrongful decisions made by insurance companies denying coverage. Axis’ managing attorney Rabeh M. A. Soofi is a Los Angeles insurance coverage and bad faith lawyer with extensive experience representing clients in insurance coverage and bad faith disputes.

Getting Legal Help

For information on retaining AXIS Legal Counsel to represent you in connection with any insurance coverage or bad faith matter, contact or call (213) 403-0130 for a confidential consultation, or visit our Insurance Recovery Practice Area or Business & Startups Portal for more information.  AXIS Legal Counsel is an insurance coverage and bad faith law firm serving clients throughout Los Angeles and California.

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