 
From Liability coverage to Workers Compensation to Health Insurance Programs, spiraling insurance premiums and hidden restrictions in coverage are affecting the profit picture of companies both large and small. Every Chief Executive wants to lower insurance costs without reducing the quality of coverage, but many are not approaching the task effectively.
In fact, most executives cannot bear to read their policies. At a recent conference of 200 company Presidents and Chief Financial Officers, a speaker asked the groups, "How many of you have read your insurance policies from cover to cover?" Not one hand went up in the audience.
There is no doubt policies make for dull reading. They are often written in industry jargon in print that even bifocals cannot handle. So executives tend to scan policies and stop reading when they have reached the section telling them whether or not they will have to spend more this year for coverage that may or may not be as comprehensive as last year's. When the premiums go up, many executives frantically telephone their brokers or agents hoping to find some way to reduce their insurance costs. To often they are advised, "The insurance carriers are unwilling to bend. If you want to reduce costs, you will have to accept higher deductibles and decrease your coverage." Or executives may be told, "The ways things are, it is lucky we got the coverage at all."
According to Thomas Kovatch, President of UIC, luck has little to do with an effective insurance program. "Obtaining the proper coverage at a low premium requires a tremendous amount of insurance expertise and creativity. Most people do not realize that an insurance policy is actually a contract that starts out blank. We tend to forget this because we are so often handed standardized policies created by insurance carriers." In Tom's view, important clauses in a policy can be negotiated and customized to best cover a client's exposures. Yet executives who hire lawyers to review leases and accountants to audit books routinely accept insurance policies that have not been examined by independent insurance experts.
UIC is in the business of helping companies understand their insurance contracts and the coverage and costs involved in properly protecting their assets and liability exposures. Since UIC does not sell insurance, it can look at a business objectively. Unlike brokers and agents, the company does not accept commission, broker's fees, agent's fees, nor does it represent any particular insurer. UIC workers on a fee basis without requiring a contract or retainer. UIC does not participate in any of the premium savings it typically achieves for clients.
As insurance consultants, UIC is outside the traditional structure of the insurance industry, but knowledgeable about how it operates. Thus, UIC associates are free to approach coverage from a unique perspective.
UIC demonstrates to its clients that the extent of a company's coverage and how much it pays for insurance hinge on the size and nature of the company and the scope of its operations. Evaluating a company's risk exposure is the keystone of how insurance carriers construct contracts and determine premiums. It is critical for companies to accurately portray their operations to the carrier. Developing this picture involves obtaining a working knowledge of a company's operations, understanding management's goals, inspecting company facilities, and gathering pertinent data about the operation, such as contractual obligations and previous and potential losses.
Without a correct portrait of the company, insurance carriers may base coverage and premiums on a standardized definition of what they think the company does. This practice can lead to unjustified restrictions and higher premiums than the company should be paying.
For example, a client of UIC was being charged an enormous premium because it was classified as a crane manufacturer. In actuality, the company produced small industrial hoists. By providing the broker and carrier with an understanding of the product and how it was used, UIC was able to prove to the insurer that it had an erroneous perception of the client's exposure. As a result, the coverage increased fivefold and the premium was reduced $500,000. UIC helped the hoist manufacturer measurably improve its annual profit figures.
Besides higher premiums, misunderstandings about the nature of a company's operations also result in carriers including clauses in the policy that restrict coverage. UIC is often successful in getting such restrictive clauses removed from policies, thus improving coverage at no extra cost to the client.
THE ROLE OF THE INSURANCE CONSULTANT
The function of UIC is to help its clients achieve optimum coverage at a low premium. UIC associates not only help a company prepare its operational profile, they are invaluable resources for assessing the financial soundness of insurance carriers, specifying optimum coverage, and negotiating premiums.
HOW STRONG IS THE CARRIER?
There is no doubt that some insurance carriers are in better financial shape than others. But how do you judge? Your carrier may be able to pay a claim today, but what about six months from now? Five years from now?
To assess the strength of any insurance company, many companies rely on popular rating guides by publishers such as AM Best and Standard and Poors. Companies are rated from A+ to C or receive a Not Assigned (NA1-NA10) classification. If there is a need to find about a Canadian carrier, many consult either Stone & Cox or Track Reports. But rating guides do not necessarily reveal the entire picture. In the past two years, companies have gone out of business in a short time before the ratings reflected their weaknesses. UIC believes rating guides are a starting point, but assessing the soundness of a carrier requires ongoing data about a carrier's financial reserves, the types of investments it makes, and the type of businesses it underwrites.
FINANCIAL RESERVES It is essential to evaluate the amount of a carrier's loss reserves. According to Best's Key Rating Guide, "For many insurers, a 25% change in current loss reserves would exceed five years of net income. For some insurers, the equity or deficiency in reported loss reserves can exceed reported policyholders' surplus" thus making the insurer insolvent.
TYPES OF INVESTMENTS When it comes to investments, is the carrier putting its money in treasury bills, municipal bonds, common stock, junk bonds, or other options? As recent economic patterns have demonstrated, some of these financial instruments are stronger than others. Timing plays a critical role.
BUSINESS UNDERWRITTEN The types of businesses a carrier underwrites have an impact on its stability. For example, some companies have gone out on a financial limb by underwriting too much malpractice insurance.
Executives also have to be sure that, at minimum, insurance companies under consideration are licensed to conduct business within the state in which they operate. This gives the company some protection under the state's insurance insolvency fund. However, state funds are no guarantee of adequate protection. The limit of insolvency funds in many states is usually below $1,000,000. For example, the limit in New Jersey is $300,000.
HOW ADEQUATE IS THE COVERAGE?
The proper perspective regarding coverage depends on the type of insurance. Property, Liability, Umbrella, and Automobile Policies have several sections and types of clauses that require special scrutiny. Although it is not possible to cover the numerous pitfalls of commonly-held policies, the following are a few areas that merit an executive's attention:
PROPERTY INSURANCE Clauses in your policy determine how you will be paid if you have a loss. Examine the valuation definitions to determine whether you will receive "Actual Cash Value" or "Replacement Cost." Actual Cash Value (ACV) is replacement cost less depreciation for time and age. "Pure Replacement Cost" means replacing buildings and/or equipment with like kind and quality without any form of depreciation. You have to examine "Replacement Cost" clauses. They may not mean that that the insurer must replace on a "NEW FOR OLD" basis. They may also stipulate that you must replace on the exact same site. Clauses can be amended to state "Replacement Cost means New for Old, Same or Any Site." It is also important to review other valuation definitions such as merchandise, manufacturers selling price, raw materials, stock in process, and finished stock, and understand how the insurer defines Business Interruption. It is also wise to pay attention to the forgotten coverages such as Contingent Business Interruption, Lease-Hold Interest, Backup of Sews and Drains, Off-Premises Power Failure, and fees and charges to prepare a comprehensive loss report.
LIABILITY INSURANCE Principals provide coverage for claims to a third party arising out of bodily injury, property damage, personal injury, advertising injury, or contractual liability caused by an occurrence. The General Liability Policy on an overview basis states in only several paragraphs that it provides broad coverage as stated above, but then the entire remaining parts of the policy are devoted to taking away coverage via an exclusion, definition and condition in the original broad coverage terms. It is, therefore, critical to modify exclusions and definitions to tailor make this policy to fit the exposures of a business' particular operation. For example, Contractual Liability coverage has a far different exposure to clients in the construction industry as opposed to manufacturing or real estate. The Care, Custody and Control Exclusion must be modified or deleted if your entire operation is one of having third party's property in your care, custody, or control like maintenance contractor and security guard firms. The list of examples is endless as the variations of business operations. The most important idea to remember is that General Liability Policies can and must be modified to fit distinct exposures. The key is to identify the need and professionally communicate the desire in a way that the insurance industry can and will understand, and positively respond.
UMBRELLA An Umbrella Policy is perhaps the most important policy you can purchase, but it is generally misunderstood. An Umbrella Policy typically provides Excess Liability Limits over your Primary General Liability, Automobile Liability, and Employers Liability coverage. It is critical to have an adequate Umbrella Policy because many claims may be well in excess of limits on other policies. Check the underlying schedule for gaps in coverage. For example, imagine there is an $800,000 claim against your company. If you General Liability Policy has a $500,000 limit and your Umbrella Policy becomes effective at $1,000,000, you will not be covered for $300,000 of the claim. Be careful of sublimits in your General Liability Policy. For example, Fire Legal Liability and Employee Benefit Liability may not be specified in the underlying schedule page of your Umbrella Policy.
AUTOMOBILE Here too, you must examine your limits of coverage. Do you have a gap between Automobile coverage and excess coverages? You should also purchase the maximum limit of Uninsured Motorist coverage for at least executive vehicles to give you protection if you are involved in an accident with an uninsured or underinsured driver. When it comes to Rental Car coverage, "Should I or shouldn't I" seems to be the question at the rental car desk these days. If you have a Personal Auto Policy or are renting with a charge card that covers the exposure, you do not need to buy Collision coverage on rental vehicles. You might consider the coverage anyway if you want to avoid a hassle should an accident occur.
OVERLOOKED COVERAGES Companies most often neglect to check coverages for Long- Term Health Care, Crime, Workers Compensation, Fiduciary Liability, Directors and Officers, and Boiler & Machinery coverage for private companies.
In seeking coverage, it is critical to remember that many coverage enhancements are absolutely free, but must be requested. Others are nominal in cost, but are sold, if possible, at an inflated premium cost. Consultants are aware of free coverages and know the true going rate for others.
ARE THE COSTS JUSTIFIED? When companies object to rates, they are often today there is nothing that can be done because the manual determines the rates. Except for Workers Compensation rates, this is not the case. All rates are negotiable based on the perception of risk. In addition, the extent and cost of coverage vary depending on the rating basis and classification codes used to define a company's operation.
The rating basis may be the company's sales, payroll, square footage of facilities, frontage, or other criteria. Since some bases are less expensive than others, it is critical to use the right one and be sure it is stated in the policy. For example, one tire importer was experiencing booming sales without having hired any new personnel. The sales increase resulted from a new sales incentive plan. The company's insurance premium was about to be increased because the carrier based the premium on the company's sales volume. UIC helped the company obtain more extensive coverage at a lower premium by getting the rating basis changed from "sales" to "company payroll." What's more, the rating basis can be changed again should circumstances warrant. There is tremendous flexibility in the areas that determine how a premium is arrived at by the carrier.
Companies also have to examine how they are classified. The ratings manuals contain industry descriptions, but a company may fit more than one classification code. An insurance expert can assist the company in determining which description best fits the company and carries the least perception of risk.
WORKING ON THE CLIENT'S BEHALF
Independent insurance consultants are invaluable for the skills they bring to insurance negotiations on the client's behalf. Consultants give diverse and innovative advice on how to best present the company's exposure to obtain optimum coverage while reducing costs. They are insurance equalizers for the client since they are insurance experts who speak the language of insurance carriers, brokers and agents, but do not make a commission on the insurance sold.
Another advantage of working with consultants is that they can determine the true need for coverage and seek it from the best specialists. Unlike brokers or agents who can only recommend or use insurance markets they represent, consultants are not restricted in any way. They can seek the most competitive proposals from the entire insurance marketplace or recommend non-insurance techniques to transfer exposurer at a lower (or no) cost.
However, it must be emphasized that consultants are not duty-bound to find fault in a company's insurance programs. Competent consultants are always pleased when they can tell a client that after a careful review, "Everything's in order." Often the consultant's auditing activities suffice to encourage everyone - from clients, to brokers, to agents, to insurers - to attend to the details necessary to obtain maximum coverage at lower costs. Although no one has a crystal ball, when executives hire competent, independent consultants to examine insurance companies, coverage and costs, they can be reassured about the quality, extent and cost of their insurance coverage.
UIC is a uniquely structured company. It was established by Thomas Kovatch, an insurance consultant with more than 20 years experience. The company's associates have been together since the company was found and together serve over 500 clients in the United States, Canada, South America, Europe and the Far East. They read thousands of policies each year and negotiate millions of dollars of premium on their clients' behalf.
Clients range from manufacturers to distributors to retailers to contractors who may pay more than $100,000 in annual premiums for Group Health, Liability, Workers Compensation, Automobile, Crime, Directors and Officers (D&O) and Umbrella Policies. UIC assists clients with both domestic and overseas coverage since its associates are well versed in both national and international exposures.
In the consulting process, UIC meets with a client to discuss the company's operation and loss exposures. Current policies are audited serially, beginning with the policy that is most troublesome. UIC then works with the client and its brokers or agents to immediately cover any holes in existing coverage. After the company's operations have been defined and exposures identified, UIC and the client prepare a description of the operation that best represents the client's needs to the insurer.
UIC then works with brokers, agents and/or direct-writing insurers to obtain the best terms for the client. UIC and the client review competing proposals and select the policy that best fits the specifications provided.
But UIC's work doesn't end with the selection of the carrier. Associates examine binders to ensure they accurately reflect the proposed coverage and premium, and they review the policy and all changes and endorsements to make sure all errors are correct d.
But UIC's work does not end with the selection of the carrier. Associates examine binders to insure they accurately reflect the proposed coverage and premium, and they review the policy and all changes and endorsements to make sure all errors are corrected.
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