This is the start of a project that will hopefully be interesting and perhaps even useful to those in the commercial property & casualty insurance business.

First, I’d like to introduce my just-published book “Insurance: A Big Decision for Small Business”. It was written expressly for the business owner, not insurance people, but is a neutral take on insurance issues for small-business owners.

It’s available in both paperback and ebook versions. Click here to buy it at Lulu Publishers . A Kindle version is also available on Amazon and the ePub version from iTunes.

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Why Business Interruption Coverage Needs Special Attention

Over the years, one thing I’ve consistently noticed is how little thought many business owners put into planning what they’ll do following a big loss. This isn’t really surprising with how many things an owner already has to do, but a bit of planning beforehand really pays off if a fire, tornado or other disaster hits.

The goal of Business Interruption and Extra Expense coverage is broadly two-fold. First, it pays those expenses that continue to be incurred and lost profits because your business isn’t operating. Second, it is also the funding mechanism for your recovery plans. You may be able to set up temporary operations or outsource certain operations in a fashion that allows your operations to continue wholly or partially until your own facilities are back up and running.

The point is to think about these things before the loss occurs. Not all businesses have the same exposures. For example, worker payroll is a very big expense for many businesses, but not everyone needs to insure it to the same extent. Compare a fast food restaurant — with very high employee turnover — to a machine shop with a group of experienced and highly trained workers. The fast food operation probably won’t worry if they have to dismiss their line employees during the rebuilding process. Conversely, the machine shop may end up permanently out of business if they let their employees to go unpaid for months; they’ll move on to new jobs and be unavailable when the business starts back.

The same is true of other aspects of the BI/EE exposure. An apartment owner is simply temporarily out of the rental business if his building is damaged. Contrast that to a wholesale distributor who may be able to continue operations out of a temporary location, albeit at a higher expense. In between, a retail store can rent an alternate location but will likely find it not as productive as their regular store that customers know.

Without dragging this out, the point is that a business owner needs to contemplate what his business could do in response to a major disaster. Are temporary operations possible? If so, what would they entail? What will you do with your workers during the rebuilding period — can you afford to permanently lose them if they are laid off? Look at all of your expenses — which ones would you continue to incur despite the loss and which would temporarily decrease or cease until you are up and running again?

This analysis does two things. First it allows you to choose a limit of insurance for BI/EE that is appropriate for your company. Second, it helps clarify what can be done following a loss; you don’t want the day after to be the first time you’ve ever thought about the subject.

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Think before adding coverage

One of my jobs at the agency I’m with involves reviewing the current insurance programs for prospective clients. It’s interesting what one sees.

For example, today I check a policy for a building owned by an individual who leases it to a business. Pretty straightforward stuff – property coverage on the building, some loss of rents coverage and a pretty basic general liability policy.

But, they also had an employee dishonesty section. This was not a throw-in, but rather a separately rated coverage section with an additional premium of over $500.

The insured was an individual with no employees. What was meant to be covered by this endorsement? Employee dishonesty policies exclude the owners – no insurance company covers someone for stealing from themselves. And, there was no one who could steal from the owner who qualified as an “employee”.

In short, over $500 down the drain.

The moral? Just because an insurance coverage is available doesn’t mean you need it. Insurance policies need to be thoughtfully matched to the client.

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WC Experience Modifiers in Missouri

I’ve noticed that experience mods in Missouri have been swinging more wildly than expected recently.

Much of this is due to the July 1, 2011 change by the NCCI where a 70% discount now applies to med-only claims, regardless of size.

Prior to July 1, med-only claims went into the mod formula at 100% in Missouri. However, by law, Missouri employers were permitted to pay med-only claims under $1,000 out of their own pocket in order to keep them out of their mod.

This change has pretty much defeated any advantage an employer gains from this (and it applies retroactively to all claims for mods effective after the July 1, 2011 date) so a lot of employers lost any benefit from their efforts in prior years.

Meanwhile, some employers got a windfall. Med-only claims excess of $1,000 now enter the formula at on 30 cents on the dollar. I know one client that had several med-only claims in the $3,000 to $5,000 range. Their 2011 mod came in a full 8 points under the projection just due to this change.

So, some insureds are being punished for following the intent of state law (RSMO 287.957 was written expressly to benefit those employers who paid claims under $1,000 out of their own pocket). Meanwhile, other employers are reaping unexpected benefits that are saving them thousands in premium dollars.

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WC Codes – be careful what you ask for

There are roughly 1,000 different work comp codes in the NCCI Scopes manual. It pays to put some effort into determining the correct codes for your clients, but sometimes things aren’t what you’d expect.

One of my favorite examples is the Iron & Steel Frame Structures construction class. There are two codes for this class. Code 5040 is for work over two stories and code 5059 is for under two stories.

The initial impulse is to think that the work on buildings taller than two stories would be more dangerous – the farther you fall, the more it hurts.

But that doesn’t match reality. The assigned risk rate for code 5040 – the over two story class – is $44.61 per hundred of payroll in Missouri. However, the rate for code 5059, the under two story class, is $113.80 – two and one-half time higher!

How could this be? Simple. Remember that rates are based on the actual historical loss experience reported to the NCCI for all risks in the state using that class code.

The over two story work is done by professional firms, with proper equipment and trained workers. The contracting companies that do this type of work know what they are doing.

In contrast, the under two-story class draws a lot of “cowboy” contractors who often don’t have the experience, equipment or training to safely handle structural steel. Inevitably, those issues reflect in the statewide loss experience for employers in this type of business.

This is an extreme example, but it does show that you can’t always take things at face value.

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