Are You Covered?

Every business owner needs insurance–it's as inevitable as death and taxes. Failing to obtain adequate coverage for any commercial or not-for-profit entity is just plain bad practice.

By Kate Goff

Attempting to understand an insurance policy's fine print is deadly in itself, but it's worth the time and effort to review your coverage on a regular basis to make sure that you've got the right insurance package for your needs. Failing to do so could be disastrous.

In the case of solid waste operations, the consequences of an inadequate or incomplete insurance package can put you out of business in no time at all. Even though claims have gone down in the last 20 years or so in this and other sectors–mostly due to safer operating practices and more stringent compliance requirements–any incident that does occur is likely to carry some severity. In addition to the classic package of coverage for businesses–general liability coverage and property, workers compensation, and vehicle–it's likely that you'll want to obtain some form of environmental insurance too if you are engaged in disposal, recovery, or transformation activities.

Find the Right Agent

You are the number one expert on your own business, and when it comes to finding the best coverage at the best price, you want to work with an agent that understands your specific situation and your specific needs. But how do you find the right agent? Well, a good start is to ask others who are in the same or similar businesses as yours.

Another good source is your industry's trade associations–they can provide you with a list of agents specialized in your sector. Often trade associations have their own group insurance programs that could be what you are looking for. The buying power of a large group can mean lower rates for you. For example, the Institute of Scrap Recycling Industries has had a property/casualty program in place for the past thirty years that offers more competitive rates to its members than other insurance carriers.

You will want to make sure that the agent you select is experienced and well versed in how your business operates and the risks that you face. He or she should be someone you have an adequate comfort level with when they are writing your policies. The agent should also be on top of changes in the industry and have access to insurance carriers that offer the products that you are looking for.

It's important that your agent review your contractual agreements, such as property, equipment and vehicle leases, and purchase orders, in order to completely understand your liabilities.

Let's first take a look at the classic insurance package and its components.

General Liability and Property Coverage

Comprehensive general liability coverage insures you and your business against accidents and injury that could happen on your premises as well as exposures related to your products. The insurer not only pays the damages, but also pays for your legal defense. Property coverage includes all your physical assets such as buildings, equipment, and fixtures.

Depending on the nature of your activities, you might want to purchase additional liability policies to cover specific concerns such as directors and officers liability, which protects top executives against personal financial responsibility resulting from actions taken by the company. You might also want to purchase additional liability coverage after the limits of your underlying policy are reached–a sort of umbrella policy.

The price you pay for comprehensive general liability is determined by the size of your business and the specific risks involved.

Most property insurance is written on an all-risks basis, which differs from a named peril basis. The latter offers coverage for specific perils spelled out in the policy, so if the loss results from a peril not named, it isn't covered. However, with all-risks coverage you are always covered for fire, and only those events that are named as exclusions are not covered. Depending on where you are located and the specific risks associated with your geographic location (it's pretty probable that earthquakes will continue to occur in California, and you can bet that if you're in the Midwest, you risk getting hit by a hailstorm or a tornado one of these days), you might want to buy additional coverage for specific risks.

Vehicle Insurance

If you own and operate commercial vehicles, those vehicles need to be adequately insured. You can save money on auto insurance by raising the deductibles, which will cause your premiums to go down accordingly. It goes without saying that you have to be able to afford the deductible if an accident should occur.

You should regularly review your auto coverage to make sure that you remove the collision and comprehensive coverage from older vehicles in your fleet. You should also pay attention to policy limits when purchasing auto insurance because many states set minimum liability coverage that are often below what is really needed. If you don't have enough insurance, the courts can then go after everything you have.

"Operators should take a hard look at where their trucks are traveling and what would be the worst-case scenario if something did happen," says Jack Adams, President of Environmental Insurance Services in Birmingham, AL, an insurance broker specialized in providing environmental services to firms with environmental exposures. "In some situations, depending on what they are hauling, they may want to carry pollution liability along with their auto because standard auto would not cover pollution cleanup."

Workers' Compensation

Workers' compensation is a form of insurance that protects employees should they be injured when on the job. It was first established in 1911 so that if a worker was injured on the job, he no longer had to sue his employer to recover lost wages and to pay for medical care. Instead, employers would pay through workers' compensation insurance, and employees would lose the right to sue for damages.

It is by far the biggest single item in a business insurance package, so it is important to understand how it works. It affords two types of benefits–wage replacement and payment for medical costs related to an injury. The amount and duration of wage replacement benefits varies from state to state according to each state's legislation.

Hundreds of insurance companies throughout the US provide these policies, and some states have their own state funds that compete with private insurance companies for the business. The cost is based on anticipated loss experience and is made up of two basic components–manual premium and modified premium.

The manual premium is determined in each state through a categorization of each specific job type in both a class and class code, and is based on aggregate loss experience for the type of job. The manual premium for the employer is computed by multiplying the rate for each class by $100 of payroll in that class.

Let's take a look at an example:

The modified premium is determined after the manual premium has been established. This is multiplied by an Experience Modification Factor (e-mod). The e-mod is a reflection of each employer's loss experience at their own workplace. That is, employers who implement good safety practices usually have a more favorable e-mod than employers who are careless or negligent about safety practices.

According to Keith George, managing director of Americana Financial Services in Camp Hill, PA, the biggest determinant in the pricing and availability of workers' compensation packages is the individual insured's ability to control his own losses–and this is based on the e-mod. "There is other legislation in some states that has improved the desirability to write business in that state. If there is favorable legislation towards the insurance companies in a certain state–that is legislation that controls or limits the ability to collect on the part of an injured worker–the insurance companies would be favorable to writing in that state."

Both the manual premium and the modified premium are critical factors in the final cost of workers' compensation insurance.

In addition to the above classic package of coverage, you should also consider:

• professional liability insurance if you are a professional service provider in any capacity;
• key-man insurance (or life insurance) in the event of the death of a key person within your organization;
• business interruption insurance in case you are unable to run your business in the event of covered peril such as fire, storm damage, and vandalism; and
• destroyed or damaged records insurance in case your business records are destroyed or damaged in the event of covered peril.

Also, depending on the nature of your business and whether you carry machines and tools off-site, you might need what is known as an inland marine floater. This covers those things that can be lost or stolen off-site.

Environmental Insurance

The environmental insurance market has steadily expanded since it was first developed in the early 1980s. It was originally intended to provide mechanisms to satisfy the financial responsibility requirements of hazardous waste facilities and environmental service companies subject to local, state, and federal regulations. During that time, insurers have developed a range of environmental coverage products and have developed the capacity to respond to a host of known and unknown liabilities and exposures.

In the 1980s, environmental coverage was very limited because the reinsurers were reluctant to accept emerging exposures. There was a great deal of uncertainty in the wake of new federal and state regulations and the market was extremely conservative in its approach to providing coverage. Because strict underwriting guidelines restricted coverage and premiums were high in those early days, many companies decided to self-insure their environmental exposures rather than pay the high costs for limited coverage.

Underwriting results began to prove favorable, however, and in the late '80s and early '90s, environmental insurance markets held profitable books of environmental insurance business.

Environmental claims are infrequent, but when something happens, it is usually catastrophic. Despite the high costs of meeting an eventual claim, insurers have been able to establish adequate reserves in the long run due to the infrequency of claims.

A significant increase in the number of regulatory cleanup programs, enforcement of environmental liabilities disclosure requirements under Securities & Exchange Commission and Financial Accounting Standards Board rules, coupled with increased public awareness of environmental issues have contributed to the growth of the environmental insurance market in recent years.

Many different types of industries face many different kinds of exposures resulting from environmental issues. Operational risks that are commonly covered by environmental insurance programs include:

• all sudden and gradual pollution releases,
• first- and third-party property damage and bodily injury claims,
• first-party business interruption,
• historical and prospective unknown remediation costs,
• legal and defense expenses,
• liabilities resulting from transportation and disposal of contaminants,
• historical cleanup costs that exceed original estimates,
• all general contractors' and environmental contractors' operational exposures, and
• lender liability and protection of outstanding loan balances associate with the lending activities of various financial institutions.

The environmental insurance industry is currently characterized by significant capacity, broader policy terms and conditions, competitive pricing, multiyear policy terms, and knowledgeable and skilled underwriters.

According to Adams, "My belief is–and maybe it's not quite this severe–90% of getting a deal done is getting the right information. Going beyond what is on the application, knowing what questions to ask, and getting more in-depth information that is going to be important to the underwriter will ensure that you get the best insurance at the best price."

There are many different forms of environmental insurance on offer, but the five broad types are:

1. environmental consultants professional liability for a consultant who might have an environmental exposure as a result of services rendered;
2. contractor's pollution liability covers any claims for pollution and contamination for work performed by the contractor at a work site;
3. site specific coverage for any location that might have materials onsite that could create the necessity for onsite cleanup or third-party bodily injury or property damage claims;
4. transportation coverage for any insured whose vehicles carry any material, which if spilled could be environmentally damaging (this is excluded from standard auto coverage); and
5. product liability for any entity that manufactures, distributes, or sells any product that could create bodily injury or property damage including pollution.

Essentially, the above evolve from the five specific ways in which a pollution incidence can be created.

In addition to the above broad types of environmental insurance, there are specific products, such as Asbestos Abatement Liability, Asbestos Containment, Cleanup Cost-Cap or Stop-Loss Coverage, Legal Defense Coverage, Owner's Protective Professional and Environmental Liability, Re-opener or Regulatory Action Coverage, Storage Tank Pollution Insurance, and Supplemental Environmental Auto Liability, to name just a few of the coverages on offer.

Businesses can now insure both known and unknown liabilities associated with historical and future operations and contractual obligations. "The environmental business is pretty good for insurance companies," says Adams. "People in the environmental sector are required to know what the regulations are, and they are also much more conscious than people in other businesses that if they do something wrong, the consequences are much greater. This awareness and the compliance to regulations make the environmental sector attractive."

Getting the Price Right

The precautions taken and the way things are being done today makes the underwriter more comfortable that things are being done right, and that in turn has brought the price of environmental insurance down.

Although the costs of environmental insurance have steadily decreased since the 1980s, the last 18 months or so has seen a trend toward a slight increase in the price of coverage. According to George, "Now what we see is a firming of the rates, certainly. The carriers have taken a look at the profitability of their books in the solid waste industry and have seen that they have to increase prices on that type of coverage. This can either mean raising premiums or sharing costs by increasing the use of deductibles."

According to Adams, however, the pricing is still very attractive and affordable. "The average price of premium for an environmental consultant in 1992 was around $50,000, and today it's around $1,500."

He agrees that the downward pressure on pricing has slowed in the last 18 months or so but says that it is still so low than anyone can afford it.

The emphasis on, and adherence to, good compliance standards has its rewards. A recent agreement between Legends Environmental Insurance Services, of Anaheim, CA, and Environmental Support Solutions (environ.com) of Tempe, AZ, promises reductions in the cost of premiums for users of Environmental Support Solutions proprietary environmental compliance software. Bill Lohman, principal of Legends, says, "Environmental liability insurance is a necessary and affordable way to reduce your risk of environmental loss due to environmental accidents. I was so impressed with Environmental Support Solutions programs that I asked our environmental insurance carriers to offer discounts for companies that demonstrate that they use the software." Most of the carriers that Legends work with have agreed to provide a 10% or greater credit for customers that use the software because of the demonstrated reduced risk of infraction.

So what are the factors that you should take into consideration in order to make sure that you are adequately insured at a fair price? George says, "I would say that every insured part needs to make sure that they obtain historical loss information–commonly referred to as loss runs–on the insurance policies that they have purchased in the past. The should also obtain annual update from their carriers as to the status of all claims, because that's the first thing an underwriter is going to want to take a look at."

He adds that he foresees increased pressure for financial information on a given prospective insured as well, "Insurance companies are promising to pay out millions of dollars, and they are certainly going to want to know the financial capabilities of the entity they are insuring. They want to make sure that they are doing business with someone who can pay their deductibles. They want to make sure that they are doing business with someone who maintains their fleet properly as opposed to someone who may have outdated equipment that has not been regularly serviced, because that leads to accidents." This includes internal controls such as running motor vehicle checks on their drivers and providing safety training to their crews. "Anything the insured can show to demonstrate that he is safety conscious, and that he is obtaining his loss runs, and that he is monitoring–follow up after an accident, for example, to out why it happened, what are the real costs such as in downtime–helps."

The bottom line seems to be that if you are managing your business well–especially from a risk control perspective–you can manage to get the right insurance coverage at a fair price. But it is up to you to know what your needs are, to communicate those needs clearly, and to provide the kind and depth of information that will assist the underwriter in doing his job well too.

It is crucial that you understand what your risks are, how much liability you can handle, and what you need coverage for.

Author Kate Goff writes on a variety of solid waste—related issues.