Businesses have felt the effects of increasingly extreme weather in recent years. With 16 separate weather and climate events each exceeding $1 billion in damages, 2017 was historically bad for the U.S., according to NOAA’s National Centers for Environmental Information.
While you cannot control the weather or climate, you can plan for the potential impacts. Mitigating risks where possible is one step. Another step is understanding what is contained in your business insurance policy and making sure you have the right coverage, before you need it. Pay particular attention to the definitions, deductibles, and timelines you find in this important document.
An insurance policy is a legal contract that contains precise language. Every policy contains a section entitled “definitions,” which is intended to help reduce ambiguity and ensure that you and your insurance carrier share a common understanding of the terms used in the contract.
Definitions may define what something is as well as what something isn’t. If your building is insured in case it collapses, for example, will your insurance pay out if the building’s walls are bowing out? Or will your building need to fail completely before your insurance kicks in?
These definitions are critical when it comes to protecting your business. For example, you will find that most insurance carriers cover wind damage differently than losses caused by a named windstorm, such as Hurricane Harvey. When a named windstorm also results in flooding, the policy covering windstorm damage likely is not going to cover flooding. You may need a separate flood policy.
Reviewing your deductibles is an important part of your coverage analysis. A deductible is the portion of a loss that your business agrees to pay before the insurance policy pays on the claim.
The types and application of deductibles outlined in your business insurance policy ‒ or more likely these days, policies ‒ can have a tremendous impact on your bottom line. There are three types of deductibles: flat, percentage and waiting period.
A flat deductible is a flat dollar amount that applies per occurrence. For example, if your deductible for a piece of property is $2,500 and you experience two separate covered losses within the policy year, you will pay $2,500 for each event ‒ a total of $5,000 for the year.
A percentage deductible is more commonly used when insuring catastrophic losses, such as those caused by hurricanes. If your policy features a percentage deductible and you file a claim, you will pay a percentage of the insurance limit or a percentage of the insured property’s value rather than a flat dollar amount.
A waiting period is, technically, a third type of deductible, although many insurers don’t refer to it as a deductible. While the insurance takes effect as soon as you have placed it, in this scenario certain types of insurance will not begin paying out until after a defined waiting period. For example, contingent business insurance often has a 48- or 72-hour waiting period. This means the insurer will not reimburse you for covered losses that occur during that period.
Talk to your broker about the types and amounts of deductibles in your policies. You also may want to discuss whether alternative risk financing is right for your organization.
While many policies take effect as soon as they are placed (“bound”), not all do. For example, flood insurance may include a 30-day waiting period before the policy takes effect. This means that your business is not covered for floods until 30 days have elapsed. The waiting period is designed to prevent businesses from obtaining insurance only when a loss is imminent, such as when a hurricane is forecast.
It is equally important to understand the duration of your insurance coverage. If your business property is damaged, for example, your policy is likely to cover lost income until the property is or reasonably should be fixed. If your restoration takes longer than is normal, however, your insurance may not cover the lost income suffered during the extended restoration period.
Nobody enjoys reading insurance policies. But to safeguard your business, make it your policy to do the following:
- Review your policy definitions and terminology to make sure you understand how and to what extent the insurer is protecting your business.
- Understand how your policy deductible will be applied and the financial implications.
- Learn when your policy takes effect and how long your coverage lasts.
Insurance is complex, so always talk with an experienced adviser if you have questions. Invest this time before your business faces a catastrophic event.