NorthBay biz talks to several insurance experts about the myriad ways businesses can protect themselves with customized—and creative—insurance policies.
When an arson fire destroyed the Wines Central warehouse on Mare Island in October 2005, wines worth as much as $250 million—from 92 wineries—were vaporized [“Don’t Go in the Cellar,” Oct. 2008]. Transforming this disaster into a catastrophe, some winery owners found their business insurance didn’t cover their losses. They hadn’t made their special insurance needs clear to their brokers and insurers.
Experts generally agree on the “must haves” of business insurance. These include general liability in case someone is hurt or property is damaged; workers’ comp, which is required by law to pay for medical expenses due to an injury on the job; and auto insurance for any business vehicles. But in addition to the basics, insurers have come up with creative insurance solutions to cover nearly any possible exposure.
According to Napa insurance broker Jeff Erickson, the Wines Central debacle demonstrates three important principles about business insurance. Erickson, president of ISU Sander, Jacobs, Cassayre Insurance Services, says he paid his largest claim as a broker—$3.2 million-—to a client who lost inventory in that fire.
The wine industry differs from others in many ways. One is the product often changes location at different stages of production. The grapes may be crushed in one place and then stored in barrels at another. When bottled, the wine might move to a third location such as the Mare Island storage warehouse. “You need to make sure it’s insured at all these places. It’s important to tell your insurers about all the locations,” Erickson says.
Unlike Erickson’s clients, many winery owners hadn’t told their insurers that the Mare Island location was their storage area—so it wasn’t covered on their policies, he says. Although some policies had automatic coverage for unnamed locations, certain wineries were storing more wine than was included in the automatic coverage.
According to Erickson, you can’t overestimate the importance of three things in setting up your business insurance. First, you need to work with your broker to analyze your business carefully to uncover all your possible exposures. Second, you must communicate that information in detail to your insurers to make sure you’re getting the correct coverage—for wines or any other product. “We need to really know and understand what our clients do so we can craft the proper coverages to offer them,” he says. Third, it’s essential to deal with brokers and insurers who specialize in your particular area of business. In discussing details of your business, these experts may discover risks you overlooked.
In the case of insurance for wineries, careful analysis is required even to estimate the true value of the inventory. “Because of the irreplaceable quality of high-end wines, insurers have developed creative ways to insure it. Normally, something is insured for the cost of manufacturing it. But wine insurers have developed a way to insure for the price you expect to make when you sell,” Erickson says.
Then again, just figuring out the selling price of a particular wine may take some analysis. For each wine that’s sold, there may be various price points. “You may sell half of it wholesale at 50 percent of retail. Then let’s say you sell 25 percent to a restaurant and you get 75 percent of the retail price. You sell another 25 percent direct through your tasting room and get full retail for it. A claims adjuster will take a mathematical average in evaluating your inventory.”
Further complicating the situation is the fact that some wines age better than others, so their price appreciates over time. This can be a bigger issue for a new winery than for one with a historical record. “Wineries that have been in business a long time tend to have well-established price points,” Erickson says, though he notes that in a slow economy, there’s pressure to reduce prices.
Lawsuits on the rise
Since businesses may have to reduce their workforce due to the economy, another result of an economic slowdown is an increase in lawsuits charging discrimination. Unhappy former employees wonder, “Why me?”
“Employment practice liability insurance (EPLI), an optional coverage, is really big right now,” says Eric Henerlau, an insurance broker at Anixter & Oser in Novato. “This insurance defends a company from employees or prospective employees suing for discrimination. Many employers believe general liability covers this, but it doesn’t.
“The statistics on these lawsuits are staggering,” he adds.
Employers may be sued for sexual harassment, wrongful termination, failure to employ or promote, contract violations, various types of discrimination, infliction of emotional distress, invasion of privacy and numerous other practices. Each lawsuit can involve tens of thousands of dollars in attorney fees just to file an answer to the claim and begin discovery of evidence. Pretrial filings and preparation cost tens of thousands more, as does mediation. If the suit goes to trial, count on thousands more in attorney fees. If the verdict goes against you, the settlement could cost hundreds of thousands more—if you haven’t purchased the correct insurance.
If you want to cover all your business’ risk exposures, it’s also important to consider professional liability insurance, also called errors and omissions.
According to Henerlau, professional liability insurance covers economic harm resulting from your business’ products or services. “For example, an architect designs a building that collapses. The coverage is profession-specific. For physicians, professional liability is malpractice insurance. Another example in the press not long ago was a hotel using e-commerce that let credit card numbers get unsecured.”
Henerlau notes coverage for errors and omissions could be important in the technology industry. A company would be covered, for example, if its employees work on a computer system and there’s a breach of security or a loss of data the client claims resulted from employee actions. “This is one step removed from direct liability: ‘Because of my actions something else happened.’ If I corrupted a database, it could cost thousands to repair,” he says.
Cover the key man (or woman)
“Key man insurance is consistently underused and overlooked,” says Tim Chanter, principal and cofounder of Vantreo Insurance Brokerage in Santa Rosa. “People tend to place a value on land, buildings and investments, but they often overlook the human life value.”
This type of coverage, basically life insurance on a company’s key people, assures the business will have the funds to replace a key person should they meet an untimely death. “If this exposure isn’t properly funded, the owners may be forced to borrow substantial amounts of money or sell the company.”
When key man insurance isn’t properly planned, a business can take an unexpected course. “We see a lot of unfunded buy-sell agreements,” says John Cardinale, a State Farm Insurance agent in Napa. “People overlook key man insurance when they write a buy-sell agreement with their partners. If they get the agreement but don’t fund it [with life insurance], they have no capital. Then, for better or worse, the spouse of the deceased key person becomes their new partner.”
Insurance companies have developed creative solutions to exposures faced by various businesses.
One example is intellectual property insurance, which covers a creation or an idea. “It’s your creation, your idea. You have a right to use it the way you want,” says Henerlau.
“It goes beyond words and music. This can cover ideas, patents or programs. If I have trade secrets, I want to guard them against use by others. However, others may sue me, alleging patent or trademark infringement.” The insurance defends you in case someone accuses you of stealing their idea.
Crop insurance is particular to agricultural products, including wine. Some wineries buy grapes from other people, but many have their own vineyards. A federal insurance program protects the crop—this means just the grapes, not the vines, clarifies Erickson. “As a federally administered program, this insurance is fairly bureaucratic and different from other policies,” he says, but it’s important to insure the crop against perils, such as damage from unexpected weather like bad frosts.
“We recommend any grower invest in at least ‘catastrophe level’ crop insurance,” Erickson says. “It’s required to qualify for disaster relief.” A key advantage to this insurance is, the government subsidizes 100 percent of the premium at the catastrophe level, he says. The grower is required to pay an administration fee per variety insured.
He notes some insurers are developing new products for insuring the actual vines, which represent an enormous investment. “There’s only been limited coverage for vines available in the past, but new policies have been developed to cover vines against perils, including fire, and to value the vines based upon their income-producing ability rather than just the cost to replant,” he says. “In recent years, we’ve seen more cases of wildfires encroaching on vineyard land.”
Another example of a little-known type of insurance is a third-party crime policy. This pays a company for an employee who steals from you or from others while on the job, says Henerlau. “Suppose you send an employee to a job site and he steals from that location. It will pay for that, too,” he says.
The bottom line is, you must make sure you’re protecting yourself from the perils particular to your business, says Cardinale. “Business insurance must be very tailored to your particular business. If you’re a florist, you may need temperature change insurance. This would also be important for a grocer. You’d have coverage within that policy for products that spoiled because your refrigeration went out.”
“Lots of business tenants forget tenant improvements. They get X amount of insurance for their tangible items, but they don’t think of the walls, counters and other permanent improvements they’ve built into their rented space in estimating the value of their business’ property.” This is especially true for a business located in an unfinished “shell” or box space, such as in a mall, which may need considerable build-out (counters, shelving, fixtures) before opening.
Under-discussed and under-used
“What if a sudden health crisis happened to your spouse or one of your children: How would you get your job done and run your business? Where would you go for services? Who would you count on to help you through the crisis? How would you handle the expenses?” asks Pat Giacalone, CLTC, a Novato insurance agent who specializes in long-term care insurance. “I work with business owners to put a plan in place that deals with situations like this. As an owner, did you know the single greatest unprotected risk in the workplace may be long-term care? It may be the most under-discussed benefit in companies today.”
Businesses should consider providing long-term care (LTC) insurance to key personnel or to all employees, says Chanter. “There’s a substantial financial risk, and LTC insurance is available at a reasonable price. Statistics say it’ll absolutely be needed in the future for the majority of Americans. Coverage is available for home care, assisted living or skilled nursing. A little-known fact is that a ‘C’ corporation can provide LTC coverage for owners and employees and receive a tax deduction.”
Giacalone, of Genworth Life Insurance Company, notes the importance of providing this insurance as an incentive in hiring and retaining quality employees. “Many business owners know it’s critical in today’s business world to provide competitive benefit packages. Offering LTC insurance may be one of the best ways to attract, reward and retain top talented employees and stay competitive, without major financial burdens. It builds loyalty to a company.”
She notes that a 2006 survey by Metlife Mature Market Institute (a policy center focused on issues concerning aging) showed U.S. businesses lose $33.6 billion a year in workflow interruption, absenteeism and employee turnover due to caregiving responsibilities. According to the Genworth Financial 2009 Cost of Care Survey, the median daily rate for a private room in a nursing home in the San Francisco-Oakland-San Jose region is $280 per day, or more than $100,000 per year.
“Increasingly, employers are offering optional LTCI coverage to their employees through their benefit programs—paid or as a voluntary benefit. This helps them address a real need and, most important, helps owners and employees protect their families and accumulated savings. This benefit can assist in attracting and hiring people to the business and retain them and reward loyalty,” says Giacalone.
“Federal income tax incentives have expanded in recent years for businesses that sponsor qualified LTCI benefit plans,” she adds. “Tax-qualified LTCI policies provided by a company to its employees, including their spouses and legal dependents, is treated like health insurance, and the premiums paid by the employer may be allowed certain tax benefits.”
Disability income insurance is a related type of coverage. It differs from LTC insurance because it replaces a percentage of the disabled person’s earned income but doesn’t pay directly for medical care, personal care or long-term care, while LTC pays for long-term care including personal needs, referred to as “activities of daily living.”
Chanter also advises companies to provide long-term disability (LTD) insurance for key people. Business partners should consider funding their disability buyout agreement with insurance. If one of them becomes disabled, after a 12-to-24-month waiting period, the policy will pay a lump sum to the disabled person on behalf of the other partners.
“Make sure your will, trusts and estate plan are a current reflection of what you want to happen if you should meet an untimely death,” he says. “They should each be reviewed about once per year.” He notes that many wineries are family businesses. For them, a current estate and succession plans are essential. “Many family businesses have experienced substantial financial growth. Sometimes, their estate and succession planning isn’t congruent with what ‘should happen’ if a parent or child were to pass away unexpectedly.” [See “Wine: The Nest Generation"]
So sit down and analyze the risks involved in your business. Then have a long talk with your insurance broker. Make sure he or she understands your particular business and all its risks and exposures. Then make sure your policy is tailored to take care of any exposures you have. You may end up buying some types of insurance you never thought about before, and it may end up costing you a little more—but if and when catastrophe strikes, you’ll be so glad you did.
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