What Insureds Need to Know
Robert J. Lucurell, FPPA
The story could have had a happier ending!
Company XYZ, a major supplier to the aerospace industry, had been growing rapidly. Its ownership was hands-on and imaginative. For several years, the company had been purchasing used equipment along with new components for existing machinery. Most hookups and modifications were done by XYZ's own personnel. Company officials believed they had comprehensive insurance coverage and, in fact, their coverages were excellent. But when a substantial loss took place, they were able to recover only 31 percent on their property claim, and only 12 percent on their loss-of-income claim. The problem: horribly understated values, far too low to meet the policy's coinsurance requirements. The result: a disastrous financial loss that could have been avoided with better communications between the insured and the broker when the insurance program was established.
Had the broker known it was the insured's practice to expense and not book all costs for items and equipment under $300, he would have had a far different picture of what those values
should have been. But because the costs were not carried in the financial records, and because the insured didn't explain their procedures to the broker, the insurance was woefully inadequate.
A similar problem affected the business interruption coverages. In designing the program, neither the broker nor the insured allowed for the planned expansion of the business, therefore the full potential of the business interruption exposure and its effect on the coinsurance provision were never determined. Coverage the insured presumed to be adequate fell short. Had the policyholder and broker discussed the company's plans for growth, the outcome no doubt would have been different.
An unfortunate sequence of events! But a valuable lesson for insurance professionals who assume that clients understand the coinsurance principle as well as they do. It's essential that
the broker make it a priority to extract all pertinent information when the client's insurance program is formulated. Thorough communication, initiated by the broker, is the key to devising and maintaining a program that will best serve the insured when it is called upon to deliver.THE FIRST CONTACT
The broker is the policyholder's first—and often only—contact with an insurance professional, and he or she can never assume that the client understands the coinsurance concept. Just as important, it's essential that the broker be familiar with the net effect of undervaluation in a claim situation, so that condition can be explained to the client. Definitive communication is important in all coverage areas, but it is especially vital in three:
- Replacement costs of personal property, including furniture, fixtures, equipment and inventory.
- Replacement costs of buildings.
- Business interruption values.
Because insureds usually rely on historical costs to value inventory or business personal property, the figures they provide are often unsatisfactory for insurance purposes. Replacement cost and actual cash value can mean one thing to the insurance buyer, and something else to the broker or adjuster. Insureds who normally purchase used equipment, for