How to Take Control of Your Company’s Commercial Insurance Policies – and Avoid Becoming an ‘Insurance Victim’

I hear a lot of people say they feel like “victims” of their commercial insurance policy. It makes sense when you think about how often insurance policies end up not covering what you think they will.  

But it doesn’t have to be that way.

In my last article, I talked about the Insurance Dilemma, which is the phrase we use to describe the problem with how companies traditionally approach risk management.

In short, rather than taking it from the top – where we start with the risks companies face and then decide how to manage each – the insurance industry favors a bottom-up approach that starts with insurance. In the end, this limits your company’s risk management approach to only that which commercial insurance covers.

This approach works – kind of. I’d estimate that most businesses can cover 20% to 40% of the risks they face through insurance, so you’re not left totally vulnerable.

But when you encounter an event in that 60% to 80% – the not covered part of your business – you begin to feel the pain of the traditional insurance-first approach.  

I’m not talking about the obviously not covered stuff, like if a competitor moves in across the street and starts selling the same donuts as you for half the price.  

It’s the other stuff, where it feels like your insurance company is creating loopholes for themselves to get out of covering your claim.  

• You’re covered for property insurance but find out you only have $100,000 for lost income as a result of the event when your actual lost income is over $500,000.
• You have liability insurance, but when a customer sues you for nearly $1,000,000 after being exposed to a toxic gas as a result of your work, you find out the gas is considered a pollutant and is not covered in your policy.
• One of your employees causes a significant car accident in which multiple people are injured or killed. You find out you have $1,000,000 of insurance, but the damages are in excess of $5,000,000.

These are the kind of stories I hear when people tell me they feel like victims of insurance. On top of that, insurance costs continue to rise, leaving you with even less control.

Today, I want to look at four steps that can help you flip the traditional bottom-up approach to buying commercial insurance on its head and protect your business from being another victim.

1. Analyze the Risks Across Your Company

Before we start looking at which commercial insurance policies you need, we want to look at your company.

Every company encounters risks. Some are common, some are more rare.  

For instance, commercial property insurance is one of the most common policies because pretty much every company has property and equipment that is essential to operations, and they all carry the risk that losing said property would damage their company.  

But pollution liability insurance is more limited to an industry like construction, which the Environmental Protection Agency says is one of the largest contributors to air and water pollution.

So, the first step is to take an inventory of the risks your company faces. While that may seem like a big task, asking questions in the three categories of risk – Business, Strategic, and Hazard – can help clarify things immensely.  

While every company experiences these three types of risk, the questions you need to answer are specific to your individual business. That being said, I included some more general questions in each category to give you some idea where to start.

Risk No. 1: Business Risk

As I mentioned in my last article, these are the day-to-day risks inherent in any business. Questions to ask here may include:

• How do employee absences impact operations? How many absences would it take to significantly restrict your ability to operate?
• Where does your company’s financing come from, and what would happen if it was no longer available?
• How concentrated or diversified are your company’s revenue streams?
• What impact does employee turnover have on profits?

Risk No. 2: Strategic Risk

Strategic risk is about planning for the future: business expansion, key personnel issues, positioning, etc. Here are a few questions to get you thinking:

• What would happen if a key executive left your business tomorrow?
• What is your exit strategy?
• If you wanted to expand your operations to another state/country next year, what risks would that move carry?

Risk No. 3: Hazard Risk

Hazard risk is the risk of damage to your business, either physical, legal, reputational, or something else.  

• What hazards would potentially bankrupt your business if they occurred (e.g., multi-million-dollar lawsuit, tornado or flood destroys warehouse full of inventory)?
• What smaller hazards exist that would be expensive/time-consuming, but wouldn’t necessarily destroy your business (e.g., legal dispute with supplier, auto accident, minor injuries in the workplace)?
• What common hazards “come with the territory” (e.g., mistakes on the job)?

These are just a few sample questions that can be fine-tuned for your business, along with several other questions you would want to answer regarding your unique situation.

After you have a risk inventory for your business, it’s time to consider how each can be managed.  

2. Decide Which Risks to Manage Internally

It’s impossible to insure your business against every risk. Again, I’d say insurance can cover 40% of a business’s risks at best.  

Besides buying commercial insurance, what are your other options? You can manage risk in five ways:

• Prevent
• Mitigate
• Transfer
• Finance
• Assume

Let’s say you own a company that manufactures a very specific widget. Your COO sees an opportunity to start making a new widget at potentially very attractive margins. You would need to contract with a third party to help make the widget.  

Among the risks to weigh when considering a decision like this are:

• Does this widget have the potential to cause injury to property or people when in use in the market?
• Could other competitors enter the market and reduce our margins in the future?
• What is the supply chain like for the materials needed for this new widget, and can we rely on those relationships like we have for our core product?
• How much would we have to rely on the third-party relationship that would have to enter the equation? Could they cause us to miss deadlines? Could they damage our reputation?

Prevent: Don’t make the widget at all.

Mitigate: Make the widget, but do so in a limited capacity for a calculated period of time.

Transfer: Have a strong contract with the third party partner, suppliers, and end users.

Finance: This is the insurance route – more on this later.

Assume: If certain risks cannot be otherwise reasonably managed through another strategy, then you can knowingly plan to assume the risk. Your business and balance sheet can be positioned accordingly.

These methods can work in tandem. For instance, utilizing a strong contract not only transfers risk away from you, but it also puts you in a better position to purchase insurance.  

The same process can be used for other risks, such as common workplace injuries. You may mitigate the risk with safety gear and training, transfer some of it by having employees sign a waiver, and assume some level of risk for specific types of injuries.

Four of the five methods are the equivalent of managing the risk internally, or without insurance. But, after you’ve weighed the options, you will still have some risks that you are not comfortable taking on – that’s where insurance comes in.

3. Decide Which Risks to Cover with Commercial Insurance

While some companies may be flush with cash and choose to insure themselves against certain risks, there are some risks that most companies would never be able to recover from.

One example of this could occur if you have fleet vehicles or your employees drive as part of their work duties. Let’s say one of your drivers loses control of his truck and crashes into a restaurant, causing multiple injuries and tons of property damage. All told, you would be on the hook for millions of dollars to make it right.  

Let’s say this example results in $10 million in damages – a combination of property damage, medical bills and a resulting lawsuit. First, your primary liability coverage would cover up to its limit – let’s say $1 million. If that’s all the coverage you had, you’re still on the hook for $9 million dollars. But if you have an umbrella policy, it would also come into play to help cover the $9 million, assuming you had proper limits.  

Your company is able to avoid bankruptcy by financing that risk through insurance. While training and vehicle maintenance can go a long way toward managing the risk of automobile accidents, there are some risks you just can’t be prepared for – and that’s where you need insurance.

4. Take Control

The goal here is not just to protect your business – you want to be able to show insurance providers why your company is the best risk. Managing risk outside of insurance helps you position yourself to get the best price for your insurance.  

We call this a “top of stack submission” – where carriers move your application to the top of the stack because they know you’re doing the right things to avoid devastating claims.

While insurance companies are in the business of financing risk, they actually hate it. Countless professionals are employed in this industry whose entire job is to put a dollar amount on risk.  

If you can show how you manage risk holistically across your entire organization, you can save money and remove the potential “victimhood” when you buy commercial insurance by only buying the policies you need.  

You can create that top-of-stack submission by taking proactive measures, like implementing a safety program, providing upkeep and improving security to your property, providing proper training, and emphasizing employee wellness.

That’s my goal with this series of articles I’m writing: To show you how to turn your company into the best risk an insurance company could take – a top-of-stack submission – by managing risk beyond insurance.  

Why Being a Better Insurance Consumer Matters for Your Business

Why go to all this trouble? Why not just send out requests for new insurance quotes every year and go with the cheapest option?

Here are two reasons:

1. The Confidence of Knowing How Your Company’s Risk is Managed

If you can explore and address the risks present in your business – whether you choose to insure or manage them otherwise – you will be lightyears ahead of most businesses.  

Then, when something does happen, you won’t have to wonder if insurance will cover it or not because you’ll already know.  

Plus, by sticking with a single risk advisor or insurance agent, they begin to understand the history of your business. As a result, they will be more likely to inform you when things change that may affect your policy. If you’re switching every year, that historical knowledge can get lost and you end up undercovered or with gaps in your policies.  

2. No More Jumping from Policy to Policy to Find the ‘Best’ Rate

A misconception among insurance consumers is that the best policy is the cheapest policy. And insurance agencies don’t help with this much. They know the best way to keep your business is to give you what you want: lower premiums.

While saving money is nice, switching to a cheaper policy is a short-term benefit at best.  

The reality of the situation is that when you choose the cheaper policy, you choose to create gaps in your commercial insurance coverage package. There are situations where it’s okay to do that if you know what you’re getting into, but most of the time companies have no idea until it’s too late.

By following these four steps, you can stop being a victim of your own insurance and take control of how you protect your company.