Risky Business

Getting business insurance used to be a matter of filling out anapplication and sending in a check for the first month'spremium. But today, insurance of many kinds is harder to find, lessaffordable and offers less protection than at any time in years. Asa result, entrepreneurs are shopping around, changing companiesmore often, negotiating harder, and in some cases, changing theiroperations or even reducing or eliminating their insurancecoverage. Fifteen percent of small businesses don't purchasebusiness insurance to protect their enterprises, according to theInsurance InformationInstitute (III). More than 17 percent have responded to recentprice increases and other issues by reducing coverage, while nearly30 percent have increased deductibles, says the III. Eighteenpercent of small businesses changed their operations to reduce therisk of incurring a claim. While insurers' moves to endcovering such things as mold claims is an issue, cost is the majorsmall-business insurance complaint. It's not just affectinghealth coverage, either. Premiums for all types of insurance haverisen broadly and steadily for years, and nearly half of all smallbusinesses saw 10 to 20 percent increases during the first threemonths of 2002, according to The Council of Insurance Agents &Brokers. Affordable insurance is harder to find today because ofhigher damage claims, lower investment returns and industryconsolidation, according to Eric Andersen, New York City nationalmanaging director for the financial services group at AON RiskServices, a retail insurance brokerage. Directors and officers(D&O) liability insurance has been hit especially hard, forcingsome firms to go overseas to get coverage to protect their leadersfrom lawsuits. Business owners are engaging in protractednegotiations with insurance companies, including detailing actionsthey're taking to reduce the risk of being sued if anacquisition goes awry. "The underwriting process has gottenmuch more diligent," Andersen says. He encouragesinsurance-seekers to return the scrutiny by taking a careful lookat the insurance companies themselves, particularly their creditratings. If a carrier becomes insolvent, any claims you make gointo receivership and may be paid years later at pennies on thedollar. Ask your broker for information on insurers' ratingsfor credit risk, and stick to those with stellar ratings. So far,only a small percentage of business insurance users report problemswith getting claims paid. But if trends continue, the number mayrise, and the response could be drastic among those who pay theirpremiums, then see their claims refused. Conrad Powell, owner ofColumbia Antique Mall, a five-person company in Columbia, SouthCarolina, has had two theft- or vandalism-related claims totaling$50,000 rejected by his insurer within the past two years. Powellresponded by canceling all his business insurance except liability.The cost of more than $1,000 a month for theft, fire and othercoverage wasn't worth it if the companies wouldn't pay whathe considered valid claims, he says. "If my place burns down,I'll be singing the blues," he acknowledges. "But Ihad to make a business decision, and, for $12,000 a year, I'lltake my chances." No business insurance is completelyindispensable, just as no insurance perfectly protects anentrepreneur from all risks. Insurance needs vary widely bybusiness type, location and other characteristics. Errors andomissions coverage may be important for consulting firms, whileproduct liability is more critical to manufacturers. Perhaps mostbroadly valuable is insurance that allows entrepreneurs to get goodadvice from a capable board of directors. "For many directors,the need to purchase and maintain D&O liability insurance is anindispensable form of personal asset protection they seek whileserving on a board," says Andersen. "Unfortunately, evenin this difficult insurance market, D&O insurance is a keycoverage that companies must continue to purchase."Mark Henricks writes on business and technology forleading publications and is the author of Not Just aLiving.