As a financial and business structure consultant at C2 Business Services, I help business owners construct a solid financial, legal, and insurance infrastructure for their companies.
Part of our company’s goal is to help business owners manage, and most importantly understand, how exactly they are covered by their insurance.
Clients often approach me with questions about their insurance coverage. They’re familiar with my name, Rob Peers, and I’d like to think clients trust my knowledge in insurance and business structure. One of the first questions clients ask me is “Is this covered?” “This” usually referring to some very specific circumstance. For instance, a client’s business may be located near a flood zone and they would like to know what would be covered under a typical business insurance contract.
One of the common things I find myself advising clients on is how to protect from gaps in insurance.
To begin to understand why insurance gaps exist, let’s look at it from an insurer’s perspective. Insurance exists so people can be reimbursed for their investments in case something goes wrong. However, insurance companies, like any company, need to remain profitable to stay in business. Thus, most insurance policies have strict definitions as to what liabilities are covered. The policyholder is protected only for liabilities described in their insurance policy.
To fill these gaps in coverage, policyholders may have the option to add specific clauses to insurance policies. These clauses, called endorsements or riders, describe additional situations in which the insurance company is obligated to reimburse for damages. A word of caution: some gaps may need to be filled by taking out additional policies or even by purchasing coverage from another insurer.
Every insurance policy is different, but the gaps associated with each type of policy tend to be predictable. For instance, commercial liability insurance policies do not normally include protection against claims made by consumers after the business is no longer functioning.
To obtain this type of protection, the purchase of “tail coverage” may be needed. That’s a stipulation that protects against claims made against a business even after that business has closed.
When it comes to product insurance, gaps also present a problem for business owners. For instance, discontinued products are not covered in the majority of product insurance policies. Another category not covered by the typical product insurance policy are products “inherited” from another company after a merger. Policies typically apply only to products a company is producing at the time the contract was signed.
Disability insurance is also prone to coverage gaps. Take, for example, a situation where a surgeon loses the ability to perform surgery, but can still work as a waiter. If the surgeon had taken out a typical disability insurance policy, he may not be able to claim reimbursement, because he is still able to work – even though his new field, say being a waiter, pays much less than his former field. To protect clients from such an outcome, there are “own occupation” riders that reimburse policyholders in case they are unable to keep working in a specific field.
While navigating insurance coverage gaps and deciding what’s right, it should be kept in mind that additional coverage will always require an additional capital investment. Thus, it is paramount that you assess your business’s financial organization and compare it with your insurance needs before investing in any gap in coverage.
Finally, while the concept of insurance gaps may seem intimidating, knowing that they exist is better than assuming that you are covered in all situations. You can protect yourself from catastrophic risks by carefully reviewing insurance contracts, either on your own or with the help of a trusted consultant.