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[Author: Christine E. Branstad, J.D., 2013 | Keywords: Business, Operations, Insurance]

Paying your insurance premiums doesn’t always mean that you’ll get a check if you have a loss. Insurance coverage is a legal “contract.” Your insurance company may refuse to pay you (ignore their contractual obligations) if you do not comply with the terms of the policy (ignore your contractual obligations).

Many insureds are tripped up by failure to provide the insurance company with accurate ongoing information about your business.

In one case after fire destroyed a five-year old building, the owner learned for the first time that the “new” building was uninsured. He had been paying premiums based on a building at the same spot, which had been torn down two years before the “new” building was built. After the fire, the owner was unable to get the premiums back AND was denied full coverage for the burned building.

It is your contractual obligation to provide the requisite information to the insurance company. Although an insurance company representative will often help you gather the information, YOU are ultimately responsible. It is rumored that some insurance agents encourage clients to under-report information like payroll, or the number of employees in order to “hold down premiums.” The risk of bad information is the risk of reduced or no coverage.

From a legal perspective, what should you do?

  1. Look at each insurance policy to determine if the coverage “fits” your business.
  2. Actually read the policies.
  3. Ask your agent:
    1. what is covered,
    2. what is not covered,
    3. the maximum coverage for each item and each act,
    4. the maximum total coverage for all acts,
    5. what information you must provide for coverage to “kick in”.
  4. Review and update the items you are required to report including:
    1. Inventories.
    2. Valuations of assets and depreciation schedules.
    3. Income, sales, and payroll reports.
    4. Employee information (numbers of employees and classification).
    5. MAKE SURE YOUR REPORTS ARE CONSISTENT. Examples of reports that should “agree” include:
      i.   Sales reported to the insurance company and sales tax reports.
      ii.  Income tax return and the assets reported to the insurance company (including depreciation schedules).
      iii. Payroll tax reports, employee reports you provide the insurance company, employee reports to government agencies.

                     Note: Inconsistent reporting may become evidence against you if you sue the insurance company for non-payment of a claim.

5.  Review exclusions (things that are specifically not covered) and ask:
a.   Should I buy coverage specifically for those situations?
b.   Are those areas covered by other policies?

We recommend regular reviews of coverage and reporting in areas including:

Property (buildings, equipment or inventory): Are all buildings listed? Have you added on to or improved a building? Does your coverage provide for depreciation? Do you need to report inventory? Are all of your supplies and equipment covered?

Does your coverage provide for “replacement cost” or for “fair market value”? (Do YOU know the legal meaning of these terms as used in the policy?) Will you need to get all “new” supplies, artwork, etc. if there is a fire? If so, are they covered? Do you need specialized property insurance such as coverage for employee theft, computer-related losses, or lost papers? Do you want specialized coverage for weather and natural disasters such as flooding, wind damage or earthquakes? (Yes, there can be earthquakes in Nebraska and Iowa.)

Vehicles: Does your vehicle coverage include all the components of personal auto coverage: liability, rental coverage, repair, and diminution of value (rarely covered but provides for the drop in value if you have to repair a vehicle)? Are all vehicles fully described? Did you report the correct names and license information for covered drivers? Did you correctly report any moving violations (including DUI/OWI)?

Garage liability policies may define what autos are covered. Read the exclusions and the coverage. If the coverage is based on reporting, verify the reporting.

Garagekeepers policies cover damage to customers’ vehicles. The premiums may be based on any number of factors, from gross salary of employees, to number of employees, to net income of the business, to projected sales or sales from the past year, to inventory. Check your reporting. The larger the loss, the more likely the insurer will look at your premiums to verify that the loss is covered before paying. 

Business Interruption: What is extent of the coverage both as to amount of time covered and benefit available? What coverage do you need? Are premium payments affected by lowering the maximum time covered? If it is to cover payroll in the event of a business interruption, does your carrier have the most current payroll information, gross income or net income information? Have you provided your insurance carrier with current revenue and expense information?

Liability: Do you have enough liability coverage? Have you considered coverage for employment practices/issues like harassment? There are many ways to determine the amount of liability insurance to carry. One is to look at your business net worth and determine the level needed to “protect” the business. Additionally, you may assess recent legal cases about businesses in similar situations and determine what coverage was needed (or insufficient) for those businesses. The practice of determining the danger involved in a business is important for the insurance companies, but should not be used to determine the coverage needed for your businesses. A broken arm caused by a faulty bungee cord is approximately as expensive as a broken arm caused by failing to mop up a small spill.

Workers’ Compensation: Does your state have a website which provides your requirements to maintain coverage and avoid penalties? If not, have you asked your insurance agent? Have you fully and properly reported all employee information (even if you need to pay more premiums)?

There are additional types of insurance to consider. Examples include: Disability insurance, Directors and Officers liability insurance, Key person, and Health insurance.

Regardless of the type, amount and premiums paid, the last thing you want after paying years of premiums is to get that letter from the insurance company that your claim is DENIED. To avoid litigation, it is imperative that YOU make sure the information provided to your insurance carrier(s) is accurate, up to date and complete.

Christine Branstad is an attorney with the Kreamer Law Firm, P.C., West Des Moines, Iowa. She is admitted in all Iowa Courts, the 8th Circuit Federal Courts, and the D.C. court of Appeals.