The 20 Biggest Personal Insurance Mistakes

What Is Insurance?
Let’s not make this complicated. Insurance is a tool to transfer the financial consequences of
certain risks you face. Those risks exist based on property you own or actions you take.

We address risk by avoiding the exposure (sell your home and you don’t have to worry about it
burning down), transferring the risk (using insurance or a contract) or retaining the risk. Usually
we combine techniques – you insure your house (transfer), but take a deductible to help lower
the premium (retention). You may insure your building for fire (transfer), but decide not to buy
coverage for flood (retention).

Insurance contractually transfers the risk from the policyholder to the insurance company. The
policy spells out what is insured and the terms and conditions of the transaction. The policy also
tells you what is not covered – the exclusions.

Mistake #1 -Not Having the Right Agent
Early in my career I learned that the most important part of the insurance transaction is the
relationship between the insurance agent and the insurance buyer. As with all professional
relationships, trust and respect are of the utmost importance. If you don’t trust your attorney,
you need to find a new attorney. The same thing is true of your interactions with your insurance
agent.

Ask people you respect for advice when looking for an agent. Talk with friends and associates.
When looking for a new agency, interview the people who will be handling your account. If
something doesn’t feel right, it probably isn’t. You’re the buyer; it’s your money. Work with a
trusted professional who gives you a feeling of confidence in his or her work. Consider his or
her technical competence as well. How long has he or she been in the business? What classes
has he or she taken? What industry designations does your agent hold?

Mistake #2 -Failure to Monitor the Financial Rating of Your Insurers
Each year insurance companies go out of business. From 1990 to 2002 almost 500 insurers
became insolvent. Their clients were severely impacted. Claims went unpaid, cash values
were lost, and annuity payments were reduced or cut off. Policies had to be replaced in a rush
resulting in lower coverage and higher premiums. Not a fun time.

Several organizations analyze insurance companies for soundness. The best known is the AM
Best Company (www.ambest.com). Standard & Poor’s also rates insurers. I find that Weiss
Ratings (www.weissratings.com) is a tough, unbiased source of insurer information.

Mistake #3 -Failure to Review Your Coverage at Least Once a Year
Meet with your insurance agent at least once a year to review your coverage, catch up on
changes, and talk about hazards. The best time is usually a few months before your policy
expires.

Sometimes the review can be done over the phone. Depending on your agent’s location, you
may want to meet in person. Review the limits of protection. You should talk about your plans
for the next few years. Is a job change imminent? Planning to add-on to your house? Moving?
Did you buy a summer home? Are the kids getting their driver’s license? Is retirement coming
soon?

Let the agent know of risks you’re concerned with. Discuss other insurance companies that
may be able to help you improve your coverage or reduce your costs.

Mistake #4 -Splitting Coverage between Two or More Insurance Agents
You’ll get a better insurance program if one agent handles your entire insurance account. This
is true of both your business and your personal insurance. You may even want to have your
business and personal insurance handled by the same agent.

Having one agent will save you time and aggravation. Having one agent means that you make
one call when you have a problem or a change in your life or business. Having one agent helps
prevent gaps and overlaps in coverage.

If you follow the advice in the previous section, one agent means only one review meeting, thus
saving you time.

I’ve worked with several insurance buyers who thought that it was best to split the business up.
Their idea is to let the two (or three) agents fight it out, scrapping for the business. I have never
found that this works very well. Come claim time it can be a nightmare when each points to the
other for coverage.

If you currently have two agents, you know which one is the better service provider. Pick that
agent and have him or her handle your entire insurance account.

Mistake #5 -Renters Without Insurance
It’s estimated that only 25% of renters in America have a tenant’s insurance policy. The other
75% have no coverage for a fire in their apartment building or for personal liability in the event a
guest is hurt while visiting.

Don’t look to your landlord to protect you. The building owner’s insurance will not pay for the
loss of your furniture and property in the event of a fire. Your landlord won’t pay for you to find
another apartment or pay for a hotel while the smoke damage is being fixed. Personal liability
coverage is another gap without tenant’s insurance.

Tenant’s insurance is inexpensive and broad in coverage. In most parts of the country a renter
can buy protection for less than $300 a year.

Mistake #6 -Failure to Understand Homeowners’ Policy Limitations
Most homeowner insurance policies contain limitations for different classes of property. There’s
a limit of $1,000 for theft of jewelry in many policies. Silver is limited to $10,000. Guns, coins,
and money also have limitations. Some policies limit off-premises coverage for guns. Talk to
your agent. In many cases you can increase the coverage or buy specific coverage on certain
items, called a “floater.”

Consider separate insurance coverage for collections, antiques, and fine art. High value and
rare items should be appraised and insured specifically. Many policies exclude damage caused
by breakage. Ask your agent about your collections and your coverage.

Mistake #7 -Contents Valued on Actual Cash-Value Basis
Some home insurance policies cover your possessions for the market value of the property—
sometimes called actual cash value. Bad thing! Tell your agent you want replacement cost
coverage on your contents.

If your house burns down, will you replace your property? Why buy insurance that pays only
part of the cost to replace it?

Mistake #8 -Using Insurance to Pay for Little Losses
Accidents happen in our daily lives. Don’t use your insurance to pay for the little bumps in the
road. Look to insurance to help you through catastrophes.

Did a windstorm damage a few shingles on your roof? Fix them and move on. Insurance
should be for when your roof is destroyed or for a loss that would have a devastating effect on
your financial health. Did a roof leak cause water stains on your ceiling? Patch the roof and
paint the ceiling.

Use high deductibles on your property insurance to reduce your premiums. Consider $5,000 or
higher. Small losses are a part of living. Pay for the small things and move on.

Small claims can also affect your future premiums. Insurers are getting tougher on people with
many claims. You may find your premiums zooming up if you turn in several claims.

Note: Never pay liability claims yourself. Report damage to other people’s property or person
as soon as possible. Even if it seems like the injury is minor, report the claim to your insurer
quickly.

Mistake #9 -Not Considering Flood Coverage for Your Home
Damage caused by a flood or rising water is not covered by most home insurance policies.
Floods are devastating. Don’t think of it as water damage. Floodwater is not nice clean water.
Floods take out septic systems and sewage treatment plants. Dead things will be floating in
your basement. Shovels are used to clean up the mess, not mops. It’s messy, dirty, smelly,
and disgusting. You’ll want help cleaning it up, and insurance offers that help.

Don’t depend on government disaster relief. Less than fifty percent of all incidents of flooding
are declared disasters. No declaration of disaster, no state or federal relief. Most Americans
have access to flood insurance through the National Flood Insurance Plan (NFIP), a
government-backed program that encourages flood coverage

A few things to know about flood coverage:

You’ll Have To Wait For Coverage -Unless you’re just buying your home there is a thirty-day
waiting period for coverage to be effective under the NFIP.

Limited Coverage To Your Basement -Your basement is covered by flood insurance. Furniture,
tools and other personal property in your basement is not covered.

Limited Coverage For Your House -The most insurance you can buy under the NFIP is
$250,000 on your home and $100,000 on your contents. Your agent can help you find excess
coverage.

Mistake #10 -Depending on Personal Insurance to Cover Your Business
Don’t depend on your homeowner’s policy for liability or property coverage for your business. A
home-based business should have separate commercial insurance coverage.

Most homeowner’s policies exclude any “other structures” used in a business. So, if you are
storing products, inventory or tools in your garage, the building may be excluded from coverage.

Talk with your agent. Review your policy terms, conditions, and exclusions.

Mistake #11 -Not Considering Earthquake Insurance
Earthquake is excluded under most property insurance policies. Consider adding the coverage.

If you live in quake-prone areas your agent has undoubtedly discussed the coverage with you.
Most agents on the East Coast don’t even talk about earthquake with their clients. That may be
a mistake.

Intense quakes can hit anywhere. An earthquake hit Boston in 1755 that damaged 1,200
buildings. More than one-hundred chimneys were leveled. People on ships in the harbor felt
that they had run aground the intensity was so great. Think what would happen now?

Talk with your agent. You may be surprised at how inexpensive the coverage is.

Mistake #12 -No Coverage for Libel, Slander, or False Arrest
Unlike commercial insurance, most homeowner’s insurance policies don't include coverage for
libel, slander, false arrest, or invasion of privacy.

Several years ago, a “good friend” of mine was away on vacation. Neighborhood kids decided it
would be OK to party at his home. The place was trashed. Upon returning home my friend
pressed charges against the kids. My friend was also not timid about telling people what the
kids had done. The delinquents’ parents threatened a lawsuit for defamation. I wasn’t
worried—I mean my friend wasn’t worried—because he had truth and an insurance policy on his
side.

Ask your agent. You may be able to endorse protection to your current policy or use a personal
umbrella liability policy to fill the gap in protection.

Mistake #13 -Not Maximizing Your Medical Reimbursement Account
Maybe this isn’t, strictly speaking, insurance, but it does have to do with deductibles and
“uninsured expenses.” Section 125 of the IRS code allows employers to set up “pre-tax”
accounts to be used for medical expenses that are not paid by insurance. So, your deductibles,
co-payments, eyeglasses, dentist bills, orthodontics, and acupuncture treatments can all be paid
for using pre-tax dollars.

Here’s an example:

If you make $40,000 a year and the government takes 35% in income taxes, you are
taxed $14,000 ($40,000 x .35). You have $26,000 to save and pay bills. If you have
$2,000 of un-reimbursed medical expenses you have $24,000 left.

If you make $40,000 a year and the government takes 35% in income taxes and you put
$2,000 into a Medical Reimbursement Account you are taxed on $38,000 ($40,000 less
the $2,000 in the MRA). Your tax bill is $13,300 ($38,000 x .35). So, you have $24,700
for savings and expenses. Using your Medical Reimbursement Account yielded you a
$700 raise.

There is a downside. For some bizarre reason the US Treasury has put a provision into the law
that if you set money aside and don’t use it, you lose it. Keep this in mind when you set the
amount you will pre-tax into your account. Write your member of Congress to get rid of this
goofy provision!

See your human resources department for the details of how your plan works.

Mistake #14 -Buying Collision Insurance on an Old Vehicle
Consider the value of your vehicle and the cost of your insurance. If you took my advice above
and increased your deductible, think about what you are really insuring. Look at the value of the
insurance you’re buying.

For argument’s sake let’s say you have an eight-year-old car that’s worth $8,000. An average
collision premium would be about $400. Assume also that you have a $1,000 deductible. This
means that you’re buying $7,000 of insurance. Think back over your driving career. Most
people have never had an accident that cost them (not the damage to other people’s property)
over $5,000. Think of the entire premium you paid.

Here’s my analysis: You are paying $400 for $7,000 of insurance. At that rate a $200,000
house would cost you $11,400 to insure. Not a good deal.

Mistake #15 -Not Buying the Collision Damage Coverage for Rental Cars
Never rent a car (Hertz, Avis, etc.) without buying the collision damage waiver.

Either buy it from the rental car company or use a credit card that includes the coverage. Call
your credit card company. Most “gold” or preferred cards offer the protection.

Don't depend on your personal or commercial auto insurance. The rental agreements
contractually obligate the renter to costs not covered by "normal" insurance. Issues like “loss of
use” and “replacement cost” are a major source of trouble that can be avoided by purchasing
the coverage from the rental car company or using the right credit card.

Short-term leasing of a commercial vehicle (Ryder Truck, etc.) presents unique exposures.
Most commercial auto insurance policies provide coverage for non-owned auto liability (check
with your agent). However, few provide comprehensive or collision coverage. My general
advice, again, is to buy the coverage provided by the rental company. When renting trucks or
vans you probably won’t be able to use the coverage offered by credit card companies.

Mistake #16 -No Umbrella Liability Policy
Umbrella liability insurance provides protection above and beyond what’s offered by your
general liability, auto liability, and employer’s liability insurance. It’s an inexpensive way to
increase your level of protection against someone suing you. Premiums can be as low as $150
per $1,000,000 of coverage.

Consider $1,000,000 a minimum. Think about $2,000,000 or $3,000,000 or more. For a few
hundred dollars you can be assured that a lawsuit won’t financially cripple you and your family.

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information designed to help you manage your insurance better.

Mistake #17 -No Disability Coverage or Buying the Wrong Kind
Disability coverage is missing from far too many financial plans. If your family depends on your
income then you need protection from your inability to work caused by an accident or sickness.

Disability policies can be a part of a group plan through your employer or an individually
purchased policy. Some trade associations also have special disability insurance programs.

Most group disability policies don’t require health statements or physicals. Some policies will
have a provision limiting coverage for preexisting conditions.

Individual policies are underwritten much like life insurance policies. You’ll have to answer
many questions about lifestyle and health. You will also have to justify your income by tax
records and pay stubs.

Pay attention to the definitions of disability in the policy. Will the policy pay if you’re unable to do
your job or any job? Some policies only pay if you are unable to perform any job for which you
qualify based on training and experience.

Use waiting periods to reduce your premium—they work as a deductible does. Consider the
length of time your policy will pay a benefit: one year? Three years? Insurance contracts that
pay for your disability until you're 65 are preferred.

Mistake #18 -Not Buying Enough Life Insurance
How much life insurance should you buy? More than you probably have now.

The Internet is full of calculators and rules. However, I like to keep things simple.

I follow the “eight times income” rule of thumb. If you make $50,000, then buy $400,000 of life
insurance. If the money is invested at 8% your family can pull out $45,000 a year and the
money will last for almost 16 years.

Financial planners can give you a more accurate calculation based on your own situation. You
should, however, think in terms of multiples of your income. The typical one or two times
income provided by most employer-paid insurance programs is not enough. If you like, add in
final expenses and the immediate obligations that will come at death (credit card debt,
immediate expenses, etc.) If someone depends on your income, you need life insurance.

Buy term insurance. It’s much cheaper and allows you to buy large amounts of protection. I
recommend that you not consider insurance an investment vehicle. Invest your money in
stocks, mutual funds, savings accounts, retirement funds or your own business. Protect your
family with term insurance.

Mistake #19 -No Will or Old Will
I know, a will is not insurance. However, it certainly is a risk management tool. Depending on
your state law, dying without a will could lead to delay in the settlement of your estate or
forfeiture of part of your assets to the state.

If your will is more than five years old, get it revised. Failure to have a current, valid will means
your estate won’t be handled according to your wishes but those of the courts or the state.

Mistake #20 -Misunderstanding the Hazards of Volunteer Work
You are exposed to risk in everything you do. From the moment you get up in the morning until
you go to bed, everything has the potential for risk. Any time your actions could cause injury or
loss to someone else, you're exposed to the possibility of a lawsuit. The nature of your actions
determines what type of insurance you need to cover the exposure.

Your personal liability insurance (part of your homeowner’s policy) excludes business liability.
Your work for your church, the Boy Scouts, or with your local Rotary Club is not a business
activity. Therefore, most homeowner’s insurance policies (and umbrella insurance) will provide
protection—as long as the allegation is within the scope of the policy.

If you're working with a Girl Scout group and accidentally injure another volunteer you’ll be
covered under the “bodily injury” protection in most homeowner’s policies. However, if you were
sued for discrimination as a member of the board of the local Girl Scout council, you’ll have no
coverage: discrimination isn’t included in most homeowner insurance policies. The solution is a
policy purchased by the organization you’re volunteering for, directors’ and officers’ insurance.

I won’t serve on volunteer boards of directors unless the organization buys directors’ and
officers’ insurance. The policy pays for wrongful acts including poor decisions, employment
issues (discrimination, harassment, wrongful discharge), and other events that don’t result in
bodily injury or property damage.

Mistake #21 Failure to Use an Insurance Consultant
Shameless self-promotion, you say! I only promised twenty mistakes, so this is a bonus!

Using an informed specialist works. I have seen it many times. The insurance transaction
traditionally has three players:

1. Insurance company
2. Insurance agent
3. Insurance buyer
The complexity of the insurance world puts the buyer at a tremendous disadvantage. Few really
understand insurance or the insurance marketplace. Most buyers spend only a few hours each
year on insurance. Working with a specialist levels the playing field. Quality cannot exist
without a balance of knowledge and information. A consultant brings expertise to the buyer
without the "entanglements" of an agent who works for an insurance company on commission.

When engaging a consultant, ask if he or she ever accepts commissions, fees, or gifts from
insurance agents or companies. You’re looking for someone who answers, “Never!”

The 20 Biggest Business Insurance Mistakes

Mistake #1 -Not Having the Right Agent
Early in my career I learned that the most important part of the insurance transaction
is the relationship between the insurance agent and the insurance buyer. As with all
professional relationships, trust and respect are of the utmost importance. If you don’t
trust your attorney, you need to find a new attorney. The same thing is true of your
interactions with your insurance agent.

To find the right agent, ask people you respect. Talk with friends and associates.
When looking for a new agency, interview the people who’ll be handling your
account. If something doesn’t feel right it probably isn’t. You’re the buyer; it’s your
money. Work with a trusted professional who gives you a feeling of confidence in his
or her work. Consider his or her technical competence as well. How long has he or
she been in the business? What classes has he or she attended? What industry
designations does he or she hold?

Mistake #2 -Failure to Monitor the Financial Rating of Your Insurers
Each year insurance companies go out of business. Each year insurers go insolvent.
Their clients are severely impacted. Claims go unpaid, cash values are lost, and
annuity payments are reduced or cut off. Policies have to be replaced in a rush,
resulting in lower coverage and higher premiums. Not a fun time.

Several organizations analyze insurance companies for soundness. The best known
is the AM Best Company (www.ambest.com). Standard & Poor’s also rates insurers. I
rely on Weiss Ratings (www.weissratings.com) as a tough, unbiased source of
information. They never accept fees from insurers. They utilize industry and
regulator’s filings in their analysis. They’re tough graders; a B-is still considered good
in their system.

A recent review of AM Best Ratings revealed that almost 90% of insurance
companies receive a rating of “Very Good” or higher. Only 29% of insurers received a
Weiss Rating of “Good” or higher. Weiss has a higher standard. When working with
my client’s money I want objective, tough, and accurate ratings.

Mistake #3 -Failure to Review Coverage with Your Agent Regularly
Meet with your insurance agent at least once a year to review your coverage, catch
up on changes, and talk about hazards. The best time to do this is usually four
months before your policies expire.

Your agent should provide you with a summary of coverage and a listing of your
losses. You should talk about where your business has been and where you plan to
go in the near future. Are you considering mergers or acquisitions? Is a new product
line being considered? Are you planning new locations or buying new equipment?
Are you discontinuing any operations?

Let your agent be a part of your company. Let the agent know of risks you’re
concerned with. Look at your loss record. What can the agent do to help? Find out
what services the agent offers that can assist with problem areas. Learn what
services your insurer offers.

Mistake #4 -Splitting Coverage between Two Insurance Agents
You’ll get a better insurance program if one agent handles your entire insurance
account. This is true of both your business and personal insurance. You may even
want your business and personal insurance with the same agent.

Having one agent will save you both time and aggravation. Having one agent means
that you make one call when you have a problem or a change in your life or business.
Having one agent helps to prevent gaps and overlaps in coverage.

If you follow the advice in the previous section, one agent means only one review
meeting, saving you time.

I’ve worked with several insurance buyers who thought that it was best to split the
business up. Their idea was to let the two (or three) agents fight it out, scrapping for
the business. I have never found that this works very well. Come claim time it can be
a nightmare when each points to the other for coverage.

If you currently have two agents, you know which one is the better service provider.
Have that agent handle your entire insurance account.

Mistake #5 -Failure to Review All Policy Exclusions
Your insurance policies are filled with exclusions. Most are contained in the
exclusions section of the policy-form. More and more, however, insurers are adding
exclusions by endorsement – separate forms at the end of the policy (or coverage
section) that change your insurance. Read through these and review them with your
agent. This is especially important with professional liability, directors and officers,
and employment practices liability insurance.

Many of the policy exclusions have logical explanations. A general liability policy
excludes auto accidents because they are best insured by an auto policy. Some
exclusions limit coverage an underwriter isn’t comfortable writing.

Work with your agent to understand the limitations of the insurance you buy.

Mistake #6 -Failure to Protect Your Profits after a Loss
I am regularly asked to explain business income insurance. First, let's get past
semantics. The following terms mean the same thing: business interruption coverage,
loss of business income, time element, use & occupancy. They all mean the same
thing—protection from the loss of income that occurs when a business is shut down
due to a fire or other insured loss.

For many years I’ve used the same story to help business owners understand what
exactly business income coverage does. It's a silly story but it makes the point.

Pretend you own a goose. Your goose lays golden eggs. If your goose gets run over
by a truck, it's going to take you nine months to get a new goose. You have
insurance that will pay for the cost of the new goose (property insurance), but what
about the value of the eggs you won't get in the nine months you're without a goose?
Business income coverage pays the value of the eggs while you’re waiting for your
new goose.

Part two of business interruption coverage is extra expense. Extra expense coverage
pays the increased cost of getting your goose in five months instead of waiting for
nine.

Another point: eliminate coinsurance penalties from business income coverage if at
all possible. Make sure your policy will continue to pay for enough time to rebuild your
property – many policies limit the time of business interruption payments to twelve
months. Make sure the policy has enough coverage to accommodate a claim during
a peak season in your business. For example, a hotel that is closed for a month in
the off-season suffers a different loss than being closed for a heavy tourist month.

Consider contingent business income coverage that will pay if a key supplier or
customer is shut down by fire or other insured peril.

Mistake #7 -Failure to Manage Your Workers' Comp Policy
Managing the components of your workers' compensation policy can yield big
savings.

Make sure your employees are properly classified. There are over 600 different
classifications. Some have a low premium rate. Some are high. Ask your agent for a
copy of your class descriptions. If you have more than one classification make sure
your employees are assigned to the right one.

Ask to review the insurance company’s annual audit of your payroll. These
worksheets show the employees allocated to each classification as well as how the
payroll numbers were determined. They can be a major source of errors that cost you
premium dollars.

Make sure your audits are performed correctly. Has the extra pay for overtime been
removed from payroll amounts? Did the auditors recognize the salary caps for
executive officers?

Your experience mod is the ratio of your claims to losses expected in companies like
yours. It directly affects your premium. Make sure your experience modification is
correct. I have found that about 10% of the experience modification worksheets I
review contain an error in the data.

Mistake #8 -Buying Insurance to Cover Non-Catastrophic Losses
Things happen in our daily lives. Don’t use your insurance to pay for the bumps in the
road. Look to insurance to help you through catastrophes.

Did vandals damage your sign? Why look to insurance to pay for such? Did a
windstorm damage a few shingles on your roof? Fix them and move on. Insurance
should be for when your roof is destroyed or for a loss that would have a devastating
affect on your company’s financial health.

Use high deductibles on your property insurance to reduce your premiums. Consider
$5,000, $10,000, or higher. Small losses are a cost of business. Budget for them.

Note: Never pay liability claims yourself. Report damage to other people’s property or
injuries to your insurance company as soon as possible. Even if it seems that the
injury is minor, report the claim to your insurer quickly. Most insurers have 24-hour
claim hotlines. Use them!

Mistake #9 -Low Umbrella Liability Limits
Umbrella liability insurance provides protection above and beyond the coverage
included in your general liability, auto liability and employer’s liability insurance. It’s
an inexpensive way to increase your level of protection against someone suing you.
Premiums can be as low as $750 per $1,000,000 of coverage.

So, if you have an auto policy with $1,000,000 of coverage and a $2,000,000
umbrella, you have a total of $3,000,000 of coverage for your liabilities from an auto
accident.

Consider $1,000,000 a minimum for even the smallest of companies. Think about
$2,000,000 -$3,000,000, or more. Review your liability limits as compared to your
annual sales and total business value. Think of the daily activities of your business
and the accidents or losses that can occur.

Recall that most liability policies have total aggregate limits of coverage. This is the
maximum amount that will be paid for the total of all of your claims. You can use up
your insurance if you have multiple lawsuits against you.

Contractors should be very careful of their liability limits. Look at your exposure to
loss. A careless employee with a cigarette burned down a multi-million-dollar church
in my town a few years ago. It isn’t just the “big boys” who cause big losses!

If you manufacture, bottle, or sell booze, try to get your liquor liability insurance
included in the umbrella coverage. Most underwriters will add the extra protection at
a fairly modest premium.

Mistake #10 -Inadequate Employee Dishonesty Coverage
Theft by employees is a huge cause of loss to business – estimated by some to be
almost half of all business theft losses. Be sure you have enough coverage.

Every time there’s an article about someone stealing from his or her employer there
is a quote like, “I never thought he would steal from me.” Yep!

I can't tell you how many business owners tell me, “I don’t need employee dishonesty
coverage. I trust all my employees.”

Think this through. If you didn’t trust someone, would you let him or her handle your
money? Of course not. Therefore, anyone whom you entrust with your money, you
trust! (I can hear you saying, “Duh, obvious!”) Therefore, the only people who ever
steal from their employer are trusted employees. Employees you don’t trust are never
given the opportunity!

The only employee who steals from you is the one you give opportunity to. You need
to do two things: remove the opportunity, and buy insurance.

Be sure the person reconciling your bank account doesn’t have check signing
authority. Better yet, reconcile the account yourself. Do frequent inventories looking
for shrinkage. Let everyone know you’re watching the storage room. Video
technology is at a place where every business should have cameras. They also deter
fraudulent injury claims – by both employees and customers.

How much crime insurance should you buy? $50,000 is a minimum for even the
smallest company. You’ll find that $1,000,000 of coverage is not all that expensive.
Talk with your insurance advisor.

Mistake #11 -No Claims Management Program
Big or small, your company should have a plan for handling incidents – those
covered by insurance and those under your deductibles. Claims management
includes follow-up with the adjuster. Stay in touch with your employees injured in
workers' compensation claims too.

Keep the phone numbers of your insurance agent and insurance company handy.
Let your employees know that in case of an auto accident with injuries, they should
call the insurance company from the scene if possible. Make sure your insurer’s
claim-reporting phone number is on the Insurance ID Card or in the glove
compartment. All vehicles should have a disposable camera under the driver’s seat
(the coolest part of a car) to be used if there’s an accident.

Know what claims to report and to whom you report them. Know your workers'
compensation insurer’s procedure for claims reporting – online, fax, phone, or email.

Managing your claims means that you are on top of the claims process. Your
diligence also will be noticed by over-burdened claims adjusters who will be more
diligent with your case files.

Mistake #12 -No Loss Control/Loss Prevention Plan
Accidents happen, but do they really need to? With training, thought, and analysis
you can reduce and prevent accidents and claims.

Review past accidents for clues as to what can happen. Build a safety team to help
identify hazards and offer solutions. Your employees should also be comfortable
pointing out issues and making recommendations.

Use your insurance company’s loss control experts. Look at all areas of potential
losses:

•
How can you protect your property from losses like fire and windstorm?
•
How can you prevent employee injuries that result in workers' compensation
claims?
•
What can be done to lessen the exposure to product liability issues, including
packaging and instruction sheets?
•
What procedures should be in place to prevent liquor liability claims?
•
What can prevent slip and fall accidents by customers and employees?
•
Work with your attorney to prevent employment practices claims like
discrimination and harassment.
•
What are the exposures of your business to intellectual property issues –
unfair trade, violating patent or trademark?
•
How can you minimize the chance of vandalism or break-ins? How can you
make your business less of a target?
Mistake #13 -No Fiduciary Liability Coverage
The federal law ERISA makes the administrator of employee benefit plans personally
liable for errors. That means that the head of HR who mistakenly fails to add
coverage for a new spouse is liable (using personal assets) for the oversight. Your
company can’t reimburse the employee, either. Personal liability!

The only protection or indemnification allowed is a Fiduciary Responsibility Insurance
Policy, or the more limited Employee Benefits Liability coverage. Premiums are quite
reasonable compared to directors and officers or other professional liability policies.

You need Fiduciary Liability Insurance if you have group health insurance, a pension,
401k or other savings plan, disability coverage, life insurance, etc.

Don’t confuse fiduciary liability coverage with the bond required by ERISA (you must
buy a fidelity bond that covers 10% of retirement plan assets).

Mistake #14 -Buying Inadequate Property Insurance
You’d think that the coverage on your buildings and business property would be
pretty straightforward. It’s a place I see plenty of problems, though.

First, you need to be sure you have enough insurance. If you intend to repair or
replace your property in the event of fire, windstorms, or other catastrophe, buy
enough insurance to actually replace the property. Ask your agent to come up with
an estimate of the replacement cost of your building, or ask a contractor to give you
an estimated cost per square foot for a building like yours. If you built your building in
the past twenty years, ask your agent what the “increased cost of construction
factors” are for your area.

Contents or personal property coverage is important too. Survey your belongings by
walking into each room. Count $1,000 of value – don’t worry about the small stuff.
For example, in an office – desk and chair, $1,000. Three file cabinets, $1,000.
Supply cabinet, $2,000. You’re trying to get a broad idea of how much insurance
you’ll need to buy new property if you have a fire.
Work with your agent to eliminate any coinsurance clauses from your policies.
Coinsurance is a penalty provision. It never helps you. It can only hurt at the time of a
loss.

Talk with your agent about blanket coverage – one amount of insurance for all your
property. Even if you only own one building, combining the building and contents
insurance into one amount of coverage can help you at the time of a claim.

While we’re talking about property insurance, document the property you have. Take
pictures or video of the inside and outside of your buildings.

Mistake #15 -Not Checking Motor Vehicle Records
This goes to loss prevention both for auto insurance and in general hiring practice. It
is a well-established principle that people with poor driving records have accidents.
Do you really want them driving for you when they have their next one?

Know who’s working for you. I believe that a motor vehicle report tells you a great
deal about a person. Do they have three citations for driving an unregistered vehicle?
What does that tell you about an employee’s attention to detail and follow-up?

Many companies run criminal background checks on new staff. Many use personality
profile tests. Anything you can do to prevent a “bad” hire is worth it. Think of how
hard it is to get rid of a poor employee. Think of the legal hoops you may have to
jump through. Consider the impact a poor employee has on the morale and
performance of others. Troubled employees can lead to accidents or file false
workers' compensation claims. Do what you can to prevent bad hiring decisions.

Build an attitude of “slow to hire, fast to fire.” Removing poor employees (in a legal
way with proper loss control procedures) will improve the overall quality of your
business.

Mistake #16 -No Non-Owned Auto Coverage
If your employees drive their personally-owned cars on company business, you need
coverage for accidents involving “non-owned” autos.

Under common law if a worker goes to the store in his car to buy copy paper, you’re
as responsible for any accident as he is. Some auto insurance policies cover
employers for the actions of their employees, but some don’t.

Ask your agent if you're covered for non-owned auto liability.

Mistake #17 – Failure to Protect Business Data
Everyone is dependant on his or her business records in some way. Be sure that
your computer data is backed-up and stored off site. Don’t use fireproof safes to store
your backup data on site – tapes and computer disks can't withstand the heat that
paper can.

Store important paper records in fireproof file cabinets.

If you have a computer data backup plan, test it. If you don’t have one, make one,
then test it. Create a simple word processing document and store it so it will be
backed up. After a few days, delete the file from your hard drive, and then have your
computer techs retrieve it from your backup copy.

Tapes used in backup systems deteriorate with age and use. Rotate new tapes in
and old tapes out into archive storage.

Ask your computer people where the latest backup is. If it’s on site, raise hell!

In almost every company I visit, the data backup system is a process that has
deteriorated. Employees who are involved in data protection must realize that their
work is vital to the future of your company. Regular audits of the process to ensure
the integrity of the system are vital. Technology should also be reviewed regularly to
improve the quality of the backup system.

Mistake #18 -Not Considering Earthquake and Flood Insurance
The perils of flood and earthquake are excluded under most property insurance
policies. Consider adding the coverage.

If you live in quake-prone areas, your agent has undoubtedly discussed the coverage
with you. Most agents on the East Coast don’t even talk about earthquake with their
clients. That can be a mistake.

Intense quakes can hit anywhere. An earthquake hit Boston in 1755 that damaged
1,200 buildings. More than one hundred chimneys were leveled. People on ships in
the harbor thought that they had run aground the intensity was so great. Think what
would happen now?

Flood is the other commonly underinsured peril. Just because you don’t live in a flood
zone does not mean that your property can’t be damaged by water.
Talk with your agent. You may be surprised how inexpensive the coverages are.

(Side Note: What actions can you take to prevent a flood loss? If you are using
basement storage, are all boxes off the floor? Are drains clear? Can flood barriers be
prepared and held in-the-ready?)

Mistake #19 – Not Managing the Risk of Employee Suits
Claims against employers for discrimination, harassment, wrongful termination, and
failure to hire are far too common to ignore. Employment practices liability insurance
policies are widely available. Many insurers are offering exceptionally broad
coverage. The premiums have come down dramatically from where they were ten
years ago. Your agent can help you get competitive quotes.

Risk management is also a part of the process. Here are some other points to
consider:

•
How current is your employee handbook?
•
It's better to not have a handbook than to have one you don't follow.
•
Better yet, update the handbook to match your process.
•
Have a labor attorney review your applications and policies regularly.
•
Your managers must be trained in your process.
•
Documentation is vital -if it isn't in writing, it didn't happen.
Mistake #20 -Improperly Funded Buy-Sell Agreements
Buy-Sell agreements are contracts between the partners or shareholders of a
business. The agreement stipulates that if one party dies, becomes disabled, or
retires, the other(s) will buy the business. This protects the value of the former
owner’s share of the business while protecting the remaining owner(s) from having to
deal with unqualified spouses or unrealistic valuations.

The tough part is figuring out how to fund the transfer of ownership. Partners should
consider funding for all events that remove an owner—death, disability, and
retirement.
I've seen many buy-sell agreements with life insurance in place. However, few have
disability insurance in force to protect against an accident that prevents an owner
from continuing as owner. For most business owners the chance of being disabled is
much higher than the chance of death.

Make sure your buy-sell agreement is properly funded.

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Mistake #21 -Failure to Use an Insurance Consultant
Shameless self-promotion, you say! I only promised twenty mistakes, so this is a
bonus!

Using an informed specialist works. I have seen it many times. The insurance
transaction traditionally has three players:

1. Insurance company
2. Insurance agent
3. Insurance buyer
The complexity of the insurance world puts the buyer at a tremendous disadvantage.
Few really understand insurance or the insurance marketplace. Most buyers spend
only a few hours each year on insurance. Working with a specialist levels the playing
field. Quality cannot exist without a balance of knowledge and information. A
consultant brings expertise to the buyer without the "entanglements" of an agent who
works for an insurance company on commission.

When engaging a consultant, ask if he or she ever accepts commissions, fees, or
gifts from insurance agents or companies. You’re looking for someone who answers,
“Never!”