Insurance is meant to transfer risk from your corporate balance sheet to the insurer.

That only works if you set up your insurance policy accurately. How do you know if your insurance is set up accurately. Most firms do not know if they are set up properly until a claim happens and they find out where they stand. There are many unsatisfied insurance customers all with a variety of circumstances that leave the business absorbing a loss it thought it had transferred. No matter what your industry, every single insurance policy issued has clauses that protect the insurance company.

Makes sense since these clauses are set up by the insurance company. What that means is, your broker or agent has to read the coverage and discuss these clauses with you at the time you are setting up the policy and every year upon renewal. Inevitably, excellent brokers and agents negotiate the best coverage & align them to your unique needs. Yet so many firms renew simply renew, never read the policy, just pay the bill and move on to the next priority, filing the policy away.

One example of a clause that is in every property policy is the co-insurance clause
The co-insurance main purpose is to protect the insurance company from firms under insuring. A good example to use is a building. Most building owners believe they do not have to insure their buildings to its full replacement value as the land beneath their building is highly valuable and will retain that value regardless of what insured peril hits their building.

While that is logical in their reasoning, insurance policies do not work that way. Yes, the land will always have value, however, the co-insurance clause is there to prevent property owners from underinsuring. Let’s suppose a building cost $10 million to rebuild but it is insured for only $5 million.

If the building suffers a $100,000 insured fire loss, the insurer may pay only $50,000.
Since the building was underinsured by 50%, the payment will also be reduced by 50%. In other words, whatever you do to the insurer, they will do back to you.
Let’s turn this situation around, instead of under insuring your building you insure it accurately.

You invest $10,000 more of premium, insure your building to ten million and in this example, you suffer an insured loss, and your claim is in the amount of $1,200,000. In this instance, you would receive the full $1,200,000 so that your costs to repair/rebuild are covered by the insurer. Protecting your corporate balance sheet, doing the job you expected.
Ultimately, you want to understand what you bought, ask questions, look at your co-insurance clause.

Have your broker try to negotiate it out by agreeing to what the true replacement value is, insure accurately and allow your insurance policy to accurately transfer your risk from your corporate balance sheet to your insurers balance sheet.
Read the policy. Ask questions. Get confirmation from your insurance advisor that the coverage is appropriate for your business. That’s why it’s important to understand your insurance policy before you need to use it.

Co-insurance is only one example.
Other provisions—including hammer clauses, liability limits, evidence-of-insurance requirements, excluded contractual liability, damage caps, per-occurrence limits and waivers of subrogation—can also affect how your policy responds. Each insurer has its own limitations and clauses, some policies are broadened to fit your true needs, most need to be negotiated by your broker and that is why, making sure your broker/agent is aware of any changes in your operation, equipment purchases, discusses.

Judi Smith’s bio

Working as an independent, fractional risk management advisor, Judi Smith provides experienced oversight without replacing your broker, insurer, or internal team.
With more than 27 years in complex commercial risk environments she brings a wider lens to your organization risk management requirements.

Known for reducing firms’ cost of risk, & a focus on helping senior executives meet their duties and obligations with content designed to address your governance, risk & compliance milestones. Understanding each firm has their own unique risk fingerprint, Judi’s review and content is customized to her clients needs. With her certified risk management, her chartered insurance professional designation, her journey into her fellowship of her chartered insurance professional and now acting as an out of house Chief Insurance Optimization Officer.

Judi contributes thought leadership articles and does speaking engagements regularly to share her knowledge with business leaders and advisors, helping them with safe growth. Judi is a regular contributor who has a lens on risk with a deep respect for improving profit margins safely.

Judi Smith, CIP, CRM (BA), CIOO
📞 647-204-1227
✉️ judi@judismithriskmanagement.com
www.judismithriskmanagement.com