Risk identification is a formal process including interviews and document review. A subsequent step is to compare identified risk to the technical quality of the buyer’s insurance program. The disparity is often appalling. Some very common examples follow:
1. The interest of responsible parties is frequently omitted. The insurance industry sells contracts to identified parties. An omitted name, affiliate entity, or contractual obligation frequently results in claims denial – even when the exposure has been identified and premium has been paid to the insurance company for years.
Following a loss the legal cost to get an insurance policy reformed to add the interest of an omitted party, even when the omission is a clerical error, can be enormous. Obtaining a policy reformation to add an omitted name may take a year – or more – of legal maneuvering. These efforts are often unsuccessful.
2. Contractual obligations are constantly overlooked. Seventy to eighty percent (70% to 80%) of property leases transfer substantial obligations to the tenant. The insurance industry’s underwriting process and standard policy forms expressly exclude these exposures. The consequences can mean great harm to both landlord and tenant. I have reviewed thousands of property leases and find less than one percent (1%) of tenants have amended their insurance program to address routine obligations.
3. Discrepancies in property insurance programs are rampant. Post disaster studies make this point very clear:
a. 43% of firms suffering a significant loss never reopen;
b. 28% of those who reopen close within three (3) years;
c. Within five (5) years eighty percent (80%) are out of business.
[Sources: US Department of Commerce, Hoosier Banking Study, Insurance Industry educational materials]
4. Obligations in loan agreements are often unmet. This can be very bad news.
5. Business “package” insurance programs are inexpensive because they omit important elements identified in the most cursory risk assessment process. Please refer to item # 3 above.
6. A personal insurance account is often more complex than a business.
7. Opportunities to reduce long term cost are frequently overlooked.