Understanding Insurance Coverage

Insurance is the last line of defense for a small business owner executing a comprehensive asset protection plan. In order to make wise decisions regarding its use, an owner needs to have an understanding of how insurance will--or will not--offer this valuable protection.

Insurance companies earn a profit in two ways:

• through the spread (the difference between insurance premiums charged and the payments made to insured parties for claims)
• thorough investment income (interest derived from investing the premiums received)

If an insurance company can deny a claim, the spread and, therefore, its profits will be higher.

Similarly, the longer an insurance company can delay paying a claim, the longer the premiums will continue to earn income. This form of income cannot be overlooked because, in practice, it represents a significant source of profits since insurance companies collect billions of dollars in premiums. For example, $1 billion of premiums earning interest at 8 percent for an extra six months will yield an additional $40 million in profits.

Why should this be an important issue for the small business owner? When making a claim on a policy, the business owner should expect the insurance company to deny the claim or to delay paying the claim. The insurance company has a strong financial incentive to do both.

In fact, what most people don't understand is that denial of a claim begins well before a claim is made. It begins with the carefully selected wording in an insurance policy. The actual language in the policy, subject to court interpretation, will delineate the scope of the coverage and exclusions from coverage.

Certain issues run across lines of coverage. The small business owner should follow these general guidelines with respect to any type of insurance coverage:

• compare premiums and policies beforehand
• retain insurance policies indefinitely
• give prompt verbal and written notice of a claim
• enforce the duty to defend clause
• use the threat of a bad-faith claim
• rely on another party's insurance
• indemnification by other parties
• factor liability insurance into solvency tests
• court interpretation of coverage and exclusions