Edward E. Hall & Company
Do You Know Where Your BOP Stops?
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While most small business owners carry a standard Business Owners Policy (BOP) many are unaware of the various exposures not covered by these types of policies. What many small business owners often fail to realize is that these gaps in coverage can leave them exposed to substantial losses. These losses can decimate a growing company and even jeopardize the personal assets of a small business owner.

"Brokers have the opportunity and the obligation to ensure that owners of small and mid-sized businesses are aware of their full spectrum of exposures, including their long list of specialty risks. Only then can owners make informed decisions about insuring or self-insuring these risks," says Vincent C. Tizzio, President, AIG Small Business.

According to the U.S. Chamber Institute for Legal Reform (ILR), small businesses are clobbered by approximately $18 billion in uninsured liability costs yearly.1 "No wonder the cost and availability of liability insurance is among the top issues worrying small business owners the most. Smaller businesses are hit especially hard when their coverage falls short since they typically don't have the financial resilience to absorb significant losses," says Bill Skapof, Senior Vice President, Marketing & Sales, AIG Small Business.

The following are some exposures that may not be included in the standard Business Owners Policy.

Employment Practices Related Exposures
"Any company with employees can be vulnerable to employee-initiated lawsuits. Many small and mid-sized businesses currently have no insurance for these potentially catastrophic exposures." For example, Bill explains, "When you examine the employment practices of many small businesses you are less likely to find formal employment rules and regulations. Typically there is no employee manual, formal human resources function, or extensive employment practices training."

Making matters worse, smaller businesses typically do not have the risk-mitigating infrastructure that many larger companies do. And in the end, even if a judgment favors the defendant, defense costs can have a tremendous impact on a small business.

Directors and Officers Exposures
Many board members serving small and mid-sized operations are shocked to learn that their personal assets could be vulnerable to losses as a result of their board activities.

"Directors, officers and trustees have fiduciary obligations and can be sued for dereliction of duties. We see this in the headlines. What we don't see is how frequently this plays out at the local level," Bill adds.

"It can be as simple as a condo board that did not purchase enough insurance to cover a loss to the facility and then has to assess property owners for additional funds. These property owners can then sue board members for negligence in not properly insuring the facility in the first place. Boards that have not secured sound D&O liability coverage could find their personal assets at stake," Bill says. "And what about the condo board that interviews a prospective resident and decides the individual is not a good fit for the association, then is sued for discrimination? Even if allegations ultimately prove groundless, defense costs can stack up."

Conducting Business Abroad
International risks pose another dilemma for small and mid-sized businesses. "Simply sending a salesperson overseas can open a gamut of exposures, from international commercial auto liability, to kidnap and ransom and political risks," Bill says.

Many business owners mistakenly believe that their international risks will be covered under their domestic insurance policies. In many cases, they are not and they are unwittingly self-insuring foreign exposures.

There is also the issue of employees who become ill or injured while traveling abroad. "Even more important than reimbursing an employee for medical care in a foreign and possibly remote location is being able to get employees to the right quality of care," Bill says. "Many businesses do not have the in-house expertise and resources to do this and would welcome outside assistance if given the opportunity."

U.S. Torts in the Cyber-Age
The ability of the U.S. tort system to hand down severe damage awards is well documented. "Even a 'routine' automobile accident can easily result in damages and defense costs exceeding $1 million, which is the standard BOP policy limit," Bill says.

And the internet is adding fuel to the fire. "Virtually anyone who feels they have been wronged can access the information and resources needed to file a lawsuit right online," Bill adds.

The internet also makes it simple for potentially claim-provoking incidents to escalate and multiply. "There was a time when an individual who was dissatisfied or harmed by a product would send it back and deal one-on-one with the manufacturer. Today, customers compare notes online, are influenced by blogs and suddenly the manufacturer has not one but dozens of claims erupting," Bill says.

Yet many growing businesses are unprepared for the true consequences of liability claims. "Excess liability insurance is not an extra in the current tort environment, it is an essential," Bill adds.

Insurance Market Response
The rapid rise of specialty exposures among small and mid-sized businesses has not gone unnoticed by insurers, who now focus on growing businesses as never before. "The insurance marketplace is competitive, and there is virtually no reason a business owner has to self insure specialty risks unless they choose to," Vince says.

The biggest challenge now, he explains, is increasing awareness. "Owners must be made aware of these exposures and the solutions available to them so they are not surprised if uninsured losses occur."

Knowing that small businesses lean heavily on their brokers, AIG Small Business and other insurers have made it a priority to help brokers educate clients on specialty risks and insurance options. "We regularly share third-party and in-house experts to help the marketplace better understand the full range of specialty exposures," Bill commented. "AIG Small Business is here to help small businesses think outside the BOP. Our products and services are designed to help fill the coverage gaps left by these narrow policies."

Consequently, exploring and delivering specialty coverages should no longer be considered a laborious undertaking. Brokers and their clients can investigate these coverages annually and make informed decisions about what's needed in the current environment.

"There is a real market need and plenty of opportunities for brokers to sell specialty coverages to small businesses. "What growing businesses need more than anything is a clear understanding of what is covered under their current policy and what is not," Bill says.

1 U.S. Chamber Institute for Legal Reform (ILR) - Liability Costs for Small Business - June 8, 2004.
Published on Wednesday, January 24, 2007
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