Avoiding the Pitfalls of “Cheap” Insurance

I read a post on LinkedIn the other day that purported to offer tips on how to buy “cheap” business insurance. Ever since reading it, that post has really stuck in my craw. The phrase “cheap insurance” is like fingers on a chalkboard to me and it should be to you, too. Why? Because I’ve seen what can go wrong when price is king.

Photo credit: insurancejobs.com

Photo credit: insurancejobs.com

Why do businesses purchase insurance anyway? Because they have assets – people, property, profits – at risk of loss due to something accidentally going wrong. Furthermore, business owners and their employees are sometimes unjustly accused of wrongdoing, and in those situations, the cost of defending the claim often exceeds the value of the claim itself. The financial cost of defending claims, repairing, replacing or rebuilding damaged business property, and indemnifying claimants may exceed the business’s ability to pay for the loss on its own. Insurance is really a source of funds to cover the costs resulting from accidental loss; costs which the business cannot otherwise afford to absorb.

Truth is, insurance companies and the insurance policies they sell are not created equal. If the insurance buyer isn’t careful, that “cheap” policy may not respond as anticipated when a loss occurs. Perhaps the policy was cheap because the insurer’s financials are not real strong. Will the insurance company be around to pay the loss when it comes due? That day of reckoning often comes years after the temporary satisfaction derived from getting that cheap premium has worn off. Perhaps the policy was cheap because the underwriter excluded some key elements of coverage or reduced coverage limits on some aspects of the policy in return for cheapening the cost of his product. Such adjustments are sometimes the very thing that jumps up to bite the business in the behind when the claim is presented and declined by the insurer, leaving the business owners with nothing more than a three-ring binder full of paper that just might be worthy of campfire starter fuel. If you are the business owner or the owner’s designated manager of her risk management and insurance strategy, you do not want to place yourself or your business in this precarious position.

Photo credit: sorryaboutyourweight.com

Photo credit: sorryaboutyourweight.com

So what is a business owner to do? How can she be most assured that the insurance she purchases today will truly be there for her business later when it’s needed? Let me answer this way. I consider myself to be a pretty decent handyman. I’ll tackle basic repairs to many items in my home, but there are three items I will not touch: electricity, natural gas, and plumbing. If I mess with those systems and make a mistake, the result could be catastrophic. So when those systems need work, I call a pro. Business insurance falls into that category as well. The business owner is very skilled in her chosen field but probably does not have the expertise or the relationships to self-source the best possible insurance policy for her business at the best possible price. That’s where the insurance broker steps in.

A quality insurance broker will be familiar with the business owner’s industry and the insurers most qualified to cover it. A quality broker will interview the business owner or her designee to glean as clear an understanding as possible of the potential causes of accidental loss the business might face while counseling her on practical strategies that just might help prevent the loss from occurring in the first place. In transacting an insurance purchase, the broker’s job is to gather required underwriting data, prepare marketing materials for presentation to qualified potential insurers, receive quotes, and negotiate policy terms, conditions and price. The broker then presents quality options with pros and cons of each to the business owner or her designated insurance buyer so she is equipped make an informed purchase.

Photo credit: dearmediacare.com

Photo credit: dearmediacare.com

Managing the insurance transaction in this manner benefits the business owner in at least two ways: (1) The business owner is free to focus on her business while letting the insurance pro work the marketplace in her behalf, and (2) The business owner is now in the best possible position to achieve the optimal balance between coverage quality and coverage price. Even better is the fact that insurance brokers are typically compensated by the insurers via commissions; thus, the business owner should not incur additional cost for accessing the services of a quality insurance broker. (Note that there are other methods of broker compensation, but that is a topic for another post).

If you are a business owner with the objective of buying “cheap” business insurance, I hope you will rethink that strategy. Don’t put your business at risk to save a few bucks on your insurance premiums. Call a pro who will manage the insurance marketplace in your behalf to help you achieve a quality purchase at a reasonable price. That, indeed, is the wise business decision.

Note to the Reader: The information offered herein is derived from my personal experience as a risk management professional. The thoughts and opinions expressed are my own. This information should not be considered as a substitute for legal, tax and/or actuarial advice. Please contact the appropriate professional counsel for such matters.

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