Startup Risk Tips: How to Deal with Business Insurance Claims
You’re a homeowner; a car owner; a business owner. You have insurance, but when should you turn to your insurance for help? Will a duck quack “Aflac”? Will the Mayhem Man mimic an exact situation the common policyholder will encounter? Probably not.
“I pay all this money for insurance, and as soon as I submit a claim, my insurance premium skyrockets.”
Is this always true? Of course not. Is submitting a claim to your insurance company somewhat of a double-edged sword? My opinion is that it’s not…but you could make the argument. So that begs the question, how does the common business owner know when to turn to their insurance for coverage? The short answer is, turn to your insurance broker for guidance. But it’s important for policyholders to have a working knowledge of how insurance companies view the relationship between claims and policy premiums.
There are two key elements the insurance companies consider when it comes to analyzing a policyholder’s claim history:
Claim frequency looks at how often the insurance company is put on notice regarding an incident that may (or already did) result in a claim. Let’s consider a hypothetical situation in which a business owner pays $50,000 a year for insurance. Over the course of this year, they submitted four claims, resulting in a $4,000 settlement for each. At the end of the 12-month period, the insurance company collected $50,000 and only paid out $16,000 – seems like a profitable account for the insurance company. But this is a prime example of how the loss ratio (premium collected: claims paid) is not indicative of the insurance company’s view of the account. If this particular business experienced four separate incidents in the past year, it is only a matter of time until a more catastrophic loss is incurred – and for this reason, the insurance company can justify a steep increase in insurance premium upon renewal of this account.
Claim severity focuses more on the total dollar amount the insurance company pays out on a specific claim rather than the number of claims submitted. In the case of a severe, or catastrophic claim, there’s no question that it needs to be reported to the insurance company, but there’s also a slim chance that the premium does not increase upon renewal. Often times after a severe loss, a business is forced to tweak their operations to demonstrate to insurers their awareness of loss exposures and willingness to change to avoid certain risks.
Let’s use a couple examples to work through how claim situations can play out.
Example 1. At your company’s retreat, two employees jumping on a trampoline collide and each sustains serious head injuries.
Example 2. A child chokes on your company’s newly designed wearable fitness tracker.
If a policy holder only has one severe loss, often considered a “shock” loss, it may be easier to convince a new insurance company that this type of loss cannot happen again due to operational changes (ex: remove all trampolines).
So if a catastrophic claim (one that alleges a high dollar amount in damages) should always be reported, how does a policyholder know when to retain smaller claims to keep their loss frequency down? Again, turn to your broker for guidance! A soft rule of thumb is to retain a loss if the alleged damages are less than twice the policy deductible.
Example 2. Your company’s office is broken into and a laptop is stolen. Consider the following property policy:
In this scenario, it may be more cost effective in the long run for the insured to retain this loss rather than report the incident to the insurance company. The insurance benefits are likely too minimal to justify the claim history.
More importantly than when to report a claim, are actions you could take to prevent a claim. Here are some important procedural considerations when trying to minimize future losses:
Don’t have the time or resources to implement such detailed risk management practices and procedures? Here’s a quick chart to illustrate how different loss exposures should be handled:
All business insurance claims must be considered on a case-by-case basis, as there are different exposures to consider, and risk management procedures to apply. But the one universal pointer applicable everywhere (and I would be remiss to not mention it one last time) is to consult with your insurance broker when it comes to claims!
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