February 10, 2014
Insurance professionals put business interruption insurance high on the list of coverages a business should have to protect itself from a worst-case scenario like a flood, earthquake, extended power outage or fire.
But this insurance is often overlooked by those responsible for managing a company’s risk because it’s either wrongly-believed to be included in a company’s existing policies or it is thought of as unnecessary.
It’s a common misunderstanding that funds for rebuilding and compensation for losses are the only key elements to getting a business back up and running after an emergency.
When disaster strikes, one of the biggest losses can be the loss of business. Without people coming through the door, losses can mount by the day.
When business is interrupted, a company may be faced with closing, laying off or furloughing employees, deferring payments to debtors and hoping its customers return when the company is back on its feet. Or an operation can find and pay for a temporary solution, such as leasing a vacant building to re-establish clinic operations, and bankrolling the lease and extra cost of operating with cash on hand.
But those are options for those without business interruption insurance.
An agency like HUB International, the insurance broker for the American Veterinary Medical Association’s PLIT-sponsored program tailored for veterinarians, can offer horror stories about worst-case scenarios.
And there is no shortage of sad stories about businesses that had to close after natural catastrophes like Superstorm Sandy, Hurricane Katrina or the Northridge earthquake. Even smaller-scale incidents like localized flooding or an isolated fire can take out a business.
HUB can also offer real-life examples of companies that had a business interruption and how they recovered because of their coverage.
HUB cites these examples of veterinarians with the coverage.
* “When Dr. A arrived for work Monday morning after a weekend of low temperatures, the building was full of water and still leaking from pipes in the second-floor walls. A claim investigation revealed that the plumbing had frozen in the second-floor grooming area and the pipes burst.
“The practice closed operations for building repairs. Dr. A rented an office and equipment to continue business operations at a temporary location. A second practice of Dr. A’s accommodated some of the lost business. The insurance carrier paid more than $286,000 in damage to the building, the business property, and business interruption and extra expenses.”
* As another example, HUB uses “Dr. B’s practice,” which was declared a total loss from fire. While the practice was being restored, Dr. B rented an RV and a mobile storage unit to resume limited operations in the practice’s parking lot.
The veterinarian’s insurance carrier paid more than $233,354 in damage for business personal property and business interruption and extra expenses, while damage to the physical building was covered by the property owner’s insurance policy.
In the eyes of Janet D. Donlin, DVM, CEO of AVMA PLIT, business interruption coverage is just as important as insuring a building or contents.
“You need a team of advocates working for you (who are) experienced in the veterinary profession—veterinarians serving veterinarians,” Dr. Donlin said.
Business interruption protects a practice’s profit when physical damage to the property causes an interruption of operations, and expenses typically covered include: payroll expenses; overtime; cost of transferring operations to another site, which includes rent, lease payments on premises and equipment; lost income; and the cost of outside services.
Related coverage includes civil authority interruption, which provides coverage for a loss resulting from a government agency restricting access to a practice, and utility interruption, which provides coverage for a financial loss due to damage at a location other than one’s own practice —such as damage at a utility generating station or compromised power lines.
Say, hurricane-driven winds cause a power outage and force a practice to temporarily close. In addition to lost business, the practice may experience financial loss if the power outage ruins refrigerated biologics or inventory.
Tom Kelly, vice president of HUB, notes that getting coverage for these possibilities is a good idea, but adds that it’s important to make sure the policy does not exclude loss of power utility interruption for downed overhead transmission lines, which Kelly said is a typical exclusion.
Like most risk and insurance professionals, Kelly encouraged practices to consider risk financing as part of an overall action plan in case of emergency.
“In addition to insurance protection, planning ahead will minimize your impact,” Kelly said. “Every practice should have an emergency action plan for business continuity. Your written plan should outline emergency duties and procedures including employee support services, clean-up and salvage, and resuming operations.”
Clayton MacKay, DVM, a veterinary consultant in Nobelton, Ontario, Canada, is a big proponent of business interruption insurance, particularly with so many small businesses still struggling to recover in the post-recession era.
“In the current environment of poor economic returns that business insurance (at least business interruption) may be even more important because more practices are closer to the line economically and a dramatic decline in cash flow could end in bankruptcy,” Dr. MacKay said.
MacKay said some considerations should be made when buying business interruption insurance including location of a practice and the likelihood of natural disaster, the size of practice, number of veterinarians, whether the practice can continue for a prolonged period if individuals are absent for any number of reasons, and comparing the price of insurance to the cost of self-insuring a practice.
What other forms of business insurance should veterinarians consider?
Supplemental property coverages to consider include back up of sewer and drain, electrical and mechanical causes of loss, animal damage to property, animal bailee coverage and building ordinance.
| Insurance terms
DEDUCTIBLE: The amount of loss paid by the policyholder.
EARTHQUAKE INSURANCE: Covers a building and its contents, but includes a large percentage deductible on each.
EMPLOYMENT PRACTICES LIABILITY COVERAGE: Liability insurance for employers that covers wrongful termination, discrimination and other violations of employees’ legal rights.
EXCLUSION: A provision in an insurance policy that eliminates coverage for certain risks, people, property classes or locations.
EXPERIENCE: Record of losses.
EXPOSURE: Possibility of loss.
GROUP INSURANCE: A single policy covering a group of individuals, usually employees of the same company or members of the same association and their dependents.
HARD MARKET: A seller’s market in which insurance is expensive and in short supply.
INSURANCE: A system to make large financial losses more affordable by pooling the risks of many individuals and business entities and transferring them to an insurance company or other large group in return for a premium.
LIABILITY INSURANCE: Insurance for what the policyholder is legally obligated to pay because of bodily injury or property damage caused to another person.
MALPRACTICE INSURANCE: Professional liability coverage for physicians, lawyers, and other specialists against suits alleging negligence or errors and omissions that have harmed clients.
PERIL: A specific risk or cause of loss covered by an insurance policy, such as a fire, windstorm, flood, or theft.
POLICY: A written contract for insurance between an insurance company and policyholder stating details of coverage.
RATE: The cost of a unit of insurance, usually per $1,000. Rates are based on historical loss experience for similar risks and may be regulated by state insurance offices.
RISK: The chance of loss for the person or entity that is insured.
SOFT MARKET: An environment where insurance is plentiful and sold at a lower cost, also known as a buyers’ market.
UMBRELLA POLICY: Coverage for losses above the limit of an underlying policy or policies such as homeowners and auto insurance.
WORKERS’ COMPENSATION: Insurance that pays for medical care and physical rehabilitation of injured workers and helps to replace lost wages while they are unable to work.
SOURCE: INSURANCE INFORMATION INSTITUTE
Both Donlin and Kelly offered a long list of what should be included in an insurance portfolio that will protect a practice.
Among their suggestions were business property/general liability, commercial auto, crime, cyber liability, data breach, employee benefits liability, employment practices liability, flood, workers compensation and professional liability for each doctor in the practice.
Data breach, also commonly referred to as cyber liability, is a coverage increasingly sought by practices, Donlin said.
A veterinary practice could be responsible if personally identifiable information is compromised. And anyone who follows the news knows that such “hacks” have been happening even at big corporations that can afford sophisticated security software.
This coverage responds to loss, theft, accidental release, or accidental publication of personal information, Donlin said.
Another emerging exposure has been created by Health Insurance Portability and Accountability Act privacy rule violations in cases of unauthorized access to personal information on a practice’s employees.
Data breach insurance, noted Donlin, provides coverage for legal and forensic services, public relations and crises management, notification expenses and defense and liability expenses.
Insurance agent Tiffany King encourages veterinarians to consider disability insurance for themselves, other doctors in the practice and their employees, noting that statistically, disability can occur to about 10 percent of people ages 18 to 64.
It’s also useful as a funding vehicle, said King, of King & Associates in Orlando, Fla.
“If there are multiple partners, a buy/sell arrangement should be legally established and that should be funded with both disability and life insurance,” she said. “This keeps the partners out of business with the sick or deceased vet’s spouse and provides the right amount of cash at the very moment it is needed.”
The costs of insurance should be looked at and weighed against the costs of not having insurance in today’s litigious world.
It’s a reminder that Brian Borngesser, president of the commercial insurance division for Henssler Norton Insurance in Atlanta, likes to offer to practice managers.
“A veterinary clinic should also consider employment practices liability coverage,” Borngesser said. “This coverage provides ownership and management with protection from discriminatory charges brought against a business by their employees or employment prospects.”
A U.S. Equal Employment Opportunity Commission report shows 99,412 workplace discrimination charges were filed in 2012. EEOC charges have been in the rise for several years since the recession. Before that, the annual number of charges was in the high 70,000- to low 80,000-range, the EEOC report shows.
HUB’s Kelly noted employment practices liability, which agents and carriers often abbreviate as “EPL,” will respond to allegations of discrimination, harassment and wage and hour violations.
He advises looking for a stand-alone policy that offers an optional punitive damages sublimit, which provides coverage if a court awards punitive or exemplary damages above what is required to compensate the plaintiff, because most EPL policies exclude coverage for punitive damages.
A policy should also provide risk management tools like access to free unlimited human resources consulting advice and online management training and education resources, Kelly advises.
Costs for insurance vary as much as the coverages a practice can chose, and in the insurance business agents like to use the terms “hard” or “soft” market to describe where pricing is headed.
While opinions run the gamut, Borngesser believes the market is “hardening,” meaning veterinarians may see insurance rates go up.
“The insurance market in general is starting to harden and vets are definitely seeing this,” he said. “Property rates are increasing quite a bit, mostly due to recent storm damage and wind losses.”
Veterinarians are also seeing the cost increase in already pricey worker compensation rates, Borngesser noted.
“Workers compensation is a very costly coverage for an insurance company and so the loss frequency along with the average claim expense has caused carriers to seek rate increases,” he said.
Navigating rates for all forms of insurance is a tricky issue, and the rates a business pays aren’t always based solely on losses, Borngesser said.
“It’s important for the business owner to understand that while your business might have a squeaky clean claims record, the industry as a whole does not,” he said. “This stresses the importance of having a good insurance agent to be able to navigate through these rate issues.”
Kelly and Donlin agreed that the market for business insurance has hardened, particularly worker comp rates and property insurance rates, though they don’t believe other lines of coverage have been as affected.
Donlin said that in the AVMA PLIT-sponsored program annual premiums for primary professional liability, also known as malpractice insurance, veterinary license defense, professional extension (animal bailee) and student professional liability remained unchanged for the 2014 policy year.
In fact, annual rates have either decreased or remained stable in seven of the last 10 years and primary insurance rates today are lower than in 2005, Donlin said.
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