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Insurance Foresight: A buyer's guide to insurance.

January 27, 2009
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When browsing at the local mall these days, I find myself having to repeat the phrase “just looking” more than usual.



I hear others using it, too. It seems that all of us are holding tightly to our wallets and trying to make do. For me, avoiding the mall is a good game plan for keeping my money. But there are some purchases that cannot be avoided--like insurance. For these must-haves, there are ways to get the most bang for your buck.

A Balancing Act

The cost of insurance protection depends on different factors, but the basics are the same. “Pay-in” costs, or premiums, are what you guarantee to the insurance company whether you use the plan or not. “Pay-out” costs, or claims, are your payments in the case of a financial loss.

A basic rule regardless of coverage is that you either pay more on the way in (insurance premium) or on the way out (financial loss/claim). The objective is to pay as little as possible on the way in while funding the ability to pay on the way out. Most of us cannot afford to risk our homes and other assets by going without insurance. But there are ways to keep the premiums as low as you can without creating too much risk at claim time--or, in other words, keep costs down without giving up your safety net.

Health Insurance

Take a close look at your co-payment. If you visit the doctor less than two times per month on average, it is a good idea to consider increasing the co-pay charge per visit to reduce the pay-in cost up front. Increasing co-payments for emergency room visits, specialists and hospital stays should also be considered to reduce pay-in costs.

Also consider the deductible for your health insurance. The higher the deductible, the lower the pay-in. Some plans only charge a deductible for out-of-network services. When shopping for health insurance, ask to see plans that also have a deductible for in-network services so that you pay the first $500 or so of medical costs before the insurance kicks in. This will offer even further savings on the pay-in.

Examine your needs. Are you paying for a plan that allows both in-network and out-of-network services when your employees/family are only going to in-network providers? In-network-only plans will reduce your pay-in cost.

Higher-risk options--such as a health savings account (HSA) or health reimbursement arrangement (HRA) plan, which allow the participant or employer to fund or promise to pay the first dollars of health insurance--will also reduce the pay-in cost. Section 125 (cafeteria) plans help employees pay for their share of insurance premiums as well as out-of-pocket costs (deductibles, over-the-counter medicines, etc.) on a pretax basis. If you are an employer, you may decide to pay for the administrative costs of this plan while asking your employees to take more of the burden for health insurance. If employees can pay for their cost pretax, the net effect on their take-home pay is reduced.

You may be able to avoid associated fees by purchasing coverage elsewhere. The key is to understand the amount you are spending on administrative costs that are not directly linked to the coverage itself. Ask these questions to determine whether your plan includes unnecessary expenses:
  • What are the additional fees/costs associated with the plan?
  • Is membership required to obtain coverage? If so, what is the cost?
  • Are there charges for installment plans or other financing fees?
  • Are there late-charge fees?
  • Are there administrative fees?
  • Are the group premiums less than what they would be if purchased outside of the group?
After you know the answer to these questions, you may decide that the fee is worth the service provided.

General Liability

General liability insurance protects the company from claims for bodily injury and property damage from third parties. The cost for a design professional should be bundled into the cost for property coverage and not a separate line item cost on insurance. If you are paying separately for this coverage, question your broker.

Property

Consider the following for property insurance: Are your deductibles as high as they can be? Are you aware of all of the automatic limits included in your policy so that you are not duplicating a coverage and cost? Are you covered for all catastrophic potential? For example, flood insurance is not generally included on standard property policies.

Automobile

Depending on how you operate your company, it may be cost effective to increase your deductible to lower your pay-in cost for auto insurance. Other factors that can impact your cost include the drivers, the overnight location and the purpose/use of the vehicles. Determine whether extra coverage is worth the cost. Do you need rental reimbursement, or do you have an extra vehicle you can use? Are you already enrolled in another plan that offers towing services? How much does full glass coverage cost?

Notice that I did not discuss the liability portion of the auto coverage. This is because this portion is your safety net, and it is where the majority of your dollars should be allocated.

Workers’ Compensation

Review your workers’ compensation insurance. Are you eligible for credits from experience modification or merit modification? Are any discounts or dividends available from your current insurance carrier or others? Is payroll assigned to the correct classification? Make sure to identify employees and their work duties with your broker.

Professional Liability

Make sure that what you report on the application for the coming year is accurate and not an inflated version of your gross billings for the past three years because insurance costs will be based on these figures. As always, higher deductibles will reduce premiums.

Extra Costs

Determine whether you are paying any extra costs that you can eliminate. Are you are paying for coverage through an installment plan with a finance company? Many insurers offer installment billing for a small fee, and some even offer free financing if you set up automatic withdrawal of premium payments from your checking account.

Is the insurance through a surplus lines carrier, which creates an additional cost for taxes and fees? Are there options for other companies that do not require this additional cost?

If you purchase insurance through a group/association plan, are you paying a membership fee solely for the purpose of obtaining reduced cost on coverage? You may be able to obtain comparable coverage for the same cost without the additional membership fees.

Stand Behind Your Product

By carrying insurance, you are standing behind your product and people. At a time when we are all being asked to share the burden of many, do not forget to ask the same for the continued life and success of your own business by passing on the insurance cost to your customers on a job-by-job basis. This practice will allow your business to continue providing quality work for a price that is fair.

One of my surveyor clients told me a story about his largest claim ever. Fault was assigned to the architect, engineer and surveyor--and he, the surveyor, was the only one who had professional liability coverage. When the problem came to light, the surveyor thought that the builder would never hire him again because of the error on his part. However, 20 years later, the surveyor continues to work closely with the builder. The builder remembers that the surveyor was the only one who stood behind his product with insurance. This allowed the builder to continue his work for the owner and keep his reputation intact. Yes, a claim was paid out. But it resulted in a continued working relationship based on trust and mutual respect that benefited the surveyor, his client and the job owners.

With a well-thought-out strategy and the insurance to back it up, small businesses will continue to be the champion in this country and will be able to support the needs of their customers, employees and owners well into the future.

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