You may have said at one time: “Insurance companies are all the same. I just want the one with the lowest price.” Have you ever used that reasoning when selecting your company's insurance? While there may be many similarities between coverages insurance companies can offer, there are many subtle — and not so subtle — differences between actual insurance contracts that can significantly impact your business. Those differences may be service-related or coverage-related.
When it comes to service, partner with an insurance company that provides value-added services. These services may include, but aren't limited to:
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On-site risk analysis
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Individualized safety programs
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Access to a library of safety materials and programs
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Medical provider networks that aggressively manage and monitor the treatment of workplace injuries
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Assistance in setting up a return-to-work/light duty program
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Programming recommendations that help manage experience modifiers and help contain workers' compensation costs.
You probably have the basic business coverages, such as building, business personal property, installation floaters, general liability, business auto liability and physical damage, and workers' compensation.
However, if your insurance representative or insurance company doesn't know your industry, there is a chance that some coverage needs may be overlooked. These missing coverages could put your business at risk.
Two commonly overlooked insurance coverages for HVAC contractors are coinsurance and business errors and omissions. Let's take a look at these two important coverages.
Coinsurance
Coinsurance is a separate agreement between the insurance company and the policyholder. The insurance company agrees to write the coverage at a reduced rate and, in return, the customer agrees to maintain insurance to at least 80%, 90%, or 100% of the policy value. Insureds who fail to keep their part of the agreement become “co-insurers” of the property to the extent of the deficiency. Their “penalty” is a reduction in the amount the insurer pays to settle a claim.
Originally, coinsurance was intended to discourage policyholders from insuring only a fraction of their values to cover just the more common smaller losses. Today, it's included in almost every property policy. Coinsurance penalties usually result from unintentional under-insurance, rather than purposely gambling against a serious loss.
The coinsurance formula is:
(‘Did’ [amount carried]) / (‘Should’ [amount required]) × Loss = Loss Payment
Here's an example of how it works. Assume a contractor has personal property values of $100,000, has purchased $60,000 in coverage, and has coinsurance at 80%. This contractor suffers a loss in the amount of $20,000.
Applying the coinsurance formula:
($60,000 [amount of insurance]) / ($80,000 [80% of property value]) × $20,000 Loss = $15,000 Loss Payment.
The policyholder in this example becomes a “co-insurer” for 25% of the loss. Failure to maintain adequate limits of insurance costs the customer $5,000.
Coinsurance calculations are confusing and often misunderstood. Keep in mind that as the coinsurance percentage increases, the margin for error is reduced. It becomes increasingly important for the insured to be certain the limit of insurance is adequate. Coinsurance on personal property can be even more challenging because inventory values are subject to fluctuation, and policy limits would require constant review.
Business Errors and Omissions
The business errors and omissions policy was developed especially for exposures unique to your business, plugging many of the gaps that are built into most product and completed operations insurance policies.
This type of policy provides protection for costs that result from your legal obligation to make good on faulty work, material, or design caused by a negligent error or omission you make in your business, including lawsuit defense costs and damage from the loss of use of property. (General liability policies will apply if bodily injury or property damage occurred.)
You will want to be sure your errors and omissions policy pays for or covers the following:
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Repair or replace work due to an alleged error or omission, but no bodily injury or property damage is involved.
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Damage to work performed
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Damage to your products
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Recall of products, work, or impaired property
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Costs to redo a job or repair/replace a faulty product you install.
Here's an example of how and errors and omissions coverage works:
A large private home is being remodeled. An HVAC contractor recommends and installs a new heating and air conditioning system. Mechanically, the system functions properly. However, the system does not adequately heat or cool the upstairs of the home. Another party advises the dissatisfied owner that the heating and cooling system is undersized and the ductwork is insufficient. The homeowner successfully sues.
Who reimburses the contractor for the extra expense to remove the undersized system and reinstall the ductwork? That's where an errors and omissions policy comes into play.
Look Beyond Price
The bottom line for your business insurance needs is exactly the same as the bottom line you try to convey to your customers when they're shopping for an HVAC system: look for value, not just price. There's a lot more to consider than price alone when it comes to protecting your HVAC business. The right coverage and value-added services can give you real value for your premium dollars.
Mark Love is an account executive for Federated Insurance. He is the account executive in Association Risk Management Services for the states of Kentucky, Maryland, Ohio, Virginia, and West Virginia. Love can be reached at 800/533-0472, or by e-mail at [email protected].
This article is for general information purposes only. It does not include all steps or processes necessary to adequately protect you, your business, or your customers, and should not be relied upon for specific coverage information. Please consult with your personal attorney or a qualified insurance professional for advice unique to you and your business.