Home > Uncategorized > Stray Thoughts on Business Insurance and How Your Insurance Carrier Can Kill You

Stray Thoughts on Business Insurance and How Your Insurance Carrier Can Kill You

One of the bigger threats to your company’s security could come from an unexpected source: your own damn insurance company. In our experience, the company you pay to save you when the chips are down is the most likely instant killer of your business. It’s not the moron that sues you (and he or she will), or the accident that happens (it will), or health care costs (we agree, they’re terrible), but it’s the very company that you hire to insure against the risks of day to day business that may pose the biggest risk of all.

The relationship between your business and your insurance provider is unique in the sense that you are making payments toward purchasing peace of mind with the hope that you will never have need for the insurance company’s services. However, billion dollar ad campaigns notwithstanding, insurance companies are not in the business of providing generous support and security to their clients. They are in the business of making money: by charging premiums, and hopefully receiving more premiums than the costs of paying out claims. Even if you make all of your monthly payments in full and on time, your insurer may not cover you in the event of a catastrophic loss and will likely be more willing to expend resources toward defending itself in a rejection of your claim than toward paying out your policy.

No matter how positive your relationship is with your insurance provider or for what length of time you have faithfully paid your premiums, when the chips are down, your insurer is not your friend. It is easy to vilify the insurance agents and assume they are inherently evil (and it’s true, there are many scumbags out there), but it is equally likely that you are engaging in some self-sabotage with your insurance. However, there are numerous steps you can take to be proactive about your insurance policies and better secure your business, as well as an active body of California law that protects the insured from many of the most egregious examples of bad faith conduct by insurance providers.

Perhaps the biggest mistake most business owners make when purchasing insurance policies is not reading the contractual language behind their policies. And who can blame them?  Policies are long, boring, and full of legalese. Relying on the word of your insurance broker is easier, particularly if you do not have a background in the legal terminology employed in most contracts, but brokers do not necessarily have your best interests in mind and may not accurately or completely describe the specific exclusions and coverage outlined in your policy.   Brokers are essentially marketing agents of the insurance companies they represent and make money by commissions on the premiums you pay.  That’s not inherently a bad thing, and in our experience, most independent insurance brokers are hardworking and knowledgeable. However, they also find the policies to be long, boring, and, well, full of legalese.  They often don’t read them either.

Nevertheless, read your policy and all supporting documentation and be aware of what your insurance actually covers. If you’re still unclear, have a lawyer read it: preferably a lawyer with some background in insurance coverage issues. You have a legal right to have an attorney review and explain a contract to you prior to your signature if you do not feel comfortable interpreting the contractual language on your own. Oftentimes a business owner will assume that they are covered in the event of certain losses, only to find out in a moment of crisis that the fine print calls for lower coverage limits than expected or exclusions of coverage all together. It may not be that your insurance company purposely misled you, but rather that you bought the wrong insurance for your needs due to willful neglect to read what you were signing. It would be nice to know this beforehand, right? Whether your business is truly covered if something happens? Think about it.

We have a saying here at Rad | Krogh:  any idiot who can afford a filing fee can file a lawsuit.  Your business insurance is the key to managing the costs of such a suit and any loss that may result.  But in the event of a catastrophic event insurance companies can get, well, sort of “wiggly”, and deny coverage on various grounds.   Then, boom, you have an uncovered loss – and then the trouble really begins.

Another mistake many business owners make is in mistaking the relationship between their company and their insurance provider. Insurance is inherently an uneven business expense in which you pay for a service you may never receive. The product you are really purchasing is the peace of mind and feeling of security that insurance can provide, but it is important to remember that insurance providers are businesses as well, and accordingly, they are out to make a profit. To the extent that both you and your insurance provider are hoping that there will never be a cause for you to make a claim on your insurance, you and your insurer can be on the same side. However, if a situation arises in which you are dependent on your insurance to cover business losses, the insurer’s goal is to protect its assets by taking whatever recourse it can to prevent paying out on a policy. The best tactic to use in the event of a loss is to be aggressive with your insurance company. Insurers will only pay out on a policy when they feel that they are legally compelled to, not just because you ask nicely. Be prepared to confront your insurer with evidence of your loss, excerpts from your policy identifying your related coverage areas and limits, and a strong drive to get what you are legally entitled to based on your policy.

Insurance companies employ a large team of legal counsel, accountants, and insurance agents who are experts at contractual analysis and insurance law, making it difficult for a customer to succeed at going against them alone. It can be helpful to arrange a similar team on your side in the event of a dispute with your insurance company by seeking legal representation to aggressively pursue your claim. You can also work to circumvent the experts employed by insurance companies by using independent brokers when you purchase your policies. A broker employed by a specific insurance firm is more inclined to act as a sales associate and advocate for that company’s products, regardless of actual value, than an independent broker would be. Groups such as Independent Insurance Agents and Brokers of America can prove to be useful resources in finding a broker who can objectively weigh the pros and cons of specific policies as applicable to your unique situation, risks, and needs. Furthermore, your broker’s job does not end after you purchase your policy; they are also there to assist you with claims and understanding insurance law, as well as to maintain client records in case you misplace your policy documents. Regardless of whether you choose an independent broker or one employed by a specific company, ask for his or her licensing information and several references before allowing him or her to negotiate a contract on your behalf to ensure that you are prepared with a trustworthy team of experts on your side. Over the years, we have worked with many outstanding insurance brokers in the region, many of whom are actively engaged in their clients businesses and provide outstanding service.

Unfortunately, even if you steadfastly follow all of the above suggestions, there are still ways that your insurance provider can kill your business by going outside the legal boundaries of their own rights and obligations. Luckily, beginning with the landmark case Comunale v. Traders & General Ins. Co. (1958), which established the concept of insurance bad faith as a cause of action, lawmakers and courts have been increasingly proactive in protecting business owners from fraud and unethical business practices at the hands of their insurers. Although insurance companies have their own rights and are legally entitled to pursue profits, there is a fine line between exercising their rights and engaging in unethical conduct to avoid a claim. In any situation, insurers have basic obligations to accurately represent their own contractual obligations to the insured in the event of a claim, to refrain from doing anything to injure the right of the insured to receive the benefits of the insurance contract, as well as to conduct prompt investigations of any claims (see CA Insurance Code § 790.03). In the event that an insurance provider breaches its contract with an insured by unjustly denying a claim, engaging in dilatory claims handling, or any of numerous other “bad faith” business practices, many businesses have seen success in the courtroom in pursuing both civil and punitive damages against their insurers.

Civil penalties are presumed to make the plaintiff “whole” by remedying any losses the plaintiff sustained by the conduct of the defendant. In cases involving lawsuits against large insurance corporations, civil penalties are often not sufficient to deter the insurance companies from engaging in bad faith conduct with other clients. Consequently, CCP §3294 (a) is frequently cited in resolving these cases, allowing a defendant to be charged with punitive damages in cases of intentional dishonesty as a means to punish and deter future bad behavior. One such case involving a particularly egregious example of an insurance company purposely misleading a client and denying a claim on fraudulent grounds, Amerigraphics, Inc. v. Mercury Casualty Company (2010), initially led to a $1.7 million punitive damages award, approximately 10 times the amount of compensatory damages (this value was later reduced to $500,000, just under four times the amount of compensatory damages). The court cited the defendants’ “really terrible,” “really, really bad” handling of the plaintiff’s insurance claim as the grounds for punitive damages, calling the case “a disaster,” a “total disaster,” and “a very, very, very solid case for punitive damages, as solid as I have ever seen in my time on the bench.” It is usually worthwhile to pursue your options within a court room if you are wronged during an insurance claim and can offer compelling evidence, particularly if the misconduct led to large losses to your business.

Let’s face it though: nobody wants to see the inside of a court room. Although Amerigraphics had court room success, the hell they were put through trying to get coverage spanned years, and it’s unclear whether this small company was made whole.  Don’t let this happen to you.  Make good, informed business decisions early on.

Insurance coverage is important to the security of any business and, in many situations, is legally mandated. It is nearly impossible to avoid purchasing insurance and it is likely that you will face the need for an insurance claim at some point during the operation of your business. There are numerous mistakes business owners make in finding and purchasing insurance, as well as in pursuing claims against their insurance companies in the event of loss. Furthermore, insurance companies are intrinsically designed to benefit themselves rather than the insured. In light of these obstacles, it can be daunting to deal with the legalities of a claim on your insurance, particularly if you are already dealing with the effects of a business loss or catastrophic event. The attorneys of Radoslovich | Krogh, PC are experienced in assisting clients from businesses small and large who are impacted by unfair business practices of their insurance companies and we can help you navigate the complexities of insurance contract law should a dispute arise.

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