Plan for Business Risk: Basics of Business Insurance

Running an accounts receivable agency means balancing opportunities with business risks that can threaten your bottom line.

From compliance violations to data breaches, even a small misstep can become costly if your team isn’t prepared. That’s why effective business risk management is essential.

Attorney Lauren Valenzuela and Finexus Insurance CEO Katie Zugsay, both experts in financial services, stress that the right risk management strategy (and the right business risk insurance policy) can make all the difference.

Here’s a guide on using your insurance policy to manage the operational risks you can’t avoid, the basics of what a business policy might include, and what to look out for to protect your agency.

Anatomy of a Business Risk Insurance Policy: Insurance Provisions

To get the most out of your business insurance policy, you need to understand what it includes. Here are the six sections most policy provisions fall into:

1) Declaration page

This section provides a snapshot of your overall policy. It is usually no more than a page or two, explaining your basic limits.

2) Insuring agreement

This section tells you what is generally covered in your policy. It usually includes boilerplate language. If you negotiate changes to your policy, they may not appear in this portion of the document.

3) Conditions

The conditions portion of an insurance policy usually outlines the requirements your business must follow for coverage to apply.

This section may discuss how or when to file claims properly, what may happen if fraud is committed, or other instances that may cause forfeiture of coverage.

4) Exclusions

This section discusses what is specifically not covered under your policy. This is an important section to understand before business risks create a real problem. Otherwise, your company may end up covering unexpected costs.

5) Definitions

This is an often-overlooked section of insurance policies. Depending upon the definitions your policy follows, you may not be fully covered for certain events or scenarios.

For instance, Zugsay suggests looking at the definition of a “Loss” to find out whether it includes defense costs, or how other common insurance terms are defined specifically within your policy.

6) Endorsements

This section includes all the changes you have negotiated for your policy. Zugsay recommends starting at this section, as it may alter or negate other portions of the document.

To understand the policy as a whole, make notes on your copy based on the changes mentioned in this section. Once all changes have been noted, read your policy from the beginning. This will save time and reduce confusion.

Business Risk Insurance Policy: Making Claims

Despite all efforts to prevent business risks, some events are bound to happen. When you can’t avoid risks that lead to an issue, it’s time to look at your insurance policy and make a claim.

During this risk management process, here’s what you need to know about policies and claims:

1) Understand the basis and nature of the claim

Consumers, plaintiffs’ attorneys, or regulators may use a specific label to describe a situation, but another definition might actually fit better for insurance purposes. Ask yourself:

What is the nature of the situation?
What part of the policy does it fit best?

Zugsay offers this example for debt collectors:

Oftentimes, FDCPA cases allege improper third-party disclosure. They may add a breach of data and an “intrusion into seclusion” to this situation as well.

These claims may fit better under a cyber policy. It’s important to speak to your insurance broker when you’re trying to understand what type of claim to make.

2) Get familiar with additional coverages

Become familiar with your Errors & Omissions policy and any additional coverages your policy may include.

Sometimes brokers won’t mention every additional coverage within a policy because they don’t realize these are relevant to your company’s business risks.

These additional coverages (like licensing proceedings or subpoena defense) can provide you with money when you really need it, and these additional coverages often don’t include a deductible.

Ask your broker for a cheat sheet of additional coverages, or create one yourself. Keep a list easily accessible as part of risk monitoring, to quickly view if the need arises.

3) Time is of the essence when filing a claim

Timing is key when filing an insurance claim. It can impact what type of claim you file and how your claim is treated based on the incident and filing dates.

Always note important dates during a risk analysis or claim.

4) Know the difference between policy types

Understanding what type of policy you have can impact how and when you might report a claim.

Sometimes an incident won’t come to light right away. Effective risk management requires a knowledge of your policy type, so you know if you will be covered.

Occurrence policies

If an incident occurs during the policy period, your company is protected from covered losses, even if a lawsuit is filed years later.

As long as you report to the carrier right after becoming aware of a lawsuit, the reporting timeline isn’t an issue.

Claims-Made-and-Reported policies

Unlike an occurrence policy, this claim must both occur and be reported within the active insurance policy period.

Retroactive dates matter. These define how far back an incident can occur and still be covered.

Retroactive dates are especially important when switching carriers. Depending on the new retroactive date, past activities (such as calls, letters to consumers, or credit reporting) may not be covered.

To avoid coverage gaps, negotiate with the new carrier to adopt your previous retroactive date.

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Evaluating Coverage Options to Manage Business Risks

Don’t assume every insurance plan is the same. Differences between plans can impact your company when you need help the most.

Business owners should consider their company goals to determine the appropriate coverage for their unique business risks.

What protection are you seeking?

For the proper coverage, first decide what protection your agency needs. Ask: What is the most important type of protection that will help with mitigating risks?

For example, debt collection agencies are likely to deal with compliance risk, like FDCPA, FCRA, TCPA, and other regulatory issues. Check the details of any defense protection included in your business risk insurance policy.

Items to consider:

Defense: Defense in a policy typically only covers legal defense costs. Attorney fees are not always included, which could leave your agency responsible for a large expense during a lawsuit.

Indemnification: Unlike defense, indemnity typically addresses settlements and final judgments. Often, insurance companies will offer a combination of both protections.

Thinking ahead: Consider what’s important and ask for coverage proactively.

Omit what you don’t need: Don’t get extra coverage that will never be relevant. You shouldn’t pay more for a policy that doesn’t apply to your needs.

Related claims

A little-known insurance policy provision is the ability to relate multiple claims under one deductible. This would be useful if a single error in your agency causes multiple lawsuits from consumers.

If the provision applies, you would only have to meet your deductible once before receiving insurance benefits for multiple claims.

Use this feature with extreme caution: When negotiating with a new carrier, related claims could make you appear to be a high-risk client (even if you’re not).

Have an open conversation: Meet with your broker to evaluate all possibilities available to your business, and weigh the benefits and drawbacks.

Business Risk Management: Representing Your Brand

Take caution with how you represent your company when shopping for insurance or filing claims. Misrepresenting your agency can lead to wrong coverage, reputational risk, or denied claims

When making a claim

Clearly Understand the following:

Who did it
What are the exclusions?
When did this happen?
Where (under what circumstances did this arise)?
If sublimits don't apply to your claim, avoid buzzwords that my falsely trigger one.

Be truthful with your insurance carrier

Always be truthful with your insurance carrier. Don’t mischaracterize events and timelines. Doing so can cause your claims to be denied. Clearly answer the following when making a claim:

Who did it?

What are the exclusions?

When did this happen?

Where (under what circumstances did this arise)?

If sublimits don’t apply to your claim, avoid buzzwords that may falsely trigger one.

Take timely action with claims and cooperate with carriers

Your business risk insurance policy will only protect your agency if you cooperate with carriers. Reporting must be timely. Ask for bordereau reporting if needed.

Bordereau reporting allows you to compile and send periodic summaries of claims and potential claims to your carrier.

This process simplifies reporting if you have a high volume of potential claim activity.

Bordereau reporting must be negotiated ahead of time.

It’s also essential to cooperate with insurance during settlements. Otherwise, you may be on the hook for payouts. Look out for “hammer clauses” in your policy.

A hammer clause may apply if your agency is offered a settlement you don’t agree with, but the insurance company feels is fair.

You may find your company financially responsible for some or the entirety of the court case that follows a rejected settlement offer.

Preparing for Business Risks Through Insurance Coverage

Now that you know the basics of an insurance policy and coverage considerations, it’s time to identify the next steps in managing your risk.

Does your current business risk management program cover the events you might face? Find out if you’re prepared:

Identify your risks: What are the business risks your agency faces? Are you prepared financially? Are you covered under your policy?

Understand your documents: Are you paying extra to shift risks that don’t apply, or aren’t a big threat to your business?

Compare risks with your program and fill the gaps: Are there new risks that you may be overlooking? What needs to be done to mitigate or protect against these risks?

Follow up on reservations of rights and pending claims: Are you keeping track of your claims? Pay attention to pending claims to know if they get denied. Don’t get stuck paying the surprise cost of an incident.

Strategy for responding to claims: Are there risks you’re mitigating that your insurance carrier needs to know about?

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