WALNUT CREEK, CA—Failing to plan ahead of time for an emergency—via system back-ups, video walk-throughs of their space and utilization of cloud-based storage systems—is the worst mistake companies can make, Newmeyer & Dillion attorneys Jacquelyn Mohr and Alan Packer, Esq., tell GlobeSt.com. Mohr recently published a news alert highlighting “Steps to Preserve and Enhance Your Insurance Rights In Light of the Recent Natural Disasters.” We spoke with her and Packer about the most common insurance mistakes companies make related to natural disasters and how to avoid them.

GlobeSt.com: What are the most common insurance mistakes companies make that are related to natural disasters?

Mohr and Packer: One of the most common issues we see is that companies fail to plan ahead of time for an emergency. It's such an easy thing to do, but often companies are too caught up in the day-to-day operations of their business to take the time to prepare for the worst. For example, companies regularly do not have a back-up of their system; a video walk-thru their office, focusing on their personal property; or a cloud-based storage system of important policy documents and contact info.

Another common mistake we encounter is that companies often don't have enough insurance, or the right kind of coverage. The most basic question is deceptively simple: Does the business have the correct coverage? In the business context, this is a critical question to consider regularly.

For example, one client of ours had a series of policies that were reflexively renewed year after year, without substantial discussions. Since their original policy, they had merged with another company, opened new locations and engaged in new businesses, and their existing structures had been substantially improved. Not only were their prior coverage limits no longer adequate, but they arguably did not apply to their current business form, were never updated to include new locations and did not cover certain environmental exposures they had acquired with their new business.

It's also important to be mindful of what could happen in an emergency: Does your company use chemicals or other products that could potentially have a direct negative effect on the environment if spilled or released because of a natural disaster? This likely wouldn't be covered under the traditional property policy. There is definitely a policy that will cover this, but you need to ask for it.

We therefore make it a point to encourage our clients to think through all aspects of their business and make sure they are fully covered for each area. For example, property coverage likely won't provide a business with coverage for errors and omissions, and vice versa.

It's also important to consider the policy's limits regularly: How do the deductibles apply if you have multiple locations? Are they applied per site, per policy period, per entity? Similarly, what are the sub-limits for your coverages (i.e., the limit for each occurrence)? Sub-limits often need to be increased as a business grows or becomes more complex. How much coverage do you have for building-code upgrades (especially important for businesses that own older properties)? Is the business-interpretation coverage adequate? And all the other policy limits and figures.

Another common mistake we see that we have already touched upon above is that businesses often forget to review their coverage regularly to update their coverages as the business grows and evolves. Questions to consider when evaluating your coverages should include:

Is the business accurately described in the insuring agreement? For example, if you're a real estate company but you end up taking over the lunch café in the office building you own, you've suddenly got exposures that you didn't have before, and you may not be covered for it if your policy just extends to your work in “real estate.” In another situation, a client had a policy that stated all of the company's work was completed in its factory. In reality, although they did the complicated manufacturing in their factory, the business would also assemble the manufactured items when delivered, if requested. A dispute arose about the assembly activities that occurred at the delivery location. The insurance company denied coverage because the policy said they only work in the factory.
As demonstrated in these examples, a critical question for growing/changing business must always be: Are you covered for your new activities? This is also true when your business acquires another company: What coverage comes with the acquisition? What do you need to procure on your own?

We therefore recommend that companies regularly perform due diligence to make sure their coverage meets their growing and changing needs. Also, be sure to update your insurance brokers of business changes to make sure you are covered.

The final mistake we see is relying too heavy on brokers and insurance agents. Read it before you sign. Don't trust blindly; this goes back to the issue above about understanding your coverage. You will be the one left holding the bag if your coverage isn't correct—not your broker or insurance agent.

Just because a policy is expensive, doesn't mean it's going to cover you in an emergency in the way you hope. Ask questions; and make sure they show you where specifically in the policy the provision is.

GlobeSt.com: How can these mistakes be avoided?

Mohr and Packer: Failing to plan ahead of time is easy—just do it. For everything else, these mistakes can be avoided if business owners, executive teams and risk managers are actively engaged and understand their coverage. We encourage our clients to review the policies themselves. Engage with your insurance broker, and ask questions. Make your broker explain all the aspects of your policy on which you are unclear. And ask your broker to walk you through how the claims process works, as well.

Consider an outside review: Either you or someone you trust should confirm that you have appropriate coverage; brokers and insurance agents can be great resources to show you where to look, but you want to make sure you understand, rather than blindly trusting someone else who doesn't have the same stake in the business that you do. Spit-ball “what if” scenarios your business may face, and confirm you are in fact covered. Talk to other business owners to see what coverages they have, and consult with your attorneys for coverage analysis on the coverages you have and the ones you lack.

GlobeSt.com: Which companies are most likely to make these mistakes and in which situations?

Mohr and Packer: While it would be easy to say it's just small businesses that are susceptible to these problems, everyone from mom-and-pop shops to Fortune 500 companies are making these mistakes. Owners and executive teams from every company, no matter the size, should be actively engaged and understand their coverage.

GlobeSt.com: What do most companies not realize about real-estate-related insurance that they really should know?

Mohr and Packer: Business owners often overlook the fact that their basic property policy doesn't cover everything. Property coverage is limited. As discussed above, unless it's clearly included in an endorsement, a property policy likely won't cover pollution caused by your products that were released as a result of a natural disaster. Property policies are also often limited to specified perils, and you may suffer losses from perils not listed. There are often large deductibles or SIR's for certain coverages (like named windstorms), which can be very expensive for businesses. Property policies may also exclude onsite injuries that may occur during an emergency. They may also not cover attorney's fees for disputes. Property policies also may not extend coverage for employee accidents or liability claims that arise because of a disaster.

However, if you plan ahead and think critically through the issues that may affect your business with your risk managers, insurance brokers and attorneys, most—if not all—of these problems can be avoided.

GlobeSt.com: What are the most common insurance mistakes companies make that are related to natural disasters?

Is the business accurately described in the insuring agreement? For example, if you're a real estate company but you end up taking over the lunch café in the office building you own, you've suddenly got exposures that you didn't have before, and you may not be covered for it if your policy just extends to your work in “real estate.” In another situation, a client had a policy that stated all of the company's work was completed in its factory. In reality, although they did the complicated manufacturing in their factory, the business would also assemble the manufactured items when delivered, if requested. A dispute arose about the assembly activities that occurred at the delivery location. The insurance company denied coverage because the policy said they only work in the factory.
As demonstrated in these examples, a critical question for growing/changing business must always be: Are you covered for your new activities? This is also true when your business acquires another company: What coverage comes with the acquisition? What do you need to procure on your own?

GlobeSt.com: How can these mistakes be avoided?

GlobeSt.com: Which companies are most likely to make these mistakes and in which situations?

GlobeSt.com: What do most companies not realize about real-estate-related insurance that they really should know?

Instant Insights /

Common Insurance Mistakes Related to Natural Disasters

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