Author: Bill Wilson
Much has been written about how to reduce insurance premiums. Unfortunately, too much of this advice has been BAD and much of this bad advice comes from consumer web sites and publications that have little understanding of insurance and risk management. The purpose of this article is to identify some of the bad advice being bandied about and to reinforce some of the good advice.
Many Americans are struggling financially in the current economy, particularly those struck by lay-offs, and are faced with tough decisions about how to reduce expenses. As a result, much has been written in recent months about how to reduce or eliminate insurance premiums as one aspect of a belt-tightening strategy. Unfortunately, too much of this advice has been BAD and much of this bad advice comes from consumer web sites and publications that have little understanding of insurance and risk management. The purpose of this article is to identify some of the bad advice being bandied about and to reinforce some of the good advice.
For example, a common theme involves price shopping. Consumers shop for most things based on value, not price. The same should be true when it comes to insurance products which are often portrayed as some sort of homogenous commodity. No one is guiltier of this than our own industry with "minimum limits for minimum budgets" and "pick your price" advertisements that look more like Priceline.com commercials for hotel rooms. We should be presenting ourselves as insurance and risk management professionals, not William Shatner knock-offs or giggling Walmart-like aisle clerks. Insurance is designed to protect our assets from direct loss or from third-party liability. What and how much we buy depends on our exposure to loss and what we need to protect, not what we're willing to pay. A number of agencies have established minimum limits underwriting guidelines below which they won't write anyone's coverage.
Too often, these types of ad campaigns result in uninformed, gullible and misled consumers moving to cheaper policies with inferior coverage. Regardless of what low-cost insurers would lead us to believe, auto policies are not the same. Compare the ISO standard Personal Auto Policy (PAP) to others in the marketplace. One excludes undisclosed household residents. What if junior loses his job and moves back in with mom and pop without thinking to notify their insurance agent. Think the insurer will tell you about this up front?
The ISO PAP covers the named insured and resident spouse if they drive an auto insured separately by another resident family member. Not all policies do that. Think this presents an exposure? To see how much of one, check out this article and this article. Many family members are moving in together out of economic necessity and this can create coverage gaps in auto and homeowners policies unless the right product is in place.
Most PAPs have no specific limit for physical damage coverage, so you can own a 'beater' and yet be covered for the full value of a Mercedes if you test drive one. That's not true of all policies and some even have a specific dollar cap. Some PAPs do not cover ANY business use. So, if you run to the post office or to Office Depot, you're likely to have no coverage. Some PAPS provide NO coverage for rental cars. Some provide no coverage for ANY nonowned autos. Another PAP covers medical payments only if paid for expenses incurred from a licensed physician. Do the companies selling these types of products tell you about these serious coverage deficiencies? Unlikely. The focus is typically only on cost. As the adage goes, you get what you pay for.
During tough economic times, some insureds may take on second jobs or might moonlight while looking for work, for example, by delivering pizzas. Some PAPs cover this exposure, some don't. Similarly, while unemployed, some insureds might do work from home ranging from bookkeeping to lawn mower repair. Homeowners policies may provide little or no coverage for the many exposures presented by these activities.
As another illustration, an investor owned 40 dwellings insured under DP-3 dwelling forms. A fellow investor told him to convert to DP-1 forms to save money. He failed to mention the significant coverages he would be giving up.
One agency sends out marketing mailers saying that they can save consumrers money with an HO-8 policy, which is “about the same coverage” as their current HO-3 policy. I guess it depends on what you think "about" means. The HO-8 provides dramatically inferior coverage to an HO-3, particularly with regard to perils insured and the method of valuation. In addition, theft coverage is not included in the unendorsed form and theft claims are likely to increase during economically depressed times.
A major national publication included advice from a "consumer expert" that recommended dropping replacement cost coverage for actual cash value coverage, something that is likely to save the insured little in exchange for much in the way of lesser coverage. In the late 1980s and early 1990s, Charles Givens made a name for himself, in part, by recommending that consumers drop various kinds of insurance. In 1993, he settled a lawsuit from a woman whose husband had been killed by an uninsured motorist after they had followed Givens' advice and dropped insurance.
Some insureds are choosing to eliminate flood coverage or reduce it to only what the bank requires to protect the loan. Businesses may choose to reduce or eliminate fidelity insurance because of fewer employees. Others may drop mechanical breakdown or even business interruption coverage, often because they simply don't understand the need. Similarly, we've had a number of questions from agents whose trucking insureds want to know why they need CGL coverage...for a list of reasons, click here.
If there's any good news it's that most articles are pointing out that it is a mistake to reduce coverage because a dwelling or commercial building is declining in market value. The cost to repair or replace is different from market value. Declining market value doesn't mean limits should be reduced. However, despite that small ray of sunshine, the bad advice gets worse....
One highly trafficked consumer insurance web site recommends that consumers consider dropping their physical damage and UM/UIM coverage completely and reduce their liability coverage to the state minimum. At a time when consumer assets are at their greatest peril, now is not the time to be reducing or eliminating critical coverages.
The article on this web site shows that, by dropping your liability from 100/300/50 to 25/50/10 and eliminating the physical damage and UM coverages on your auto, you can reduce your total premium by just over 50% on average. What they don't show is that the average values of the autos they used in the examples, according to Kelly Blue Book, ranged from $12,000 to $22,000. How many economically depressed or out-of-work families can afford even a $12,000 loss, much less a 6- or 7-figure liability claim?
According to the Insurance Research Council, 1 in 6 drivers may be driving uninsured by 2010. With the number of UM drivers already over 25% in some states, what happens when a family member is permanently disabled by a UM driver and the family has dropped its UM coverage? A much better recommendation would be to begin cost-cutting measures by eliminating the purchase of pizza, cigarettes and beer instead of critical insurance coverages. The suggestion to drop or not buy UM coverage is a common one, with advocates for this often citing the availability of health insurance or workers compensation coverage. UM/UIM covers far more than medical expenses and includes coverage for passengers that might not have access to health coverage who then file suit. For more on the UM issue, read these personal lines and this commercial lines articles.
In order to minimize the need to increase fees, some condo associations are raising deductibles on the condo master policy, leaving unit owners to pick up the difference in their HO-6 policies. Many of these HO forms limit coverage for a deductible assessment to just $1,000.
Be wary of any insurance advice given by a noninsurance professional. For example, a Wisconsin insured owned a building occupied by his business. He created an LLC and transferred ownership of the building to it. His attorney suggested he consider dropping his umbrella because of the "reduced personal exposure." Sadly, consumers often accept insurance advice from attorneys, plumbers, roofers, cops, and accountants before they'll listen to their own insurance agent.
Some small business owners are being encouraged to opt out of workers compensation to save money. Aside from the fact that this could be illegal in some states, if you can opt out of workers compensation, you open yourself up for tort claims and statistics indicate that claims are more likely during economically depressed times. One "financial adviser" actually suggested that workers compensation for the owner was not needed because of the employers liability section of the policy. Some businesses or employees are told to rely on L&H policies rather than workers compensation without determining whether there could be exclusions that apply and without considering that workers compensation coverage typically includes unlimited medical, decent disability coverage, some life/burial insurance, and rehabilitation expenses. Should corporate officers exempt themselves from workers compensation to save money? This article suggests not.
A VU faculty member shared a personal experience where a business owner was traveling with a customer and was severely injured in a private plane crash. He said that had his WC coverage not paid his rehabilitation expenses he would have been forced into bankruptcy. His customer, who had opted out of WC, was similarly injured and ultimately filed for bankruptcy.
Too many insureds think they can rely on the insurance of others, such as a contractor dropping his CGL policy when requiring additional insured status on subcontractor policies. The same is true of landlords who often rely, via triple net leases, on the tenant procuring coverage for the benefit of the owner. For the pitfalls of this approach, search the VU for "triple net."
We've had reports of businesses being advised to drop hired and nonowned auto coverage and relying on employees using their own cars to vicariously provide coverage under their PAPs. Other insureds are taking autos out of service (allegedly) and providing limited coverage through lay-up endorsements. In one case, a large contractor had a number of dump trucks and semi-trailers idled during a construction slow-down. The agent was looking for ways to reduce the premium. One consideration was retaining Business Auto (BAP) coverage and modifying the rating usage criteria. Another was using a lay-up endorsement. The most questionable approach was to turn in the tags, delete them from the BAP, and cover them on the CGL as mobile equipment at the site where they were to be stored. This raised questions about whether "mobile equipment" definitions 12.b. and 12.f. or any motor vehicle laws still applied. To review our analysis, click here.
These are just a few personal and commercial lines examples of what consumers and business owners are doing to reduce their insurance costs, many of these approaches coming from extraordinarily bad advice from consumer writers (and, sadly, some within our own industry) who do not understand what they're suggesting. Attorneys, for example, often suggest that youthful drivers be placed on their own minimum-limits policies (and their vehicle titled in their name if possible) in order to insulate the parents' assets from a lawsuit. Many, if not most, auto policies have an exclusion that would result in the parents having NO coverage under their own policy for some claims, an unintended consequence that arises from advice given by someone who lacks the intimate understanding of the insurance contract necessary to provide sound insurance advice.
So, what are some reasonable approaches that CAN be taken to reduce or control insurance costs? Click the link below for a consumer version of this article that includes 10 things consumers can do to control insurance costs:
Big "I" member agencies are free to share this article with customers. For additional consumer articles, click here.
A final observation and recommendation comes from VU faculty member and risk management consultant, Jim Mahurin, CPCU, ARM:
"Working in insurance related litigation since 1993 has provided many tragic opportunities to see the consequences of individuals and business firms who "saved" money on insurance. Each year hundreds of thousands of people who 'saved' money by not buying flood insurance will learn that three (3) feet of water in a one story building will prompt repair costs approximately one third (1/3) of the cost to rebuild new. Each foot of water in a building will cost approximately eleven percent (11%) of the replacement value of the structure. Tragically, they learn these lessons after an uninsured or under-insured loss. While many uninsured or under-insured people resort to litigation against their insurance company or insurance agent, very few recover their loss. Encourage the public to assess risk first. What are your exposures? What can you lose? What exposures represent losses you cannot afford? What exposures can you retain? The quality of your decisions may be the difference between economic survival and bankruptcy. Carefully chose an insurance representative who can help assess risk with a degree of sophistication and business acumen."
Note: This article includes contributions from the Big "I" Virtual University faculty and several participants in the Yahoo! Group RiskMail.