November 23, 2007

When Buying Liability Insurance the Devil is in the Details

Article reprinted with permission from the March 1, 1996 edition, page 60
Bicycle Retailer and Industry News

A Legal Viewpoint

By Steven W. Hansen

I often get phone calls from retailers asking about buying insurance or changing insurers. My best advice is to question your broker or agent carefully. Some of the answers may surprise you.

Most insurers typically use a standard commercial general liability form and many share the same form. A few insurers, however, use their own language which can provide broader or narrower coverage than the standard form. Some retailers purchase a business owners policy that calculates the premium based on a store’s square footage rather than gross sales like the commercial general liability policy.

A business owner policy is usually cheaper than a commercial liability policy, but is more likely to be non-renewed if you have any type of loss. Insurers base their decision to renew on a so-called "bad loss ratio" that compares dollars paid out to premiums collected.

Rates Will Vary. If your sales volume goes up, your policy price may increase from one year to the next even if the rate stays the same. Your premium also may increase because of losses. Even if an insurer paid nothing on a claim, legal defense costs can raise your rate.

Premium discounts or reductions are rare on business owners policies, while discounts on commercial general liability policies are often subjective. Established shops, and those with larger property coverage deductibles, usually get better deals. An insurance cancellation in your history, or no insurance history at all, also work against better pricing.

How Much Coverage? Insurers usually offer coverage in large round numbers like$500,000 or $1 million. If you have a $50,000 per-year operation, a $1 million policy may be too much. It depends on your exposure.

The main factors in determining exposure are the type, the number of bicycle units sold, years in business and your insurable assets. How large should your deductible be? Again, it depends on what you can afford and often what the insurer offers. Most insurers prefer small liability deductibles with a larger premium up front so they don't get caught with an uncollectible deductible in a claim.

Common Coverage Issues. Most policies cover liability for test rides, but do not cover a bike's theft during a test ride. You usually need to add this coverage to your policy. If you get a valid credit card charge before a test ride, you may be protected. Insurance usually covers a bike stolen out of the store. Policies might include employee theft, theft of money and bike rentals, although sometimes your broker will need to add those separately. Most policies cover bicycle events you sponsor, including USCF/NORBA races, "fun rides" or club rides, unless there are professionals competing or there are prizes or cash awards. In that case you need to get an endorsement added to your policy or ensure that the USCF/NORBA master policy for race sponsors includes your store.

More Questions to Ask. Make sure your insurer is "admitted" in your state. If it is not, your state's insurance guarantee fund may not protect you if the insurer becomes insolvent. Ask if the insurer offers coverage on a "claims made" basis. That means the accident must happen and you must report it while the policy is in force. Other policies are issued on an "occurrence" basis. With that kind of policy, the accident must happen while the policy is in force, but the claim can be made years later, as sometimes happens.

The worst time to learn what is not covered under your policy is after you tender a loss to the insurer. If an insurer determines the claim is uncovered, they will refuse to pay for an attorney to defend the case. If there is a possibility that the claim is covered, the insurer may deny indemnity for the loss but still provide you with a defense while they investigate. If you are unhappy with the attorney's competence, notify the insurer in writing. It’s your reputation and your premium.

Law Offices of Steven W. Hansen | | 562 866 6228
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