Business Insurance Explained
Business Interruption Insurancecovers a business’ loss of earnings as a result of damage to or loss of business property. Reimbursement for salaries, taxes, rents, other expenses and profits that would have been earned during the period of interruption are also often included.
For example, if a woodworking shop suffers a fire which renders all of the equipment unusable, the woodworking shop would not be able to fulfill any of the outstanding contracts, resulting in a loss of these earnings. Depending on how long the shop is shut down or unusable for, the company could suffer extensive losses; especially as some clients would move their contracts elsewhere.
Business Interruption losses can be very extensive; while standard property policies may cover reinstatement of your buildings and some or all of the machinery, they will not extend to cover any losses to the income of your business. Business Interruption insurance will provide coverage in this area and help to minimize the financial impact. Losses can affect businesses for months if not years – you must consider the cost of what it will take to bring the company into the same position it was in immediately prior to a loss; this can take quite some time depending on the size, nature and extent of the business operations.
We strongly recommend that businesses consider Business Interruption insurance and to speak with their insurance broker to ensure adequate limits and extensions of cover are sought.
Extra Expenses coverage provides for additional expenses incurred following a loss; that would not have been incurred in the normal course of business.
For example, prior to a loss your business makes a monthly rent payment of $1,000; after a loss you are required to relocate temporarily until such time as your building has been repaired however, the only building available costs $2,000 per month to rent - the extra expense would be the additional $1,000 rental payment per month.
By-Laws
Definition
If there is insured damage to your office and you are required, by law, to repair or rebuild to a certain standard (use of 2x6s instead of 2x4s for example), By-Laws provides coverage for the costs you may incur in complying with applicable laws.
Applicable laws may require you to rebuild 100% of the office if it has suffered damage to at least 75% (or less) of the property. By-Laws would provide for demolition and removal of the undamaged portion and provide coverage for any improvements required by law; you may also require further coverage for the additional time required for rebuilding (a form of business interruption coverage).
For Example – The replacement cost for your office building has been calculated at $1,000,000, which means that if there is a total loss (fire for example), it will cost $1,000,000 to rebuild with like material and quality. However, laws and regulations can change which may require upgraded materials to be used. Since your building was originally built, a law has been implemented, for example, stipulating that sprinkler systems must be installed in all new buildings; as this was not in the original building, the replacement cost would not have been calculated including the cost of installing a sprinkler system. This extra cost is not covered in the $1,000,000 which means you’re your business is, technically, uninsured for those costs. By-Laws coverage would pay for this enhancement to your office as it is required by law.
If your building no longer conforms to zoning by-laws (located in an area which is now zoned as residential property only for example) which could affect any repairs or replacement, speak to your broker about whether By-Laws coverage would include relocation to a commercial zoned location. Insurers vary widely in this respect and we encourage you to discuss this with your broker should you find yourself in this situation.
Insurers vary in this respect, while some include By-Laws coverage automatically; others charge a small fee to add this to your policy.
In the example above you would be responsible for paying the increased cost of enhancing the property by installing a sprinkler system and / or the cost of relocating, which could amount to tens of thousands of dollars if not more.
Ensure the replacement cost for your building is up-to-date, this will reduce the risk of underinsurance overall. Also, consider the small fee (if this cover has not been automatically included) for By-Laws cover.
Co-insurance is a complex policy clause that appears in business property insurance policies such as buildings, stock and equipment.
The clause stipulates that you (the insured) are required to insure your property for a certain amount (usually expressed as a percentage) based on the value of the property insured; if you fail to do so, you agree to insure yourself for all losses in the same ratio as your failure to comply with the required level of coverage (i.e. you must pay the difference).
For example
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Building Value
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$100,000
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Actual Limit of Insurance (Insured Value)
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$60,000
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Amount of Loss
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$10,000
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Co-insurance requirement
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100%
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Underinsured by
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40%
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The above shows that the building should have been insured for $100,000 (i.e. 100% of the building value) but it was only insured for 60% of the value, which means that the insured has agreed to insure themselves for 40% of any loss. Accordingly, where a loss of $10,000 occurs, the insurer will only pay a maximum of $6,000.
Calculation as follows:
(Actual Limit / Required Limit) x Amount of Loss = Maximum Claims Payment
($60,000 / $100,000) x $10,000 = $6,000
It is often the case that co-insurance requires policyholders insure their property to 80% or 90% of its value; taking the above example, the following maximum payments would result.
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Co-insurance requirement
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80%
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Co-insurance requirement
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90%
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Required Limit of Insurance
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$80,000
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Required Limit of Insurance
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$90,000
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Underinsured by
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25%
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Underinsured by
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33%
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Maximum Claim Payment
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$7,500
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Maximum Claim Payment
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$6,666
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If you do not have the required level of insurance to comply with the co-insurance clause in your policy / policies, you may be required to pay for a portion of any claim which arises, as highlighted in the above examples.
Co-insurance appears in almost all business property insurance policies; each insurer will vary in practice and each policy will be different with respect to the level of cover required. If you have multiple business insurance policies you must ensure you understand the required level for each individual policy. We strongly recommend that you speak with your broker to ensure your limit of insurance has been adjusted to meet your current insurer’s requirements. We also suggest that an appraisal on your property be conducted by an expert in the field as this will help determine what levels you will need to adequately insure your property.
CGL is the term used to describe all business liabilities excluding automobile liabilities. CGL typically covers a collection of liabilities specific to your business and will often include bodily injury and property damage liability arising from your company’s operations.
Examples of types of business liability:
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Products
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Personal Injury
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Premises
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The above are some examples of the type of liabilities which may fall under your CGL policy; as every policy is different, we recommend that you contact your broker to discuss what coverage is appropriate for your company.
Companies’ receipts are used to calculate the premium required for certain liability coverages. These receipts give your insurer an idea of the size of your business; as your insurer cannot predict the size of your business looking forward, they look back at the past year to identify its size and whether it has grown or shrunk compared to previous years. Once the insurer has reviewed your receipts they will calculate the premium to reflect your exposure to losses.
Depending on the type of liability and the type of operations your company performs, an insurer will use different measures to calculate the premium payable. We recommend that you speak with your broker to ascertain whether a calculation based on receipt figures is the method suitable for your business.
Cross liability stipulates that the insurance provided under your policy applies to each person insured. For example, in a situation where one insured (employee) has injured another, cross liability allows for each to be treated as a separate entity and, therefore, a claim can be submitted following such an injury. If cross liability was not included, all employees under one policy would be treated as one entity; as one cannot claim against oneself, no such claim for injury could be made.
This is only one example of how cross liability can apply; if you believe a situation has arisen where cross liability should apply, speak with your broker to identify whether coverage would be provided by your insurer.
A Commercial Umbrella Liability policy is designed to provide liability protection above and beyond that provided by standard Commercial General Liability policies. Therefore, Commercial Umbrella Liability policies will not come into effect until such time as the limits on a standard liability policy have been exhausted.
For example, if a business’ liability limit is $1,000,000 and a claim occurs where they are held liable for $1,500,000, the standard policy would be responsible for covering the first $1,000,000 and the Umbrella policy would pay anything above and beyond the $1,000,000 subject to that policy’s own liability limits.
Functions of a Commercial Umbrella Liability policy:
- Provides liability limits over and above the Commercial General Liability and auto liability policies.
- Provides certain additional coverages which are typically excluded under the standard Commercial General Liability policy as these coverages are normally underwritten by specialty markets. For example, advertising liability, non-owned watercraft and non-owned aircraft, oral contracts and more.
In addition, some coverages already provided under the Commercial General Liability policy are broadened under the Umbrella policy. These additional coverages are called drop down coverages and are typically included at no extra cost however, a self-insured retention or deductible of $10,000, for example, will often apply for losses which are not covered under the Commercial General Liability policy. The Umbrella policy will also often provide coverage for related defense costs; even if a suit is groundless.
- Supplements a reduced or exhausted aggregate (collection of claims made in a certain period) limit under a Commercial General Liability policy. The products / completed operations section of the Commercial General Liability policy as well as several extensions typically contain an aggregate limit of liability; if the limit is reduced or exhausted, the Umbrella will drop down to the remaining amount. If exhausted, the Umbrella will usually pay any subsequent claims from the first dollar, with no deductible applied.
Commercial General Liability policies typically have a $2,000,000 limit; depending on the activities your business undertakes, the liability risk could more than exceed the $2,000,000 limit. Umbrella policies often offer additional levels of $1,000,000 or $2,000,000 on top of the standard Commercial General Liability policy.
Examples of business activities which could increase your business’ liability risk:
- Extensive travel (especially to the USA)
- Larger businesses
- Ownership of 2 or more properties
- Ownership of recreational vehicles (high hazard) – ATVs, Snowmobiles etc.
As an organization, you must review your activities as well as consider what risk you are willing to take on in respect of potential liability claims. Smaller businesses may suffer more from a single claim; while larger businesses would suffer more from multiple claims and would be more exposed to multiple claims as well.
We strongly recommend that you review your business’ liability limits as well as the types of activities your business performs in order to determine whether an Umbrella liability policy with its enhanced coverage would be appropriate.
This endorsement provides limited coverage for all glass on a vehicle and, in addition, vandalism to windows other than the front windshield.
This coverage, as it limits or restricts what is covered under your traditional automobile insurance policy, will reduce your automobile insurance premium.
WFG recommends this coverage for drivers who want to keep their premiums down and prevent increases in premium caused by multiple glass claims.
This coverage is not automatically included in car policies and is not available for certain types of automobiles; it is also not typically available with Comprehensive coverage where the deductible is greater than $250. This coverage must be requested when you set up your insurance policy or at renewal.
If you choose not to take the limited glass waiver, your premium will be higher to reflect the enhanced coverage.
If you choose to add this endorsement to your policy, you may wish to purchase a separate glass insurance policy. These policies have been developed by insurers and tend to be offered at a lower rate than if it were to be covered on a standard car policy. Any claims made on a separate glass policy would not affect your car insurance claims free discount. We recommend that you speak with your broker to see what options are available to you.
Deductibles
Definition
A deductible is the portion of a claim which the policyholder is required to pay. The amount is a fixed figure and will typically be paid before the benefits of the policy can apply (i.e. before the claim is paid).
Does a deductible apply to every claim?
A deductible may not apply to every claim you make. Each policy is different and Government regulations differ between provinces. To identify whether a deductible will apply to your particular claim, refer to your policy wording or speak with your insurance broker.
I’ve only made one claim, why do I have to pay more than one deductible?
Depending on the event, a claim you make could extend to more than one section of your insurance policy which would result in more than one deductible being charged (the liability, property and auto insurances, for example, being affected by the same event).
Some insurers will waive all but the highest deductible, others will waive all but two deductibles (if more than two apply); while others will not waive any deductible. Any waiving of a deductible is at the discretion of your insurer and is not mandatory. If you make a claim that is subject to more than one deductible, speak with your insurance broker to determine what is owed in your circumstances.
I already paid the premium, why do I now have to pay a deductible?
Deductibles are a means of keeping premiums low – see How can a deductible affect my premium? for more information.
How can a deductible affect my premium?
Deductibles vary between commercial insurance policies with most insurers providing the insured with an opportunity to reduce their premium by accepting a higher deductible. If you are looking for a way to reduce your annual premium and are in a position to afford a higher deductible should a loss occur, discuss the deductible options with your broker.
Directors’ and Officers’ Liability Insurance
Definition
Directors’ and officers’ liability insurance provides coverage for damages or defense costs in the event that the directors or officers are sued for Wrongful Acts committed while they worked for that company. The company can also be sued for acts of the directors and officers during their employment.
Wrongful Acts can be justified or not and often include errors, misstatements, neglect, breach of duty and other similar acts. Each insurer will have a different definition of Wrongful Acts and it is recommended that you speak with your insurance broker to identify which acts are covered by your policy.
Regardless of whether an action against a director or officer is justified, the cost of defending that action can be great. Directors’ and Officers’ Liability Insurance provides coverage for these defense costs as well as other liabilities which may arise from performing your duties.
Why would this not be covered by my CGL policy?
A general liability policy for a business will not typically extend to provide such coverage as it tends to be limited to property damage or bodily injury caused to others; while the Directors’ and Officers’ policy has been developed specifically to provide coverage for these types of legal expenses.
My business has no Board, why would I need this coverage?
While you may not have a Board, if your company is incorporated in Canada, you will have directors and officers who would benefit from this type of policy. If your company is not incorporated, i.e. you are a sole proprietor or a partnership; while you may not have directors and officers, as someone running this business, you are still vulnerable to many similar exposures as directors and officers, such as claims brought by employees, customers, competitors, donors and government agencies. It is these types of claims for which a Directors’ and Officers’ or Management Liability policy would provide coverage.
Equipment Breakdown coverage usually covers vessels which operate under pressure such as boilers and air compressors. Typically property policies, even All Risk policies, specifically exclude some of the most common types of equipment breakdown, including electrical arcing, mechanical breakdown and rupture.
Equipment Breakdown can provide coverage for sudden and accidental breakdown of boilers and machinery or equipment, including computer systems and telephone or other communications systems. This coverage also typically provides for damage caused to electrical panels and air conditioning units; it also usually includes reimbursement for property damage, expediting expenses (express transportation charges) and some business interruption losses.
Equipment Breakdown coverage does not typically include production machinery automatically; if you wish to obtain this coverage, speak with your broker to determine what options are available.
You might think your warranty and / or maintenance contract gives you the coverage you need. In fact, more than 35% of all equipment accidents result from operator error; most warranties and contracts exclude operator error. Warranties and contracts also do not normally cover business interruption, extra expenses, or spoilage, where the cost to a business can often exceed the cost of physical repairs.
Traditional property policies tend to exclude any damage or injury caused by machinery which operates under pressure; if your business suffers damage of this nature, you could be responsible for all expenses following on from such an incident such as:
- Repair or replacement of the damaged machine.
- Cost of repairing or replacing any property damaged by water which escaped from piping following the loss.
- Fees for professionals used in determining the extent of damage and repairing the damaged machine(s).
- Extra expenses incurred in speeding up the recovery of the business after the loss (overtime salaries for example).
This endorsement is similar to Excluding Operation of Attached Machinery (SEF 30) however, it relates to any physical damage to the machinery. Therefore, this endorsement will remove any coverage for physical damage to attached machinery as specified in the policy.
This endorsement would typically be added to a policy where the machinery is more suitably covered under a separate equipment policy.
This endorsement relates to any liability for bodily injury or property damage caused by the operation of a particular piece of machinery (which will be specified in the policy).
As this endorsement excludes this type of activity, it limits what is covered under a typical business automobile insurance policy.
This coverage would only typically be added to a business automobile insurance policy when an insured vehicle has machinery attached to it (a crane for example). Should this endorsement be added to your policy, we recommend that you discuss the reasoning and consequences with your broker.
An insurer would typically add this endorsement automatically to a policy where operation (use) of the attached machinery is more suitably covered under a separate Commercial General Liability policy.
This endorsement provides protection to the insured, their spouse and certain other relatives should they suffer bodily injury or death caused by an inadequately insured motorist. This endorsement is subject to a limit, based on the limits of your liability coverage as well as the other motorist’s limit of liability coverage; we, therefore, recommend that you speak with your broker should you have any questions regarding this endorsement.
Each province may have a slightly different definition of who will be covered under such an extension; it is, therefore, recommended that if you have this coverage, you speak with your broker to identify who it extends to.
While some insurers automatically include this coverage for car insurance policies, some will only do so at your request and for a small fee.
If you do not have this coverage and an accident with an underinsured motorist results in injury or death to you or one of your family members, there may only be a limited payment, if there is a payment at all, as a form of compensation.
The Third Party Liability section of your car insurance policy will cover injury or property damage to third parties only. The definition of a third party does not extend to include those passengers in the insured automobile; only the driver and passengers in any other automobile involved in the accident.
Consider the cost of such an endorsement, should it not be automatically included in your car policy, and whether you want to take on the potential future cost of compensation and / or payment for bodily injury should you not have this coverage.
A broker is an insurance professional that has access to sell the products offered by two or more insurance companies.
Your commercial broker will work with you to identify the insurer, coverage and policies available for your company’s insurance needs. Every business is unique and each requires special attention to ensure all areas of the business are insured to your requirements. Commercial brokers will also provide other services including claims assistance, loss prevention and any other services necessary to successfully manage your insurance needs.
You should treat your commercial broker as a source of knowledge and information and should contact them without hesitation should you have any questions or concerns regarding your insurance needs.
This endorsement will waive any depreciation on repair or replacement of a new vehicle (subject to certain restrictions) should it suffer an insured loss. The term for which this coverage is offered varies with insurer (typically 24-30 months).
Not all insurers will include this coverage automatically; but, if asked to do so, will often add this for a small fee.
Should you suffer a total loss within 1 year, for example, of purchasing your car, your insurance company will take depreciation into account when calculating the claim settlement. Depending on the purchase price, this could reduce the value by thousands of dollars. It is usually one’s intention to replace a total loss with the same or a similar car; in the case of a new car, owners tend to want a new replacement. When depreciation is taken into account, the owner will be left with the cost of the difference between the claims settlement and the actual cost of the same new car.
This endorsement provides coverage for the rental of a vehicle while yours is out of use following an insured loss. This enhances the loss of use by theft coverage which is included in most standard automobile policies.
Not all insurers add this endorsement automatically however, for a small fee you may be able to add this coverage.
If it is not automatically included or if you choose not to add Loss of Use to your policy, you will be liable for all costs incurred when you rent a car while yours is being repaired. Depending on the extent of the damage and the availability of parts, this period can be quite lengthy and the costs can add up quickly.
Consider alternative substitute car options:
- Second Car - do you have another vehicle which you own that can be used while the damaged one is being repaired?
- Courtesy car (often a per KM charge).
- Car pool - if driving to work is the main use for your vehicle.
- Public Transport - Do you have access to public transport? This could be a suitable alternative for some people depending on their daily needs.
You can pay your insurance premium through your Western Financial Group broker using the option that best suits you:
- In full
- Cash
- Cheque
- Online payment
- Direct payment to your insurer*
- In installments using Premium Finance
- Three payments using your credit card
- Monthly pre-authorized chequing draft
- Post-dated cheques
- Direct payments to your insurer*
*Direct payments to an insurer are not always available; please speak with your broker to determine whether this is an option available to you.
Waivers of Liability
Definition
A waiver of liability is a form signed by an individual or individuals which works to remove any liability from the insured for injury or property damage to those individuals. For example, horse stables that offer public horse rides will often have each rider sign a form to indicate their agreement not to pursue legal action against the stable should they be injured during their public horse ride.
Businesses and associations may wish to use waivers to reduce claims but should be cautious when doing so as there are times when a waiver will not prevent the business from being held legally liable; waivers of liability should not be considered as a replacement for liability insurance.
Before using a waiver, we suggest you seek legal advice from a lawyer as to the pertinent details of your operations and the intent of the waiver if and when it would be used in your operations. If you are using a waiver, it is important you give a copy to your broker to share with your insurer.
Without knowing what a quote has included and excluded, it is not possible to offer an opinion as to why one policy is cheaper than another. As you will see throughout this section, insurers vary in practice when it comes to including certain cover as well as the limits of cover they will provide. Insurers will offer different discounts, which also contributes to the final premium. We can work with you to identify which of our providers offers you the most comprehensive cover for your needs.
This is never more true a statement than with respect to insurance policies. If you get the cheapest policy, you are likely excluding certain covers which are added to the more expensive policies; make sure you know what risks you are willing to take on yourself (i.e. what you will not insure and will pay for should there be a loss) before deciding which policy is best for you.
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