Selling More Insurance Via Coverage Gap Analysis: An Approach That Will Revolutionize Your Production! 9798986979106, 9798986979113

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Copyright © 2022 by Matthew Starkey SELLING MORE INSURANCE VIA COVERAGE GAP ANALYSIS AN APPROACH THAT WILL REVOLUTIONIZE YOUR PRODUCTION!

ISBN (Print): 979-8-9869791-0-6 ISBN (eBook): 979-8-9869791-1-3 No permission is given for any part of this book to be reproduced, transmitted in any form or means; electronic or mechanical, stored in a retrieval system, photocopied, recorded, scanned, or otherwise. Any of these actions require the proper written permission of the author. Published by SilverStar Publications, Inc. 19051 Oro Verde Ln Yorba Linda, CA 92886 SilverStar Publications, Inc. ALL RIGHTS RESERVED.

Table of Contents Chapter 1 INTRODUCTION What are some of the benefits? Broker of Record Letters vs. Quoting Situations Where You Might Quote FAQ’s Want To Grow Your Book of Business Faster? Chapter 2 WHY THIS BOOK? Objective of This Book Wait a minute, what do you mean by an “embarrassing position?” Who is it for? Why is it needed? The dirty little secret of the insurance industry Why would a fellow insurance producer write a book like this? Chapter 3 SOME BACKGROUND Advice from a retired insurance broker The first account I ever wrote The ensuing 25 years—A remarkable discovery! What is the true cost of an insurance policy? Want To Grow Your Book of Business Faster? Chapter 4 WHAT IS COVERAGE GAP ANALYSIS?

First, what it isn’t So what is it? Is it hard to learn? Consultative Selling Chapter 5 THE ADVANATAGES OF SELLING VIA COVERAGE GAP ANALYSIS A great differentiator Gets you out of the quoting “rat race.” Increased hit ratio A powerful broker of record tool A tremendous time saver and money maker Leads to more referrals But wait, there’s more! Insulates your renewals / Increased renewal retention Broadens your prospect base Blindside your competition Equips the new producer to excel! Lends itself to team selling It’s just more fun! Want To Grow Your Book of Business Faster? Chapter 6 SO HOW DO YOU APPLY THIS APPROACH IN THE “REAL WORLD”? Explaining how you work The 3 meeting approach Several observations are in order

More detail please! An alternative way to set up the closing meeting When and how to ask for the Broker of Record Letter Time for some soul searching Stand Out From The Competition, Become The Obvious Choice & Grow Your Book Of Business Faster! Chapter 7 ADDITIONAL CONSIDERATIONS Some people won’t care Don’t make them feel stupid! Don’t make the middle manager look bad Presenting to the right person To leave or not to leave Chapter 8 THE PROTEGO RISK ASSESSMENT Stand Out From The Competition, Become The Obvious Choice & Grow Your Book Of Business Faster! But wait, there’s more! Chapter 9 THE TOP 10 COVERAGE GAPS Yeah, but how serious are these, and what’s it cost to fix them? Cascading Coverage Gaps: Multiple Simultaneous Gaps Triggered by One Event, and Why Do You Have Those Asterisks In The Above Table? The nightmare scenario Stand Out From The Competition, Become The Obvious Choice & Grow Your Book Of Business Faster! Chapter 10 DETAILED DISCUSSION OF EACH POTENTIALGAP OR DEFICIENCY Top 10 Coverage Gap #1: Incomplete or Inaccurate Named Insured

Named Insureds: What Could Possibly Go Wrong? Top 10 Coverage Gap #2: Coinsurance Penalty Exposure Top 10 Coverage Gap #3: Inadequate or Non-Existent Business Income Coverage Top 10 Coverage Gap #4: Non-Existent Equipment Breakdown Coverage Top 10 Coverage Gap #5: Inadequate or Missing Improvements & Betterments Coverage Top 10 Coverage Gap #6: Insufficient Fire Legal Liability Coverage Top 10 Coverage Gap #7: Missing Employee Dishonesty Coverage Top 10 Coverage Gap #8: No Employee Benefits Liability Coverage Top 10 Coverage Gap #9: Missing EPLI Coverage Top 10 Coverage Gap #10: No Fiduciary Liability Coverage Bonus Gap #1: No or Inadequate Property in Transit Coverage Bonus Gap #2: No Non-Owned & Hired Auto Liability Coverage Bonus Gap #3: No DOC Coverage Chapter 11 FINAL THOUGHTS Appendix A: Our Process Exhibit Appendix B: Resources & Useful Links

FOREWORD “When you are standing in the middle of a storm you have two choices: Pray to God that it goes away. Or, start praying to God that he gives you the wisdom to figure out why you’re standing in the middle of a storm.” ~ Shannon L. Alder If you are reading this book then I assume that you are an insurance producer. Perhaps you are just starting out, or more likely you’re an experienced producer who is a little frustrated. If you fall into the latter camp then join the crowd, you’ve got plenty of company! Business in general seems to have become tougher over the years, and the insurance business is no exception. Does any of the following sound familiar? It’s hard to get in front of enough prospects. Your hit ratios aren’t as high as they should be. The quotation process sometimes stalls out due to lack of loss runs or other information. Prospects can’t seem to recognize that you’re better than other brokers, and in fact the whole quoting process seems a little demeaning. You work on a risk but find that the incumbent broker has already blocked all the markets. You work on a risk but find that you’re up against two or three other brokers, in addition to the incumbent. The buying decision usually comes down to price. You feel like you should be getting more referrals. It takes a lot of time to get all the information you need to quote, to put the submission together, to market the account, and then put a good proposal together. Sometimes you come in with the best price, but you get “rolled” anyway.

It’s difficult to come up with compelling reasons (other than price) that a prospect should go with you—meaningful reasons that are truly unique to you and your agency. You’ve got that nagging feeling that there has to be a better way! Again, does any of the preceding sound familiar? If so, and you’re genuinely frustrated, then you’re not alone. Your frustration stems from the fact that you’ve been commoditized. What if I were to tell you that there is an easy to implement, very effective, and incredibly underutilized way to break out of the commodity trap? A method of producing insurance that eliminates all of the above problems, sets you apart from more than 90% of your competitors, and is actually fun? I’m referring, of course, to producing insurance via Coverage Gap Analysis. There is a thundering herd of look-alike, sound-alike brokers out there who are all chasing a finite amount of business in a similar fashion. The result is that, as an industry, we’ve done a pretty good job of marginalizing ourselves in the eyes of our clients, and trained them to focus on one thing—price! In fact, many brokers actually promote the fact that they give “apples to apples” quotes. Many brokers know nothing else. This creates an incredible opportunity for those producers who are willing to think a little differently about the right way to approach insurance. That’s what this book is all about. Here’s my story in a nutshell. I’ve been in the insurance industry since 1978. After several years as an Underwriter for a couple major insurance companies and Surplus Lines firms, I made the move to the agency side of the business. I am currently a partner in the firm ISU Insurance Services- Willingham & Starkey—the second agency I’ve owned. I act as both a broker and a consultant to businesses of all types and sizes in Southern California. On the next page are a few more things I’ve done and am currently doing in the insurance industry taken directly from our agency website: Matthew Starkey, CAWC, CCIP, CLCS, CLIC, PWCA, SRM, WCIP With over 40 years insurance industry experience, Matt’s specialties include Workers’ Compensation and Commercial P&C lines. He holds the following

industry designations: AU - Associate in Underwriting CAWC - Certified Authority On Workers’ Compensation CCIP- Certified Construction Insurance Program CLCS- Commercial Lines Coverage Specialist PWCA - Professional Workers’ Comp Advisor SRM- Sustainable Risk Management WCIP- Workers’ Comp Insurance Professional Following is a summary of Matt’s relevant experience: Co-Founder: ISU Willingham, Combs & Starkey (2010 – present) Founding Member & Board Member: BizAssure™ (2000 – present) Creator of commercial coverage gap finder software Founder: SilverStar Publications, Inc. (2004 – present). Publisher of various insurance industry newsletters, books, software, etc. Co-Founder: Combs & Starkey Ins. Services, Inc. (1988 – 2003) 1978 – 1988: Underwriting & Excess Lines Underwriting with firms such as INA Ins. Co.; AIG Group. Matt has also served as an Expert Witness in prevailing insurance coverage cases, and is the author of Surviving Business Insurance—Don’t Let Your Insurance Policies Put You Out Of Business!; The New Producer’s Handbook; and Selling More Insurance Via Coverage Gap Analysis;

CHAPTER 1 INTRODUCTION “The secret of getting ahead is getting started.” ~ Mark Twain In this introduction we’ll briefly touch on some of the basic concepts involved in selling insurance by finding coverage gaps. Most of these ideas are expanded upon in later chapters. If you’ve never sold insurance by identifying the coverage deficiencies in a prospect’s insurance program then get ready for an epiphany! If you have used the coverage gap approach, then you’ll find that a tool we’ll introduce you to later in this book takes this approach to a new level and makes it incredibly effective, comprehensive, and efficient.

What are some of the benefits? When you sell insurance by the coverage gap approach, you’ll find that you will: Dramatically increase your hit ratio, Stop wasting valuable time with quoting, Get more business by B of R, Totally blindside your competition, and Start having a lot more fun!

Broker of Record Letters vs. Quoting. Perhaps you’ve heard the old axiom, “Most of us are too busy making a living to make any real money.” Perhaps this could be restated to fit the insurance industry as “Most of us are too busy quoting to write any real

business.” It’s instructive to occasionally take a step back and think logically about our business. Have you ever considered how long it takes to actually quote a risk? Later in this book we’ll show you how securing business by Broker of Record Letter is approximately twice as efficient as quoting. Coverage Gap Analysis will give you a tool to justify a Broker of Record assignment. Why is it so hard for most brokers to ask for a Broker of Record Letter? Because they intuitively realize that, in truth, they really aren’t that much different than every other broker out there. Furthermore, they realize that astute insurance buyers know it. Not convinced? Suppose you’re meeting with a prospect, and he asks you the following: “Tell me why I should go with your agency? What makes you better than your competitors?” Do you know what 9 out of 10 agents would say? One or more of the following: “We’ve been in business since _____.” “We tailor coverage to meet your needs.” “We represent lots of good ‘A’ rated carriers.” “We have good relationships with our carriers.” Or, worst of all, “We give really good service!” So think about that question for a moment. Is there really something compelling you can say about your agency that truly differentiates you from your competition; something that your competitors can’t say and, even more importantly, something that prospects will actually value? If not, then you basically have one thing, and one thing alone, on which to compete… Price! And we all know how frustrating and sometimes even demeaning it can be to compete solely on price. If you see yourself reflected in those typical answers above then I’ve got great news for you—there is a simple and inexpensive way for you to immediately distinguish yourself from the thundering herd of mediocre agents who compete only on price. It is such an effective method that even brand new producers can start using it to take business away from seasoned veterans, often by Broker of Record Letter, without wasting valuable time

trying to quote and compete on price.

Situations Where You Might Quote. Are there times when it makes sense to quote instead of going for the B of R? Sure, but not many. In my opinion, most of the time you’re better off walking away than getting into a quoting contest -- it’s just too time consuming and hit ratios are too low. However, here are a couple situations where it might make sense to quote instead of rigidly adhering to a B of R only approach: You have a zinger market for the risk that the incumbent broker doesn’t represent, and you just know you’re going to clobber him on price. In that situation why not come in with a devastating one-two punch of an unbeatable price and a coverage gap report showing that you’ve put some thought into properly protecting the insured’s assets? You were referred to the account by a close friend, and you sense that insisting on a B of R might offend the prospect, and therefore your referral source. At times like this you can still probe for a B of R, but it might be better not to walk if the prospect doesn’t grant you one!

FAQ’s Following are some questions I’m frequently asked about the Coverage Gap Analysis approach: Will I Really Be Able To Find Coverage Gaps? Emphatically… YES!!! My experience using this approach for over 25 years has been that, conservatively, 8 out of 10 programs you evaluate will contain serious and multiple coverage gaps. What’s more, it’s really a blast finding those gaps, almost as much fun as presenting your findings to the insured! Why Is Selling Insurance By Coverage Gap Analysis So Powerful? Here’s a summary of why this approach works so well: It dramatically differentiates you from the competition. Most insureds have never seen a report like you’ll give them. It gives the insured a compelling reason to appoint you as his broker. It’s virtually impossible for the incumbent broker to respond to this.

After all, what can he say, “Oh, I’m sorry I left all those gaps in your policy, but I still deserve to be your broker”? Is It Difficult To Learn This Technique? Not really. There are tools we’ll discuss in this book that simplify the process. Using these tools, even a brand new producer with little current insurance knowledge can, in relatively short order, get to the point where he/she can start to take business away from long time producers who are not using this technique. How Large Are The Coverage Gaps That I’ll Find? “Large” is a relative term, but how about $1,000,000-plus!? Seriously, it’s not unusual at all to find coverage gaps totaling at least hundreds of thousands of dollars, and often you’ll find gaps exceeding $1,000,000. Can You Give Me an Example of The Types of Coverage Gaps I’ll Find? There are literally scores of potential coverage gaps, but let’s just look at a couple.1 Incredibly, a common coverage deficiency starts with the Named Insured itself! It’s amazing how often you’ll find that a policy has an incorrect or incomplete Named Insured and, as you know, that could potentially void any coverage. Various Property coverages are also a common source (probably the most common source) of coverage gaps, many of which can be triggered by a single loss. For example, a business I evaluated once had the following deficiencies that a single large fire loss would have triggered: A significant Personal Property Coinsurance Penalty exposure, Underinsured Business Income coverage, non-existent Leasehold Interest coverage, Underinsured Fire Legal Liability, and non-existent Improvements & Betterments coverage. These gaps alone totaled well over $2,000,000 and, as we said, could have been triggered by a single fire loss. This All Sounds Too Logical—Don’t People Buy On Emotion, Not Logic? That’s what the sales “gurus” tell us, isn’t it? Only we’re not selling dress shirts here, we’re trying to protect people’s livelihoods and assets.

But let’s assume the gurus are right, that people buy on emotion. Well, when you point out to a business owner that his insurance program has holes in it exceeding $1,000,000 they tend to get pretty emotional! The difference is that you can get them to that point without using any gimmicky, manipulative sales techniques that were created by someone who’s never sold an insurance policy before in his life!

Want To Grow Your Book of Business Faster? Join The Preeminent Producer Mastermind Group and get access to high-earning coaches & exclusive training that will show you how! Go To ThePreeminentProducer.com to grab your spot! Later in this book we’ll look at the 10 Most Common Coverage Gaps

CHAPTER 2 WHY THIS BOOK? “We must view with profound respect the infinite capacity of the human mind to resist the introduction of useful knowledge.” ~ Thomas R. Lounsbury

Objective of This Book The objective of this book is three-fold: 1. If you are a producer stuck in the commoditized “quoting trap,” to get you to consider that there might be a better way; 2. To introduce you to that way, namely the Coverage Gap Analysis approach; 3. To be sure you are never put in an embarrassing position.

Wait a minute, what do you mean by an “embarrassing position?” O.K., imagine for a moment that one of your insureds calls you up one day and says something like this: “Hey Bob, I hate to tell you this, but another broker came in, did a thorough analysis of my business and insurance policies, and gave me a very professional report outlining over $1,000,000 in coverage gaps and deficiencies. Based on this I gave him a Broker of Record letter.” How would you respond? You would probably ask to see a copy of the report. Let’s say you did that, and found that the report was accurate, meaning it outlined several completely objective and irrefutable coverage gaps and deficiencies. Now what do you do? You can’t argue with the facts. In the eyes of the client, that would just make you look more stupid than you already do. It would be equally pathetic to agree with the other broker’s findings, but to suggest that the client rescind the Broker of Record letter and let you fix the coverage. The insured has already lost all confidence in your abilities. Do you really want to put yourself in the position of hearing something like, “Uh, Bob… that doesn’t really make any sense to me. You put me in a very dangerous position. I just don’t trust your ability to do the job right. Thank you for your prior service, but we’re moving on.”? I want to be sure you are never put in that position. Instead, I want you to be

the one putting the other producer in an embarrassing position!

Who is it for? This book is primarily intended for new and experienced insurance producers who are looking for a better method of selling insurance. Those producers who have already adopted this approach will probably find some new ideas herein, and their commitment to Coverage Gap Analysis will hopefully be reinforced. We also welcome readers from other disciplines within the insurance industry —who knows, perhaps this book will inspire you to become a producer!

Why is it needed? I wish this book wasn’t needed. Unfortunately it is because: Most insurance policies are so poorly constructed that they could literally put the policyholder out of business if the insured experienced a large claim. At the very least it could cost the insured dearly even if they have a small to moderate claim. Most insurance brokers are doing a very poor job of structuring proper coverage, evidencing either a lack of product knowledge or a lack of care. Or both!

The dirty little secret of the insurance industry. The dirty little secret of the insurance industry is that 80% of commercial insurance programs do not properly protect the insured, and… NO ONE SEEMS TO CARE! Not the carriers—their allegiance lies (and properly so) with their shareholders. Apparently not the brokers—if they truly cared then the policies they sell wouldn’t be so full of glaring coverage gaps and deficiencies, almost all of which can be easily corrected, usually at minimal cost, and are avoidable in the first place. The fact that at least 80% of the insurance policies I have evaluated over the years are woefully inadequate and are chock full of serious (and sometimes flabbergasting) errors tells me that either:

The brokers are incompetent, or The brokers are lazy, or The brokers are too busy to do a good job, or They don’t care, or They care, but don’t know how to do it right. Seriously, what other reason could there be?

Why would a fellow insurance producer write a book like this? So why would I, a fellow producer and therefore your potential competitor, write a book like this? It’s really pretty simple. First, I’m nearing the end of my insurance producing career, and there’s plenty of business (at least where I work, in Southern California) to go around. But more importantly, our industry needs help. If we as producers are ever going to escape the commodity trap, we’ll need the insurance buying public to value things like proper coverage. Our clients simply deserve better.

CHAPTER 3 SOME BACKGROUND “Coinsurance and Business Interruption sells a lot of insurance.” ~ An early mentor

Advice from a retired insurance broker. In 1987 a retired insurance broker who was nearly 40 years my senior peered at me over the top of his eyeglasses and uttered these prophetic words, “Coinsurance and Business Interruption sells a lot of insurance.” In the almost 30 years since then, I’ve discovered that indeed those and other common coverage deficiencies present an incredible but seldom used opportunity to sell commercial insurance, often by Broker of Record letter without having to waste your valuable time quoting.

The first account I ever wrote. I still recall the first account I ever wrote, a small manufacturing firm employing about 10 people. I was young (in my late 20’s), but knew a little bit about insurance coverage having been a Commercial P&C Underwriter. Plus, I was armed with the above advice. Anyway, I conducted an initial meeting with the prospect, asked the usual questions, and obtained a copy of his policy. I went back to him a few weeks later to present a quotation that wasn’t exactly “apples to apples”. I reviewed my proposal with the prospect, which included my recommendation to increase his Business Personal Property limit to avoid a potential Coinsurance Penalty. I shared with him that, given his current limit and the policy’s 90% Coinsurance Clause, he was in danger of losing (via a Coinsurance Penalty) approximately $200,000 if there was a total fire loss.

He said something along the lines of, “Let me get this straight. You’re telling me that even though I carry a limit of $800,000, because of this coinsurance thingy, if I had a large fire loss I’d only get $600,000?” “Yes”, I said, “and you’d still have to pay your deductible!” He stared at me for a second and then said, “Hang on a minute.” He proceeded to pick up the phone and call his current agent right in front of me! He went over my findings, and asked his current agent if I was correct. Receiving an answer in the affirmative he said, “You’re fired!” Hanging up the phone, he then turned to me and said, “You’re hired!” Not bad for my first proposal! I’d love to say they are all as easy as this, but of course they’re not. However, that experience got me hooked on selling by Coverage Gap Analysis. As mentioned previously, you’ll probably find gaps and deficiencies in 80% 90% of the insurance programs you’ll evaluate if you adopt this approach. It’s simply amazing what a poor job most brokers are doing in structuring proper coverage for their clients, which again presents a tremendous opportunity for the astute producer.

The ensuing 25 years—A remarkable discovery! In the last 25+ years I’ve evaluated hundreds of insurance policies. I have never—not once!—found an insurance program that was completely error free; containing no coverage gaps or deficiencies. I would estimate that about half of the insurance programs I evaluate have gaps totaling somewhere between $100,000 - $1,000,000. The other (almost) half, contain gaps or deficiencies that could cost the policyholder over $1,000,000. And less than 5% have gaps totaling less than $100,000. I’m not exaggerating. As mentioned above, in close to three decades of evaluating policies I have never found a perfect policy. I do recall the best insurance program I ever saw, and even though the broker in this case did an exemplary job, it turned out that the one gap I discovered would have effectively doubled the cost of that insurance program had there been a certain type of loss! That particular situation was essentially as follows:

An attorney referred me to one of his clients who wanted his coverage evaluated. The insured operated a multi-location wood millwork & molding manufacturing business. Not an overly complicated operation, but not a simple, one-location concern, either. After interviewing the client and obtaining a copy of his policies, I discovered only one relatively small coverage mistake. The insured frequently transported goods in his company vehicles, with an average value of approximately $75,000 per vehicle per trip. The limit of transit-owned vehicles on his policy was only $25,000 (an automatic limit that came with the policy). I met again with the client and explained that his broker had done an excellent job of structuring coverage, in fact the best job I had seen in some time. The single deficiency was the $50,000 transit gap. Without further prompting, the business owner said something along the lines of “So, if I had a transit loss I’d have to fork over $50,000 out of my own pocket? My total premiums are about $50,000 so that would essentially double the cost of my insurance.” He got it!

What is the true cost of an insurance policy? Insurance isn’t fun. It’s a product people hate to buy, and hate to use! It can be expensive, and in fact it often costs even more when a policyholder has to use it (via deductibles, coinsurance, lost time, frustration, and the shock of finding out that proper coverage doesn’t exist). Insureds won’t know how expensive their insurance policy really is until they submit a claim to the insurance carrier. Too often business owners focus only on the up-front cost—the premium. However, the premium cost can pale in comparison to the true cost of the policies if the coverage hasn’t been structured properly. In later chapters we’ll look at numerous specific examples of potential coverage gaps, and how much they could cost the policyholder. For now, suffice it to say that I almost always find coverage gaps that are well into the six figures.

Can your clients survive an unexpected hit of several hundred thousand dollars? How about a million?

Want To Grow Your Book of Business Faster? Join The Preeminent Producer Mastermind Group and get access to high-earning coaches & exclusive training that will show you how! Go To ThePreeminentProducer.com to grab your spot!

CHAPTER 4 WHAT IS COVERAGE GAP ANALYSIS? “No, no! The adventures first, explanations take such a dreadful time.” ~ Lewis Carroll, Alice’s Adventures in Wonderland & Through the Looking-Glass

First, what it isn’t. Selling via Coverage Gap Analysis is not one of those obnoxious, “paint the prospect in a corner” selling systems. You know, the type of system that advocates getting a commitment (almost always price-based) from the prospect, and then reminding him at the outset of your closing meeting that he said the last time you met that if you saved him 10% he would go with you. It is not a sales technique where you have to remember a bunch of fancy closes, but use them only after you have tried at least 3 “trial closes,” etc. It doesn’t require that you memorize the best rebuttals to common “objections.” In short, it is an approach to insurance sales that doesn’t make the prospect, or you, uncomfortable. If a sales technique makes you squirm, then that should be the first clue that it’s no good! In my early years, an older producer shared with me his approach. He actually advocated presenting your quote, and at the end sliding an invoice across the table right up to the prospect, and then just shutting up. I recall him saying something along the lines of, “You then just stare him down. Don’t speak. There might be a long period of silence, and it could get

uncomfortable, but the first person to speak loses.” Does that sound like a sales technique that would work for you? How would you react if a salesperson slid an invoice under your nose and then tried to “stare you down”? Selling by Coverage Gap Analysis is so effective because it doesn’t rely on ridiculous sales gimmicks and tricks. It doesn’t make the prospect feel pressured or manipulated. Rather, it goes right to the heart of what the insurance purchasing decision should be based on: Proper coverage.

So what is it? Coverage Gap Analysis is pretty much just what it sounds like. It is simply evaluating an insured’s insurance policies to determine if the coverage provided properly addresses the exposures faced. In other words, do the current policies contain gaps or deficiencies? How to determine actual exposures is addressed later in this book. The process of actually selling via Coverage Gap Analysis has some nuances of course, and these are also addressed in later chapters.

Is it hard to learn? Well, it all depends. If you already have a good base of product knowledge, then no, you’ll be ready to jump right in. A brand new producer with minimal product knowledge will have a little bit of a learning curve, but a sophisticated software tool that we discuss in Chapter 8 will greatly shorten the learning process.

Consultative Selling. Consultative Selling is a term that was coined in the 1970s, and is frequently heard today. It is a more professional approach to sales that involves listening to your prospect’s needs and identifying problems, and then presenting solutions. Most insurance producers would say that they take a Consultative Selling approach. However, is there anything consultative about simply duplicating a prospect’s current coverage and trying to come in with a lower price?

One hurdle the producer who sells by Coverage Gap Analysis faces is that, in most cases, the prospect “doesn’t know what they don’t know.” In other words, the prospect usually doesn’t realize or suspect that their policies may contain many serious coverage gaps and deficiencies. Further, they probably don’t appreciate the potential impact those deficiencies could have on their business. As mentioned previously, this is due to the “excellent” job our industry has done to commoditize our product and process! Therefore, the aspiring Coverage Gap Analysis producer faces a challenge that consultative sellers in many other industries don’t, namely that the prospect probably doesn’t realize that they have a problem! That’s why 90% of the time when you ask a prospect what problems they’re having with their insurance program, they will respond with “the cost.” The good news is that if you professionally educate your prospect, and present an eye-opening coverage analysis, you will have completely and dramatically set yourself apart from 90% of your competitors.

CHAPTER 5 THE ADVANATAGES OF SELLING VIA COVERAGE GAP ANALYSIS “If, on the other hand, in the midst of difficulties we are always ready to seize an advantage, we may extricate ourselves from misfortune.” ~ Sun Tzu, The Art of War So why embrace selling by Coverage Gap Analysis? What do you stand to gain if you adopt this sales method? I’ve identified below what I consider to be the main advantages to the Coverage Gap Analysis approach. In no particular order, here we go… Advantages of the Coverage Gap Analysis approach: A great differentiator. Gets you out of the quoting “rat race” and “price trap.” Increased hit ratio. A powerful Broker of Record tool. A tremendous time saver and money maker. Leads to more referrals. Insulates your renewals / Increased renewal retention. Broadens your prospect base. Blindsides your competition. Equips the new producer to excel. Lends itself to team selling. It’s just more fun! Who wouldn’t want to adopt a system that saves time, increases your hit ratio, gets you more B of R’s, insulates your renewals, and leads to more referrals?

Let’s discuss how Coverage Gap Analysis accomplishes all this.

A great differentiator. Our industry is just crying out for differentiation. Selling by Coverage Gap Analysis will differentiate you from 90% of your competition! Simply put, the vast majority of insurance producers are, for all intents and purposes, indistinguishable from one another. They approach this business the same way as do their thundering herd of mediocre competitors. They look the same, they talk the same, they represent the same carriers, and generally they do a poor job of designing coverage that will properly protect their clients. A few years ago, I was retained to do a consulting project which necessitated evaluating insurance agency websites and conducting subsequent face-to-face meetings with agents. Over the course of a few months I examined scores of websites and then met with perhaps two dozen agencies. I came to a startling conclusion: These guys were all the same! Their websites all said pretty much the same things and I noticed that lots of the sites utilized the same design template and even the same photos! What was more alarming though, was that when I met with these brokers and asked them a couple simple questions, most of them seemed completely flummoxed. What were these questions? They were really pretty basic, and as you read these please think of how you might answer if a prospect asked you the following. Question #1: “From your perspective what makes you and your firm unique. I mean really different and better than other brokers? In other words, why should a business pick you as their broker?” That’s a pretty simple question, isn’t it? Surprisingly, many producers, even Agency Principals, have a hard time answering that question. I’m convinced the reason is that most producers and agencies simply aren’t really different, in any meaningful way, from their competitors, and they haven’t invested thought, time, and other resources to accomplish differentiation.

I asked that same question of multiple agencies as part of the research project I conducted a few years ago. I was simply asking them to tell me what made their firm different and uniquely qualified compared to their competitors. They invariably responded with the following three platitudes: Platitude #1: “We have lots of good ‘A’ rated carriers.” Platitude #2: “We tailor coverage to fit your needs.” Platitude #3: “We give really good service.” That’s it, that’s all that 90% of your competitors can come up with. How about you? Oh, occasionally I heard something equally uninspiring like “We’ve been in business over 20 years,” or “We specialize in such-and-such industry,” but usually it’s a variation of the above three-pronged theme. Let’s go on to the next question. Again, imagine that a prospect you’re meeting with for the first time asked you this. Question #2: “O.K., could you be a little more specific. Please tell me exactly what ‘good service’ means to you?” This question really separates the wheat from the chaff. Many producers are completely stumped by that question. Even a seasoned producer will have difficulty answering if they have failed to create differentiators of unique value for their clients. The typical reply I received to that question was something along the lines of “I return all calls the same day,” or “We get Certificates issued really fast.” Put yourself in the place of your prospect. Those aren’t very compelling answers, are they? Now imagine that you are a Coverage Gap Analysis expert. You’ve educated yourself, and acquired a sophisticated software tool that allows you to systematically and thoroughly evaluate insurance policies in a consistent manner. You’d be able to answer that question with something along the lines of: “We really are different! In fact we’re probably unlike any agency you’ve ever met before. The things most brokers say, things like ‘We have a lot of carriers,’ or ‘We tailor coverage to fit your needs,’ is really just the price of admission. We go way beyond that.

First, we meet with you to clearly establish the exposures you have to loss. Then, using a state-ofthe-art software system, we carefully evaluate your current policies looking for any coverage gaps or deficiencies. We give you a comprehensive written report outlining our findings, along with a detailed plan providing the appropriate solutions.” That’s a little more impressive, isn’t it? Presenting a detailed Coverage Gap & Deficiency Analysis Report to your prospect will dramatically separate you from your competitors, including your most important competitor—the incumbent broker. In fact, from the very first meeting with the prospect, you’ll be differentiated. In the next chapter, we’ll be discussing how to apply this approach in the “real world,” but here’s a sneak preview: The very questions you ask during your exposure identification meeting will serve to differentiate you.

Gets you out of the quoting “rat race.” We’ve mentioned a couple times already that the whole quotation process can be a bit demeaning. You’re probably all too familiar with the quoting rat race. You beg, borrow, steal, and perhaps even grovel to get a chance to work on a new account. Then, when you get that opportunity, there are numerous things that can and often do go wrong. For example: You may discover that the insured is already with the best carrier in terms of price. The insured might not be able to get you loss runs or other information in time for you to obtain a quote. You find out that the good markets are already blocked by the incumbent broker or, even worse, a combination of the incumbent plus other brokers. In spite of all the above, let’s say you persevere and obtain a great quote, beating the current pricing by 10%. We all know what happens more often than not. The insured gives his current broker the last look. That broker either

matches the price, or obtains a Broker of Record assignment taking over your quote. All your time and effort has gone right down the tubes. But don’t lose heart, there’s always next year, and besides you’ve got a couple other prospects to work on, and the cycle starts all over again. Yes, I know, there are sales “systems” out there that purport to stack the deck in your favor. Through various uncomfortable sales techniques you’re supposed to get a “commitment” from the prospect that he won’t give his broker last look, he won’t B of R your quote away, and he really will move to you if you come in with a lower price. You get him to “visualize” firing his broker and to tell you that he’s not afraid to do that. The problem with those sales systems, and indeed almost all insurance sales systems, is that success still ultimately hinges on you coming in with the best price. And coming in with the best price absolutely guarantees that you’ll get the order, right? The Coverage Gap Analysis approach, on the other hand, sets you free from the quoting rat race/price trap. In fact, done correctly, you never compete on a price basis. Premium isn’t at all part of the discussion that leads to you getting the order.2

Increased hit ratio Over the years I’ve found that most producers overestimate their actual hit ratio. In fact, one producer I met years ago actually insisted with a straight face that his hit ratio was 100%.3 It’s probably just human nature to remember our hits and deemphasize our misses. What is your hit ratio? If you’re working primarily on non-referred leads, as most producers do, then in reality your hit ratio is probably 20%, and no greater than 25%. If that surprises you then I’d encourage you to keep brutally honest records over the next year and see if I’m not right. If you already keep accurate records and are doing better than 1 out of 4 (remember, we’re not talking about referrals) then congratulations, you are an exception to the norm! Based on my experience, switching to a Coverage Gap Analysis approach will significantly increase your hit ratio. I think this is primarily for the

following reasons: It differentiates you from your competitors. It makes you look much more professional. It gets the insured to focus on what’s truly important-- is the business properly protected, and who is the broker most qualified to make that assessment?4 It takes “price” completely out of the equation, and replaces it with a focus on “cost”—and what is the true cost of an insurance program. Resetting the sales focus from price to coverage is incredibly effective, and it’s almost unbelievable that producers compete so often based on premium. Ask almost any business owner why he purchases insurance for his business and the answer will almost always be to protect the business, the asset that he has worked so hard to create. The answer will never be “I buy insurance to reduce my cost.” So, if that’s the case, why do we as an industry focus almost exclusively on lowering the premium cost rather than on fixing the coverage? It’s almost insane when you think about it.

A powerful broker of record tool. Coverage Gap Analysis is a powerful B of R generator. In fact, the ultimate goal of selling by Coverage Gap Analysis is to secure a Broker of Record letter before going out to the marketplace for premium quotes (if you ever do). In the next chapter we’ll discuss ways to position for and ask for a Broker of Record letter. I suppose there must be some producers who are just so engaging and such great salespeople that they can ask for, and receive, Broker of Record letters based solely on their charm. Unfortunately I’m not one of them! It’s always seemed to me that you have to offer some justification for requesting a Broker of Record letter. I can’t think of a more compelling justification than being the producer who points out to the prospect that his/her insurance program is full of holes! As mentioned earlier, it is hard for most producers to ask for a Broker of Record Letter because, intuitively, they realize that they really aren’t that

different than any other broker out there and that astute insurance buyers know this. Is there really something compelling you can say about you or your agency that truly differentiates you from your competition? Is there something that your competitors can’t say and, even more importantly, something that prospects will actually value? If not, then your sales tactics and the buying decision will inevitably revert to price.

A tremendous time saver and money maker. The preceding three advantages combine to make Coverage Gap Analysis both a significant time saver, and money maker. It is an approach that gets you out of the incredibly time consuming quoting rat race. At the same time, it increases your hit ratio. In addition, it is based on a Broker of Record letter approach which is inherently much more efficient than quoting. Have you ever considered how long it takes to actually quote an account? How about in comparison to securing a Broker of Record letter? A typical quoting scenario takes 2 to 3 times longer than a Broker of Record approach. Let’s look at the impact of this. The Coverage Gap Analysis approach lends itself to obtaining Broker of Record letter assignments. In fact, some producers who have adopted this approach work exclusively on a Broker of Record basis; meaning they never quote! In the next chapter we’ll discuss how that’s possible, but first let’s look at some of the rationale behind this approach. Here is a table that attempts to identify the major steps and time involved in quoting an account. We think you’ll agree we’re using reasonable assumptions here. Sure, we could quibble over the exact time it takes for each activity, but if you really think about it, you’ll probably agree that, if anything, we’re being conservative here. Time it takes to quote a risk:

Some quick observations are in order: 1. As you can see from this table, it typically takes approximately 10 hours to quote one risk from start to finish. Compared to quoting, securing business by a Broker of Record Letter is approximately twice as efficient. Steps 4-9 & 13 are eliminated, shaving 5 hours off the process. Step 10 is replaced with putting together a Broker of Record proposal (more on that later). 2. So, if you worked on a pure Broker of Record approach, you could make

twice as many presentations in the same amount of time. If the success ratio of the Quoting vs. Coverage Gap/Broker of Record approaches was equal, then you’d end up writing twice as many accounts by the latter approach. If the success ratio of the Broker of Record approach was half that of the Quoting approach, you’d still end up at the same place. 3. On the other hand, if the success ratio of the Coverage Gap/Broker of Record approach was 50% better than the quoting approach, you’d end up writing three times as many accounts in the same amount of time! Now let’s talk about a way to make the Broker of Record approach four times as effective.

Leads to more referrals We have found that the Coverage Gap Analysis approach leads to more referrals. The reason is probably two-fold: 1. It is so much more professional. It’s human nature to refer people to your friends if you know it will make you look good. Conversely, people are reluctant to make referrals if they fear it will make them look bad. When you present an eye-opening Coverage Gap & Deficiency Analysis Report to a business owner, it makes you look quite professional. This makes it easy for your new client to refer you to others. 2. It is vastly different. It is also human nature to enjoy sharing news, or being the first to tell someone about a new discovery. The Coverage Gap Analysis approach is so different than what most business owners are used to seeing from insurance brokers that it’s easy and natural for them to share that with their peers. When you add the power of referrals to the Broker of Record approach the results are stunning. Let’s examine this a little closer and try to quantify this. In the preceding section we compared the time involved in a Quoting approach vs. a Broker of Record approach. We concluded there that the Broker of Record approach is approximately twice as efficient (time wise) as the Quoting approach. Now let’s overlay some assumptions about Referrals vs. Cold5 leads and see

what we get. We’ll start with some basic assumptions that you’ll probably agree are reasonable: 1. Your “hit ratio” on cold or tele-marketed leads will be 1 / 56. 2. Your hit ratio on referred leads will be at least 2/5, just one more. 3. You can see twice as many accounts if you exclusively utilize the B of R approach vs. the Quoting approach as they take half the time. 4. You spend half your time producing, and the other half in the office doing non-production work, so that leaves approximately 86 hours a month of production time. Those assumptions would produce the following comparison:

Some comments & observations: 1. Note that in the same amount of time you’d end up writing 4 times as many accounts! 2. Most producers would probably anticipate writing at least 50% of referred leads, which would make this comparison even more dramatic. Wouldn’t you rather have 1 or 2 referrals than 10 telemarketed leads? That’s because, in truth, we all probably write close to 50% of the referrals we receive. Based on all this, you need to ask yourself if you as a producer (or your agency) are spending more time and resources creating and chasing down cold or telemarketed leads than generating referrals, why? It makes no sense at all, yet we constantly see agencies working on this basis. [Note: This book does not deal with how to go about generating

referrals. However, another book I authored, The New Producer’s Handbook, has an entire chapter dealing with a simple approach that, if followed, will generate a steady stream of referrals.]

But wait, there’s more! We’ve already seen that the Coverage Gap Analysis sales approach has many benefits. Let’s recap to this point. Among other things, it will: Differentiate you. Get you out of the quoting “rat race” and “price trap.” Increase your hit ratio. Give you a powerful broker of record tool. Save you time and make you more money. Generate more referrals. And if that isn’t enough, there are some additional benefits that might not be immediately apparent to the casual observer.

Insulates your renewals / Increased renewal retention. Selling by price is a “live by the sword, die by the sword” proposition. When you are a one trick pony and gain accounts only when you come in with the lowest premium, you are susceptible to losing accounts to the next lowest bidder next time around. When you gain an account because you performed a Coverage Gap Analysis and found significant coverage deficiencies, you have insulated that account from the vast majority of your competitors who know nothing but price quoting. You will build a clientele that values the professionalism and counsel you provide, and they will want nothing to do with the armada of amateur price quoters out there.

Broadens your prospect base. When you are a price bidder there is only one time during the year that it

makes sense to meet with a prospect. That of course is right before their renewal date. Prospects get bombarded with calls 3 months before their renewal date by brokers asking if they are “accepting bids” this year. We’re all familiar with the time-wasting 90 days quotation drill. The producer who specializes in Coverage Gap Analysis, however, is not limited by the prospect’s renewal date. In fact, an effective strategy is to meet with a prospect 6 months or more before their renewal date, when no other broker (including the incumbent broker) is courting the client. If you secure such a meeting and perform a Coverage Gap Analysis, often you will be able to pick up a Broker of Record letter before the current broker knows what hit him! In these situations it’s very difficult for the incumbent broker to secure a rescinding letter. Think about what you could possibly say to one of your clients who calls you up mid-year and says something like: “Hey Bob, I hate to tell you this, but another broker came in, did a thorough analysis of my exposures and policies, and gave me a very professional report outlining over $1,000,000 in coverage gaps and deficiencies. Based on this I gave him a Broker of Record letter.” Getting hit mid-term like this catches the incumbent broker completely off guard. In addition, you don’t have to worry about any other competing brokers because the account is completely off their radar screen; after all it’s not in their magic“three months before renewal date” window. Thus, operating on a Coverage Gap Analysis basis greatly broadens your prospect base. You can go after any account at any time regardless of their current renewal date. This dovetails into the next advantage…

Blindside your competition. Just as the incumbent broker gets blindsided if you take the account away mid-term, all the competing brokers get blindsided even if you’re working during that 90 day window.

In essence, what we’re talking about here is: 1. All the other brokers are competing on the regular old price basis. 2. You come in with a completely different proposal that they are not equipped to address. 3. You can actually come in and close the account just a week or two after your first meeting with the prospect. We’ll get into more detail on how to do this in the following chapter, but it’s actually one of my favorite techniques.

Equips the new producer to excel! I believe that there is no better way for a new producer to learn insurance— and to begin excelling right away—than to master the Coverage Gap Analysis method and, in particular, to utilize The Protego Risk Assessment tool as discussed in Chapter 8. We will discuss this in more detail then, but suffice it to say for now that I have seen fairly new producers take accounts away from much more experienced producers utilizing the Coverage Gap Analysis method. It is simply that powerful, and even a seasoned pro who is asleep at the wheel is vulnerable to losing accounts to a young upstart who adopts the Coverage Gap Analysis approach.

Lends itself to team selling. I believe that team selling is an under-utilized approach in the insurance industry. There is something quite powerful about team selling. I’ve used this approach extensively. One of the magic things about team selling is that, while your partner is talking, you’ll be able to observe the prospect and might well pick up on signals that your associate has missed. It’s easy to miss things when you’re the one doing the talking! For example, you may notice that while your teammate is explaining something, the prospect isn’t really getting it. You can subtly clarify the point by saying something like, “Another way of saying that is…” or “Sometimes the way I think about it is…” With the right partner most people find team selling flows naturally, and is very effective.

The Coverage Gap Analysis method really lends itself to a team sales approach for a few reasons. The Coverage Gap & Deficiency Analysis report that you present to the prospect typically generates an actual conversation. In fact, it often generates a lot of conversation. This is different than the price presentation proposals that all the other brokers give. Those are distinguished by a one-sided information dump as the broker dutifully presents his quote, and the prospect quietly listens with a barely stifled yawn to the same stuff he’s heard from every broker he’s ever met. The Coverage Gap Analysis presentation is not the “same old thing” the prospect has heard a million times before. Therefore, it typically intrigues the prospect and captures his attention right off the bat.7 As such, it can generate an animated discussion as the prospect wants to fully understand what risks he’s facing because of the coverage deficiencies you’ve discovered. Because of the amount of conversation needed, it’s often good to have an associate with you to be sure you’re answering every question clearly and thoroughly, and to make sure that you’re not missing any buying cues8 or the essence of the questions the prospect is asking. There is another reason that the Coverage Gap Analysis approach lends itself so well to team selling. You’ll usually be covering a lot of ground, and will probably be delivering a report that discusses multiple lines of insurance, for example Property, Liability, Automobile, Workers’ Comp, D&O, E&O, Excess Liability, etc. In these cases, it’s useful to bring in another team member who you position as an expert in Workers’ Comp or the Casualty lines, for example. When it comes time to discuss the coverage gaps in those areas, he/she can explain those. That allows you to then play the role of the observer, contributing occasional little nuggets of knowledge or pithy observations along the way. It also tends to keep the presentation more stimulating for the prospect. Many insureds also feel that they will be better served by a team than an individual.

It’s just more fun! Finally, many producers just find the whole process of selling by Coverage

Gap Analysis to be more fun! First of all, winning is fun. By improving your hit ratio, increasing your renewal retention, and broadening your prospect base (not to mention all the other advantages discussed above), you will win more often. Secondly, you will find that the Coverage Gap Analysis method is much more intellectually satisfying. Let’s face it, insurance (done the wrong way) can be boring. Done the right way though, it can actually be quite interesting. Discovering the coverage gaps in a prospect’s current insurance policies is pretty fun. It is similar to solving a crossword puzzle or something of the kind. I think you will find that looking for coverage gaps is kind of like going on a treasure hunt, interpreting clues and coming up with the solutions. While reading an insurance policy to see what it covers can be boring, reviewing a policy to see what it doesn’t cover, especially when those are the items you know will help you sell the account, is anything but! Finally, there is always the satisfaction to be gained from simply “doing the job right.” It is much more satisfying knowing that you act as, and are viewed as, a coverage professional rather than as just another insurance salesman.

Want To Grow Your Book of Business Faster? Join The Preeminent Producer Mastermind Group and get access to high-earning coaches & exclusive training that will show you how! Go To ThePreeminentProducer.com to grab your spot! The next chapter deals with how to apply the Coverage Gap Analysis approach. Later, in talking with the Agency Principal, it turned out that this producer had the lowest hit ratio in the agency! 9 times out of 10 you’ll be the only broker doing or even offering to do a coverage analysis, so the question of who is most qualified answers itself. By a “cold” lead, we mean non-referred leads that you had to seek out. The most widespread of this type of lead is the telemarketed lead. Some producers argue that they have a higher hit ratio on cold or telemarketed leads, but we think even in exceptional cases the realistic hit ratio ends up being no better than 1 out of 4. In the next chapter we discuss how to capture the prospect’s attention at the outset of the closing meeting. In the next chapter we’ll discuss some simple things you can say when you see one of those buying cues.

CHAPTER 6 SO HOW DO YOU APPLY THIS APPROACH IN THE “REAL WORLD”? “In theory, theory and practice are the same. In practice, they are not.” ~ Albert Einstein Those of you who have never tried the Coverage Gap Analysis approach might be wondering how to apply this method in the real world. It’s actually pretty straightforward, and you’ll probably find it’s an easy transition from the usual, but less effective, quoting approach. In this chapter we’ll discuss some practical ways to put this powerful technique to work.

Explaining how you work. The Coverage Gap Analysis method will make perfect sense to many of the prospects with whom you interface. However, it’s an approach that deviates from the way most other brokers work. Therefore it’s a good idea to explain exactly how you work, and why. The essential message you want to get across is as follows: 1. You don’t work the way most other brokers work, and there’s a good reason for that. 2. Most other brokers simply seek to duplicate your current coverage, and come in with an “apples to apples” quote at the lowest price. That’s great, but what if those apples are rotten to begin with? 3. You, on the other hand, have discovered that many of the insurance

programs you evaluate are full of coverage gaps and deficiencies. In fact, those gaps are often so serious that they could literally threaten the very life of the business they are designed to protect! 4. Therefore, your approach is to thoroughly evaluate the efficacy of the current policy(s). You do this by first carefully determining the actual exposures to loss that the business faces. Then you compare those exposures to the coverage actually provided by the policy(s) that are currently in force. Finally, you prepare a written report that clearly outlines your findings. That sounds pretty easy to explain, right? It’s sure a lot more compelling than talking about all the great carriers you represent, how long you’ve been in business, and myriad other platitudes spewed forth by so many brokers. It’s probably not hard to imagine that the Coverage Gap Analysis approach might sound more intriguing to the average business owner. After all, if there are serious gaps in his coverage, he’d probably like to know about it!

The 3 meeting approach. I recommend a three meeting approach. I prefer three meetings but, if you wish, you can combine the first and second meeting into one. In an ideal world, here’s how I like to proceed: 1st Meeting: A short meeting wherein you describe your unique approach, explain to them your process,9 get the insured to buy into that approach, then set the scene for and schedule the 2nd meeting. Again, another option is to combine the 1st & 2nd meetings into one meeting. 2nd Meeting: An approximate 60 minute meeting where you ask all your exposure questions, and obtain a copy of their current policy(s). Ideally this meeting occurs within a week of your 1st meeting or, again, you may have combined this with your initial meeting. Your goal here is to determine the insured’s true exposures to loss. By the very nature of your questions you’ll be differentiating yourself (your questions will go beyond the basic Acord application questions that all the other producers ask), and you’ll be building further rapport. 3rd Meeting: This is the closing meeting where you present your findings, and ideally this occurs just a week or two after the 2nd meeting. Chances are

very high that you’ve uncovered several coverage gaps, many of which will be quite serious. Start out with an attention getting statement that you’ve found over $1,000,000 (or whatever the case may be) in coverage gaps. You ask for the Broker of Record assignment at the conclusion of this meeting (and sometimes at an earlier point during the presentation).

Several observations are in order: Done correctly, you never present a premium quote. This way, price is taken completely off the table, and you’re getting the prospect to focus on what really matters. Our industry has done an excellent job of getting prospects to focus solely on price, thus commoditizing the entire insurance purchasing decision and reducing producers to mere number quoters. By adopting this approach you will have eliminated all those time consuming steps involved in preparing a submission and submitting it to markets, only to find out you’ve been blocked and thereby dooming yourself to a price competition which is normally won by the incumbent producer anyway. By the time you arrive for the closing meeting you’ll have built more rapport with the prospect than you would have via the standard quotation process because you’ve already met with him twice in a compressed period of time. Further, the prospect knows that you’re coming in with some analysis rather than a quotation, and hopefully his/her curiosity is piqued and they are looking forward to seeing what you have to offer. Note the relatively short time frame from start to finish, perhaps just 2-3 weeks. Compare that to the typical quotation process where anywhere from 30–90 days elapse from your initial meeting with the prospect, giving very little opportunity to build rapport or make a good impression. In addition, in the typical quotation process you’re up against 3-4 other producers competing on the same basis. Why not compete on a completely different basis? You will have differentiated yourself from all the competing brokers who are following the standard quotation path. Plus, you’ll have the opportunity to be back in there securing an order while they’re still dickering with carriers before they can come see the insured again in a couple months. By the time they get back to the prospective client, if things go according to plan, you

will have already been assigned the account! If, as is so often the case, the incumbent broker’s policies are full of coverage gaps and deficiencies then, without any mudslinging, you will have marginalized the incumbent broker’s position. Put a little less eloquently, you will have made him look bad… but in a professional way! If you go through this process and the insured will not assign you as their new Broker of Record, we suggest you politely walk away, and refuse to get dragged into a quoting contest. Occasionally a prospect might tell you they are very impressed with your findings, but they’d like to see a premium quote before making their decision. Our feeling is that if they won’t select you as their broker after seeing your analysis, then realistically they won’t select you as their broker if you come in with, say, a 10% lower price. By agreeing to quote, you are sending the message that you in fact really are no different than all the amateurish producers out there, and that your Coverage Gap Analysis really isn’t that important. That’s why I say, at that point, it’s time to walk away. A little later in this chapter, in the section entitled “An alternative way to set up the closing meeting,” I give you an alternative approach. It still involves three meetings, but sets up the closing meeting in kind of a clever (some might say sneaky) and powerful way.

More detail please! Let’s dive a little deeper into some of the “ins & outs,” strategies, and even scripts for successfully implementing this approach. We’ll take it meeting-bymeeting. Ins & Outs Of and What to Say in the 1st Meeting: The goals of the 1st meeting are simple. First, you want to explain to them how you work and why. Second, you want to schedule the 2nd meeting! In the section above titled “Explaining how you work,” we’ve given you the essential elements of the message you want to get across. It should be fairly simple to weave that into your presentation. One thing you must not forget to do, however, is to verify that your approach

makes sense to them and that they’re interested. After you explain your approach (I like to use the “Our Process” exhibit that appears in Appendix A), it’s as simple as asking: “Bob, does this make sense to you, and sound interesting?” Let me quickly point out that you’re not trying to “paint them into a corner,” or asking them to commit to something, and you don’t want to come off as if you are. So, keep it conversational and non-threatening. If they say that this doesn’t sound interesting to them (that rarely happens), then it’s not time to put the hard sell on them! I would simply suggest saying something like: “Okay, if you’re not interested, then no problem, I’m not going to try to sell you something you’re not interested in! But maybe I didn’t explain this correctly. I know you’ve worked hard to build this business, and we just want to be sure it is properly protected. What we do is analyze policies for coverage gaps, which we find 90% of the time. You wouldn’t be interested in finding out if your policies might have some serious flaws in them that might cost you a lot of money, or even threaten the existence of your business?” If he’s still not interested, or says he just wants you to give him a quote, then it’s time to politely excuse yourself and walk away. That’s not the kind of client you want. In fact, that’s exactly the kind of client that will protest, “You told me everything was covered,” the minute he has an uncovered loss! Ins & Outs Of and What to Say in the 2nd Meeting: The goals of the 2nd meeting are pretty straightforward. You want to determine their exposures, pick up a copy of their policies, and schedule the final meeting. So you should briefly remind them why you’re there, namely that you need to ask several questions to determine their true exposures to loss, 10 and to pick up a copy of their current insurance policies. Let them know that you will go back to your office and thoroughly analyze their policies, and will then be coming back to give them a written summary of your findings. Ins & Outs Of and What to Say in the 3rd Meeting:

The purpose of this final meeting is to present your findings to the prospect, be sure he understands the magnitude of the coverage gaps you’ve discovered, and ask for a Broker of Record assignment. It probably goes without saying that you should prepare a professional looking report. The BizAssure Protego Risk Assessment tool will do this for you. Let’s face it, most business owners find insurance a little boring, so they often have short attention spans. I therefore recommend that you let the prospect know right at the start of this meeting that you discovered over $1,000,000 in coverage gaps (or whatever the case may be). From there they should be an attentive audience! Once you’ve presented your findings, it’s time to ask for the Broker of Record letter. We’ll cover how to do that in a moment, but first let’s take a brief detour and look at the alternative approach I mentioned above.

An alternative way to set up the closing meeting. Some producers are reluctant to adopt the “Sorry, I don’t quote” approach, or would like to postpone that conversation. Also some prospects, who actually might appoint you as their new broker once they see your coverage gap analysis, might not even let you get to that point if they think you won’t be giving them a quote. To address these issues I offer an alternative way to set this up. It’s not necessarily the approach I recommend in all cases, and I still recommend the three meeting approach as described above, but with one wrinkle. In acknowledgement of the fact that most prospects are expecting to see a quote from you (as discussed, our industry has done a great job of conditioning them to assume that), you might not want to fight that expectation; at least not initially. So, when you are describing your approach, you could consider letting them know that you will of course get them a great quote in addition to your coverage analysis. However (and here’s the sneaky part), in reality you’ll probably still obtain a Broker of Record letter before going through the quotation process, and if they decline to give you the B of R you will still probably walk away at that point.

Let’s assume that you’re meeting with a prospect on January 15, and his renewal date is April 15—the typical 90 day situation. Here’s how the conversation might go at the end of the 2nd meeting: You: “Bob, thanks again for all your time today. We’ll probably be back to you in early April to give you our quote.” Prospect: “Okay, great. Don’t come in too late though, we need some time to compare all the quotes.” [Translated: We’re talking to several brokers, we focus on price, and if you come in with a lower quote we’ll give our current broker the last look. Not exactly the situation you want to be in!] You: “That won’t be a problem.” [It won’t be because you really don’t intend to get caught up in the time wasting quoting process.] You continue: “Bob, one more quick comment. As I mentioned, as part of our process we do a thorough Coverage Gap Analysis. I’ll probably have that done in a couple weeks. If I find anything significant I’ll give you a call back in a couple weeks to discuss that with you.” At this point the prospect is happy. Things seem to be business as usual. He’s probably impressed that you do a coverage analysis, but he’s not necessarily anticipating that you’ll find anything of significance. Maybe you will, or maybe you won’t. But in my experience 90% of the time you will find serious coverage gaps. Some of these could have business-ending potential. At other times you might simply find a series of smaller deficiencies that, when taken together, add up to a significant amount. When I say “smaller,” I’m still referring to individual gaps of $100,000 or more. There aren’t too many business owners who would be happy covering a $100,000 gap out of their own pocket! The next step is to go back to your office and conduct the Coverage Gap Analysis. Once again, this process is greatly simplified if you utilize The BizAssure Protego Risk Assessment software. If you adopt the Coverage Gap Analysis approach there is simply no excuse not to purchase this tool—it is incredibly affordable and makes the entire process so much more efficient, thorough, and consistent.

I recommend that you conduct the analysis within a week and then, assuming you find coverage gaps, call the prospect and set up a closing meeting. Don’t wait two weeks, but don’t call him the next day either (after all, how thorough could your analysis be if it only took you a day?). The conversation might go something like this: You: “Hi Bob, this is ___. You might remember that one of the services I provide is a thorough coverage evaluation of your current policies. I’ve completed my analysis now, and I think we’d better meet.” Almost always his response will be: “You found something?” You: “Yes, I did, and I think we’d better get together sooner, not later.” From there you go ahead and schedule a meeting, and prepare your report. Did you notice that a few significant things have been accomplished? 1. When you first met with this prospect, what was probably foremost on his mind was price. Now, that has suddenly shifted to coverage. 2. You haven’t wasted valuable time going through the submission preparation and marketing process. 3. You’re meeting with the insured again within a week or so of your last meeting, and actually going in for the kill, at least 60 days before all the other brokers. (They’re still scrambling around trying to find carriers, and expecting to compete on the soon-to-be discredited price approach, and you’re about to take them all by surprise.) 4. The prospect is looking forward to meeting with you, and might actually be worried, so he’s wondering what you found. Price is the last thing on his mind. He’s not expecting you to come in with a quote.

When and how to ask for the Broker of Record Letter. All right, through one of these two approaches you’ve now found yourself back in front of the prospect presenting your Coverage Gap Analysis. Your

report will probably be quite compelling and attention getting, but you can’t simply conclude your presentation, clam up and expect to get the order! You have to ask. As I mentioned previously, many producers find it difficult to ask for a Broker of Record letter. Well, I think it is difficult when you don’t have anything different to offer. Imagine—and maybe you’ve found yourself in this situation—that you ask for a Broker of Record letter and the insured asks why he should give you one. Do you have any compelling reasons to give him? I’ve never found anything nearly as compelling as a well thought out and professionally presented Coverage Gap Analysis report. As you know, every sales situation is different, so you have to be flexible and try to utilize an approach that will appeal to the prospect’s personality. Here’s what I suggest, but you can modify this to fit the individual prospect and of course your own style. I suggest asking for the Broker of Record assignment part way through the discussion, or if necessary at the conclusion of the presentation. Part way through the presentation, when you have presented a few important coverage gaps and sense that the time is right, there are a couple things you might ask. Here’s one: “Bob, let’s take a step back for a moment. Can I ask you, at this point, how are you feeling about this?” You’ll find out pretty quickly if you’ve captured his attention. Maybe he’s already seen enough, and is ready to appoint you as his new broker. I prefer being a little more direct. For those of you who also like being a little more aggressive, instead of the above question you might prefer something like: “Bob, I’d like to ask you something. Based on what you’ve seen so far, respectfully, is there really any question who your broker should be?” If you’ve taken the time to analyze his policies, and have found numerous and/or serious coverage deficiencies, you’ve earned the right to ask that question. You have to absolutely believe that your analysis is important, your expertise is valuable, and that you are the best broker for the client.

In a great short book entitled Marketing in Less Than 1000 Words, Rob Burns writes: “Most people hate the idea of ‘selling.’ So don’t. Stop being a salesman. You only become a ‘salesman’ when you don’t thoroughly believe in the power your product has to improve someone’s life… Either start believing in your product or stop selling it and find a product you really can believe in.” I think that is really well stated. If you’ve asked one or both of the previous questions, and still don’t have the order, that’s okay. You still have more coverage analysis to present. But instead of dutifully pressing onward, this would be a good time to probe just a little deeper. Let’s say you asked him the first question above and he responded “No big deal, I’m not worried.” Or let’s say you asked him the second question and he just shrugged his shoulders. Instead of just plowing ahead with your presentation, it might be worth trying to find out why he feels that way. This isn’t the time for gimmicky salesmanship. Prospects can see right through that. You’re not trying to maneuver him into a corner. You simply want to know why he’s not impressed, not worried, etc. If you’ve just shown him that his policies could cost him hundreds of thousands, and he’s not interested, then there’s obviously a disconnect somewhere! I think a simple direct question is best. I like something like, “Hey Bob, I’ve just shown you some coverage gaps exceeding $500,000 and I’m not even done yet. Does this bother you?” You can take it from there. Once you conclude your presentation and answered any questions, it’s time to wrap things up and once again ask for the order. I suppose there’s a million ways to do this, but I stick with the “keep it simple” philosophy and I just get right to the point. Usually it comes out something like this: “Bob, thanks again for all your time today. We just reviewed over $1,000,000 in coverage gaps that I discovered. I guess it’s time for me to ask for the order! If you assign me as your broker I can fix all this, and make sure your coverage never again puts you in a perilous

position. It would be an honor to help you; will you go ahead and appoint me as your broker?” Again, there are many ways to ask, but you’ve got to ask!

Time for some soul searching. Okay, so far we’ve introduced you to Coverage Gap Analysis, discussed what it is and what it isn’t, identified a dozen key advantages to this approach, and discussed some ways to incorporate this approach. The key question now is does it make sense to adopt it? If you’re already experiencing the kind of production success you want, then perhaps not. On the other hand, if you’re frustrated with the insurance business, then perhaps it’s time for a change. I suggest that selling insurance via the Coverage Gap Analysis approach is the way to go!

Stand Out From The Competition, Become The Obvious Choice & Grow Your Book Of Business Faster! You’re Invited To Join The Preeminent Producer Mastermind Group and get access to high-earning coaches & exclusive training that will show you how! Go To ThePreeminentProducer.com to grab your spot! I find it helpful to give the insured a graphic to follow along with as I explain my process. An example of the “Our Process” exhibit which I use appears in Appendix A. The BizAssure Protego Risk Assessment tool, discussed in Chapter 8, provides a comprehensive questionnaire to help you do this.

CHAPTER 7 ADDITIONAL CONSIDERATIONS “It’s the little details that are vital. Little things make big things happen.” ~ John Wooden There are a few things I’ve learned the hard way over the years about selling by the Coverage Gap Analysis approach. To save you from repeating these same mistakes, it’s good to keep the following in mind.

Some people won’t care. Not everyone will share your passion. You might do some great analysis, and then enthusiastically present your findings to a prospect, only to find that it seems to be falling on deaf ears. You will run across some business owners who are simply unimpressed with your analysis. The lesson is not to let that frustrate you, it’s just the way it is. Don’t beat your head against the wall in a quixotic quest to change their thinking. You’ll find enough appreciative insurance buyers to make it worthwhile. Just as this method isn’t for every producer, proper coverage doesn’t seem to matter to some insureds. You will find some prospects who insist that all they want is a quote from you; they don’t even want to see any analysis. In either of those situations there comes a point where it’s simply better just to walk away. I recall one prospect with whom I visited many years ago. A couple times during my initial meeting, as I was explaining the approach I take, the Controller mentioned that all she wanted from me was a quote. She was obviously uncomfortable with the approach I wanted to take, and in fact she even said that it was “weird!” (Always quick on the uptake, I determined that

was probably a good time to call it quits!) I politely told her that I wouldn’t be giving her a quote. Then I explained to her that the “pressure was off;” in other words I was leaving and wasn’t going to try to sell her anything, so why not tell me what’s really going on here? She then explained to me that her boss (the owner) made her get quotes from at least three other brokers every year. She also shared with me that they had been with the same broker for 20 years, and every year her boss just gave the quotes to the incumbent broker and he always held onto the business. Yikes!

Don’t make them feel stupid! If you’re not careful, it’s easy to inadvertently insult the intelligence or competency of the insurance buyer. At the beginning of my presentation I like to point out that I could never be an expert in their business, and I don’t expect them to be expert in mine. I usually say something along the lines of: “Bob, let me say at the outset that I found numerous mistakes in your current policies, but those mistakes aren’t your fault. I do this 365 days a year, and you deal with your insurance only once a year…”

Don’t make the middle manager look bad. Although we’d all like to always present directly to the business owner or final decision maker, sometimes we have to deal with a middle manager first. As you may have experienced, they can quash the deal! Getting them on your side is therefore important. Be aware that your Coverage Gap report can make the middle manager look bad! Let’s assume that the Controller of a particular company for example, has been tasked with securing the insurance each year. However, let’s assume that the owner or someone higher up makes the final decision. In that situation, the Controller might understandably be reluctant to share with his/her boss your report showing that the company’s coverage is riddled with coverage gaps. I’ve found the best way to get around this is right at the start. If my initial

meeting is with someone other than the final decision maker, I try to set the middle manager at ease. Conspiratorially, I suggest to them that when we both meet with the owner (or whoever the final decision maker is) and review my findings, I will indicate that the middle manager had suspicions that something wasn’t quite right with the coverage, and that’s why they called me in. I make it clear that I will make them look good.

Presenting to the right person. We’ve always been taught that we need to present to the decision maker, and that’s good advice. More often than not, when I’ve agreed to present to someone who is not the final decision maker (violating one of my own rules), I’ve regretted it. In larger companies you often need to start out with a middle manager who is not the final decision maker. That’s okay, but you should get the commitment that the owner, CFO, etc. who makes the final determination will be present at your presentation meeting. I explain that we’ll be going over issues that could have serious financial impact on, or even threaten the very existence of the business, and it’s important that all decision makers be present. On occasion I have agreed to review my findings with the middle manager, but with the understanding that I will not leave my proposal with the company until I meet with the final decision maker (see more discussion below).

To leave or not to leave… I’m not talking about walking away here. Rather, I’m referring to leaving or not leaving a copy of your report with the prospect. It’s a tough decision, and I’ve gone back and forth on that one. I made a mistake in a presentation many years ago that I vowed to never repeat again. I had done everything right. My initial meeting with a mid-sized manufacturing company was with the Controller. I gained agreement that the owner would attend my final presentation. When I showed up at the assigned date and time, my excellent Coverage Gap Report in hand, the Controller told me that the owner had been called out of the office unexpectedly, and wouldn’t be able to join us.

Stupidly, I said something like “Okay, no problem, you and I can just review it”. What I should have said was “Okay, no problem, let’s just reschedule this for a time he can be here.” You can probably guess what happened. I had to rely on the Controller to make my case for me, and let’s just say it apparently wasn’t one of my better presentations! So, I no longer leave my report with the middle managers. If I meet with the final decision maker I usually will agree to leave a copy of my presentation. If you don’t want to do that, there are a couple options to consider: 1. Present your analysis using your laptop, iPad, or PowerPoint projector, etc. The idea here is that you never give them a written copy of your proposal, rather you present everything electronically. At the end of the presentation if they still want to “think about it,” there’s nothing to leave with them. 2. Another alternative is to simply have an understanding up front that the report you present is the property of your agency, and that you will only leave a copy with them if they appoint you as your broker. You could consider putting a statement to that effect on the cover page of your proposal. 3. I heard something another consultant/broker said a few years that impressed me. At his first meetings with prospects he would say something like “When we meet next time I’ll present my findings, and after that I’ll have a simple question: is my analysis and findings of enough value and impressive enough for you to appoint me as your new broker? You’ll either say Yes or No. If No I’ll take back my report and we’ll part friends. If Yes you’ll assign me as your new broker and I’ll get to work for you.”

CHAPTER 8 THE PROTEGO RISK ASSESSMENT “An investment in knowledge always pays the best interest.” ~ Benjamin Franklin If you’ve read this far, then it’s probably occurred to you that it might be quite a challenge to systematically, consistently, thoroughly, and in an easily repeatable manner, go about finding coverage gaps. How can you comprehensively establish the exposures that lead to coverage gaps? How can you be sure that you thoroughly review a set of policies, and don’t overlook something? And, once you’ve done all that, how can you efficiently put together a professional looking coverage gap proposal? Luckily, there is a product called The Protego Risk Assessment tool that will walk you through the entire process. I’ve already mentioned The Protego Risk Assessment tool a few times in this book. It is an outstanding online tool, available at a very affordable price. It’s simply a tool is that no broker who sells insurance via Coverage Gap Analysis should be without, and represents one of the best values in agency differentiation software. The Protego Risk Assessment tool is a powerful and systematic way of identifying coverage gaps. It then produces a powerful report to present to your prospect. It’s a time-saver and a great Broker of Record tool. The system will walk you through the entire process. New and veteran producers alike will benefit from this great differentiating tool. Using this tool couldn’t be easier. With a copy of the insured’s policies and notes from your meeting in front of you, you simply and quickly answer a

series of questions. These questions, many of which are just “Yes or No”, walk you through the various lines of insurance in a logical sequence. You don’t have to do any calculations as they’re already built into the system. Once you finish answering the various questions the program automatically generates a report describing and quantifying the various coverage gaps and deficiencies you’ve found. A report is generated to review with the insured, and also a separate report is created for your eyes only which provides further insights, discussion points, tips, etc. to help walk you through the presentation.

But wait, there’s more! The coverage gap analysis feature is just one part of a much more comprehensive risk assessment that the Protego Risk Assessment tool addresses. The system also helps uncover, discuss, and quantify numerous “non-insurable” risks and challenges that businesses face. And yes, the program automatically generates an attractive report combining the “insurable” risks (i.e., the coverage gaps you’ve found) with the “noninsurable” risks into a single unique report that will be unlike anything your prospective insureds have ever seen. There’s nothing else like the Protego Risk Assessment tool in the marketplace, period. Availing yourself of this resource will set you apart from the thundering herd of look-alike sound-alike producers, and equip you to dominate your marketplace.

Stand Out From The Competition, Become The Obvious Choice & Grow Your Book Of Business Faster! You’re Invited To Join The Preeminent Producer Mastermind Group and get access to high-earning coaches & exclusive training that will show you how! Go To ThePreeminentProducer.com to secure your spot!

CHAPTER 9 THE TOP 10 COVERAGE GAPS “When you want to know how things really work, study them when they’re coming apart.” ~ William Gibson Over and over again, we see many of the same coverage gaps come up in our analysis. We’ll take a look at this Top 10 to help get you started on the path of Coverage Gap Analysis. In reality, there is so much room for error when designing insurance coverage that it was actually difficult to come up with just the 10 most common gaps. I’m sure some of my colleagues might come up with a slightly different list, but many of these would probably appear on anybody’s list. By the way, there’s nothing esoteric here. As you’ll see most of these are pretty basic “meat and potatoes” type items, so it’s surprising how often brokers get them wrong. This list is not in order of importance or of frequency. Rather, it loosely moves in the sequence we normally evaluate insurance policies, from General items, to Property items, to Liability items, and to Misc. items, etc. Without further ado, here is the list: 1. Incomplete or Inaccurate Named Insured. 2. Coinsurance Penalty Exposure. 3. Inadequate or Non-Existent Business Income Coverage. 4. Non-Existent Equipment Breakdown Coverage. 5. Inadequate or Missing Improvements & Betterments Coverage. 6. Insufficient Fire Legal Liability Coverage. 7. Missing Employee Dishonesty Coverage. 8. No Employee Benefits Liability Coverage. 9. Missing EPLI Coverage.

10. No Fiduciary Liability (or broader Management Liability) Coverage

Yeah, but how serious are these, and what’s it cost to fix them? By their very nature, some coverage gaps are more serious than others. Surprisingly though, several of them are very inexpensive, or even free, to fix. The following table presents these Top 10 Gaps in summary format.

Cascading Coverage Gaps: Multiple Simultaneous Gaps Triggered by One Event, and Why Do You Have Those Asterisks In The Above Table? You may have noticed that there are asterisks next to five of the coverage gaps in the above table. I have highlighted those gaps as an example of how multiple coverage gaps can easily be triggered by a single event. This phenomenon of cascading coverage gaps compounds the costs an insured would have to pay (out of pocket and unexpectedly), and is a perfect example of how poorly structured policies can actually put a company out of business! It’s almost like the proverbial “house of cards” tumbling down. To illustrate, let’s create a nightmarish example that is played out all too often in real life. As we go through this example, think about how powerful it would be to walk a prospect through a discussion like this using his actual policies and coverage gaps.

The nightmare scenario. Let’s assume that there is a small-medium sized manufacturing firm leasing 15,000 square feet in an industrial park. We’ll also assume that the company owns $1,000,000 worth of Business Personal Property but only carries an $800,000 limit with a 100% coinsurance clause. In addition, we’ll assume that they are 50% underinsured in Business Income due to growth, have no Improvements or Leasehold Interest coverage, and have only a $300,000 Fire Legal Liability coverage limit. (This is actually pretty typical of what I find).

Let’s further assume that a fire occurs and the business burns to the ground. (All the below potential coverage gaps are discussed in more detail in the next section of this book, and that section will help you understand how we come up with the following numbers.) Here’s what can unfold: 1. $160,000 Coinsurance Penalty kicks in: The business owner doesn’t even receive their policy limit of $800,000. The carrier only pays out $640,000. The business loses $160,000. And we’re just getting started! 2. $500,000 Business Income deficiency is discovered: While the business can’t operate they generate no revenue, and their coverage is way underinsured. Again, more detail is in the next section of this book, but this is a typical deficiency. This alone could easily put them out of business. 3. $200,000 Improvements & Betterments go up in smoke: They made significant improvements to the premises, but failed to understand the need for that coverage (or their broker never explained it to them). 4. $700,000 Fire Legal Liability limit shortfall: The broker relied on the automatic $300,000 limit that came with the policy, but the insured was occupying a building worth over $1,000,000 and the fire caused significant damage to the building. 5. $48,000 Leasehold Interest coverage was missing: They had 2 years left on their lease which had very favorable rates, and the cost to lease new premises was at least $2,000 more a month for 24 months. Five different coverage gaps were triggered by just one event, totaling over $1,600,000 in uncovered losses and penalties. Could a typical business survive an unexpected financial hit like this? I’m sure some of you think I’m exaggerating, but I’m not. Have I seen the exact above scenario happen? You bet! The potential for just a single coverage gap to financially cripple a business is significant, but when multiple gaps are triggered the effects can be absolutely devastating. It takes just a little extra effort and a minimal additional premium to prevent this from happening.

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CHAPTER 10 DETAILED DISCUSSION OF EACH POTENTIAL GAP OR DEFICIENCY “Trifles make perfection, and perfection is no trifle.” ~ Michelangelo Buonarroti In the following pages we’ll take a more in-depth look at each of the Top 10 Coverage Gaps and then, just for fun, we’ll throw in 3 more to make a Baker’s Dozen. Remember, these are the 10 most common coverage gaps and mistakes we see repeated over and over. It’s very easy for one or more of these to creep into insurance programs. Experienced producers will find some of this pretty basic, but please bear with me while I explain some of this to the brand new producers! We’ll address each gap in similar fashion, by answering the following questions, and then we’ll go into a little more detail: What’s the big picture, what is this gap? Why should the insured care? How much could it cost an insured? What’s the solution? How much will it cost to fix it? Also, I want to reiterate that this isn’t just an academic exercise. The potential is very real for these gaps to absolutely destroy a business, and even the less fatal gaps can dearly cost a company. So, let’s dig just a little bit deeper!

Top 10 Coverage Gap #1: Incomplete or Inaccurate

Named Insured What is this gap? Simply put, the “Named Insured” identifies who is insured by a particular policy. You need to pay careful attention to be sure the company is completely and accurately identified on the policy. Why should the insured care? Because if the Named Insured wording is inaccurate, or more likely incomplete, there might not be any coverage! How much could it cost an insured? Everything! An incorrect Named Insured might eliminate all the coverage they thought they were purchasing. What’s the solution? Simple: get it right! That’s easy to do -- for more info read the article below. How much will it cost to fix it? Absolutely nothing! More detail: Following is the text of a blog entry that I authored for our agency website on the importance of a proper Named Insured.

Named Insureds: What Could Possibly Go Wrong? “Who’s On First?” Could there possibly be a more critical component of any commercial insurance policy than the Named Insured wording? Incredibly, based on the fact that so many policies contain incorrect or incomplete Named Insured wording, many brokers don’t seem to think so! Why is the Named Insured section so important? Simply because if the Named Insured wording is incorrect, then the entire policy could be nullified, making everything that follows (e.g., limits, deductibles, etc.) moot. If the entire policy is not nullified then, at the very least, coverage may be denied for those entities that are not properly identified on the policy, thus creating a major coverage gap. “What, me worry?” Let me give you an example of what I’m talking about. In the following true story only the names have been changed to protect the innocent! A few years ago one of my associates reviewed a Property & General

Liability “Package” policy for a medium sized manufacturer of plastic goods who had been in business for approximately 15 years. The current insurance broker who wrote this policy had over 20 years of experience, and worked for a large regional insurance brokerage. The Named Insured on the policy read: “The Ultimate Plastic Parts Company” That’s it, nothing more, nothing less. So what’s the problem? Glad you asked! The problem is that this was an alarmingly incomplete Named Insured--to such an extent, in fact, that it is doubtful the policy would have responded to any serious claim. It turns out that “The Ultimate Plastic Parts Company” was merely the DBA of an (unnamed) Corporation. The sole owners of the Corporation were a husband and wife, and their shares were held in a Family Trust. Here’s how the Named Insured should have been structured: “The John Doe & Jane Doe Family Trust; Ultimate Plastic Manufacturing Company, Inc., A California Corporation DBA: The Ultimate Plastic Parts Company; John Doe & Jane Doe Individually As Their Interests May Appear.” Note that the Named Insured afforded no coverage whatsoever to the Corporation, not to mention the Family Trust. When this error was pointed out, the initial reaction of the Corporation President’s was “Well, I’m not too worried because I’ve been with our carrier for a long time, and I’m sure they’d cover a claim anyway.” WRONG! Never count on an insurer’s benevolence. In dealing with insurance companies it’s important to remember a couple facts: 1. Insurance companies are quite good at collecting premium, but when it comes time to pay a claim, especially a very large claim, they are also very good at finding ways to pay back as little as possible. 2. Insurance policies are legal contracts between the Named Insured and the insurance carrier. Therefore, especially because an insurance carrier’s ultimate obligation is to its shareholders (not to the policyholder), they carefully follow any policy wording that allows them

to minimize payments or deny claims outright. Because of this, every part of an insurance policy, starting with the Named Insured wording, needs to be carefully examined. “So What’s A Business Owner To Do?” How do you assure that the Named Insured on each of your policies is proper and complete? Simply list each and every entity (e.g. Trust, Corporation, Partnership, Joint Venture, DBA, AKA, Individual, etc.) that has an interest in the business. Make sure that the Named Insured wording accurately reflects the exact and complete legal names of each entity, and the relationships between those names. Then go one step further and try to identify any de facto trade names, DBAs, or AKAs. These should be listed also. What do we mean by a “de facto trade name?” Here’s a real example, and once again the actual names have been changed. We were asked to evaluate coverage for a Non-profit Corporation providing various social services to disabled citizens. Starting at square one, we examined the Named Insured. The Corporate name, which was the only Named Insured on the policy, was accurately identified as “California Disabled Services, Inc.” (Again, not the real name). However, the insured’s website address, building signage, and even the way they answered the phone was “Cal Disabled Center.” Even though “Cal Disabled Center” was not a formally filed DBA, as the Corporation was essentially holding itself out to the public under that name, we arranged to have it added to the Named Insured. Here are some things you can investigate in an attempt to identify if you have some possible de facto trade names: Website urls & email addresses. Product packaging. Phone answering practices. Advertising & promotional material. Signage. Invoices, business cards, and other stationary. Summary:

A deficiency in the Named Insured wording on a policy(s) can completely nullify coverage. The Named Insured should be the first thing you evaluate in reviewing an insurance program. Best of all, any deficiencies you find in the Named Insured wording can be fixed for free.

Top 10 Coverage Gap #2: Coinsurance Penalty Exposure What is this gap? This potential coverage deficiency is particularly insidious, and can dramatically reduce the limit of Property coverage a business thought they had. The majority of Property policies contain Coinsurance Penalty Clauses, but they are often not properly disclosed, and many insureds have never heard of them. Coinsurance Clauses are commonly applied to Building and Business Personal Property coverages, but can also be applied to other types of Property coverage. Why should the insured care? Because if they’re not careful, they might discover at the time of a loss that they don’t have anything close to the limits of Property coverage they thought they had, no matter what the limit on the policy says! How much could it cost an insured? Coinsurance penalties are usually not minor, and can easily cost them $100,000 or more out of their own pocket. What’s the solution? Determine if the current policy contains Coinsurance clauses, and then evaluate them to be sure that their policy limits meet those requirements (see more info below). Better yet, eliminate the Coinsurance Clause altogether by obtaining an “Agreed Amount” or “Agreed Value” endorsement (not always available, but should be explored). “Blanketing” limits is sometimes touted as a way around the Coinsurance Clause, but does not in and of itself actually eliminate the potential invoking of a Coinsurance Penalty. How much will it cost to fix it? Probably not much. Property rates are usually pretty reasonable, and unless a company is currently way underinsured it will cost just a fraction of the current premium to fix this. More detail: As mentioned above, Coinsurance Penalties are insidious in that most policyholders have never heard of them. Additionally, a couple of

misconceptions are often held even by those business owners who have some familiarity with them: 1. That Coinsurance Penalties do not apply to partial losses, and; 2. That securing “Blanket Limits”, “Replacement Cost”, or other coverage features negates the potential for a Coinsurance Penalty; Again, these are misconceptions, and even some experienced insurance people get confused about them. We’ll look at each one separately, and in the process illustrate how the Coinsurance Clause works. MISCONCEPTION #1- Coinsurance Penalties Do Not Apply To Partial Losses: Coinsurance Penalties emphatically do apply to partial Property losses. Partial Loss Examples: We’ll look at a couple examples to show how this works, and how Coinsurance Penalties are applied to partial losses. Calculation #1: 100% Coinsurance Clause, Partial Loss We’ll use the following assumptions: 1. An insured owns $1,000,000 worth of Business Personal Property; 2. Their policy contains a 100% Coinsurance Clause; 3. They purchased a limit of $500,000 (they are 50% underinsured); 4. A major fire destroys $400,000 of their Business Personal Property; They were expecting a check for $400,000 but instead received one for only $200,000. In other words they were penalized $200,000. To rub salt into the wound, in most cases they would also still have to pay a deductible! What happened? The carrier applied the Coinsurance Penalty Clause. The essential principle is that if a business is underinsured, a claim will be paid back to them at the same ratio that they’re underinsured by. Put another way, they’ll be penalized in proportion to their limit deficiency. The Coinsurance Formula: Here’s an easy-to-remember formula that shows how it works:

Did/Should x Loss = Amount You Receive In the above example they did carry $500,000; they should have carried $1,000,000; and the Amount of Loss was $400,000. Plugging those #s in: $500,000 / $1,000,000 x $400,000 = $200,000 MISCONCEPTION #2- Securing “Blanket Limits”, “Replacement Cost”, Or Other Coverage Features Negates The Potential For A Coinsurance Penalty: Insuring Property on a “Replacement Cost” basis or on a “Blanket” basis does not eliminate the potential for a coinsurance penalty. Most Property policies are written on a Replacement Cost basis, and generally of course that’s a good idea. When eligible, it’s also usually a good idea to have Property limits written on a “Blanket” basis, however neither provision eliminates the requirement imposed by Coinsurance Clauses. The only surefire way to eliminate the potential for a Coinsurance Penalty is to have the clause removed via an “Agreed Amount” endorsement. Unfortunately, Agreed Amount endorsements are not always available.

Top 10 Coverage Gap #3: Inadequate or NonExistent Business Income Coverage What is this gap? Should the insured incur a fire or other type of covered Property loss, Business Income will pay for their lost income plus normal continuing operating expenses. In other words, it will let them survive while their business is unable to operate and generate income, or is able to operate but only at less than full levels. Special Note: The insured may have to request an “advance” on Business Income payments, otherwise the carrier might wait until the end of the claim and property restoration process to make the claim payment, thus negating much of the advantage of paying “continuing operating expenses.”

Why should the insured care? Because after a major Property loss, the single most common reason businesses never recover is either inadequate or nonexistent Business Income coverage. They can’t operate (or can only operate at a reduced level) so revenue decreases or ceases altogether, and improper Business Income coverage will not replace the lost revenue. Inadequate Business Income coverage can quite literally be business ending. How much could it cost an insured? Everything! What’s the solution? First, be sure they have Business Income coverage on their policy. Second, be sure the limits are adequate (see more discussion below). The most important thing to understand is what their actual exposure is. The approach that many business owners and brokers take—“My monthly revenues are x, and I’d probably need 3 months to get back up and running, so give me 3 month’s worth of coverage”—is far too simplistic, and fraught with peril. The time to discover that a Business Income limit is woefully inadequate is not after a loss! There’s really no substitute for completion of a Business Income Worksheet in determining what limit of coverage should be carried. Fortunately, there are several online worksheets that help simplify this process (see Appendix B). How much will it cost to fix it? Probably not much. Business Income rates are typically a percentage of the Building or Business Personal Property rates, and unless the risk is currently significantly underinsured, it can be corrected at just a fraction of their current Property premium. More detail: It’s important to be aware of some basics, definitions, and a half-dozen or so wrinkles and options. We’ll take a quick look at these in alphabetical order. 12 Month Actual Loss Sustained Basis: This option available from many carriers typically comes automatically on a “BOP” form (Business Owners Policy) offered by most carriers for certain types of businesses. The 12 Month Actual Loss Sustained form is just what it sounds like, the policy will pay for the actual loss of business income sustained (without a Coinsurance Clause and in most cases subject to no

dollar limitation). However, the insured will have to prove the dollar amount that was lost, and the form only pays lost income for up to 12 months. Assuming the insured will be able to fully resume operations within 12 months then this is a suitable form. If full resumption of operations would likely take longer than 12 months then they would probably be better off on a regular Commercial Property Policy form. Most business owners underestimate the amount of time it can take to get up and running again after a major Property loss. There can be a maddeningly byzantine maze of delaying factors to navigate including working with local fire authorities, insurance adjustors, building inspectors, architects, contractors, upgraded municipal codes, etc. to name just a few. Business Income: Policy wording may vary, but a typical definition of Business Income included in a policy will read something like “Business income includes the net income (net profit or loss before income taxes) that would have been earned or incurred by the insured and the continuing normal operating expenses incurred, including payroll”. Coinsurance: Many policies will contain a Coinsurance Clause that works similar to the Coinsurance Clauses that often apply to Building and Business Personal Property coverage—in other words it can result in a penalty. If it is determined at the time of a loss that a business is underinsured (i.e., that they do not meet the coinsurance requirements), then the amount that they’ll receive from their insurance carrier will be reduced, sometimes drastically reduced. Completion of a Business Income Worksheet will enable you to secure an “Agreed Value” endorsement which will suspend the coinsurance penalty clause. Always secure the Agreed Value option. Common Policy Forms: Business Income coverage is most commonly written on one of three different forms: The Coinsurance form; a Monthly Limitation form; or the Maximum Period of Indemnity form. In the vast majority of cases the Coinsurance Form is the best and most appropriate way to go, but again be sure to secure the Agreed Value option to suspend the Coinsurance Clause.

Contingent Business Income: Also sometimes called Dependent Properties Business Income, this often overlooked coverage is designed to cover the loss of business income resulting from damage to property owned by others. For example, many businesses rely on key vendors or suppliers that cannot be easily or efficiently replaced. Conversely, some businesses might rely on one or two major customers who purchase the majority of their products. Therefore a major fire at one of these other locations could result in a significant loss of Business Income. Contingent Business Income provides coverage for these situations. Typically for coverage to apply the cause of loss (e.g., a fire) must be of a type that would have been covered if that loss had occurred at the insured’s own property. When a business depends on one or a small number of critical suppliers, manufacturers, or purchasers of its products Contingent coverage should be considered. Coverage can even be purchased when the insured relies on an anchor business nearby (referred to by insurers as a “leader property”) to draw in customers. Examples of leader properties might be a shopping mall, a key destination retail store, or an amusement park, etc. Deductibles & Waiting Periods: In addition to Coinsurance Clauses, another policy feature which can reduce coverage is the standard 72-hour deductible that appears in most Business Income policy forms. The effect of this is that there is no coverage during the first 72 hours after a loss. These deductibles can vary from carrier to carrier, and are sometimes negotiable so you should see if any deductible can be eliminated. Extended Period Of Restoration or Extended Period Of Indemnity: The insuring clause of a typical Business Income policy states that the carrier is liable for loss of Business Income only during the “period of restoration”, which is typically defined as the length of time required to repair, rebuild, or replace the damaged property. Even if the policy expires before the period of restoration is over, the policy will provide coverage as long as the actual physical loss occurred during the policy period. A potential problem is that the impact of a business slowdown or shutdown

on Business Income can extend beyond the point where the damaged property is repaired or replaced. Standard policy forms typically only provide a 30 day “Extended Period of Restoration” beyond the standard period of restoration. In many cases this 30 day period may not be sufficient, therefore most carriers offer the option to increase that limit in various 30 day increments up to 720 days. If it’s likely to take a considerable period of time to ramp up sales again even after the damaged property is repaired, then purchasing an Extended Period Of Restoration should be considered. Ordinary Payroll: Note that the standard definition of Business Income given above includes payroll. However, a business has the option to include or exclude “Ordinary Payroll” from coverage. Most policy forms define “ordinary payroll expenses” as “payroll expenses for all your employees except: officers; executives; department managers; employees under contract; and additional exemptions, shown in the schedule”. If such “ordinary” employees are important to an operation, they may want to keep them on the payroll until the business is ready to reopen. A Hidden Danger-- Lengthy Claims Settlements Impact When You Receive Payment There is an insidious danger lurking within Business Income policies that can seem to run counterintuitive to the intent of the coverage, namely the “Loss Payment” provision. The Business Income policy will include wording that reads similar to the following: “Loss Payment: We will pay for covered loss within 30 days after we receive the sworn proof of loss, if you have complied with all of the terms of this Coverage Part and: a) We have reached agreement with you on the amount of loss; or b) An appraisal has been made” (emphasis added) So, what is the impact of this? The impact is that, unless the carrier has agreed to make interim payments, the insured could easily end up waiting a year or more to receive payment from their insurance company. Could their business survive 12 months of lost income? How about 24 months? Could

they obtain financing to get them through that period of time? The solution to this is to request interim payments from the carrier. The carrier might agree to e.g., quarterly payments during the period of restoration while the final claim amount is being evaluated. That’s an imperfect solution, but the insured definitely will not receive interim payments unless you ask. Wrapping Things Up As stated at the outset, Business Income is commonly misunderstood, and consequently often inadequately addressed. However, proper Business Income coverage becomes critical in the event of a business shutdown or slowdown due to a fire or other covered event. Again, more businesses that never recover from a Property loss fail because of the resulting loss of business income. A few key takeaways that could save an insured significantly in the event of a loss: Complete a Business Income Worksheet to determine the true exposure; Eliminate the potential for a Coinsurance Penalty by securing an Agreed Value endorsement; Be aware of the “delayed payment” phenomenon discussed above; Don’t forget to evaluate the exposure to Contingent Business Income losses; Consider recommending an Extended Period Of Restoration to add more time to the coverage;

Top 10 Coverage Gap # 4: Non-Existent Equipment Breakdown Coverage What is this gap? In the old days we referred to this as “Boiler and Machinery” coverage, but modern policy forms cover a lot more than damage to boilers. In essence, Equipment Breakdown covers the often significant physical and financial damage resulting from a breakdown of various types of equipment necessary to a business. Most business owners seriously underestimate the losses that can result from an equipment breakdown.

Why should the insured care? Because these can be very costly claims which are usually not covered by standard Property policies. Although some carriers now offer (often limited) Equipment Breakdown coverage automatically built into their Property policies, most coverage forms exclude the types of losses resulting from an Equipment Breakdown. How much could it cost an insured? As mentioned above losses can be severe, and remember they are typically excluded from most standard Property policies. Equipment Breakdown losses usually go beyond mere damage to the equipment, and extend to damage caused to other business property, as well as resultant loss of income and extra expenses. What’s the solution? First, check to see if their current Property or “Package” policy includes Equipment Breakdown coverage (check the Property Declarations page), and if so determine if it only provides a minimal amount of coverage. If there is no coverage presently chances are good that the carrier can offer it as an endorsement to the current coverage. If not, there are several carriers that can offer Equipment Breakdown coverage as a standalone policy. How much will it cost to fix it? This is really a case of “it all depends,” but most business owners find the cost of Equipment Breakdown coverage to be reasonable once they understand the exposure and necessity of this coverage. Premiums will be a fraction of what they’re already paying for their various other coverage (Property, Liability, Automobile, Workers’ Compensation, etc.). More detail: As mentioned above, Equipment Breakdown covers the physical and financial losses that can follow from various types of breakdownsmechanical, malfunction, electrical damage, operator error, etc. (see CAUSES OF LOSS below). These losses can be significant. The cost to repair or replace the damaged equipment is covered, and in addition Equipment Breakdown can be structured to cover both the loss of Business Income, as well as various “Extra Expenses”. Extra Expenses include costs the insured incurs to minimize the damage, continue operating, and speed recovery. Coverage can also extend to spoilage or contamination to their products, inventory, etc. resulting from an equipment breakdown. Let’s take a more detailed look at the types of equipment covered, the causes

of loss that are covered, etc. But First, How Large Can Losses Really Get? Major insurance companies often publish examples of Equipment Breakdown losses to illustrate the types of losses that can occur, and how large such losses can become. To give you a flavor for what can happen, here are some real life examples (omitting names to protect the innocent!). The actual losses in each of the examples below ranged from $65,000 $1,500,000: Electrical Example: Arching caused damage to the main electrical panels of an office building. Not only was equipment damaged, but tenants lost business due to the power outage. Electrical Example: An electrical supply bus to an apartment complex burned out. Extensive damaged was caused to electrical wires and cables. In addition, displaced residents had to be relocated. Mechanical Example: A bolt came loose and fell into a high-speed printing press, damaging the internal gears and cylinder. Contamination Example: An ammonia line at a food processing plant ruptured when a compressor crankshaft and its connecting rod broke. Food products were contaminated with ammonia. A new compressor also had to be acquired and installed. Remember, none of these losses would have been covered by a standard Property policy! Causes Of Loss: The coverage scope of modern Equipment Breakdown policies is quite broad. Actual coverage forms vary of course, but common causes of loss that are covered include: Power surges Short circuits Mechanical breakdowns Electrical arching Motor burnout

Centrifugal force Pressure vessel bulging, cracking, collapse, explosion Artificially generated electrical current Operator error Equipment Covered: Many modern policies now cover virtually any type of equipment you can think of, including new technology. Some examples include, but are not limited to: Electrical equipment Computers, telecommunications, and electronic technology systems Production machinery and systems Generators Mechanical equipment Motors and pumps Air Conditioning and Refrigeration equipment Engines CNC machines Security systems Ventilation systems Elevators Renewable and alternative energy systems And of course, boilers, pressure vessels, etc. Some Other Considerations: Occasionally a business owner thinks that Equipment Breakdown coverage isn’t needed due to Manufacturers’ Warranties, or because they assume it’s the building owner’s responsibility. Also, business owners and insurance brokers often fail to evaluate “contingent” equipment breakdown exposures. We’ll Warranties: The equipment you purchase or lease comes with a Manufacturer’s warranty, so does that obviate the need for Equipment Breakdown coverage? In a word, no! Most warranties contain several limitations, and are also only good for a limited amount of time. Further, warranties will only address specific and often restrictive types or causes of product failures. In addition, don’t count on a warranty to pay for the loss of

business income and extra expenses resulting from an equipment failure—it won’t. Finally, warranties will not pay for damage due to operator error which is a common cause of equipment breakdown. Leased Buildings or Leased Equipment: Those businesses that lease their building or use equipment owned by others still have an Equipment Breakdown exposure. Although in many cases the building owner is responsible for repair to damaged building equipment and systems, carefully read the lease agreement as it may impose those obligations or portions of those obligations on the tenant. Even in the typical case where the building owner is responsible, that obligation will only extend to repair or replacement of the damaged equipment. The loss of income and extra expenses incurred as a result of the equipment breakdown will be the tenant’s responsibility. This is important because approximately 50% of equipment breakdown situations result in significant business income claims. Contingent Business Income: The last item we’ll look at is called “Contingent Business Income”. An insured’s Equipment Breakdown coverage can be endorsed to include coverage for situations where an off-site equipment breakdown impacts their business. If they have key vendors or suppliers that they rely on, then an equipment breakdown at one of their facilities could create a significant financial loss to their business. Many businesses carry regular Business Income coverage as part of their Commercial Property policy, and some of those policies provide Contingent Business Income coverage. However, such policies won’t provide coverage for off-site claims caused by Equipment Breakdown, so they need to secure that coverage as part of their Equipment Breakdown coverage. Wrapping Things Up: Equipment Breakdown is one of the most neglected Commercial Property coverages. It is misunderstood by many business owners and brokers who either assume it’s automatically covered, or simply fail to think about it. Key Takeaways: Equipment Breakdown losses can be severe, even business-threatening; Equipment Breakdown coverage is excluded on most Property policies. Chances are good that an insured’s current coverage has no Equipment Breakdown coverage;

Equipment Breakdown coverage usually costs only a fraction of the other commercial insurance coverage premiums; Coverage is extremely broad, and can even be extended to cover “contingent” situations; Coverage applies to both physical and financial losses;

Top 10 Coverage Gap #5: Inadequate or Missing Improvements & Betterments Coverage What is this gap? If the insured is a tenant in a building, and makes modifications or alterations (“improvements”) to the building at their own expense to suit the needs of their operation, they can insure against loss to those improvements. Why should the insured care? If they’ve made no improvements to the building they are leasing then this shouldn’t be of concern. However, that’s often not the case, and if they don’t want to be out the money they’ve put into modifying the building, then they should be sure they have this coverage and that limits are adequate to cover their outlay. If the insured is the building owner, then they should be concerned with properly insuring that asset (the building), and the value of the asset has hopefully been increased due to the improvements made by the tenant. How much could it cost an insured? It all depends on the cost of the improvements that have been made. I’ve had some clients who made little or no improvements, and some who made improvements well into the six figures. Rates will reflect the current Business Personal Property or Building rates, and thus will typically be fairly inexpensive. What’s the solution? Examine the Property policy to be sure that Improvements and Betterments is already contemplated within the definition of Business Personal Property or Building coverage, and again be sure that the respective Property limits have taken into account improvements. If the current Property policy does not already include Improvements & Betterments coverage you should be able to easily have this endorsed. How much will it cost to fix it? This is typically a pretty inexpensive coverage. Rates are usually a percentage of the Building rates, and Building

rates are usually among the lowest of Property insurance rates. More detail: Improvements and Betterments coverage, also sometimes referred to as Tenant’s Improvements and Betterments, or “TIB’s” for short, is one of those concepts that seems simple on the surface, but actually is layered with subtleties and complexities that are important to understand. Because of this it is an area that is often misunderstood, leading to sometimes significant surprises and coverage gaps. Whether an insured is a tenant in a building, or a building owner, a misunderstanding of how Improvements and Betterments coverage works, especially in relation to Lease Agreement and Insurance Policy wording, can cost them significantly at the time of a fire or other cause of Property loss. Going a little further, business owners often make upgrades or improvements to buildings that they rent. If the insured is a tenant, TIB’s are probably already covered within their business personal property form, but at the time of a Property loss who is responsible for replacing or paying for damaged TIB’s can be difficult to sort out. Actual ownership of vs. responsibility for insuring TIBs can be a confusing matter. The definition of “Improvements and Betterments” found in most Property policies of will read along the lines of “improvements and betterments such as fixtures, alterations, installations or additions: (a) Made a part of the building or structure you occupy but do not own; and (b) You acquired or made at your expense but cannot legally remove.” While that may seem simple enough, issues often arise. Properly understanding the interrelationship between lease agreements and insurance policies, and the resulting implications for ownership and insurance obligations can be problematic. At the time of a claim there is often conflicting language in lease agreements and insurance policies, the two contracts that come into play in settling a loss. Disputes can arise as to which party (the tenant or the landlord) owns the TIB’s, and is therefore responsible for them. Further complicating matters is the fact that many building owners, tenants, and insurance brokers do not thoroughly review lease agreements. The time to clearly understand the contractual duties and obligations of the parties is before an actual loss occurs, and ideally before executing a lease agreement.

Digging Deeper: Let’s dig a little deeper and look at some issues surrounding the contracts involved, and the types of situations that could create a TIB related loss to the tenant. Contracts-- Leases & Insurance Policies: A lease agreement should clearly address who actually owns the TIB’s that are made to a building, who is contractually obligated to pay for the replacement of damaged TIB’s, as well as which party is required to insure the TIB’s. Unfortunately, not all leases are worded clearly and consistently. For example, while most leases obligate a tenant to insure only the TIB’s he/she installs, some leases require the tenant to insure all TIB’s, including those installed by a prior tenant. That hardly seems fair! O.K., so far so good. But other contracts come into play in the event of a loss, specifically the tenant’s insurance policy, and the landlord’s insurance policy. In an ideal world everything goes smoothly, but sometimes the policy language of the tenant’s insurance policy might conflict with or be inconsistent with the rights and obligations created by the actual lease agreement, or with the language of the building owner’s insurance policy. It’s best to reconcile these differences before an actual Property loss occurs. For example, in the situation cited above where a tenant is required via the lease agreement to insure all TIB’s (even those installed by a prior tenant), a cleaner solution would be to have the landlord agree to insure the value of those prior installed TIB’s within his/her Building coverage, and simply charge back the associated insurance cost to the tenant. What could cause a TIB’s related loss to the tenant?: There are three situations which have potential to cause a financial loss to a tenant. The first is obvious, the second and third less so. Direct Damage: This is the obvious one. Damage directly to the TIB’s could be caused by a fire, theft, or other insured Property peril. Policy terms such as perils covered, valuation (Actual Cash Value or Replacement Cost), coinsurance clauses, and deductibles, etc. will dictate the amount of recovery.

If the insured is a tenant, then normally their TIB’s are covered as part of their Business Personal Property. However, if they have a substantial TIB’s exposure, it may be possible and desirable to separate their TIB coverage from their Business Personal Property coverage, and thus obtain the typically lower Building rate. Ordinance or Law: If they are a tenant and have a substantial TIB’s exposure, another cause of loss you may be concerned with is Ordinance or Law coverage. Standard Property policies contain an Ordinance or Law exclusion, excluding coverage for losses caused by the enforcement of any law regulating a) the construction, use, or repair of any property, or b) the tearing down of any property, including removal of the debris. A potential problem arises from the fact that most insurance policy forms utilized to provide Ordinance or Law coverage (e.g., CP 04 05 “Ordinance Or Law Coverage”) apply only to Building coverage, and again most tenant’s TIB’s are covered within the Business Personal Property form. Therefore, a coverage gap is created. The way around this yet again is to get the TIB’s as part of the Building coverage. Most carriers will accomplish this by having ISO form CP 14 15 “Additional Building Property” added (but be sure also to have CP 04 05 added as well). CP 14 15 specifically states that the scheduled property is “added to BUILDING” and “does not apply under your BUSINESS PERSONAL PROPERTY”. This then effectively converts the tenant’s TIB’s coverage from Business Personal Property to Building, and consequently coverage for Ordinance or Law can now apply. Lease Cancellation: There may be various conditions stated in a lease agreement allowing for cancellation of a lease by the landlord. If the tenant has a favorable lease, i.e., at rates better than current market rates, this creates a Leasehold Interest exposure. The Leasehold Interest exposure increases with the length of time left on the lease. In the case of TIB’s, a loss of “Use Interest“(discussed further below) would be realized if a lease is cancelled early. For example, most leases contain a Damage Or Destruction clause allowing the landlord to cancel the lease if the premises are damaged or destroyed during the term of the lease. If that clause is triggered (and less than total destruction may trigger it), and the lease is therefore cancelled, the tenant will realize a loss of use interest. If Leasehold Interest has not been added to the policy then chances are that no insurance

coverage will exist for this loss of use interest exposure. The way around this is to add Leasehold Interest coverage to the policy. Some Terms And Considerations: Some terms and various other considerations, most of which we have touched on above, are worth being clear on. Who owns TIBs? There is a difference between “ownership interest” and “use interest”. As mentioned previously, typically a tenant’s interest in TIB’s is considered a use interest. Even though a tenant may have acquired, paid for, and installed TIB’s, they are usually ultimately owned by the building owner. In fact, it is generally understood that the ownership interest change to the landlord occurs the moment the TIB’s become part of the building. Recall that most insurance policies define TIB’s as improvements “You acquired or made at your expense but cannot legally remove.” This is yet another reason to carefully read the lease agreement. Fixtures vs“Trade Fixtures”: The typical insurance policy definition of TIB’s reads in part “improvements and betterments such as fixtures, alterations, installations or additions”. Again, these by definition cannot be legally removed by the tenant. However, a certain category of fixtures called “Trade Fixtures” differ from ordinary fixtures, and can be legally removed by the tenant. A typical example would be a display case. Most lease agreements will contain an “Alterations and Improvements” clause (or some title to that effect) that should specifically state that trade fixtures are owned by the tenant. The lease should be examined to be sure this clause exists to avoid any surprises when it’s time to vacate the premises. “Use Interest”: We’ve mentioned this term before, but it’s a concept worth getting your arms around. Improvements and Betterments (other than trade fixtures) that a tenant makes are typically ultimately owned by the landlord. The TIB’s are “used”, however, by the tenant. Therefore, the tenant has a “use interest” in the TIB’s. Direct damage to the TIB’s, damage to the building, an Ordinance or Law situation, or a lease cancellation could cause a use interest loss. In a way, from a tenant’s perspective, it’s really this loss of use interest that is being insured, not the physical TIB’s themselves. Whose Policy Pays, and The “Other Insurance” Clause:

TIB’s could be insured by either the landlord or the tenant. To avoid disputes, the lease agreement should clearly state which party is responsible for insuring TIB’s. If a review of the lease agreement makes this unclear then it should be clarified. The importance of this becomes apparent when you consider that most Property policies contain an “Other Insurance” clause. Although actual policy wording may vary, the Other Insurance clause typically states something like “If a loss covered by this policy is also covered by other insurance, we will pay only the proportion of the loss that the Limit of Liability that applies under this policy bears to the total amount of insurance covering the loss.” That sounds reasonable, however some Other Insurance clauses also state that any other insurance will be primary, meaning that any other available insurance must respond first. So what happens if both the tenant’s and the landlord’s policies contain such Other Insurance wording? You can see the potential for disputes and claim settlement delays, again illustrating the importance of reviewing and clarifying lease language beforehand. Coinsurance Penalty Exposure: Building owners must take special care to increase their Building limit by the value of any TIB’s in order to avoid a potential Building coinsurance penalty. Conversely, tenants also must take care to increase their Business Personal Property limits to avoid a potential Business Personal Property coinsurance penalty. As a refresher, most Property policies contain a Coinsurance Clause. Such clauses specify that, at the time of a loss, if the coverage limit you maintained was inadequate you will be penalized. We won’t go into the formula again here, but suffice it to say that these penalties can be dramatic, costing an insured tens of thousands or even hundreds of thousands of dollars at the time of a claim. As a building owner, if an insured fails to take into consideration the value of tenant installed TIB’s when setting their Building insurance limit, they could easily be facing a coinsurance penalty at the time of a Property loss. As a tenant, if an insured fails to increase their Business Personal Property limit to take into account TIB’s they might be exposed to a coinsurance penalty. Wrapping Things Up: Equipment Breakdown is one of the most neglected Commercial Property

coverages. It is misunderstood by many business owners and brokers who either assume it’s automatically covered, or simply fail to think about it. Key Takeaways: Equipment Breakdown losses can be severe, even business-threatening; Equipment Breakdown coverage is excluded on most Property policies. Chances are good that an insured’s current coverage has no Equipment Breakdown coverage; Equipment Breakdown coverage usually costs only a fraction of the other commercial insurance coverage premiums; Coverage is extremely broad, and can even be extended to cover “contingent” situations; Coverage applies to both physical and financial losses;

Top 10 Coverage Gap #6: Insufficient Fire Legal Liability Coverage What is this gap? If the insured is leasing a building, they are legally liable for damage caused by their negligence to that building. Fire Legal Liability, also known in today’s policies as “Damage To Premises Rented To You” (now that’s a mouthful!) coverage, provides protection should the insured cause fire damage to the landlord’s building through their negligence. Why should the insured care? Because it is incredibly common to be significantly underinsured in this area. We see it all the time. The typical Commercial General Liability policy automatically comes with either a $100,000 or $300,000 limit, which is adequate to cover only the smallest of buildings. How much could it cost an insured? If they occupy a building worth, for example, $1,000,000 and they only have a Fire Legal Liability limit of $100,000 then they’d better hope they never cause a fire to that building as they could be on the hook for $900,000! What’s the solution? Approximate the value of the building the insured is occupying (or the portion of the building they are occupying if they occupy only part of the building), and increase the limit of coverage to reflect that. Most carriers have access to various commercial building cost estimators that

can approximate the replacement value of various types of commercial buildings. However, it’s important to point out that there are both insurance and risk management solutions. In many cases a combination of both are necessary to minimize this potential coverage gap. Simply increasing the limit of insurance coverage may not be enough. How much will it cost to fix it? Fortunately, it is typically pretty inexpensive to address this. In fact, some solutions cost nothing, and even dramatically increasing the current limit of coverage (assuming they have the appropriate coverage form already in place) usually costs just a fraction of their overall premium. More detail: “Damage To Premises Rented To You” is an important yet often overlooked coverage. Many aspects of it are also commonly misunderstood. When an insured rents or occupies a building that is owned by someone else, they could be held liable if the premises are damaged. It is important to evaluate both the obligations imposed on them by their Lease Agreement, and whether or not their current insurance coverage properly addresses those exposures. For reasons to be discussed, many insurance buyers and brokers overlook this important coverage. It’s not obvious where to find the coverage in the policy, and who really reviews their policies or lease agreements anyway? However, simply relying on the limited (and restricted) coverage that comes automatically with most Commercial General Liability policies can prove to be a costly mistake. Reviewing Lease Agreements and Insurance Policies isn’t high on the list of most business owners’ priorities. However, if they lease even a modest size building worth e.g., $1,000,000 they could easily be facing an uninsured coverage gap—meaning it comes out of their pocket—of $700,000 $900,000 by accepting without scrutiny the automatic coverage limit that comes with most Commercial General Liability policies. Worse yet, they could end up being completely uninsured for liabilities they may have unwittingly assumed in their Lease Agreement by having the wrong coverage form. Legions of business owners are exposed to financial ruin because no one has advised them properly in this area. Insurance buyers and brokers tend to focus primarily on well known liability

issues such as Products Liability, or various Property exposures such as loss of Business Personal Property. Consequently, less obvious exposures such as Damage To Premises Rented To You aka: “Fire Legal Liability” are often left unaddressed. However, it’s imperative to consider the amount an insured could be held liable for should they damage the premises they occupy. If their business does not own the facility that they are operating out of you need to pay very close attention to both their insurance policy, and their real estate lease agreement. The insurance policy Declarations will refer to this coverage as Damage To Premises Rented To You, but many insurance professionals will refer to it by the older name Fire Legal Liability. Throughout the remainder of this discussion we’ll refer to it as Fire Legal Liability. Fire legal Liability refers to the risk that a business is exposed to when it has property belonging to others in its possession. These are important exposures to evaluate as standard Commercial General Liability policies specifically exclude coverage for damage to property of others in one’s care, custody, or control. (You’ll usually find this in Exclusion j.). Fire Legal Liability coverage for damage to a building an insured occupies is granted via an exception to this exclusion (just read a little further down from exclusion j.). This exception gives an insured coverage as a tenant for damage caused by a fire to premises they occupy or rent that they are legally obligated to pay. If they have Personal Property of others in their care, custody, or control there are both General Liability and Property forms that can accommodate that. In fact, some modern Property forms automatically extend such coverage—you’ll have to check the policy in question to determine if such coverage already exists. But back to Fire Legal Liability, which again applies to premises. This coverage is automatically included via an exception to the Property Of Others exclusion.11 This automatic coverage is actually often restricted and limited in several ways. Therefore, it’s vital to review the policy vis-à-vis the requirements imposed by the lease agreement. Digging Deeper: Where is the coverage found? Fire Legal Liability coverage is found in a paragraph that almost seems like an afterthought. The paragraph is at the end

of Coverage A—Exclusions and states that exclusions do not apply to damage by fire to premises rented or temporarily occupied by the named insured with the permission of the owner. Also, reference is made in the paragraph to application of a separate limit. How is the coverage restricted and limited? Fire Legal Liability coverage only contemplates damage caused by fire, and only applies to damage to the premises. Also, it applies only if an insured is legally liable for the damage— in other words the fire must have been caused by their negligence. Coverage applies only to that portion of the real estate they rent, so if a fire spreads to other parts of the building, or causes damage to the property of other tenants, coverage does not apply (look to the Each Occurrence liability limit for help there). The limit that comes automatically with most policies is usually only $100,000 or $300,000. Sometimes it’s less. How do you get coverage for damages not caused by a fire? You can utilize a Commercial Property Form—the Legal Liability Coverage Form CP 00 40 04 02. This will provide coverage for property of others in your care, custody, or control that is described in the policy declarations. It’s a legal liability form, so you must be legally obligated to pay for the damage to the property. Of course, the cause of damage also must be one of the Causes of Loss specified in your Property policy. Contractual Liability Exclusions & Lease Considerations: Most modern lease agreements place broad responsibilities on tenants. If you have not reviewed the lease agreement you have no way of knowing how much responsibility the tenant has assumed. Some lease agreements might make the tenant responsible for any damage to the premises regardless of cause! In addition to the fact that signing such a lease probably doesn’t make good business sense, a further problem arises in that the insurance policy will probably contain wording within the Contractual Liability exclusion that will state in part something like “We will not defend any claim or ‘suit,’ or pay damages that you are legally liable to pay, solely by reason of your assumption of liability in a contract or agreement” (emphasis added). If an insured is held liable solely due to an agreement to be responsible for damage to the property, there is no coverage. Therefore, an insured could find themselves in the situation of having accepted responsibility (via signing a lease agreement) with no insurance coverage to address that responsibility.

What alternative insurance and risk management solutions are there? There are multiple ways to address the various issues surrounding an insured’s Fire Legal Liability exposure, and there really isn’t one single best solution. A review of their lease with help from a competent attorney is important to establish their exposures and the efficacy of their current insurance coverage to address those exposures. Following are some alternative risk management and insurance approaches. These may or may not be appropriate to the given situation. Therefore, the following should not be construed as either legal or insurance advice applicable to any specific situation, and absent a review of specific coverage recommendations cannot be made. Increase the limit: Their current Fire Legal Liability limit may be woefully inadequate. We often find that business owners are relying simply on the limited amount of coverage that comes automatically with their Commercial General Liability policy. That limit, usually only $100,000 or $300,000, is often far short of the actual Replacement Cost value of the premises, creating a significant coverage shortfall. Explore utilizing Property Form CP 00 40 04 02: As mentioned previously, this form covers legal liability for damage to property that is in an insured’s care, custody, and control, with a few distinctions. First, it must be described in the policy. Second, it only applies to losses for which they can be held legally liable. An important advantage of using this form is that coverage will be provided for a variety of perils beyond just fire—coverage will apply to any of the Property Causes of Loss in their policy. Further, both real and personal property can be covered under this form. Rates will be significantly less than the Property rates that apply to the given Building and Personal Property. Amend the Lease: If a review of the lease uncovers potential uncovered liabilities, the landlord may be willing to amend it in various ways. For example, if their lease makes the insured responsible for all damage to the premises regardless of cause, in light of the fact that presumably the landlord has purchased separate insurance to cover the building, the landlord may agree to change or eliminate that phrasing, grant a waiver of subrogation clause in favor of the insured as the tenant, or create a mutual waiver of recovery rights clause. In all these instances, indeed at any time you attempt

to change the lease wording, get an attorney’s help! Secure Regular Property Coverage: When all else fails, if a review of their lease determines that they have uncovered liabilities, and the landlord is unwilling to amend the lease, they can consider purchasing Property coverage on the building. Of course, this is usually not the preferred route to take as it is the most costly, and is inefficient in that coverage may be duplicated by insurance the landlord already has in place. Occasionally an insurer my resist this approach under the assumption that as the tenant they have no “insurable interest” in the building. However tenants do have a “use interest, and the fact that they have agreed to be responsible for and therefore will incur a financial loss if the building is damaged establishes their insurable interest. In addition, the landlord can be added to the policy as a Loss Payee. Wrapping Things Up: Key takeaways: It’s important to review lease agreements and the insurance coverage intended to address the responsibilities imposed by the lease agreement; Many modern lease agreements place very broad requirements on the tenant, and it may be possible to negotiate amendments to the lease; The “standard” Fire Legal Liability that comes with a Commercial General Liability policy is limited and restricted in several ways, and may leave coverage gaps; The actual limit of coverage that comes automatically with most policies is often woefully inadequate, potentially exposing businesses to very large uncovered claims!; Various other approaches to coverage and risk management solutions may be available;

Top 10 Coverage Gap #7: Missing Employee Dishonesty Coverage What is this gap? Employee Dishonesty coverage, also sometimes referred to as Fidelity coverage, protects a company from financial loss due to theft or dishonest acts by their employees. The theft typically involves loss of money or embezzlement, but can also involve loss of securities or other forms of

property. Why should the insured care? Because employee theft and fraud, sad to say, is on the increase, and the resulting losses are not insignificant. Almost 1 in 4 employee dishonesty losses are greater than $1,000,000! How much could it cost an insured? As mentioned above, if you’re one of the unlucky few it could cost you over $1,000,000. The median employee dishonesty loss is almost $150,000. For multiple reasons employee dishonesty losses are usually significant, and very business-disrupting (more discussion below). What’s the solution? Implement various risk management procedures, and also check the current policy to see if Employee Dishonesty coverage is already included, and if so at what amount? If not, consider securing Employee Dishonesty coverage. How much will it cost to fix it? This is not one of those “cheap” coverages. The actual cost will depend of course on a number of factors such as the number of employees, prior claims history, the nature of the business, what protective measures are in place, etc. But, typically, most employers do not find the premium to be prohibitively expensive. Given the exposure to serious financial loss, securing coverage should be given serious consideration. More detail: Most insurance policies specifically exclude Employee Dishonesty coverage. Those policies that do automatically include it often provide only a token amount of coverage, like $15,000. Given the average size of an employee dishonesty loss, such a small limit is woefully inadequate. Many employers have great trust in their employees, especially their key long-term employees, and thus consider this coverage unnecessary. Sadly, some of the largest Employee Dishonesty cases I’ve seen were committed by long-term, trusted employees. Studies have determined, in fact, that approximately 1 in 4 employees who commit fraud were employed for over 10 years. The typical employer who has been a victim of employee fraud was completely shocked, and invariably the crime was committed by an employee who the employer absolutely trusted.

Unfortunately, employee dishonesty is on the rise. Various studies, some as recently as 2014, have determined that the typical enterprise loses 5% of their revenue each year to employee fraud. The median fraud loss is almost $150,000 and nearly 25% of cases exceed $1,000,000! Businesses employing fewer than 100 people actually had on average more severe employee dishonesty claims. Most of the larger employee dishonesty cases involve an employee (or even a group of employees) “siphoning” off money over a number of years. Often the schemes are well hidden, and are sometimes discovered almost by accident. One case I am familiar with involved a single employee acting alone at a large aerospace firm. A college student was interning at the company, and the very first day on the job, as he was being given an orientation to the accounting system he asked something along the lines of, “What would stop someone from doing something like this…?” (Either this intern was very sharp, or had a devious mind, or maybe both!) The executive giving the orientation said something like, “Uh, we’ll get back to you on that…” Lo and behold, after an investigation they determined that a particular employee had in fact been siphoning off money over a period of approximately 15 years to the tune of over $10,000,000! While most employee dishonesty losses aren’t of that magnitude, every year businesses ultimately fail due to employee crime, so this should not be taken lightly. Some Trends And Statistics: Various studies have analyzed occupational fraud trends. Perhaps the most often cited are the Association of Certified Fraud Examiners’ (ACFE) annual surveys. Here are just a few interesting highlights from the ACFE 2016 report on occupational fraud and abuse:12 The median fraud loss was $150,000; More than 1 in 5 losses exceeded $1,000,000; The median period of fraud occurred over 18 months, and not surprisingly losses rose as duration of the fraud increased; In nearly 100% of the cases steps were taken to hide or conceal the fraudulent activity, and the most common concealment methods were

creating and altering physical documents; Median losses suffered by smaller companies (those with less than 100 employees) was essentially the same as suffered by larger companies; Asset misappropriation cases accounted for over 83% of all losses; Most fraud cases were identified via tips, and companies with a tip reporting hotline were much more likely to detect fraud; Check tampering, skimming, payroll, and cash larceny schemes were twice as common in small organizations as in larger organizations; Surprisingly, most fraud cases involved first time offenders; Digging Deeper: How prevalent really is the risk? In addition to the ACFE Report cited above, many other organizations regularly conduct research on employee fraud. The collective findings of such research indicate that employee fraud is the most rapidly growing type of fraud, increasing at a clip of 15% per year. In one study a whopping 85% of companies responding to a survey reported incidents of fraud within the past three years. However, many fraudulent acts are never detected, and those frauds that are discovered are often never fully quantified, making it difficult to fully gauge the extent of risk. What makes employee dishonesty particularly insidious is that typically most fraud goes undetected, and often is only discovered either by accident or as the result of a whistleblower. Business owners and managers are usually preoccupied with managing the day-to-day business operations, and in most companies (especially smaller employers) there’s little time to actively implement and maintain anti-fraud measures. Consequently, fraud often goes uncovered, or is only detected after a considerable amount of time has lapsed and significant financial losses have occurred. Rubbing salt into the wound, often the perpetrator turns out to be a very trusted employee (sometimes even a family member or longtime friend). Who’s committing fraud? Surprisingly, studies have shown that 87% of employees committing fraud are “first timers” with clean employment histories. Think about the impact of that—a background check at time of hire would have shown no prior allegations, convictions, or terminations related to unscrupulous behavior.

Research shows that approximately 75% of frauds are committed by employees in one of the following departments: accounting, operations, sales, executive/ upper management, customer service, purchasing, and finance. Not surprisingly, more fraud tends to originate in the accounting department than any other. Further, higher level employees tend to commit larger frauds, and frauds committed by more than one employee working in concert are usually larger. Common“redflags”(often cited after a fraudulent scheme is uncovered) include living a lifestyle inconsistent with an individual’s salary, financial difficulties, a particularly tight relationship with a vendor or customer, unusual secrecy or control issues, and a recent divorce or other family problems. At least one of these red flags is observed in almost 3 out of 4 fraud cases. What’s the motivation of the perpetrators? In order to understand what causes employees to commit dishonest acts, consider that a combination of three factors has led to increased employee fraud: Increased financial PRESSURE on individuals Increased OPPORTUNITY to perpetrate fraud Increased willingness to RATIONALIZE or justify fraudulent behavior Sociologist Donald Cressey created a model often cited by claims examiners and fraud investigators to explain the fraudulent behavior of employees called The Fraud Triangle.13 Cressey wrote: “Trusted persons become trust violators when they conceive of themselves as having a financial problem which is non-shareable, are aware this problem can be secretly resolved by violation of the position of financial trust, and are able to apply to their own conduct in that situation verbalizations which enable them to adjust their conceptions of themselves as trusted persons with their conceptions of themselves as users of the entrusted funds or property.”14 According to Cressey, three factors must be present at the same time in order for the ordinary person to commit fraud: Pressure, Opportunity, and Rationalization. We’ll take a quick look at each one.

Pressure: Pressure is what initially motivates the crime. Typically, the employee experiences some financial pressure, e.g., gambling debts, inability to pay bills, crushing personal debt, etc., and that pressure causes he/she to consider illicit means to solve the problem. Opportunity: The person must recognize an opportunity created by their position of trust to financially solve their problem with a low chance of getting caught. Incidentally, research has shown that, of these three factors, reducing or eliminating the opportunity for an employee to commit fraud is the most effective way to reduce risk. Rationalization: As mentioned previously, almost 90% of employees committing fraud are first time offenders, therefore they typically don’t view themselves as criminals. Rather, they see themselves as honest people who were simply caught up in a bad set of circumstances. Therefore, they justify their actions in a way that makes it acceptable. Common rationalizations include: “I wasn’t being treated fairly”; “I’m underpaid”; “I’m just borrowing the money”; etc. Perceived mistreatment or one of several other rationalizations can lead to fraudulent acts that extend over long periods of time, resulting in significant financial losses to the employer. What kind of fraud is being committed? There are three categories of occupational fraud: Asset Misappropriation, Financial Statement, and Corruption. Asset Misappropriations are schemes that involve the theft or misuse of an organization’s assets. These assets can include cash or other property. Financial Statement fraud involves falsification of the business’ financial statements to make it appear more or less profitable. Corruption involves schemes wherein an employee uses their position and influence in a business transaction to obtain an unauthorized benefit in violation of the employee’s duty to the employer. The most common form of occupational fraud is Asset Misappropriation. Asset Misappropriations, however, are typically the least costly type of fraud, with median amounts of approximately $125,000. Various billing fraud and check tampering schemes are the most common type of Asset Misappropriation fraud, and create the largest losses in this category. Financial Statement fraud is significantly less common, however it typically

results in the greatest losses. Median Financial Statement Frauds are in the neighborhood of $1,000,000. Corruption cases fall in between the two, both in terms of frequency and severity. The median Corruption fraud is approximately $200,000. Corruption is usually more prevalent in larger organizations, while various types of Asset Misappropriation schemes (such as check tampering, skimming, payroll, and cash larceny schemes) are much more common in smaller organizations. Some Limitations of Employee Dishonesty Coverage: Although coverage forms vary from carrier to carrier, the standard ISO Employee Dishonesty coverage form in use by most carriers specifically excludes certain dishonest acts. For example, dishonest acts in which the financial gain to the employee is in the form of increased salaries, bonuses, commissions, or other employee benefits is usually excluded. Other common exclusions include vandalism, computational errors, accounting errors and omissions, governmental seizure or destruction of business property, profit and loss restatement, theft by the actual policy holder, and loss of business income resulting from damage or loss to property, money, or securities caused by an employee’s dishonest act. A further limitation is that the insured has the Burden of proof in an Employee Dishonesty claim, i.e., the policy holder has the burden of proving by a preponderance of the evidence that a loss occurred, that the loss occurred within the policy period, that the loss fell within the insurance inclusions, and that it was caused by the dishonest act of an employee or group of employees. The implications of this are that discovering a mere shortage, for example of inventory, will not in and of itself constitute a covered claim. From time to time employers discover missing inventory or other property, and although they may suspect employee involvement, there would be no coverage unless separate evidence can establish that the shortage was due to a dishonest act of an employee. Third party coverage: One final coverage consideration is Third Party coverage. Many businesses are under contract to provide certain services to clients, and have employees performing these services at the clients’ facilities. This coverage can be added via endorsement, and covers the acts of an employee against an employer’s

clients where there is a written contract to perform services. The endorsement further modifies coverage to include coverage for theft or dishonest acts taking place at either the client’s or the employer’s premises. The policy will pay for loss of or damage to money, securities and other property owned by the client caused by theft by an employee of the policyholder. Some Fraud Risk Management Measures: Insurance carriers have identified various safeguards that can help reduce the incidence of fraud. In addition to background checks at time of hire (which again only go so far considering that the majority of frauds are committed by first time offenders), carriers have recommended the following: Have audits conducted by an independent CPA with a review of internal controls; Require two signatures on all checks; Separate the accounting and bookkeeping functions. As an example, employees who authorize checks should not also be able to produce them; Require vacations (frequently, after discovery of a fraud scheme, the observation is made that the guilty employee never took vacations!); Have bank statement balances confirmed by someone outside the accounts payable unit; Stamping invoice “paid” when checks are issued; Inventory valuable equipment on a regular basis, in particular valuable property, and storing particularly valuable items in secure areas; Implement rigid computer controls including things like automatic prevention of repeated attempts to gain unauthorized access, exception reports generated for unauthorized sign-in or repeated access attempts, and segregation of programmers’ and operators’ duties; Wrapping Things Up: As stated at the outset, Employee Dishonesty is an often overlooked coverage. Many policyholders make the unfortunate mistake of assuming this coverage is included in their current insurance policies, however typically it is not. However, the coverage can be secured by either adding it via endorsement to their current Property policy, or as a separate standalone policy.

Employee fraud, sadly, is on the rise. Losses caused by dishonest acts of employees can be significant. In addition, discovery of a fraud perpetrated by an employee or group of employees can result in significant “soft” costs such as decreased employee morale, damage to business reputation, loss of business income, etc. Finally, keep in mind that most occupational fraud schemes are discovered, if at all, months or even years after they were first perpetrated. In addition to implementing various fraud risk management safeguards and procedures, an insured’s best protection is to secure Employee Dishonesty coverage at significant limits.

Top 10 Coverage Gap #8: No Employee Benefits Liability Coverage What is this gap? This covers an employer for claims against them made by an employee alleging that an error or omission was committed in the administration of employee benefit programs. Why should the insured care? Because these claims are on the increase. Statistics suggest that businesses are more likely, perhaps three times more likely, to incur an Employee Benefits Liability claim than to suffer a fire loss. How much could it cost an insured? Plenty. Even if they are not at fault, the defense costs alone could easily exceed $100,000. What’s the solution? Determine if their current policy includes Employee Benefits Liability coverage. If covered, it will be part of the General Liability coverage. If not currently covered, it can usually be added easily and inexpensively via endorsement. How much will it cost to fix it? This is very inexpensive coverage. It can probably be added to the current policy for between $300 - $600 in annual premium. More detail: Employee Benefits Liability (commonly referred to as “EBL” and referred to that way herein) is an often overlooked, yet easy to obtain and incredibly affordable, coverage. Essentially,

EBL covers

errors

and

omissions

committed

in

the

administration of employee benefit plans. While “administration” can be defined differently in various EBL policy wording, it generally revolves around describing and communicating Employee Benefit Plans, maintaining records, and adding, enrolling, or terminating coverage for employees and their dependents. A more detailed description of the types of acts that are covered by EBL appears later in this section. Some of the information we’ll address includes: A further introduction to EBL coverage; A brief discussion of a Fiduciary Liability, a related coverage; Coverage Triggers; Limits & Exclusions; The types of Plans that are covered, and; The types of Acts that are covered; Introduction: EBL covers claims made against a company resulting from errors or omissions made or alleged to have been made in the administration of that company’s various Employee Benefits programs. As such, EBL is actually a form of Professional Liability. However, as mentioned previously it is usually added via an endorsement to the General Liability coverage, although it can also be provided as part of either a Fiduciary Liability policy, or a “packaged” Management Liability policy. (Fiduciary Liability is briefly discussed below, and in much more detail later in this book). EBL coverage is usually written in the same amount as the General Liability policy limit, but as a separate limit. It can be further increased by Umbrella or Excess Liability coverage. Because there is a severity potential with EBL exposures it is advisable to be sure that an Umbrella / Excess Liability policy does in fact provide limits in excess of the primary EBL limit. EBL provides both defense and payment in the event of a claim which arises out of alleged errors or omissions an insured commits in the administration of their various employee benefit plans. Typical events giving rise to claims could include things such as improper advice in relation to Employee Benefits Plans, failing to advise an employee of a benefit program, or the failure to enroll, terminate, or cancel an employee in a plan. The types of plans include benefits such as group medical coverage, group life insurance,

health insurance, Workers’ Compensation, profit sharing plans, stock plans, and unemployment insurance, etc. Absent the proper endorsement, EBL claims are not covered by Commercial General Liability or other types of Liability policies (with the exception of Fiduciary Liability policies discussed further below). Employers often assume that EBL exposures are automatically covered by their General Liability policy, but again without the proper endorsement that is not the case. Brief Detour Into Fiduciary Liability: [Note: Fiduciary Liability, and the possible inadvisability of combining EBL with a Fiduciary Liability policy, is discussed in detail later in this book.] We’ll take a brief detour into the topic of Fiduciary Liability for two reasons: 1. As mentioned above, one alternative way to obtain EBL coverage in addition to endorsing it onto a Commercial General Liability policy, or to purchase it as part of a “packaged” Management Liability policy, is to secure EBL as part of a separate Fiduciary Liability policy; 2. Fiduciary Liability is closely related to EBL (but with some important differences), and lack of Fiduciary Liability coverage can create a critical coverage gap that affects the personal liability of those individuals deemed to be fiduciaries; Under the federal Employee Retirement Income Security Act, aka: ERISA, an individual is deemed to be a “fiduciary” if that person exercises any discretionary authority or control over the management of any type of Employee Benefit plan. Therefore, anyone in an organization (not just owners) having anything to do with employee benefits, pension, savings, profit-sharing, health/welfare plans, etc., are considered fiduciaries, and as such are liable to the beneficiaries for any breach of their fiduciary duties. To go a step further, under ERISA law they are held personally liable, meaning their personal assets are at risk! While EBL coverage is limited to errors and omissions, Fiduciary Liability protects fiduciaries (owners, managers, and others) for alleged or actual breaches of fiduciary trust. It’s often assumed that General Liability, EBL, Employee Dishonesty, Directors & Officers “D & O” Liability, ERISA

bonds, or Employment Practices policies provide coverage for breaches of fiduciary trust, but they do not. A Fiduciary Liability policy fills this gap. As mentioned, we deal with Fiduciary Liability in more detail later, but felt the above introduction to the subject was called for at this point. Digging Deeper Into EBL: To gain a further understanding of EBL, we’ll take a brief look at each of the following: Coverage Triggers- Claims Made Limits Exclusions The types of claims / acts contemplated by “administration” errors and omissions The types of plans Because there is not a single standard EBL coverage endorsement in use by all carriers we’ll be speaking somewhat in generalities here, and the lack of a universal coverage form underscores the importance of examining the EBL coverage form in question. Coverage Trigger- “Claims Made” basis: Most carriers write EBL coverage on a “Claims Made” basis. What this means is that for the policy to cover a claim, the incident (the alleged error or omission in administration of the employee benefit plan) must have occurred during the policy period, and the actual claim must be made within the policy period. Going a step further, some policies will include a “Retroactive Date” which could precede the actual policy inception date. In such cases in order for a claim to be covered the incident must have occurred on or after the specified Retroactive Date. Some carriers will write EBL on an “Occurrence” basis, and it is important of course to determine on which basis (i.e., Claims Made or Occurrence) the EBL coverage is written. Also, without going into excruciating detail, suffice it to say that any of the following occurring when the insured renews coverage or changes carriers could create a coverage gap, so it is important to check this at each renewal date: Changing from a Claims Made form to an Occurrence form. (You may

have heard before that an Occurrence form is preferable, so this may sound counterintuitive. However, switching from a Claims Made coverage form to an Occurrence coverage form can create a coverage gap if not handled carefully). Adding a Retroactive Date where one did not exist previously. Changing an existing Retroactive Date. In addition to the above, while switching from an Occurrence coverage form to a Claims Made coverage form does not in and of itself create a coverage gap, it does have the potential to restrict coverage and therefore should be avoided if at all possible. Limits: EBL coverage usually is structured with two separate limits: An “Each Employee” limit and an “Aggregate” limit. The Each Employee limit is the most the carrier will pay for a claim brought by any one employee. The Aggregate limit is the most the insurer will pay for all claims. EBL coverage may also include a deductible. Also, as mentioned previously, an Umbrella or Excess Liability policy can increase EBL limits if structured properly. Exclusions: EBL coverage forms will typically contain various exclusions. Although coverage forms are not uniform, typical exclusions will include claims resulting from the following: Fraud Breach of Contract Poor financial advice Bodily Injury or Property Damage Dishonest acts Employment Practices (e.g., employment discrimination, harassment, wrongful termination, etc.) Predictions of financial performance (e.g., predicting the returns of a 401K plan, etc.) Breach of fiduciary duties Criminal or malicious acts or omissions

Advising an employee to either participate or not participate in one of the employee benefit plans Coverage for some of these allegations is available under alternative coverage forms, for example Employment Practices Liability policies, or Fiduciary Liability policies. The types of claims / acts contemplated by “administration” errors and omissions. As stated at the outset, essentially EBL covers errors and omissions committed in the administration of employee benefit plans. The types of errors covered largely flow from the way the policy defines the term “administration”. Although again policy forms vary, generally the definition will include wrongful acts, errors, or omissions in: Describing benefit plans, eligibility rules, etc. Counseling employees with respect to the employee benefit plans The maintenance and handling of files and records Enrolling, maintaining and terminating employees, family members, and beneficiaries Using the above as a framework, it’s easy to envision the types of errors that often occur. For example: a simple clerical error resulting in the failure to add an employee (new or existing) to one of the benefit plans; the failure to provide a terminated employee correct COBRA information; incorrectly projecting or calculating the amount in a pension program; improperly interpreting and communicating employee plan benefits, etc. It’s a truism that small clerical errors often lead to large losses! The types of plans considered to be employee benefit plans The types of plans considered to fall within the scope of EBL coverage usually fall into and include the following categories: Medical, dental, vision, life, group life & health, accident, and other types of insurance plans; Profit sharing, stock ownership and savings, 401K, employee stock contribution plans, pension, and other similar plans; Workers’ Compensation, disability, Social Security, unemployment benefits, maternity benefits, medical leave, and other benefits;

Maternity leave, tuition assistance, and other misc. benefits Wrapping Things Up Key takeaways: Relatively small, innocent clerical errors can end up having costly consequences; EBL coverage can be easily and inexpensively obtained; Care has to be taken to avoid potential problems associated with Claims Made coverage when renewing or changing carriers; Although obtaining EBL coverage is usually most simply accomplished via an endorsement to a General Liability policy, other options (such as adding to a Fiduciary Liability policy or a packaged Management Liability policy) exist;

Top 10 Coverage Gap #9: Missing EPLI Coverage What is this gap? EPLI stands for Employment Practices Liability Insurance, and covers alleged wrongful acts an insured commits as an employer. Just a couple common examples of EPLI allegations include Wrongful Termination, and Sexual Harassment claims. However many other wrongful acts are also covered (see below for more detail). Why should the insured care? Because the number of EPLI claims has dramatically increased in recent years, and more importantly defense costs and jury awards are increasing significantly. How much could it cost an insured? Defense costs alone if the claim goes to a jury trial could run in excess of $250,000. What’s the solution? Determine if the insured currently has EPLI coverage (it’s usually a separate policy), and if not at the very least obtain a quote. How much will it cost to fix it? Although rates have been on the rise due to increased claims activity, EPLI is still considered affordable by most employers. More detail: As mentioned above, EPLI (sometimes shortened to “EPL”) claims can be costly to defend. Average out-of-court settlements plus defense

costs are about $90,000. If a case goes to trial, as mentioned above the defense costs alone can exceed $250,000 coupled with average jury awards of over $200,000. Some allegations, such as discrimination claims, see average jury awards approaching $1,000,000. These are obviously not the kind of numbers an insured wants to be responsible for without any insurance coverage! Various industry studies have concluded that businesses are more likely to incur an EPLI claim than either a Property or a General Liability claim. Yet, while almost all businesses purchase Property & General Liability insurance, a surprising number of employers do not carry EPLI coverage. Almost half of all EPLI claims are filed against employers with fewer than 100 employees. Some of the typical types of allegations that EPLI policies cover are Employment Related Discrimination, Harassment, Wrongful Termination, Retaliation, Inappropriate Workplace Conduct, Demotions, Failure to Promote, Wage & Hour claims, 15 Negligent Hiring, Negligent Supervision, Invasion of Privacy, Defamation, Negligent Evaluations, Breach of Contract, Mental Anguish, Emotional Distress, etc. Between EPLI, Employee Dishonesty, and Employee Benefits Liability, sometimes employers can feel like they have a great big target painted on their back! Remember, even if an allegation is completely without merit, businesses still have to respond, and those defense costs alone are reason enough to carry all three of these coverages.

Top 10 Coverage Gap #10: No Fiduciary Liability Coverage What is this gap? Individuals involved in a company’s various Employee Benefit plans are considered to be fiduciaries. Fiduciary Liability protects those fiduciaries (owners, managers, and others) for alleged or actual breaches of fiduciary trust. It’s often assumed that General Liability, EBL, Employee Dishonesty, Director & Officers “D & O” Liability, ERISA bonds, or Employment Practices policies provide coverage for breaches of fiduciary trust, but they do not. A Fiduciary Liability policy fills this gap. Why should the insured care? Because federal law creates a personal liability

exposure, meaning that a fiduciary’s personal assets (one’s home, finances, and other property) are at risk. How much could it cost an insured? Because a fiduciary’s personal liability is theoretically unlimited, lack of Fiduciary Liability coverage could quite literally cost an insured everything! What’s the solution? Obtain either a standalone Fiduciary Liability policy, or obtain Fiduciary Liability coverage as part of a packaged “Management” Liability policy. How much will it cost to fix it? Fiduciary Liability coverage, in particular when purchased as part of a Management Liability policy, is surprisingly affordable. Premiums will often run less than what an insured is currently paying for their General Liability coverage. More detail: Companies that offer their employees various types of employee benefit plans have a fiduciary exposure. Individuals responsible for managing and administering those plans have a personal fiduciary exposure. Fiduciary Liability policies cover these exposures, and they are not covered by Commercial General Liability or other types of liability policies. This is critical in light of the fact that the fiduciary liability imposed by law also extends to the personal liability of those deemed to be fiduciaries—in other words their personal as well as corporate assets are at risk. In spite of the above, various surveys have determined that approximately 75% of companies have not secured Fiduciary Liability coverage. This is usually due either to ignorance of the exposure, or the misperception that their fiduciary liability exposure is covered within a General Liability, ERISA Bond, or other insurance policy. When you consider that events such as mergers/ sales/acquisitions, and reductions in or elimination of various types of employee benefit plans increase fiduciary risks (all circumstances that are becoming more commonplace) the procurement of Fiduciary Liability coverage becomes even more important. Essentially, Fiduciary Liability insurance both indemnifies and defends insureds against claims alleging a breach of fiduciary duty. A typical breach could be failure to properly monitor or select investment options for a 401K

plan, failure to properly select outside service providers, or failure to make changes to plans or transfers between plans, etc., in a timely manner. The Fiduciary Liability carrier will pay compensatory awards and settlement costs, and will also provide a defense and pay the defense costs associated with responding to a claim.16 Fiduciary Liability coverage can be purchased as a standalone policy, or as part of a “package” of coverage purchased under a Management Liability policy. Many business owners and insurance brokers fail to take into account the fiduciary exposure created by employee benefit plans, and if an insured is uncertain whether or not they have Fiduciary Liability coverage then chances are good that they don’t! The Employee Retirement Income Security Act of 1974, commonly known as “ERISA”, was passed by Congress to ensure that employees participating in various pension and benefit plans receive the benefits promised by such plans. While defining the responsibilities of fiduciaries, ERISA also substantially increased the liabilities of fiduciaries. As mentioned previously, ERISA also creates personal liability on any person considered a “fiduciary”, and creates a broad definition of who is deemed to be a fiduciary. The Act creates a need for Fiduciary Liability coverage, but does not mandate procurement of coverage. In fact, the only insurance coverage that ERISA mandates is a Fidelity Bond to protect the assets of the various plans from dishonest acts of fiduciaries (e.g., theft of plan funds). Unfortunately many policyholders erroneously assume that their ERISA Bond also includes Fiduciary Liability coverage, or that the ERISA Bond is all that they need. ERISA broadly defines fiduciaries. Assuming a company sponsors a retirement or health plan, it’s safe to assume that anyone involved in any way with the administration or management of that plan will be considered a fiduciary, and again under ERISA law can be held personally liable for any breach of their fiduciary duty to that plan. Going a step further, fiduciaries can also be held liable for errors and omissions of other organizations or entities who provide administrative and other services to the plans. These “outside” entities could include for example law firms, accounting firms, investment advisers, actuarial firms, financial institution trust departments, and various other entities or organizations that

consult, service, and administer pension and benefit plans. Digging Deeper: With the above as an introduction, we’ll turn now to some further detail that is good to be aware of. Specifically, we’ll look at each of the following: The prudent standard How ERISA defines fiduciaries The types of plans covered by ERISA Summary of the difference between Fiduciary Liability and other policies Common exclusions Combining Fiduciary Liability with Employee Benefits Liability And finally, Coverage Trigger- “Claims Made” basis The Prudent Standard: As stated previously, ERISA was created to ensure that employees participating in pension and benefit plans would receive the benefits promised by such programs. In the process an important and broad scope of obligations was imposed on those acting in a fiduciary capacity. Since the security of the various plans that fall within ERISA are so important, the law also holds fiduciaries to a higher duty of care than the common “prudent man” standard, but rather to a standard of conduct commensurate with that of a “fiduciary person”. How ERISA defines fiduciaries: Under ERISA a person or corporation is considered to be a fiduciary if that person or entity does any of the following: 1. Exercises any discretionary authority or discretionary control in managing pension or benefit plans, or exercises any authority or control in managing or disposing of its assets 2. Renders investment advice for a fee or other compensation, 3. Has any discretionary authority or responsibility in administering the various plans Some courts have gone further and broadened the definition to include the sponsoring corporation’s Board of Directors, and members of its

Compensation Committee. The types of plans covered by ERISA: Although the name of the Act implies that it applies only to retirement plans, in fact it goes much further. Following is a list of the types of plans that fall under ERISA law: Pension plans Profit sharing plans 401K and savings plans ESOPs TRASOPs Welfare plans Life insurance Hospital/surgical/medical insurance Dental and vision care insurance Accident insurance Disability income Scholarship plans Supplemental unemployment Prepaid legal services Some severance pay plans Summary of the difference between Fiduciary Liability and other policies: Various types of insurance coverages skate around the edges of Fiduciary Liability, but almost without exception specifically exclude Fiduciary Liability and ERISA related claims. We’ve already mentioned some of these. Unfortunately, employers often assume that some of these other policy types provide Fiduciary Liability coverage. The following will summarize the key differences between Fiduciary Liability and these other types of coverage: Fiduciary Liability covers claims alleging breach of the duties specified by ERISA and common or statutory law, otherwise known as discretionary duties. Employee Benefits Liability covers claims alleging errors or omissions in the administration of employee benefits plans, otherwise known as

nondiscretionary errors (for example failing to add an employee to a benefit plan). ERISA Bonds cover losses from the theft of asset plans. Management Liability policies are “packages” of various types of coverage, for example D&O, EPLI, EBL, and they may or may not include a Fiduciary Liability coverage section. Directors & Officers Liability (D&O) policies cover individual Directors and Officers for allegations of various wrongful acts, but typically exclude ERISA claims. Common exclusions: Although there are no “standard” or universal Fiduciary Liability coverage forms, claims related to or arising from the following are typically excluded in most Fiduciary Liability policies: Dishonest acts Contractual liability Failure to purchase insurance, bonds, etc. Acts seeking personal profit Workers’ Compensation, Social Security disability benefits, Unemployment Insurance, etc. Bodily Injury or Property Damage liability claims Failure to collect contributions owed to an employee benefit plan Claims resulting from an acquired entity occurring prior to the acquisition Failing to fund plans as required by ERISA Discrimination and other claims that are not related to ERISA law Combining Fiduciary Liability with Employee Benefits Liability: You should be aware that Fiduciary Liability and Employee Benefits Liability (EBL) can be combined into one policy. In fact, some insurance professionals will advocate that if you secure a Fiduciary Liability policy that includes EBL, then you can delete the EBL coverage from the General Liability policy. However, there may be good reasons to keep them separate. Without going

into excessive detail, these reasons revolve around Claims Made coverage triggers and potentially differing Retroactive dates, the impact on the ability to obtain excess limits, and the potential for EBL losses to reduce the limit of liability available to pay the typically larger Fiduciary Liability claims if the two coverages are combined. A high level of care must be exercised when determining whether to combine the two coverages or keep them separate. Coverage Trigger- “Claims Made” basis: Most carriers write Fiduciary Liability coverage on a “Claims Made” basis. This means that for the policy to cover a claim, the incident (alleged breach of fiduciary duty in administration or management of the employee benefit plans) must have occurred during the policy period, and the actual claim must be made within the policy period. Going a step further, some policies will include a “Retroactive Date” which could precede the actual policy inception date. In such cases in order for a claim to be covered the incident must have occurred on or after the specified Retroactive Date. Some carriers will write Fiduciary Liability on an “Occurrence” basis, and it is important to determine on which basis (i.e., Claims Made or Occurrence) the Fiduciary Liability coverage in question is written. Also, without going into excruciating detail, suffice it to say that any of the following occurring when an insured renews coverage or changes carriers could create a coverage gap, so it is important to check this at each renewal date: Changing from a Claims Made form to an Occurrence form. (You may have heard before that an Occurrence form is preferable, so this may sound counterintuitive. However, switching from a Claims Made coverage form to an Occurrence coverage form can create a coverage gap if not handled carefully). Adding a Retroactive Date where one did not exist previously. Changing an existing Retroactive Date. In addition to the above, while switching from an Occurrence coverage form to a Claims Made coverage form does not in and of itself create a coverage gap, it does have the potential to restrict coverage and therefore should be avoided if at all possible. Wrapping Things Up:

Fiduciary Liability is a commonly misunderstood coverage. It’s also a commonly unsecured coverage (as mentioned at the outset 3 out of 4 businesses fail to secure Fiduciary Liability coverage). Key takeaways: If an insured offers employee benefit plans they probably have a Fiduciary Liability exposure; Fiduciaries are by law held personally responsible. Therefore a fiduciary’s personal assets are at risk, making the necessity of obtaining Fiduciary Liability coverage even more paramount; Who is deemed to be a fiduciary is broadly interpreted; The types of plans falling under ERISA are broadly interpreted; Fiduciary Liability is an exposure that is often assumed to be covered, but in practice often is not. Almost all other types of liability coverage exclude Fiduciary Liability;

Bonus Gap #1: No or Inadequate Property in Transit Coverage What is this gap? The intent of this coverage is to insure a business’ property while it is in transit over land or air, either in their company vehicles or by a carrier for hire. Why should the insured care? Most business have at least some exposure, and frequently a constant exposure, to property in transit away from their premises. We often find, in these circumstances, that there is either no coverage, or not enough coverage. How much could it cost an insured? Usually these are not devastating coverage gaps, and often the total exposure might be considered minimal in the big scheme of things, but even a $25,000 or a $50,000 uncovered loss is probably something a business doesn’t want to pay out of their own pocket! What’s the solution? Check the current policy to see the insured is properly covered for Property in Transit. Many policies come with an automatic token limit of perhaps $2,500 or $5,000, but that’s often not nearly enough. How much will it cost to fix it? Rates for this type of coverage are very

reasonable. More detail: Not much more to say here, Property in Transit is pretty selfexplanatory.

Bonus Gap #2: No Non-Owned & Hired Auto Liability Coverage What is this gap? Non-Owned & Hired auto liability covers bodily injury and property damage to 3rd parties resulting from operation of a vehicle the insured either doesn’t own (for example, vehicles owned by their employees), or by vehicles they hire, such as a rented or borrowed vehicle. Why should the insured care? Chances are very good they already have coverage for Non-Owned & Hired Auto Liability, but from time-to-time we come across a policyholder who is missing this coverage. That could be a big, big mistake! How much could it cost an insured? Easily $1,000,000 or more. Some of the largest claims I’ve seen involve automobile accidents. What’s the solution? Double-check their Automobile policy or, if they don’t have a separate Automobile policy, examine the General Liability policy, to see if coverage exists. If not, it should be a very simple matter to get it endorsed. How much will it cost to fix it? Not much at all, perhaps $100-$300. More detail: Non-Owned automobiles are vehicles used in connection with an insured’s business that they do not own, lease, rent, borrow, or hire. Typically, non-owned autos are vehicles owned by their employees, but used in the course of the business. Common examples might include an employee running errands, going to the bank or picking up office supplies, salespersons using their own vehicles, etc. If the employee is involved in an accident, the business will almost certainly be held responsible, and may be sued for damages incurred. A frequent assumption is that Non-Owned Auto Liability provides coverage for physical damage to the employee’s vehicle. This is not the case. It is a Liability coverage only. Further, the employee’s Personal Automobile

Liability coverage is normally primary, and then the company’s Non-Owned Auto Liability will kick in. Hired Auto Liability refers to vehicles that the insured does not own, but leases, hires, rents, or borrows. Although it is an Auto Liability coverage, Hired Auto Physical Damage coverage is also available which will pick up physical damage coverage to the vehicle itself. Examples of a Hired Auto might include vehicles rented while on a business trip or a truck rented to do a special shipment. Both of these coverages (Non-Owned Auto Liability, and Hired Auto Liability) are fairly inexpensive to purchase, but they cover a serious exposure. Some of the largest claims each year arise from negligent use of a vehicle causing serious Bodily Injury or Property Damage to a 3rd party.

Bonus Gap #3: No DOC Coverage What is this gap? DOC Coverage is short for Drive Other Car Coverage. If a business owner (or one of their employees) is provided a company vehicle, and that happens to be the only vehicle in that household, then they might not carry a Personal Auto policy. If that is the case, then the business owner (or the employee) might not have any Auto Liability coverage if they drive any other car! Why should the insured care? In the situation described above, if they borrow a friend’s car, for example, an individual might find himself without insurance coverage. How much could it cost an insured? A lot! Some of the largest claims we see are Automobile related. An assumed exposure of $1,000,000 would not be an exaggeration. What’s the solution? Add Drive Other Car (“DOC”) coverage to the Commercial Automobile policy. How much will it cost to fix it? This is an inexpensive coverage that will probably run in the area of just a few hundred dollars per person added to the DOC endorsement. More detail: No one wants to find they are without Automobile Liability

coverage. If someone is provided a company vehicle, and that happens to be the only vehicle in their household, then presumably they wouldn’t carry a separate Personal Automobile policy. If they then drive any other vehicle (a friend’s car, for example), they may find themselves without Automobile Liability coverage while driving that vehicle. Realistically, and hopefully, the owner of the vehicle being driven will probably carry Automobile Liability coverage, and the driver should be deemed a “permissive user” of that vehicle. Therefore, the vehicle owner’s insurance coverage would be primary and the driver is covered as a permissive driver. However, if the owner does not maintain coverage, then no coverage is available for the driver. Alternatively, if the owner maintains low limits of liability, then those limits might be inadequate to fully cover a serious claim. In either scenario the driver may find themselves facing a serious coverage gap. Incidentally, there is also another exception to the exclusion that provides coverage for property damage due to any cause except fire to a premise being rented for 7 or fewer consecutive days. Coverage under this exception applies not only to the premise, but also to its contents. There are more recent reports available from the ACFE A couple good summaries of The Fraud Triangle can be viewed at http://www.dummies.com/how-to/content/how-to-recognize-thetriangle-offraud.html and http://www.acfe.com/fraud-triangle.aspx Donald R. Cressey, Other People’s Money (Montclair: Patterson Smith, 1973) p. 30. Wage & Hour coverage is becoming more difficult to obtain, and when available often only a small sublimit is provided Incidentally, in most Fiduciary Liability policies defense costs lower the available limit of liability to pay or settle a claim. In other words, unlike many other types of Liability policies, defense costs in typical Fiduciary Liability policies are “inside” the liability limits, not “outside” or in addition to the limits of liability.

CHAPTER 11 FINAL THOUGHTS “The end of a melody is not its goal: but nonetheless, had the melody not reached its end it would not have reached its goal either.” ~ Friedrich_Nietzsche British author G.K. Chesterton once quipped “If a thing is worth doing, it’s worth doing badly.” It seems that many insurance brokers embrace that same philosophy. If you’ve read this far then you are probably not one of them, or soon no longer will be! The three-fold objective of this book was to: 1. Get you to consider that there might be a better way of producing; 2. Introduce you to that way, and; 3. Be sure you are never put in an embarrassing position. Hopefully we’ve accomplished that. If you choose to commit to the coverage gap analysis approach you’ll discover a world of new opportunity. In some ways it takes a little more work and creative thought, but ultimately I think you will find it infinitely more satisfying that remaining in the commoditized quoting trap. We welcome your questions and comments! You can contact me at: [email protected] 714-469-6132 P.S. If you’re ready to really take your career to the next level and become a highearning producer, I highly recommend that you join me over at The

Preeminent Producer Mastermind Group. Inside, you have access to exclusive training and high-earning coaches that will help you get to the next level. Get in this group before your competition does! Go to: ThePreeminentProducer.com to get started.

APPENDIX A: Our Process Exhibit: Following is an example of what we call the “Our Process” exhibit. As discussed in Chapter 6, we utilize this simple exhibit in our first short meeting with a prospect to explain our unique approach, i.e., our Coverage Gap & Non-Insurable Risk analysis. We use this exhibit to get the insured to easily understand and buy into our approach, and set the scene for the next meeting.

APPENDIX B: Resources & Useful Links If you’re interested in: Upping your game to the top 20% of producers? Looking up the definition of a particular insurance term? Calculating what a Business Income limit should be? Learning more by reading Insurance Industry publications? Finding other insurance educational resources? Contacting your State Insurance Commissioner? Check out helpful resources: bizassure.com/resources