The Insurance Report - June 2006

CAN YOU SURVIVE?
By Roland L. Enz - President, California Plus Insurance Service, Inc.

Can you survive a financial loss as a result of an accident or other business loss? Even the smallest accident will create large losses. This month I will look at any truck loss that creates a negative financial consequence. The coverages that you have purchased for your operation, whether you are an owner-operator or a fleet operator, are much the same. Liability, physical damage and cargo losses are the areas that we will discuss here.

For the most part your liability (third party) does not create any financial loss as long as the loss does not exceed the limits of your policy. In twenty-seven years of writing truck coverages, I have seen only one case that exceeded the policy limits. There are some instances that there may be a liability deductible, which puts the burden of any small loss (like a broken windshield) on the insured and not the insuring company. These deductibles are limited to a pre-negotiated amount, usually $500 or a $1,000. This always has to be disclosed when you purchase your insurance. This deductible is first dollar and you are at the mercy of the insurance company in settling this type of claim. If the insurer wants to settle, right or wrong, the first nickel is on you. This type of loss, for the most part, is simple and does not create much of a financial burden. Your loss amount is known and will not exceed that limit. This only takes into consideration a liability loss and does not take into consideration any physical damage or cargo losses.

Physical damage and cargo losses are subject to many different factors. At fault, non-fault, theft or any other loss will put you at a financial risk - just how much depends on the circumstances. Even a simple claim with minor damage may bring up many questions. Is the other party going to pay the loss? Will they pay for your downtime? Will they pay for a rental to replace your tractor while the repairs are being made? If your insurance has to pay, not only will you be out a deductible but you will have to pay for a replacement vehicle and handle lost revenue. In the event of a major loss, the same factors exist. Was another party responsible or do you have to burden your insurance carrier to pay the loss? Any loss, large or small, creates a financial burden on the truck owner. Can you survive this? As a rule of thumb, you should be able to exist for forty-five days without any revenue. Large losses create excessive administrative time, time for the adjuster to do his thing and time for the insurance company to make a determination about the loss. This is lost time and revenue and, always, there are expenses that continue to accumulate.

It is important that you insure to value. In the event of a total loss, the insurance company will only pay what the unit is worth. If you have understated the value (usually to lower your insurance premium), you will lose. If you overstated the value, again you will lose. In the latter case, not only will you be paid on the actual cash value, but you will have been paying extra premium for some time that you will not receive value for or get back.

Cargo losses always pose the most unexpected challenge. In this case, you should always take the time to understand what is and what is not covered. There are many parts of this coverage that exclude, limit or impose certain restrictions on coverage. Know what you are getting into when you purchase this coverage. Have your insurance agent explain the coverage and always ask questions. If the policy has a co-insurance clause, there may be serious limitations of coverage. If you are hauling produce or a refrigerated product, understand the language of the Reefer Breakdown Endorsement and be prepared to show maintenance records. Loss from an unattended vehicle may have serious consequences.

Can you withstand any downtime? All businesses, whether you are an owner-operator or a manufacturer of widgets, have that unknown component of uncertainty in the event of an unexpected occurrence. I have witnessed many cases involving owner-operators that could not survive even the smallest of losses. I have also seen large companies fall because they did not have any reserves built into their business plan. In this day and age of competition and ever-increasing costs, survival is the name of the game. Reserves are important - you owe it to yourself and your family to structure your finances to include this component. In the event of a loss, can you afford the deductible, lost revenue and additional expenses? What if your equipment is totaled? Can you afford the additional cost of purchasing new or replacement equipment? No one wins in the event of a loss - even with the proper insurance, you lose. Insurance will only limit your loss to that which has been agreed upon in the policy.

Take time each year to review your existing plan against what you have achieved. If you do not have a written business plan, make one. This will give you an opportunity to review your actual results against your projections. Your plan should always include a reserve for unexpected events. If you have any insurance questions or comments, I can be contacted through California Plus Insurance Service, Inc. at 1-800-699-7101.