February 16, 2011
Credit Union Management magazine’s Web-only “Insurance Matters” runs the third Wednesday of each month.
Last month I started the conversation on property insurance with questions for your insurance agent. Let’s add to the list...
Are we covered for flood?
Most property insurance policies exclude flood. Some insurers will add it. Some require that you buy coverage through the National Flood Insurance Program. Some policies include a limited amount of coverage. Talk with your agent. Consider the exposures at each of your locations.
Do we have earthquake coverage?
As with flood insurance, earthquake damage is excluded from coverage in most property insurance policies.
If you live in quake-prone areas, your agent has undoubtedly discussed the coverage with you. Most agents on the East Coast don't even talk about earthquake with their clients. That might be a mistake.
Intense quakes can hit anywhere. An earthquake hit Boston in 1755 that damaged 1,200 buildings. More than 100 chimneys were leveled. People on ships in the harbor said they felt like they had run aground, the intensity was so great. Think what would happen if that same intensity earthquake hit Boston now.
Talk with your agent. You may be surprised how inexpensive the coverage is.
Is our business income coverage written to protect us from a calamity?
For many years I've used the same story to help business owners understand what exactly business income coverage does. It's a silly story, but it makes my point.
Pretend you own a goose (a building). Your goose lays golden eggs (cash flow). If your goose is run over by a truck, it's going to take you nine months to get a new goose (get back into operation). You have insurance that will pay for the cost of the new goose (property insurance), but what about the value of the eggs you won't get in the nine months you're without a goose? Business income coverage pays the value of the eggs while you’re waiting for your new goose.
Part two of business interruption coverage is extra expense—coverage that pays the increased cost of getting your goose in five months instead of waiting nine. It is the most pressing need for business interruption coverage for credit unions. If a branch is down due to fire or windstorm, the priority is to reopen quickly through a temporary location or trailer. Extra expense coverage will pay for the rental.
How are our computers covered?
It is common for property insurance policies to provide separate coverage for computers and software. Separate coverage can also mean limited. Not long ago I reviewed the insurance for a 10-branch financial institution. They had $25,000 of computer coverage. It was not enough by a factor of 20.
How much computer coverage do you have? Is the coverage limited to a specific amount per location? Does the coverage include a penalty for too little insurance, also known as a “coinsurance penalty”?
What limit of coverage do we have for valuable papers and records?
Valuable papers insurance pays for the cost of recreating documents destroyed by an insured peril. It pays for the cost of research and copying the documents you need to run your business after a fire or other insured cause of loss.
Example: Fire destroys part of your office space that contains important loan records. The information is vital to your operation and to your regulators. The data must be recreated. Valuable papers insurance will pay the restoration costs.
Side-note: Buying valuable papers insurance is a lousy way to protect your records. Physically protect documents or records that are important to your operation. Put your vital documents in fireproof filing cabinets or a vault. Better yet, scan paper records and store them digitally—with proper backup, of course!
Reader Question:
Q: A board member is asking me if he should buy a personal umbrella policy to cover him in case our directors’ and officers’ insurance is inadequate. What should I tell him?
A: Any time I meet with financial institution directors I always get someone asking about using a homeowners’ policy or umbrella liability policy for protection against issues involving the board.
Personal liability insurance—either homeowners’ or the umbrella—covers bodily injury and property damage for which the insured is liable.
Business endeavors are excluded. Volunteer activities (such as voluntary service on a credit union board) may be covered, but only for bodily injury and property damage.
D&O insurance covers damage resulting from wrong decisions.
An issue of wrongful termination or discrimination in a loan is not bodily injury. Present these claims to your home insurance company and they will be declined.
Never depend on personal liability insurance to protect you from your actions on a board of directors.
Scott Simmonds is the unbiased insurance guy, consulting on, but never selling, insurance. His credit union Web site is www.CUinsuranceConsultant.com. Simmonds welcomes questions from readers. He will attempt to answer as many as possible in future columns. For a listing of over 50 insurance questions to ask your agent, send an e-mail requesting his free “Questions” white paper.
To view past articles by Simmonds visit the Credit Union Management Archive.
