One of the more difficult conversations we occasionally have with clients who are looking to insure their business starts something like this:
"I only do that operation once in a while. Can you cover part of my business?"
It is a fair question! Unfortunately, the answer is usually no. Let's talk about why!
Insurance is written for your business as a whole
When an insurance company evaluates your business, they typically look at your overall operations, not just one service or activity. Why? Your policy is designed to protect your entire business, not individual pieces of it.*
Insurance carriers calculate premiums based on the total level of risk your business presents. If part of your operations falls outside of what they are willing to insure, it changes the overall risk profile of the business. Rather than considering only the "safe" parts and excluding the rest, many carriers simply determine that they will not insure part of a whole and deem the business altogether as not fitting their appetite (meaning they will decline to offer coverage).
While this question comes up frequently with our Music, Photos, and Event Planners (MPEP) Program, the same concept applies to many types of insurance.
*Please note that the Performer and Vendor Policies have a slight exception to this. There is an endorsement on those policies that clarifies only operations listed on your Certificate of Insurance (COI) are covered. This is not typical in the industry, and it gives SIA some additional flexibility when offering coverage to entertainers and mobile vendors.
A real-world example
Let's say you own an entertainment company. The performers consist of stilt walkers, clowns, and costumed characters. Those operations are covered by SIA's Music, Photos, and Event Planners (MPEP) Program.
Now imagine you expand your business to include aerialists.
Even if aerial performances make up only a small percentage of your bookings, your business is now offering an operation that falls outside of what the MPEP Program is designed to insure. Because of that, the business would no longer qualify for coverage.
It is not because the carrier is trying to avoid covering the stilt walkers, clowns, or costumed characters. It is because they are evaluating the business as a single operation, not as separate pieces, and the underwriter of the MPEP Program will not consider risks including aerialist operations.
"But I promise I will not use that service!"
We hear this one a lot. Unfortunately, insurance companies cannot base eligibility on promises or intentions. Even if you only book aerialists once or twice a year, agree not to book them while your policy is active, or ask them to hold their own coverage, your business still advertises and/or offers that service. From an underwriting standpoint, the exposure exists. If the operation is part of a business, the carrier has to consider the possibility that it could result in a claim.
Why do carriers do this?
Insurance works by grouping businesses with similar types of risk. When businesses within a program have relatively similar exposures, carriers can better predict losses and keep premiums competitive.
If businesses with significantly different or higher-risk operations (as determined by the carrier) were routinely added to the same program, claims would likely increase. This would result in an increase in premiums for everyone.
What if my business changes?
Businesses evolve, and that is a good thing!
If you add new services, expand your operations, or are not sure whether something fits within your current coverage, let us know before offering it to clients. Sometimes the new operation may be eligible to add to your current coverage, but if it is not, we may need to explore another option. The important thing is making sure your coverage keeps up with your business. Feel free to reach out to the office with any questions regarding your coverage and/or the services you provide.
A note about different operations and premium rates
Considering starting up a jack-of-all-trades business? Please know that when an insurance company is considering your business for coverage, they not only consider whether each operation you offer is a fit for their appetite, but they also rate each operation separately. That means not only can it be harder to find coverage, but it can be more expensive.
For instance, say you start up an entertainment business that does the following operations:
- Books entertainers.
- Offers foam parties.
- Offers inflatables.
- Offers party supply equipment rentals (chairs, tents, signs, etc).
The insurance company will first determine whether each operation fits within its appetite. If they are, great—you may be eligible for coverage! Each of those operations will be rated separately and assigned its own premium. The insurance company will usually ask for the revenue associated with each operation to calculate the premium for each subset of your business.
Since insurance companies have a minimum premium they will accept for covering each operation, even if your business has a relatively low revenue, you will still be charged the minimum premium for each operation of your business. Those premiums can add up quickly!
In closing
Insurance is not about what you do most of the time. It is about the operations of your business as a whole. Many carriers generally insure businesses based on their overall operations. While it can be frustrating to hear that one service affects eligibility for an entire policy, these guidelines help ensure that coverage remains appropriate for the risks being insured.
It is much easier to answer questions ahead of time, rather than after a claim occurs. If you are thinking about adding a new service or wondering whether your operations still qualify for coverage, we are always happy to help. Give us a call at 715-246-8908 or email info@specialtyinsuranceagency.com.
