Having a comprehensive commercial insurance program is crucial for any business. By securing proper coverage, businesses can ensure ample financial protection against a range of risks and minimize the likelihood of out-of-pocket losses. Unfortunately, many businesses currently have gaps in their commercial insurance programs, leaving them vulnerable amid potential perils.
These gaps don’t necessarily stem from poor decisions, but rather from frequently overlooked exposures and misconceptions surrounding the scope of traditional coverage. Coverage gaps often remain undetected until a claim occurs, making it too late to remedy the problem. As such, it’s vital for businesses to work closely with insurance professionals during coverage renewals to ensure their programs meet their unique needs.
Gap #1: Equipment Breakdown Exposures
Many businesses leverage equipment to conduct essential operations. As a result, any equipment failures or breakdowns could lead to major losses. While some businesses may mistakenly assume that their commercial property policies will offer protection for this equipment, this coverage is generally limited to losses stemming from external perils, such as fires, theft and adverse weather. This means that equipment breakdowns due to mechanical or electrical failures would likely be excluded from commercial property coverage.
To protect against this exposure, businesses need equipment breakdown insurance. This coverage is designed to pay for equipment repairs and replacements following mechanical or electrical failures or other uncontrollable circumstances. It may also cover the cost of replacing spoiled inventory and lost business income due to equipment downtime. Equipment breakdown insurance is often available as a low-cost endorsement to an existing commercial property or business owners policy (BOP).
Gap #2: Contingent Business Interruption (CBI) Risks
Standard business interruption (BI) coverage generally provides financial protection for typical operating expenses (e.g., lost income, payroll, rental and loan payments, and taxes) when a business must pause its operations or close its doors due to direct physical damage from a covered peril. Often purchased as a supplement to commercial property insurance or a BOP, this coverage is only triggered when a business’s own property is damaged.
With this in mind, businesses facing operational disruptions due to losses sustained by their suppliers or key business partners would not be protected under standard BI coverage. This is especially troubling for businesses with concentrated supply chains, as recovery from supplier failures can take months or even years, depending on the availability (and reliability) of alternative resources. To handle this risk, businesses need CBI insurance. Such coverage can help reimburse typical operating expenses incurred due to disruptions caused by covered perils involving critical suppliers and business partners.
Gap #3: Employment Practices Liability (EPL) Concerns
In today’s litigious society, stakeholders are holding businesses more accountable for their wrongdoings, whether actual or alleged. When these incidents involve certain employment actions or contribute to a hostile work environment, they may result in costly lawsuits, leaving impacted businesses with considerable legal expenses.
Although some businesses may assume their general liability policies will respond to employment litigation, this coverage typically excludes such lawsuits. All it takes is one lawsuit, even if the claim is unfounded, to cause serious financial harm. That’s why businesses need EPL insurance. This coverage can help pay for losses arising from a business’s existing, previous or prospective employees claiming that their employer violated their civil rights.
EPL coverage applies to a range of allegations, such as discrimination, harassment and retaliation. When these allegations occur, this coverage can help reimburse the legal expenses businesses may incur in associated lawsuits, including defense costs and any damages or settlements awarded to claimants. EPL insurance is offered as either an endorsement to standard liability coverage or as a standalone policy.
Gap #4: Silent Cyber Exposures
Businesses are facing mounting cyberthreats as workplace technology advances and hackers develop increasingly sophisticated methods to steal valuable funds and data. However, most traditional insurance policies were written before cyber losses became a recognized exposure, leaving coverage for such incidents relatively ambiguous and creating “silent cyber” risks.
With cyber losses on the rise, the Insurance Services Office introduced exclusionary endorsements in several standard coverage forms, namely commercial property policies and BOPs, that clarify or eliminate protection for these losses. In light of these developments, businesses without standalone cyber insurance may no longer have the unintended coverage they previously relied on in their traditional policies amid cyber losses, leading to significant financial strain. To protect against this exposure, businesses need dedicated cyber insurance. This coverage is designed to pay for a number of first- and third-party expenses that may result from data breaches, ransomware attacks and other cyber incidents.
Gap #5: Hired and Non-Owned Auto (HNOA) Risks
Many businesses have commercial auto insurance to protect against financial losses stemming from accidents involving company vehicles. This coverage specifically applies to vehicles owned and scheduled by a business. Nonetheless, some businesses may utilize rented or leased vehicles within their operations. They may also ask employees to drive their personal vehicles for business purposes. This can create coverage gaps, forcing businesses to pay out of pocket for costly property damage and bodily injuries caused by accidents involving such vehicles.
In these instances, businesses need HNOA insurance. This coverage can help pay for various expenses arising from a business’s employees getting involved in accidents on the road while operating rental or personal vehicles. Such coverage is typically available as a low-cost endorsement to an existing general liability or commercial auto policy.
Gap #6: Social Engineering Incidents
Social engineering incidents have become one of the most prevalent cyberattack methods, causing substantial losses for businesses across industry lines. Some of the most common scenarios include vendor impersonation, fraudulent wire transfers and fake invoice schemes. While some businesses have looked to their traditional commercial crime and cyber insurance policies to cover losses stemming from social engineering attacks, these policies may not offer adequate protection against such incidents. In particular, social engineering attacks that involve honest employees being manipulated by cybercriminals into transferring company funds to external accounts are unlikely to qualify as “direct theft” under the terms of standard commercial crime insurance, thereby excluding these incidents from coverage.
Some crime insurance policies exclude losses caused by cyber incidents altogether. Furthermore, traditional cyber policies generally offer protection only for losses stemming from targeted system breaches and technology failures, thus excluding coverage when employees are tricked into voluntarily participating in social engineering attacks.
To combat this risk, businesses can purchase a social engineering endorsement for their existing commercial crime and cyber policies. Even then, it’s worth noting that specific coverage capabilities will depend on the nature of the attack and the type of fraud involved, with some insurers preferring to provide this endorsement solely for crime coverage.
Conclusion
Commercial insurance programs are most effective when they are designed to address a business’s specific exposures and coverage needs. Working with trusted professionals like the friendly, local experts at Deeley can help businesses identify and fill potential coverage gaps before claims arise and, in turn, avoid large-scale financial losses.
Call or text us at 410.213.5600 for further guidance and insurance solutions.
