Risky Business
A Small Business Insurance Guide for Independent Insurance Agents and Brokers

Chapter 2: How Insurance Protects Your Agency
Part 5: Independent Agents: Know What Business Insurance Can't Cover

No single insurance policy will cover every exposure your brokerage business or agency faces. So to fill the potential gaps, insurance providers offer "mini" coverages that you can add on to existing policies. In the insurance industry, these additional protections are called "riders" or "endorsements."

Riders allow you to easily and affordably customize your business insurance policies so you can add more coverage only where you need it. Let's take a look at a couple riders that may benefit brokers and insurance agents.

You can customize your insurance policies by adding on riders.

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Tail and Prior Acts Coverage

Tail and Prior Acts coverage can help you close gaps in your Professional Liability Insurance. But to understand those gaps, first we need to talk about how Professional Liability Insurance operates on a "claims-made" basis. This means two things. In order to receive your benefits, your policy must…

  • Be active when the incident occurs.
  • Be active when the claim is filed.

Sounds easy enough — as long as you never let your Professional Liability policy lapse or switch policies. But if you do switch policies or let your policy lapse, your business can't count on its insurance benefits. And because your new policy will likely be a "claims-made" policy, it may not cover incidents that occurred while you were covered under your old policy.

This is where a Prior Acts rider comes in. You can add this coverage to a new Professional Liability policy to cover incidents that may have occurred — but were unknown to you — before your new policy kicked in.

Tail riders operate under a similar concept, but are usually purchased by people who are retiring or closing up shop. Brokers would purchase Tail coverage when they need protection for activities completed while they were still in business, but not the protection of a full-blown Professional Liability policy.

The Problem with Stopping and Starting Insurance Coverage

When you are an independent contractor, it can be tempting at times to drop coverage. Maybe it's starting to seem unnecessary or maybe you feel it's getting too expensive. No matter what your reasoning is, dropping coverage is never a good plan.

Let's take a look at the first point: necessity. It's just you running the show, and maybe you feel as though you're careful enough to fly free without a safety net. You've had a General Liability policy for five years now, and never once has a person hinted at filing a claim.

So you drop your coverage. But in a week, a month, or a year, maybe someone comes into your office, falls on a wet floor, and breaks an arm. Because the accident is technically your fault, the injured party wants you to pay for her medical expenses. Now you're out several thousand dollars.

The point is you never know when you're going to need your coverage. And most brokers can be held liable for the "life span" of the product or service they deal in. As for the financial aspect, consider this: if you can't afford your premium, how will you ever survive a catastrophic property loss or a costly lawsuit?

Unfortunately, you don't have a crystal ball and can't predict if, or when, tragedy will strike. And even if you did know, you'd still have to contend with these two facts:

  • Once you drop coverage, you are not protected against claims, even if you had coverage at the time of the incident.
  • For some liabilities, the statutes of limitations allow people to file claims for years after the initial incident.

This mean the best way to stay protected is to avoid lapses and gaps in your coverage. And when you're dealing with other people's money, you just can't afford the risk of doing business without a financial safeguard.

Professional Liability Insurance is claims-made coverage, which means you can only receive your benefits if both the alleged incident occurred and the lawsuit is filed while your same policy is active.

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Next: Chapter 3: Special Concerns for Independent Stock and Insurance Agents

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