Are You Covered?

Natural disasters have a way of changing business priorities. Before one, insurance may be the last thing on your mind. Afterwards, it’s bound to be near the top of your list of to-dos — or should-have-dones. Those who have been hit by nature’s fury soon learn if their coverage was adequate. Those who have escaped get a warning, and a chance to close coverage gaps in case they are not so lucky next time.

Hurricane Katrina, which at this writing seems destined to go down in history as America’s costliest natural disaster, devastated the Mississippi and Louisiana Gulf Coast and literally washed away much of the region’s home medical equipment business. Many providers will bounce back, either because their facilities and inventory survived the storm, because they were adequately insured, or both.

Some may not have been so lucky or well prepared. And experts in insurance for HME firms say many other providers may be in danger of a similar knockout blow in the future. It doesn’t have to be a hurricane. Any other disaster that covers a wide area, such as tornado outbreaks, floods, earthquakes or wildfires, can ruin a poorly insured business in the wrong place at the wrong time.

So how much insurance, and of what kind, is enough? The answer depends greatly on the particulars of each business — its size, location, product line and range of services. But certain rules apply across the board.

First, the HME business has special coverage needs that conventional business policies may not meet. Second, don’t expect one policy to not cover all potential disasters.

Policies that insure against losses from fire and wind, for instance, normally do not cover flood damage. Finally, fit your insurance portfolio to your real risks. Don’t skimp on coverage you need in order to buy coverage you don’t.

Off-Premise Perils

To understand what is distinctive about the insurance needs of HME, consider the “H” — for home. At any given time, a typical HME firm will have much of its property off-site, either being used in patients’ homes or being transported there. “In our business you have a lot of your equipment out all the time,” says Mike Hamilton, executive director of the Georgia and Alabama HME associations. “If you don’t, you’re going broke because it’s not being rented out.”

But typical commercial insurance policies have fixed limits for property off the premises of the business. And it’s not a sure thing that the customers’ insurance will cover loss or damage to rented equipment such as oxygen concentrators, beds and the like.

Katrina highlighted this risk of off-premise perils. Dan Smith, senior underwriter for VGM Insurance, says, “We have insureds for whom virtually all their customers’ homes were destroyed,” and some HME businesses have had all their off-site property wiped out.

Smith, Hamilton and others say HME providers everywhere should make sure they have off-site coverage high enough to ensure that all their property can be replaced. And though Katrina may have been an unprecedented disaster, Smith says business owners should not assume it was the last of its kind: “Going forward, we have to consider this happening. A large storm can occur and not necessarily be limited to the Gulf Coast states.”

Off-premise coverage also needs to include property in transit. “You have to be very careful about what coverage you have for property in a vehicle,” says Smith. For example, he says, some policies don’t cover equipment being kept in an employee’s pending delivery.

Disasters aside, he says, this can expose the HME business to considerable risk: “We’ve had quite a few claims where property was stolen from a vehicle while at the employee’s home.”

Insurance to cover off-site risks goes by several names, such as “Inland Marine” and “Marine Floater.” Hamilton and others say it is one of the most important missing items in many HME insurance portfolios. “A lot of people just don’t seem to know what it is. At the very least, they don’t know how to ask for it, or to ask about it,” he says.

The crucial first step, then, is to ask — and to deal with a broker who knows what you are talking about. Not all of them do. “Most Main Street agents don’t really understand the HME business,” says Dennis Santoli, president and CEO of the insurance and risk-management firm Campania Group, which provides an insurance program for the American Association for Homecare. He suggests that providers check with their state associations to get an idea of what they need and which insurance agents in their area are knowledgeable about HME.

Another type of disaster-related coverage that may be coming up short is business interruption, or “loss of income,” insurance. This coverage is often available as part of a business package policy, which provides general liability and property loss coverage and may add coverage for assets such as valuable papers and business signage.

But as Santoli and others note, business interruption policies vary widely in what they cover — and you get what you pay for.

The less expensive protection, says Santoli, covers fixed expenses such as rent and taxes that a business must pay whether or not it is operating. Payroll is not covered; the assumption is that any employees are laid off until the business is back in operation. The most expensive, he says, “is full coverage that would put you right back where you would have been if the interruption hadn’t happened.”

In effect, these policies replace your normal profit. In choosing what coverage to buy, Santoli says HME business owners need to consider “how many employees they have, who they are, and how many options they have available to them.”

Smith of VGM notes that businesses can also buy “extra expense” (EE) coverage, to pay for the costs incurred in stopping and starting a business, such as cleanup expenses, renting of temporary space and overtime for employees who are called in to help with an emergency relocation.

Fire, Wind, Quake or Flood? It Makes a Difference

No matter how much of your property and business income you insure, you may receive nothing if you’ve been hit by an excluded event. Standard policies that cover fire and wind damage, for instance, generally do not cover flooding. They may well cover water damage, but the water would have to come from an internal source, such as broken plumbing. A hurricane storm surge would not come under that category. And don’t expect a standard property policy to cover damage from ground movement in earthquake-prone regions such as California.

In hurricanes especially, the exclusion issue can get tangled and litigious. Was it the wind or the water that destroyed a particular home or business? Rather than try to figure out that answer after the fact (and possibly argue over it in court), the smart course is to buy coverage for all the probable risks, with separate policies if needed.

Flood insurance is available through a national program administered by the Federal Emergency Management Agency (FEMA). Go to www.floodsmart.gov for details. Earthquake coverage, where it needs to be separately purchased, is available either from a state program or private carriers (California, for instance, has both). Premium costs and deductibles can vary widely, depending on a business’ location, and the latest hurricane season seems likely to make certain low-lying coastal areas even more costly to insure than they already are.

The business owner has a choice: Pay the money or work without a net. The temptation with property insurance (which, unlike liability or workers compensation coverage, is typically not mandated by law or contracts) is to be penny-wise and take an undue risk. “A lot of people can’t afford to self-insure, but unfortunately they do,” says Bill Thompson, senior vice president of the underwriting firm Smith Bell & Thompson.

Cover Your Risks, But Don’t Over-Insure

It’s possible to insure against most foreseeable risks, for a price. But you may not need every available coverage on the HME market. The role of insurance in risk management is to protect a business or individual from losses that meet two criteria: They are infrequent, and they are so large that, if not covered, they would wipe out at least a substantial part of one’s assets.

For frequent risks of large losses, the best course is not to invite them in the first place. This is one argument, for instance, against building in a place that suffers frequent floods. For losses that are frequent but small, like auto bodywork from minor bumps and scrapes, experts say self-insurance is the smartest course. In auto insurance, for instance, it makes sense to save money on a high-deductible collision policy and to have enough cash on hand to pay what the insurer won’t cover.

What does this mean for an HME business? First, it means sitting down with an HME-savvy agent or financial advisor and going over each risk that the business faces. Then it means setting priorities within the insurance budget. The object is to buy enough to cover risks for which insurance is appropriate, and not to buy any more.

Some risks, especially general liability and workers’ compensation, are insured in HME as a matter of course. But even here, your portfolio may need an update. Hamilton notes that your liability coverage limit might actually be too high for the business assets you need to protect: “If your company is only worth $1 million, buying $3 million to $4 million in liability insurance is probably a waste.”

On the other hand, business owners who also provide professional services, such as pharmacy or respiratory therapy, need to make sure they have professional liability coverage along with general liability. “Certain HME providers have professional liability exposure and don’t always see it,” says Thompson.

And within business liability, certain areas are more crucial to HME and should get top priority. Santoli says insurance agents who don’t understand HME will sometimes sell providers “a liability policy not covering product and completed-operations liability” — the two things over which HME providers are most likely to get sued.

Answering the Wake-Up Call

Katrina and other recent disasters have been a “wake-up call” to HME providers, says Kathleen Dodd, CEO of the Corridor Group consulting firm. For business owners in the path of a storm, she says, it has forced some to make some “really tough decisions,” such as “should I even try to rebuild and start up again?” And it may have providers everywhere thinking about insurance. As Dodd says, it has made “people re-evaluate what they are paying for” and to see what they are really getting for their money.

What many may find is that they failed to take a close enough look at their policies when they bought them in the first place. Dodd says insurance tends to get too little due diligence; the attitude is “now we have it; let’s cross it off the list.” But as the experts note, the fine print of a policy — exclusions, coverage limits, formulas for replacement of lost income and so forth — is full of potentially unpleasant surprises for those who don’t examine them closely with the help of someone who understands both insurance and HME.

It’s human nature to put off spending money to protect against risks that seem remote. But it’s never too late to take the proactive route and to start doing the kind of homework that VGM’s Smith suggests: “The important thing is that HME dealers need to ask questions. Even if you don’t think you are in a flood area, your customers might be. You have to have an awareness of where you are and where you are doing business, and if there is coverage for losses.”

Ignorance of such facts, as Katrina and a host of past storms have shown, leads to anything but bliss.

When Disaster Strikes

According to VGM Insurance, if you have a business interruption loss, you should:

• Call your broker or agent, who needs to involve the insurance company immediately.
• Make decisions in your business’ best interest, regardless of whether they fit into insurance coverage. This includes replacing broken windows or other damage to your building. Take all reasonable steps to protect your property from further damage. If feasible, set the damaged property aside and in the best possible order for examination. It is important to note that you are responsible for your property, not the insurance company. After the initial storm damage, you must prevent additional damage to the best of your ability.
• Assign an account number to the loss so that all costs can be captured, such as the cost for extra labor and materials to clean up buildings, expenses for emergency or temporary repairs or costs involved in the relocation of our business.
• Provide the insurance company with access numbers for the people who know the impact of the loss and what needs to be done to restore operations.
• Identify extra expenses, which includes the cost of continuing operations at the current site, moving to a temporary location, using other company facilities, contracting out work and paying overtime and bonuses.
• Evaluate what must be done to get back into business, either at the current location or a temporary location. Also, determine what products are most important to get back into production.
• As often as may be reasonably required, permit inspection of the property proving the loss or damage and allow examination of books and records.
• Remember, the camera can be a very important tool when documenting your losses. Keep it handy, take lots of pictures and be ready to provide them to the insurance company adjusters.