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Personal automobile liability, homeowners’ liability coverage, watercraft, aviation, and umbrella liability are designed to cover all the risks associated with day-to-day hazards. But, many times, entrepreneurs are not as vigilant with personal risk management as they are with their business’.

So ask yourself: do you want your partner’s 17 year-old son randomly choosing your next partner as the result of a DUI accident?

Once the underlying limits run out, the partnership share, the stock ownership, the thrift plans, become vulnerable to seizure. Yes, your new partner might be a bit angry with your old partner. Of course we advocate safe sober driving, but any claim can exceed the statutory limits of liability and create an unpleasant internal operations problem for your company. Cover the real risks properly.

Enterprise risk management uncovers this sort of hazard. Business continuation planning recommends surveying personal risk management among the owners and partners of any closely held company.

Just as you protect your company assets and income against casualty and property losses, protect your partnership too. Review the personal lines limits of liability partners carry. Require at least several million dollars of umbrella coverage.

Okay, you’re asking why so high.

Do you want your business to thrive for many years? Do you know how long it takes to get through the court system for a major liability case? If the injured party doesn’t settle, the business assets and partnership could be at risk for four years.

And if the case would settle for a million dollars today, claims inflation might make the payout three times that in four years. It is not entirely predictable. But it is predictable that your policy limit will not rise as the result of inflation. You must take action to increase that limit.

Stay ahead of the liability curve and protect your business structure with proper personal risk management risk assessment, planning, and program implementation.

Directors and Officers (D&O) coverage protects company and individual assets from claims regarding the management professionalism of the upper levels of companies.

The leading cause of D&O claims and payouts concerns financial reporting. The books don’t have to be cooked necessarily, as they just need to be inaccurate to provoke a claim.

Relatively new accounting standards require real property values to properly reflect environmental impacts and potential clean-up costs. For example your company purchases a piece of land for $50 knowing it is environmentally impacted with an anticipated clean-up cost of $950. The book value of the property is $50 because that is what you paid, and it is the net value including clean-up. Now let’s assume new regulations require an additional $49 of remediation. You must either write down the value by $49, or if the property is held for sale, you can optionally write down only actual costs reflected in the sales price.

Of course, as with most future conditions, how do we predict what costs will be when we remediate the site?

Unfortunately, directors and officers must make management decisions in real time while arm-chair stakeholder quarterbacks get to review results with the power of hindsight. Will the Chief Financial Officer (CFO) decide a conservative cost structure and reduce the value of the stock? Or, will he choose a more optimistic scenario and not reveal the full extent of the environmental impact thus falsely inflating values?

The answer is: in today’s regulatory and transparent business environment, adequate D&O limits are a requirement of good management. Also, the CFO should consider environmental impairment insurance.

In the spirit of insurance and great risk management, the CFO can swap a premium (known expense) for a future potential claim (unknown loss). Thus transferring the loss on the asset, to an expense. The asset value remains unchanged.

These valuation rules are very complex and you should consult with a CPA about your specific situation.

There exist many ways to calculate the value of your real property. When it comes to an insurance value, several stakeholders have some skin in the game.

The lender wants a value greater than the financed amount even though the insurance company is under no obligation to pay an amount greater than replacement cost. So what happens in a down real estate market when the best business decision might be to buy a low priced replacement building rather than face the relatively high cost of rebuilding the old one?

If a decent replacement is on the market, the business could buy, move and reopen sooner and suffer lower collateral losses, like lost sales.

So here’s the problem. If you claim the loss with the intention of buying a building with the proceeds rather than fixing the old one, the insurance company is only obligated to reimburse the “actual cash value” of the building.

Actual cash value (ACV) is the replacement cost less depreciation. With older buildings and other add-on coverage, the difference can be significant. And ACV valuation may work for you; don’t discard it out of hand.

The add-on coverage defrays costs associated with upgrading due to building codes, replacing obsolete building materials, extra demolition required by the authorities, or upgrading life, fire and access codes.

So under replacement cost valuation, the insurance company pays for your old building to be replaced with the modern, up to code version. Depending on the age difference, these costs can be significant.

With an ACV claim, the insurance company cuts you a check for that amount less what the lender got. The advantage, in down real estate markets, is if you can buy a reasonable, usable replacement location for the cash proceeds and the same loan amount, you end up with a different location and the land from the first location. You may need to demolish the balance of the building though.

Back to the lender: unless you negotiated an agreed value to a total loss, the insurance company does not look at the financed amount as relevant to the claim. Some specialty coverage can be bought to cover that shortfall, but it is not yet standard.

We suggest thinking about the contingencies and planning for them in advance. Is it more important to reopen and save the sales, or is it wiser to build an inventory stored elsewhere? How about your suppliers? Can you replace them quickly in event of a fire at their facility? A good crisis plan is common sense for risk management. Then, your selection of economic valuations of your building will be appropriate.

What do umbrella policies do?

Insurance professionals can’t help themselves. We rely on wonk-ish diatribes to describe umbrella policies because they are technical in nature.

So let’s try to simplify.

Most companies buy insurance because they are required by law. Workers’ compensation and automobile liability allow companies to hire employees and use public highways. If they own property, their lender requires insurance. If the company leases space, the landlord requires premises liability.

But the real reason to buy insurance: trade a known loss (premiums) for unknown losses (claims). Your company can budget for the acceptable level of known loss which protects against normal, everyday losses associated with entrepreneurship.

Now the umbrella policy: you’re buying catastrophic loss coverage for imaginable claims. The multi-passenger near fatal car wreck or the nightmare products liability claim that costs millions in damages.

You’re also buying coverage for unimaginable claims. Claims not covered by your automobile, general or employer’s liability:

• Do you promote your company through social media? Libel and slander losses are covered by personal injury liability, usually excluded in general liability policies, usually covered on umbrellas.
• Do you send employees out of the country? The stated territories for coverage under standard general and automobile insurance is the United States and Canada. For umbrellas, it’s worldwide. Now, some umbrellas specifically expand territory language to include “anywhere” because of commercial space travel.
• Any possible sexual harassment in your organization? Again, usually excluded by general liability, but included under umbrella coverage.

These examples of rare occurrences give a taste of the importance of umbrella liability. Your company can be blindsided by large liability claims that are not anticipated by your typical liability coverage. Broaden the territory, widen the safety net, spend a little more premium, get more peace of mind.

Trade a little more known loss, your umbrella premium, for a lot of protection against the unimaginable loss.