Choosing the Right Insurer

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Image courtesy of [Coco Flamingo] / Getty Images.

Hundreds of U.S. property/casualty insurers provide coverage to small businesses. Like many business owners you have probably wondered how to select an insurer. Here are six factors you should you consider when comparing one insurer to another.

Financial Stability

Insurers are regulated by the states. Each state maintains an insurance department that monitors the financial health of insurers licensed to do business in that state.

One of the goals of regulation is to prevent insurer insolvencies. Nevertheless, insurance companies occasionally fail. Thus, before buying a policy insurance buyers need to do their own evaluation of an insurer's financial strength.

Fortunately, assessing an insurer's financial health does not require any number crunching on your part. Rating firms have done the work for you. These firms include A.M. Best, Standard and Poor's, Moody's and Fitch. Each agency develops insurer ratings using different criteria. Consequently, an insurer may be rated highly by one agency but not so highly by another. For this reason it's important to consider multiple ratings when evaluating an insurer.

State License

Unless you are purchasing a policy from a non-admitted insurer, your insurer should be licensed in your state to issue the type of policy you are purchasing. In many states you can access insurer licensing information from the insurance department's website.

An alternate source of this information is a website maintained by the National Association of Insurance Commissioners (NAIC).

An insurer that offers several types of coverage may need a separate license for each. For instance, suppose that the Elite Insurance Company provides both life and homeowners insurance in state X.

Elite holds two licenses, one for life insurance and the other for property and casualty insurance. When an insurer has multiple licenses, each license may be held by a separate subsidiary company. For example, Elite's life insurance license is held by the Elite Life Insurance Company. Elite's property and casualty license is held by the Elite Property and Casualty Company.

Service

Service refers to the speed, accuracy and courtesy an insurer displays when it responds to your requests. The following example demonstrates why service is important.

Suppose you have been hired by XYZ Inc. to do work on a project. Your contract requires you to insure XYZ Inc. as an additional insured under your general liability policy. XYZ won't let you start work on the project until it has received a copy of the additional insured endorsement. You've requested the endorsement but your insurer doesn't issue it until three months later. At that point you've already lost the job.

Some insurers provide better service than others. If you have enlisted an independent agent to obtain quotes on your behalf from several insurers, your agent should know which insurer provides the best service. You can also ask other business owners for recommendations.

Trade associations, professional organizations and business groups may also offer insurer recommendations.

Claim Handling

As a policyholder, you expect your insurer to promptly pay any valid claim you file. Nevertheless, some insurers have a better reputation than others when it comes to handling claims. If an independent agent is obtaining quotes on your behalf, ask him or her about the insurers' claim handling practices. You should also check your insurance department's website for complaints and enforcement actions filed against the insurer. Many policyholder complaints and enforcement actions involve allegations of unfair claims practices.

Coverages

The coverages you need depend on the type and size of the business you operate. Some insurers provide basic "vanilla" coverages that most businesses need like commercial auto and general liability insurance.

Other insurers offer coverages designed for certain types of businesses, such as restaurants or contractors. If your business is highly specialized you'll need an insurer that understands your industry. For instance, if you company manufactures medical diagnostic products you'll need an insurer that is knowledgeable in biotechnology.

The insurers represented by agents vary from one agency to another. If you aren't happy with the selection of insurers from one agent, switch to another agency. Like insurers, some agents and brokers focus on certain industries or types of coverage. If you feel that your current agent doesn't understand your business, look for an agent that specializes in your industry.

Cost

The cost of an insurance policy can vary widely from one insurer to another. There are a number of factors that affect the policy premium. These include the rates charged, the limits provided, the scope of coverage included, and discounts provided by the insurer. When assessing quotes be sure you are comparing "apples to apples." Policy X may be significantly broader, and thus cost more, than Policy Y. However, if the extra coverage afforded by Policy X is not important to you, you may be better off buying the cheaper policy.