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Coverages, deductibles and policy limits

Insurance is purchased to protect you from losses that may be significant to your organization. But what is a significant loss to one organization may be a trivial loss to another. Therefore, coverages, deductibles and policy limits must be chosen carefully.

Coverages

Some of the various insurance policies available to organizations include:

  • Business Income
  • Accounts receivable
  • Commercial general liability (CGL)
  • Property
  • Crime
  • Commercial automobile
  • Errors and omissions
  • Directors and officers

Every organization requires its own set of coverages. Discuss your needs with your insurance representative. The more your representative knows about your organization, the better prepared he/she will be to advise you about the type of insurance you need.

Periodically review your insurance policy with your insurance representative. Over time, your organization may grow and your insurance needs may increase. Alternatively, you could find yourself paying for coverage you don’t need.

Deductibles

Deductibles ensure that insurance is doing what it is intended to do – pay for the substantial losses, not the minor ones. Deductibles help to keep premiums low. Essentially, the deductible is the amount for which you are self-insured. The higher the deductible, the lower the insurance premium.

To determine the amount for which you are prepared to self-insure, consider the following:

  1. Look at the premium levels for various deductible options. The money saved on the premium by raising the deductible may or may not be worth it.
  2. Consider talking with a risk management consultant to determine optimal deductible levels.

Policy Limits

You want to have adequate coverage without being 
over-insured and paying too much. To make
an accurate calculation, work with your insurance 
representative and consider the following:

  1. The value of your property:  If you lost everything in a fire, what would be the cost of that loss?
  2. Your potential liability exposure:  Property is only one aspect of what insurance covers. Insurance also protects you if you get sued. It pays for legal costs and damages if you’re found to be liable for a person’s injuries or damage to their property. Some operations are higher risk than others. A nightclub, for example, is more vulnerable to lawsuits than a flower shop and will therefore need higher liability limits.
  3. Past losses:  Use your claims history as a guide when comparing quotes for different policy limit options

How to Read an Insurance Policy

Insurance policies are made up of several parts.

Declarations identify:

  • Who is insured
  • What risks are covered (listing of coverages included)
  • Policy limits (limits of liability, deductibles purchased)
  • The amount of premium
  • Effective dates of coverage
  • Others having an interest in the policy
  • A list of form numbers and endorsements, which add to or alter that policy
  • The name of the insurance company.

The Insuring Agreements section states:

  • What losses are covered
  • The subject matter of the insurance and description of the property covered
  • The perils insured against – Circumstances under which the insured may receive the proceeds of the insurance

Exclusions that eliminate specific hazards (i.e., what it does not insure). In order for a claim to be valid it must be covered under the insuring agreement and must not be stated as an exclusion.

Policy Conditions are requirements the insured must fulfill to maintain coverage:

  • If the insured breaches a condition, the policy may be void or voidable or the insurer may refuse a claim arising out of the breach.
  • If the insurer breaches a condition, the insured may be compensated for losses that occurred as a result of the breach. The degree of compensation depends on individual circumstances and the policy wording.

Buyer Beware: Read Through the Insurance Policy Carefully

An insurance policy is a contract between you and your insurance company.

  • Check form numbers against the pages of the policy to determine that you have a complete policy.
  • Ensure the name and address of the insured are accurate. A policy cannot be transferred to another without the consent of the insurer (exceptions do exist).
  • Ensure coverage includes all the areas that you require.
  • Ensure coverage limits are adequate.
  • Check the location(s) listed to ensure they are accurate.
  • Compare editions dates on the form numbers with the edition on the policy pages and the effective dates on the policy.
  • Ensure the insurance company is identified properly.
  • Read the conditions carefully. Many policies require the insured to comply with all policy conditions before claiming on the policy. Some policies may also limit suit to within one or two years after a loss.
  • Clarify any words that are unclear or not defined in the policy. Look up any unclear words in a dictionary to understand their common meaning. If the word has more than one common meaning, the courts will likely adopt the meaning that is most favourable to the insured.

Utmost Good Faith

Insurance contracts rely heavily on the insured providing complete and accurate information. Deliberately misstating or excluding important information could result in denied claims and policy cancellation.

Your Role is Critical

Be “best in class”

To get the best possible rate and coverage for your needs, you must make your organization stand out. In insurance terms this is called “best in class.” You can achieve this by taking an active role in the insurance buying process:

  • Create a relationship with your insurance representative. The more he/she knows about your operation, the better prepared he/she will be to present your organization to insurers. Prepare any supporting materials that can accompany your application.
  • Ensure that your application is well organized, referenced and tabbed for easy review. Include all information about your risk management policies and procedures.
  • Ensure that all information requested by your insurance representative is included in the application.
  • Include any documentation that clearly describes your operation. Include an executive summary that describes your organization and why it is “best in class.”

Finally, always review the submission before your insurance representative submits it to the insurance company. Make sure the application accurately reflects your organization, its operations, your needs and the requested coverage.

Be an Informed Consumer

You don’t need to be an insurance expert to buy insurance, but you must take some time to understand the basics:

Select an insurance representative who knows your organization. Always ask for and check references who know the insurance representative’s reputation, reliability, knowledge, etc.

Consider whether you should use one or more insurance representatives and/or insurers. It may be easier to work with one insurance representative and insurer, but if your operations are difficult or expensive to place with the same providers, you may need to use several.

Ask what additional services your insurance representative can provide.  Some of these services may be included in the fees you are charged.

Shop around. Contact three different insurance representatives. Ask which insurers they will contact on your behalf so that you can make sure you get in touch with three that are contacting different insurers for you. The more insurers they contact, the better your chances of getting quotes, and the more selection you will have.

Ask your insurance representative to get quotes based on different deductibles. Compare the quotes and decide which one strikes the best balance between premium savings and your ability to pay the deductibles.

Review the quotes:

  • Meet with your insurance representative to review the quotes from the insurers. Ask which one he/she recommends and why.
  • The lowest price isn’t always the best coverage.
  • Ask your insurance representative about the insurer’s reputation for paying claims, their financial stability, etc.
  • Document why the particular insurance policy was chosen.

And Finally…

Insurers are making an investment decision every time they decide whom to insure. Just like you, they want to make sure their investments are safe. Be a coveted account for insurers. Insurers can underwrite only a limited amount of business. If your business is deemed to be a good risk, an insurer may provide more favourable conditions.

  • Report all claims to your insurance representative promptly. He/she can advise you of your rights and obligations. Failing to give prompt notice may result in denial of the claim.
  • Ask your insurance representative for assistance with the claims process. He or she may provide advice, act as an advocate, and help compile claim documentation.
  • Ensure insurance policies are kept up to date. Renew policies to ensure coverage is continuous.
  • Ensure premiums are paid on time. Non-payment of premiums may result in cancellation of your policy.
  • Keep all old insurance policies and certificates. Some claims may not be made for many years.
  • Inform your insurer about any new risk management policies, procedures, practices and other features that your organization has implemented.
  • Loyalty to your insurer is important, but shop around occasionally. You need to be sure that your insurer is being competitive.
  • Cooperate fully with insurance inspectors, adjusters and any other insurance company representatives that may visit you. Your insurer and you have the same goal – to prevent losses from occurring

This resource is Courtesy of The Insurance Bureau of Canada

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