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Processing & Services: Insurance update

Pay attention to the fine print when it comes to any insurance coverage, experts advise

By Lauren Kramer
June 01, 2008

When a business is affected by accidents or disasters, insurance can make the difference between survival and insolvency. There are many forms of insurance available, but the key to protecting a company's assets is reading the fine print and ensuring the coverage obtained is sufficient.

"A lot of disappointment arises when losses occur and a company discovers after the fact they were not covered for it because the policy wasn't designed to meet that particular need," says John Keane, president of Capital Risk Concepts in White Plains, N.Y. In the seafood industry, marine or cargo insurance policies provide a classic example of such instances of disappointment, when business owners discover too late that they are uninsured for a particular incident.

"Many companies in the industry buy coverage for change of temperature risks, essentially a 24-hour refrigeration breakdown," says Keane. "But the refrigeration has to have been broken for 24 consecutive hours before coverage kicks in. Running out of fuel or forgetting to turn the equipment on does not constitute a breakdown. You need to know a lot about the true meaning of those words and the risks you're attempting to insure for, otherwise you find yourself buying deficient coverage from the get-go."

Capital Risk Concepts is an insurance broker handling all types of insurance. The varieties of insurance a seafood business requires depends on what the company does, how it identifies the risks to which it is exposed and what it can financially absorb. "In theory one looks to insurance when you want to transfer risk that you cannot financially absorb," Keane says.

One form of insurance that is becoming increasingly necessary is product recall or product contamination coverage. "It's becoming a coverage that is going to be a necessity just to operate your 
business," says Keane.

"If you look at all the food recalls occurring these days, you see that many of those companies go out of business quickly after the discovery of a pathogen being detected. Things are good in the seafood industry with regard to product contamination, but just the bad press alone - the very mention of someone's name in the press - could result in the loss of enough business to put a company out of business, whether for a valid or invalid reason."

At Shorepoint Insurance Services, President Ray Markley offers third-party liability insurance for premises, operations and product. "If the company sells to the public and someone gets ill or injured from the product, this insurance pays for the defense of that allegation. If the company has to pay out to the victim, the insurance pays that, too," says Markley.

This insurance coverage can be crucial given today's litigious society. "These days if anyone gets sick from eating anything, they seek damages from anyone related to whatever they put in their mouth. A lot of these claims are allegations and difficult to 
prove, and in the end there will often be a resolution without knowledge of the cause of the problem," says Markley.

For seafood companies selling to large customers, liability insurance is often mandatory. "Larger retailers and distributors require that there be product liability insurance in place to protect them if their property gets damaged or their customers get sick," Markley explains. "The larger the customer, the higher the limit they require."

Aside from offering protection, some types of insurance, particularly credit insurance or accounts receivable insurance, can be tools that help a company grow safely. Credit insurance protects businesses from losses due to customer insolvency, slow payment and political risk events such as foreign policy changes.

"Let's say you have the opportunity to work with a company," suggests George Babeu, president of One Source Risk Management & Funding in Portland, Maine, a subsidiary of SeaFax. "You've pulled their credit reports and feel comfortable selling but not to the $100,000 worth of product requested. By using credit insurance you are outsourcing the credit risk. If your customer is financially unable to pay you, the insurance will step in and reimburse you for their inability to do so."

This can help seafood companies feel safer about opening up in new markets and selling to accounts in greater dollar amounts than if they were doing so under their own balance sheet exclusively. With the weakness of the U.S. dollar, for example, many seafood companies are starting to export more product to Europe and Asia.

"By being able to have their credit insurance carrier safely approve new accounts, they can make the sale, knowing they will be reimbursed if the buyer can't pay. Credit insurance essentially gives those selling the ability to sell more product than they would comfortably do so without it," Babeu says.

It is particularly important to the seafood industry, he says, because it is "very leveraged financially, with tight profit margins. There's a need to transfer credit risk, and credit insurance gives seafood suppliers a way to do this. In this economy, it's getting a lot of play.

Among One Source's clients are many of the largest seafood companies in North America. "You'd be hard pressed to find a company of any significant size that doesn't use credit insurance as a tool to help them sell more safely. That's because with the current economic conditions, [seafood suppliers] are concerned about the financial stability of their customers," says Babeu.

A significantly sized company, or one for whom credit insurance is important, is one with $1 million or more in annual sales, he adds. "What most people don't realize is that everyone carries this type of insurance - but they may self insure, or maintain bad debt reserves in the event a buyer can't or won't pay them," says John Pontin, national sales director at Euler Hermes ACI. He suggests that companies with more than $2 million in sales should be carrying accounts receivable insurance.

"We have companies with sales ranging from $2 million to $250 million," he says. "If you are only doing $1 million in sales, your biggest exposure might only be $25,000 to $50,000 at one time, so it may not be cost effective to pay the insurance premium."

Some seafood companies might be "so caught up selling fish that they might not have the credit expertise they need," adds Steve Lapsley, risk industry manager at Euler Hermes, which has a U.S. office in Owings Mills, Md. The company, which insures more than half a billion dollars in annual seafood trade, has a 38 percent share of the entire U.S. credit insurance market, and a 36 percent share globally. It boasts a database of 43 million companies worldwide whose credit Euler Hermes monitors and rates.

Lapsley provides an analogy to explain Euler's role. "After you've had a car accident, the auto insurance company makes a payment to fix the car. But with us, we're riding in the car with you, and if there's about to be an accident, we swerve to get you out of the way. If we're wrong and don't help in time, we pay you out. But we try to avoid the accident rather than just make a claim payment in the event of an accident."

At Coface North America, it's turning out to be a fun year, jokes David Leggiadro, New England regional manager. "This year almost everyone has claimed from their insurance and we've had losses locally and overseas," he says. Among the company's seafood clients, domestic and export trade credit insurance are Coface's most popular products.

"I think it's because the seafood industry is still a cottage industry with a lot of small-to-medium-size businesses and family-owned businesses," he says. "It's easier for them to see the benefits of having this insurance than, say, a multi-national company with a more sophisticated credit department and bigger balance sheets."

Coface also offers the industry a non-recourse factoring program that advances funds to its clients. "It's an alternative to regular banking, and we feel it's superior because it also protects them in the event of a credit loss," Leggiadro says. "We advance funds on their accounts receivables, and we also guarantee the sale."

In today's economy, many companies are struggling, says Lapsley of Euler Hermes.

"In a good economy companies without strong credit were able to survive, but with the slowdown there has been an increase in insolvencies and companies on the edge with an inability to pay," he says. "Our product is countercyclical. When the economy is good, our product has a lot of value. But when it's bad, there's even more value."


Contributing Editor Lauren Kramer lives in British Columbia



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