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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