Milk and cookies go so well together. Santa eats them. Kids eat them. We all eat them. It’s the cool creaminess of the milk seeped into the crunchy cookie that makes it so appealing. Opposite things often pair together well…. except in insurance.
What am I talking about? Let’s set the stage. You have a small piece of farmland with some cows and you want to produce, and of course, sell milk. And in a safe place, you have your grandma’s secret depression-era chocolate chip cookie recipe. Being an entrepreneurial spirit, you also want to bake and sell cookies. Grandma has given you her blessing. You’re ready for business.
Excited and determined, you set up a business plan for both of the ventures. All the processes are moving along and it’s now time for you to start looking at general liability insurance. This is when everything comes to a crashing halt. You’ve found an agent that can insure your small dairy farm, but once he found out about the cookie manufacturing, he told you he could no longer help you and he slipped away. Later, you found an agent that could insure your cookie manufacturing operation, but once he showed up to look at your cooking facilities and saw the cow, he quickly and quietly said he could no longer help you. Just as he starts to walk out the door, you grab him by his polo shirt collar and ask, “Why don’t you just find one insurance company to insure just the cookie business, and another insurance company to insure just the farm. Problem solved… right?” This new agent, visibly scared and now sweating, says “Look kid, you’re a straight shooter, but that’s not going to work either. I gotta go!” And he runs toward his minivan and disappears down the dusty road.
What gives? There are plenty of insurance companies that insure farms, and plenty of insurance companies that insure food manufacturers. So why is it impossible to get one to cover all or at least one of the halves of your business?
There are two reasons.
One – Why won’t one insurance company insure both the farm and the cookie manufacturing? This would be the ideal situation, right? One insurance company is always easier to deal with than two. The answer is this: insurance companies only insure businesses that they know and understand. They will only insure classes of business that they believe will be profitable for them. They have data – lots of it – that shows what type of payouts they can expect to make, and therefore how much they should charge you. Insurance companies are conservative, they stick with what they know, and they tend not to branch out into territories they aren’t familiar with. An insurance company is therefore unlikely to insure a business with two unrelated operations, like farming and food manufacturing.
Two – why won’t Insurance Company A insure the dairy and Insurance Company B insure the cookie factory? That sounds like a great idea, but insurance companies are equally unwilling to do this. Why? Because of the pesky “Other Insurance Provision.” Let me explain. The underlying assumption in this story is that you, the business owner, are one entity. Whether you have incorporated or are a sole proprietor – you are one legal entity, and this causes the problem. How? Let’s say you were theoretically able to get Insurance Company A to insure the dairy and Insurance Company B to insure the cookies factory (this could happen if each insurance company is unaware of the existence of the other operation). Your name will appear on the declarations as the named insured on each of these policies. Now let’s say a claim actually occurs – someone got sick from your milk and you are getting sued. You file a claim with Insurance Company A. Your claims adjuster will ask, “Do you have any other insurance?” You’ll tell them, “No, none for the dairy. I do for the cookie business, but that’s a separate operation.” The adjuster will say, “I need to take a look at it any way.” Once he sees your name on that policy, he knows he has just struck gold and lightened Insurance Company A’s load by up to half the costs. And Insurance Company B is finding itself paying up to 50% of a claim it never intended to cover and had never charged premium for.
This is the Other Insurance Provision in action. What the insurance provision says is that if you have any other collectible insurance available, then it will share the costs with that other insurance policy. When Insurance Company B insured you, it did not know about the dairy operating under the same legal liability, and it therefore did not charge you the premium for the coverage. But yet, it had to pay.
That is why you will have a hard time finding an insurance company to insure multiple operations and partial operations.
What can you do about it?
Here are a couple of suggestions:
- Create separate legal entities for separate distinct operations. You do not need to do this for similar operations that fall under one broad classification. For example, if you were a dairy farm and a hay farm, you wouldn’t have a problem finding insurance because it all falls under the broad category of farming. Likewise, if you were a cookie manufacturer and a granola manufacturer, you wouldn’t have had this problem.
- Conduct the distinct operations of the separate entities at separate locations. Get them separate mailing addresses too, if you can. I understand this may be difficult if not impossible to do. The reason I suggest this, however, is because when insurance companies see two separate businesses with the same address, they assume that if someone slips and falls on the location it will be impossible to prove which business was liable, and they will therefore have to participate in a claim regardless if it was the fault of the business they were insuring.
The bottom line is that if you have multiple operations, for insurance purposes, and liability purposes in general, you want to keep each operation legally separate, and if possible, physically separate. This will make your business life much easier, allowing you to focus on what you do best: making milk and cookies.
PS – this multiple operation thing works a little different with Workers Comp…. I’ll discuss next week.