Can Insurance Be Cool?
By RJon Robins
Yes, insurance can be cool. And you’d think so, too, if you knew what you probably don’t (yet) know about how cool insurance can be!
Far from being “boring,” insurance all started with a bunch of brilliant mathematicians from the 1400s and 1500s who also happened to be a bunch of degenerate gamblers, and they inadvertently invented actuarial science. When you understand how this affects your insurance today, it will help you negotiate better prices and better terms. And there’s nothing “boring” about that!
Still, I know insurance isn’t the most exciting topic in the world for most people. So I know there has to be a payoff for you . . . if I expect you to read my next article.
My promise to you: This short article about insurance will not bore you to tears in a futile effort to tell you “everything” about insurance. Instead, what this short article aims to do is:
- make you feel more empowered when shopping for business insurance;
- help you act more responsibly as the owner of a small but growing law firm; and
- show you where the path begins to saving money on your firm’s insurance portfolio.
What Your Insurance Policy Actually Is
First of all, let’s stop calling it a “policy.”
The word “policy” means “a definite course of action adopted for the sake of expediency” or “a course of action adopted by a government, ruler, or political party.”
That agreement you signed with your insurance company is actually a legally binding contract that shifts some of your risks to a multi-million-dollar company that has a team of lawyers and years of experience finding all the ways not to pay up in the event that you ever need to file a claim.
Most insurance companies don’t actually expect you to read your “policy” before you sign it. They certainly don’t expect you to understand it. And they know there’s little chance your agent will take the time or even know how to educate you about some of the key terms. After all, no one expects any of that to actually matter . . . until it does.
This is good news for you because, with a few of the pointer you’re going to learn here, you will have an easier time translating “insurance-ese” into “legalese.” And then into Plain English. Then you will enjoy a big advantage when shopping for and negotiating “price and terms” for your protection.
Into the Belly of the Beast
Insurance is a gamble. It’s a bet. It’s a wager that you pay the insurance company to make on you. That’s right, you are paying the insurance company to bet on you. And guess what happens next? Your insurance company is probably going to turn around and make a bet with another insurance company on you, too. That’s called “re-insurance,” and that’s a topic for another day.
So, it goes like this: You pay the insurance company a fee to take a bet on your firm. The insurance companies call this fee a “premium.” If the insurance company wins the bet, it gets to keep your fee as profits, less administrative expenses and commissions. If it loses the bet, it has to pay up.
The “ratings” of the insurance companies (e.g., “A rated,” etc.) tell you how likely a company is to skip out on its bet. As an educated consumer, you should be aware there are five different rating agencies, each with its own scale and standards. They don’t always agree. And none of their ratings scales are linear. This means the “B” rated insurance companies aren’t just a little bit worse than the “A” rated companies.
But once you translate all the fancy lingo into Plain English, you will discover that what’s really happening is really this simple: (1) You pay a fee. (2) They make a bet on you.
Why Not Just Bet on Yourself?
Lots of lawyers do. It’s called being “self-insured.” It’s also called being “naked.”
Think of it this way. If you could be 100 percent sure you could purchase the winning lottery ticket, what would you do? You’d probably buy that ticket, wouldn’t you?
In a very real sense, what you’re doing when you buy insurance is you’re placing a bet, too. Except you’re betting on yourself and you’re also betting against yourself. This is called “hedging” a bet.
This is an important point to understand, if you’re going to take what you learn here and negotiate better price and terms with your insurance company. You’re not betting against the insurance company. You’re on the same side of the bet with the insurance company.
So why not just bet on yourself?
The reason is because you win only a little if you’re right and you lose a lot if you’re wrong. And unlike the hypothetical example above, you can’t be 100 percent sure the day won’t come when you’ll wish you had paid a small fee for an insurance company to take a big bet on you.
Plus, there are many risks you can get the insurance company to bet on you for that are almost completely out of your control. I know, they’re crazy, right? Not exactly. Because they’re playing the odds and spreading their risk across thousands of different games of chance. If self-insured, you’re betting it all on red, and if you’re wrong, you’re done.
The “Nuclear” Argument Against Self-Insuring
Ask your spouse or significant other to read this article. Then ask:
Honey, Sweetie, Schnookums, how would you feel if my firm got sued and we lost the house because I didn’t spend a few bucks on insurance to get a ton of protection for us in the event that my office burns down, gets flooded, my secretary gets in a car accident while driving on firm business, some disgruntled employee decides to accuse the firm of violating an archaic employment law, my firm gets cyber-attacked and we lose our data, someone slips and falls in the office, or one of my crazy clients decides to file a completely frivolous claim of malpractice after he flagrantly ignored advice of counsel?
The Second Thing That Insurance Is
Now you are ready to learn about the second thing that insurance is. Insurance is negotiable. Very negotiable. Much more negotiable than your insurance agent probably wants you to know.
Remember, you are paying the insurance company to take a gamble on your business practices. So, unless your firm is a total train wreck, then the more your agent can show how your firm implements certain “best business practices” for managing a small law firm that reduce risk, the better. And because many of these best practices also make the insurance companies happy and tend to boost profits, too, why wouldn’t you want to do this?
The point is, the better you run your business, the better your agent should be able to make the case that the odds are better for your law firm than the average firm. And unless your agent is asleep at the switch, this should result in better prices and/or better terms from the insurance company.
Guess Why Some Insurance Agents Don’t Want You to Know This
- They make more money by not negotiating on your behalf.
- They need to work harder to save you money, which reduces their income in the short term.
- A surprisingly high percentage of insurance agents (in my experience) who presume to advise small law firms don’t actually know what the [heck] they are talking about! Usually they are “dabblers” who don’t do business in this space day in, day out. This is important because you want your agent to have a relationship with the insurance companies they’re negotiating with for you—just like you want your lawyer to have a good working relationship with opposing counsel, judges, etc.
Now, point number one above is obvious, and point number three probably doesn’t surprise you that much, either.
It’s with point number two where we begin to discover how to save, how to get better price and terms for our insurance.
You see, the most successful insurance agents are a lot like the most successful small law firms.
Where most struggling law firms and most struggling insurance agents try to get a client so they can “get some business out of” that client, the most successful in each respective category look for opportunities to get some work. This way they can earn the right to call you a client.
That’s why the most successful insurance agents ask so many questions and ask for so much information. The best may even make some “nosy” suggestions to help you improve your business practices. This way they can take all this information and use it to build a better case for you when they go “shopping” your risk to different insurance companies. Circle that. They should be shopping your risk.
The best insurance agents are your advocates. They conduct their “discovery,” just like you do, so they can build and make your case for you with the underwriters. The underwriters are a lot like the “pit boss” who decides whether to take the bet and what price, terms, and odds to offer.
All right, the bloom is officially off the rose. Now let’s talk about what kinds of risk you would be wise to consider off-loading to an insurance company, and what facts, evidence, and arguments your insurance agent can (and should) be making for you with regard to each of these different kinds of risk that you probably don’t want to be self-insuring yourself for.
Types of Risk
You wouldn’t want brain surgery performed by your dentist, would you? Probably no more so than you’d want the best brain surgeon in the world poking around inside your mouth! Likewise, insurance companies specialize in different areas of risk.
The insurance underwriters who study and understand causes of malpractice, for example, don’t usually also study and understand causes of (and how to help you mitigate) the unique risks faced by a small law firm in the event of a fire or a flood. So, chances are your agent is going to assemble a portfolio to be sure you’re adequately protected. And to the extent you can find one agent to manage your full portfolio, you’ll probably run less risk of there being any gaps.
I’ve already mentioned some of the different risks you can pay an insurance company to bet on (fire, flood, premises liability, business interruption, non-owned auto, employment practices, data breach, and, of course, malpractice). So, for the sake of space, I’m not going to try to “rewrite the book” on all the different types of insurance a responsible small law firm owner should be educated about. Especially because my friend Mike Carroll of Insuring Lawyer has already written that book: The Naked Lawyer (available from any online book seller—or for free from insuringlawyer.com). Disclaimer: Mike’s agency also represents my firm’s insurance interests, and we have other business dealings together, too.
Making the Case for Your Law Firm
As discussed above, your insurance agent should be gathering evidence mostly from you to build your case for you and negotiate better price and terms with regard to each area of risk.
An experienced agent will know how to present the evidence differently to each insurance company based on each insurance company’s unique underwriting guidelines and depending on the category of risk.
But when you boil it all down, your agent is basically going to be making the following main argument together with three supporting arguments:
Main argument. This small law firm is a safer bet than most, so you should charge them less to take a bet on them, or at least give them more protection for the same price.
Supporting argument #1. This law firm understands the common causes that lead to risk events, and they have taken steps to eliminate or stay on top of those causes with good management practices.
Supporting argument #2. This law firm has planned ahead and has policies, procedures, and systems in place to head off trouble and/or mitigate risk events should they occur.
Supporting argument #3. This law firm has some redundancy systems in place that protect its ability to stay in business and honor its legal, financial, and professional commitments, even if something does go wrong, to ensure that bad doesn’t turn to worse.
So Why Do I Think Insurance Is Cool?
As I mentioned above, I think the origins of insurance are fascinating. It all started with a bunch of brilliant mathematicians in the 1400s and 1500s who inadvertently invented actuarial science as a strategy to beat the house at the casinos and gambling parlors they would frequent.
It progressed in the 1600s to the coffee shops of London, where syndicates of investors would write their name under a contract together (i.e., “underwrite”) to guarantee payment in the event that goods were lost in transit on merchant sailing ships. It evolved into a more practiced profession by those very same investors who would take pains to mitigate their risk by evaluating the seaworthiness of ships they were underwriting, ensuring they were captained by trained (sober) professionals and equipped with the latest technology of the day.
Today, there is a whole field called “actuarial science” that is eerily accurate, but it can still be beat by building better business practices into your law firm.
And I think it’s pretty cool to know that armed with the right information you can “beat the odds” and level the playing field with insurance companies, which will let you buy hundreds of thousands of dollars of protection for pennies on the dollar. This way, if something unexpected does happen, you can stay focused on the business of building your law firm.