Buying the right insurance policy presents a number of challenges, including finding a reliable agent and deciphering the lingo.

A deluge of misfortune can come without warning. The right mix of insurance can help you, your business, and any contracted entities weather a storm.

If a hired entity’s actions cause a loss, you want its insurance coverage to pay for its mistakes, not yours. For biomedical engineering departments hiring biomeds on a contract basis, this means that both parties must possess the appropriate types of insurance.

Buying the right insurance coverage presents a number of challenges, including finding a reliable agent and deciphering insurance lingo. For instance, one broker told me that a liability policy is available from one “A”-rated company for about $90 a year and another “A”-rated company for about $2,500 a year, but the latter A-rated company’s policy does not include “products liability.” To purchase an effective policy, you must start with a basic understanding of terms.

The following is a general description of insurance coverage that a small firm may purchase. Actual insurance coverage purchased is described in the insurance policy. When purchasing insurance, require your agent to explain what is provided by the policy you buy.

Major Types of Insurance
The major types of insurance sold are life, disability, health, workers’ compensation, property, and liability.

If you own a business, you might purchase life, disability, and/or health insurance for yourself and your employees. These insurances provide financial assistance when the insured person dies, becomes disabled, or is injured or sick.

Workers’ compensation insurance provides coverage for employees who are injured on the job. Most states require companies with employees to purchase this insurance.

Property insurance provides coverage for property in which you have a financial interest. This could be property you own, lease, or rent, or property of others under your control. It is sometimes referred to as fire insurance.

Liability insurance provides coverage for third parties (when you injure someone else and/or damage their property) and includes the following types of coverages: bodily injury, personal and advertising injury, medical expenses, products/completed operations, and professional liability. Professional liability is usually covered under a separate policy, whereas the other coverages are usually provided under a commercial general liability policy. Sometimes a “package policy” is issued that can include both property and commercial general liability, and, occasionally, professional liability coverage.

The following are more detailed definitions of the types of liability insurance:

• Bodily injury liability insurance refers to injury, sickness, or disease, including mental anguish or death. Policyholders are covered if sued for the preceding. This includes actions such as an alleged injury resulting from tripping over a biomed’s tools or falling in a biomed’s office.

• Personal and advertising injury liability insurance is typically referred to as “hurt feelings” coverage and would protect against, for example, a lawsuit filed by the Queen in response to a biomed company advertising, “Even if you had as much money as the Queen of England, you could not get better service than we provide.”

• Medical expense liability insurance (sometimes referred to as “goodwill” coverage) generally provides coverage when someone is injured and the covered entity takes that person to a medical facility for treatment before the injured party files a claim or lawsuit. The idea behind this coverage is that if you take care of an injured party immediately, that party is less likely to file a claim or lawsuit. Should the injured party file a claim, it would be covered under the bodily injury portion of the policy.

• Products/completed operations liability insurance covers bodily injury and property damage that arises out of the process of repairing equipment and/or when something goes wrong with the product after a repair. This is very important coverage to be included in a liability policy a biomed or biomed firm purchases. Products/completed operations coverage would be used if a client or other third party claimed injury resulting from incorrectly repaired equipment. Biomed companies are at the greatest financial risk from this type of claim.

• Professional liability insurance is also important for a biomed or biomed firm to have, especially if the biomed or biomed firm is providing advice on equipment repairs or the design and manufacture of medical equipment.

Biomed Companies: Why Seek Independent Coverage
Any entity should purchase insurance to protect itself from financial damages that it cannot afford. For instance, if a biomed company has $5,000 in tools and equipment that it can afford to replace if lost or stolen, the company should not insure those assets. Should the value of the company’s equipment be more than it can afford to replace, the company should purchase property insurance for the replacement value. An insurance company typically will pay in losses and related expenses about 65% of the premiums it collects.

Because few biomed companies can afford the cost of defending itself in a lawsuit alleging injury—or the cost of a judgment should it lose—most companies must purchase various types of insurance coverage. A biomed company should purchase both commercial general liability and professional liability insurance policies to protect itself against third parties alleging damages from the company’s actions.

Companies with employees are required to purchase workers’ compensation insurance. Some companies try to avoid purchasing workers’ compensation insurance by categorizing employees as independent contractors. The employees’ duties and employment terms determine whether they are independent contractors. Workers’ compensation medical benefits are not limited, so if an employer does not provide workers’ compensation insurance when legally required, and an employee is injured on the job, the employer could be subject to all costs (medical and disability) associated with the injury, and, possibly, be subject to criminal penalties.

Contracting Entities: What Coverage to Demand
Before any entity, such as a hospital biomedical department, hires a biomed company to provide services for you or the entity for which you work, first determine whether the company’s employees have the required skills. Check references to confirm your findings. Insurance can protect you from financial consequences of mistakes made by the hired company, but it should not be used as a substitute for your investigation to determine whether it can provide the services you need. Insurance coverage cannot cover loss of reputation and other potential nonfinancial losses incurred by hiring an unqualified entity.

After establishing competency, determine whether the hired entity needs workers’ compensation insurance; if the entity is required to have it, make sure to obtain a certificate of insurance, which demonstrates evidence of a policy.

Depending on the reason you hire the biomed company (such as to repair equipment or to provide advice to you on the repair and/or manufacture of equipment), determine whether the entity has professional liability and/or general liability insurance and whether the general liability insurance includes products/completed operations coverage. You should always require that your hospital be added as an additional insured on the policy.

When a claim is made, the insurance company that protects you is usually the company whose policy was in force when the accident occurred or the damages incurred; so if a claim was filed in 2003 for damages that allegedly occurred in 1997, generally speaking, the carrier whose policy was in force in 1997 will provide coverage. For this reason, always retain copies of your old insurance policies.

How to Choose an Agent
An independent third-party company called AM Best Co (www.ambest.com) evaluates insurance companies. It provides financial strength ratings (FSR) of insurance companies on a scale of “A++” to “F.” An FSR is the opinion of the insurers’ ability to meet its obligations to policyholders. AM Best also assigns each letter-rated (A++ through D) insurance company a financial size category (FSC). On a scale of “I” to “XV” (with XV being the highest rating), the FSC provides an indicator of a company’s size in terms of statutory surplus and related accounts, according to the AM Best Web site.

Ratings A++ to B+ are considered secure, and lesser ratings are considered vulnerable. Each insurer has a rating that your broker can obtain. In general, only purchase insurance from insurers rated “B+ VII” or better.

No matter which insurance company you select, make sure you complete your due diligence and have your insurer and/or broker answer all of your questions, preferably in writing, before you pay the premium. If you wait to perform due diligence until after a claim is filed against you, it may be too late. Finally, if the premium is so low that something seems wrong, it probably is.

Disclaimer
The above information is provided to give you an elementary understanding of insurance coverages so that you can approach the purchase of insurance with a basic knowledge. The actual scope of your insurance coverage can only be determined by reading and understanding the terms and conditions stated in your policy. Your broker should explain to you the exact coverages you are purchasing. 24×7

Ron Shepherd is president of Shepherd & Associates, Menlo Park, Calif.