Understanding Jewelry Store Insurance Part 1
As a Property and Casualty Insurance Adjuster, I speak to many hometown, independent retail jewelers about their commercial insurance coverage…after they have a loss. Rarely do jewelers concern themselves with an understanding of their business insurance until they need to file a claim. It is only then that they take a serious look at their coverage conditions and limits, and what happens when a claim occurs based on the policy.
Due to my experiences with this, I am writing a series of educational articles on understanding commercial insurance for hometown, independent retail jewelers. This edition begins Part 1: Commercial Insurance 101?
What is an insurance policy?
The insurance policy is a legally binding contract that establishes an agreement between an insured and insurer that guarantees the insurer will indemnify the insured in the event of a loss. The word: “indemnify” means to make whole again. In simple terms, the concept of indemnity is to put your business back in the condition it was in 5 minutes before the loss occurred.
For instance, if a vandal throws a rock through your front glass window, the insurance policy is there to replace that window and put your storefront back to the condition that existed 5 minutes before the rock was thrown. The “5 minute” concept is not a time rule or anything formal, it is a figure of speech to denote the idea that the insurance policy is there to make you “whole” again, to protect you from the “risk” of someone throwing a rock through your front window (for instance).
What is “risk”?
Risks are events that are considered likely to happen to a jewelry store in the course of everyday business. Risks can be a customer slipping and falling on a wet floor. Risks can involve an armed robbery or a burglary after the store has closed for the day. Risk can be a fire. There are many risks that an insurer accepts by issuing the insurance policy to the insured jewelry store. When an insurance company accepts a jewelry store for coverage, they consider three basic levels of risk in determining the elements of the policy and the conditions of the coverage for that jewelry store. The elements of risk of the store guide the level of coverage and possible limiting conditions placed on the policy. These three levels of risk include:
- Preferred Risk is a jewelry store with an overall lower potential for claims. For example, a jewelry store located in a high traffic shopping area in close proximity to a police station, with advanced alarm systems and burglar bars on the doors at night would most likely be considered under the Preferred Risk. That is, the likelihood of an armed robbery or break-in is much lower with this store than the level of risk of the average jewelry store.
- Standard Risk is a jewelry store that is expected to suffer losses at the same pace as the average jewelry store in its classification. Jewelry stores in a strip shopping mall by a large freeway with a basic level alarm system and building with little or no security at night would be considered to suffer losses that are within the average level of claims for jewelry stores within the area. The anticipated risk of coverage of this store is higher than the Preferred Risk; therefore, the premiums will be higher and coverage limitations more strictly defined.
- Substandard Risk is the least desirable for insurers and encompasses jewelry stores considered to be high risk for burglary, robbery, and damage claims. Location in high crime areas can be a factor of a Substandard Risk jewelry store. Owners with criminal records or financial problems also create Substandard Risk. While jewelry stores in this category can get insurance coverage, the cost of premiums will be the highest and limiting conditions of the policy the strictest. The willingness of the insurer to cover a Substandard Risk jewelry store is based on the decision of the Underwriter.
What is an underwriter?
The term “underwriter” comes from British Maritime Insurance, as does most of the concept of insurance around the world. When an ocean-going vessel would leave on a commercial voyage, various people involved in what is now Lloyds of London would offer to put up money to insure the success of the voyage. They would offer a guarantee of success to the ship’s owner and the merchants involved for a percent of the profits. Basically, if the ship sank during the voyage, the group of individuals would guarantee to buy the ship’s owners a new ship. If the cargo was damaged by a storm during the voyage, the group would indemnify the ship’s owners and participating merchants from the loss. This was the beginning of insurance and the concept behind British Maritime Insurance. This group of businesspeople in London would gather at the ship when the voyage was about to begin, and all agree to insure the success of the voyage in return for part of the profits. There was a document that was used to make the guarantee, and those willing to offer the insurance to the voyage would write their name under the ship’s manifest. They were “underwriters”, and the term has applied to this day to those who determine if insurance coverage will be offered.
The Underwriter is the person who determines if an insurance company will accept a jewelry store for coverage, and what conditions will be placed on that insurance policy to offer that coverage. These conditions can include what kind of alarm system is required, what kind of safe is required, specific types of security within the store, specific accounting systems, there are many possible conditions placed both on the store and in the insurance policy for the underwriter to accept liability for insuring the jewelry store.
The Underwriter will usually consider the following factors when determining whether or not the insurer will accept the risk of the jewelry store:
- Personal Stability of the Jewelry Store Owner. The underwriter will look at the jewelry store owner’s history of paying invoices on time, creditworthiness, and even criminal history. All of these factors are part of the consideration of the personal stability of the jewelry store owner.
- Business Reputation of the Jewelry Store. The underwriter will next look at the length of time the store has been in business. New businesses have a high failure rate and must be considered differently than an established jewelry store that has been in operation for many years. It must also be determined if the jewelry store has any legal issues such as pending litigation against it. Also considered is the location of the store, is the store in a high crime area? All of these issues are more are considered.
- Physical Condition of the Jewelry Store is very important in determining coverage. Old buildings with high potential for fire or theft are considered Substandard Risks. Jewelry stores with outdated alarm systems, old fashion safes, and even old worn-out showcases will be considered high-risk properties.
- Jewelry Store Business Operations. This will include jewelry stores with high potentials for claims based on the products they sell. For instance, jewelry stores that do gold “grills” for teeth are a far higher risk for potential claims than one that does not offer this product. Same for ear piercing services and anything outside the usual source of claims will be considered. Also considered is how many claims the jewelry store has generated in the past. A jeweler with high volumes of claims will be carefully scrutinized by the underwriter for a future policy.
All of these are considered “hazards” by the insurer.
What is a “Hazard”?
A hazard is any risk that increases the probability of a loss occurring and a claim being filed. For instance, in the first category regarding the Personal Stability of the Jewelry Store Owner. An owner who has a history of destroying property for the purpose of making an insurance claim is a hazard to be considered. A jewelry store with accusations of making false claims about selling diamonds but delivering cubic zirconia is a hazard. Likewise, a jewelry store located in a high crime neighborhood offers its own set of hazards. Even jewelry stores with goldsmiths known to break a lot of diamonds presents a hazard. All of these must be considered by the underwriter when deciding whether the store is an acceptable risk, and how the policy will be structured to offer the requested insurance coverage to the insured, while at the same time minimizing excessive risk to the insurer.
Once the determination is made by the underwriter to issue the policy, the policy is structured and presented to the insured to sign and pay the first premium. It is at this point that most jewelry store owners fail to carefully read and understand the policy they are accepting. This policy is a legally binding contract, an agreement, between the insurer and the insured regarding how the insurance coverage will be applied to the operations of the jewelry store, and how claims will be handled and paid in the event of a loss. Jewelry store owners need to understand their insurance policy, and most do not take the time to do so.
In our next edition, we will review the structure and parts of an insurance policy that will help all hometown, independent retail jewelers better understand their commercial insurance policy to help both now and in the event of a loss.
The IIJA is a 501(c)3 Non-Profit Education Organization. We rely on your tax-deductible donations to continue to offer our services. If this first edition of our Understanding Commercial Insurance series is of benefit, please consider making your tax-deductible donation at the link below.
Next time: The Structure of the Insurance Policy
I am available consultations and assistance to all independent, hometown retail jewelers through the JewelryAdjuster.com website.
Robert James FGA, GG
Property and Casualty Insurance Adjuster, Texas Department of Insurance License #1300433
Member, National Association of Independent Insurance Adjusters
President, Insurance Institute of Jewelry Appraisal Inc.
a 501(c)3 Non-Profit Education Organization