Bannister & Associates

Like a fine wine, BOPs seem to be getting better with age. Long the marketplace standard of property and liability insurance for small businesses, BOPs, known more formally as Business Owners Package policies, have survived and thrived by changing along with the times and their customers.

Businesses with fewer than 50 employees and annual revenues of under $15-20 million view the bundled product as dependable and satisfying, providing a reasonable amount of commercial insurance coverage for a lower premium payment than if purchased à la carte.

Here's how it works
Jane rented space in a storefront to open a small office. Before she could sign her lease, she needed to provide her landlord with evidence of sufficient personal injury and property damage coverage. In addition, Jane's bank, which financed her venture, required proof of comprehensive liability and fire insurance covering her furniture, office equipment and inventory. She had also leased two vehicles for her employees to use for company business, both of which required liability and physical damage insurance. She also wanted an umbrella policy to prevent her from being completely wiped out in case of a catastrophic liability claim.

Instead of purchasing all her plans separately, Jane found it more convenient, less expensive and just as effective to combine her needs into a BOP.

Brief history of BOPs
When BOPs were conceived some 40 years ago, they were seen as a way to standardize the most common types of business insurance, putting them into a one-size-fits-all package. They were designed to accommodate the typical small business with typical risks. In essence, a BOP was a way to give smaller businesses the equivalent of what large companies had: an in-house risk manager. The BOP would manage the basic insurance needs of most small businesses. A BOP was an affordable means to ensure that small companies with neither the time nor expertise to sort through myriad insurance products could be appropriately covered against typical foreseeable events.

That concept hasn't changed. Approximately 90 percent of American businesses today are classified as "small businesses." Because the economy, and the risks of participating in it, has grown ever more complex, the need for an insurance product to protect the basic needs of small businesses is more apparent than ever.

What has changed over time is what is considered standard. In early days, the list was fairly short: General Liability and Property Damage.

Back then, a small business buying a BOP could expect to be covered against property damage from such causes as fire, wind, water and theft. BOPs generally offered business income protection in the event that a covered loss forced an owner to shut down his business or relocate it temporarily.

They also reimbursed business owners for lost profits and continuing expenses such as payroll and rent. The liability portion of the package covered the owner if someone were injured on company premises, or if a product made by the company caused someone bodily injury or property damage.

Those remain the foundation of BOP coverage, but the list is much longer now, driven by developing technology, customer demand, widespread adoption of once-revolutionary procedures, and competition among insurance companies. Today, BOPs might offer a variety of policies, depending on the carrier, including:

• General liability
• Property damage
• Business interruption
• Owned, non-owned and hired auto liability
• Computer and "cyber" liability
• Crime
• Fine arts
• Surety bonds
• Professional liability
• Umbrella coverage

BOPs do not and were never meant to satisfy a small business' every insurance need. They do not address any personal lines (health, life, disability, medical) or workers' compensation insurance, for instance.

Businesses in certain industries may need supplemental policies for certain types of machinery or activities. A BOP is generally less flexible than other policies in terms of coverage limits, but the tradeoff is in the combination of coverages at a reduced rate. It is up to the business owner to work with his or her agent to determine what level of protection is appropriate for that business. Many carriers allow a customer to attach other lines to the BOP, making for easier organization and bill paying.

Recent trends
The paradox of BOPs is that, as risk profiles change, some coverages are added while others are dropped. Take the area of Internet risk. With virtually every company reliant on the Internet for at least some part of its business nowadays, a BOP could not remain competitive without offering some type of "cyber coverage."

Yet, from an insurance company's point of view, Internet risk is still an emerging issue: the claims information that insurers rely on to make informed underwriting decisions just isn't available yet. Consequently, some insurers are excluding cyber coverage in BOPs for certain industry categories, such as Web developers and sophisticated computer programmers, or limiting the amount of coverage in other areas.

Professional liability, too, is an area in which some coverage is becoming more standard, while other coverage is being excluded. Twenty years ago, professional liability insurance applied to doctors and lawyers, and few others. But as society grew more litigious, people in other professions were experiencing more frequent lawsuits, and coverage began to extend to accountants, engineers and architects. Before long, the need for liability protection even encompassed such "low-hazard" professionals as barbers, funeral directors and florists.

As more professions demanded the coverage, more insurance companies began offering it, and creating customized policies as a marketing tool to attract customers. The result is that professional liability is a fairly mainstream coverage today, and available in many BOPs.

At the same time, developing technology has rendered some formerly "low hazard" professions much more problematic for insurers. Optometrists, for instance, now regularly perform laser eye surgery, which was never factored into the risk for that profession. In some states, pharmacists are now able to actually write prescriptions in addition to filling them, which carries substantially more risk and makes current underwriting standards obsolete.

Once a coverage no longer applies to a "typical" business, it may or may not remain part of a BOP; carriers do their own assessments, so businesses must compare policies and make adjustments accordingly.

Government regulations also have some influence on what can be included in a BOP. Workers' compensation insurance, for instance, is still not part of the package. Nor is it ever likely to be, because state regulations govern how each state handles workers' comp, making coverage impossible to standardize. On the other hand, some level of terrorism insurance is now generally included in BOPs, as mandated by the Terrorism Risk Insurance Act (TRIA) recently enacted by the Federal government.

The agent's role
One of the biggest boosts to BOP sales in recent years has been the ability to complete the transaction online. Agents can now give customers a quote, or in some cases even issue a policy, in as little as 15 minutes. Consider that as recently as five years ago, agents and customers had to speak on the telephone, send forms through the mail, await policy review, obtain signatures, and send in the final documents before the policy was effective.

Today, the agent types in the information and the computer does the analysis, rating, policy issuance and billing almost instantaneously. More than any other factor, perhaps, automation has revolutionized the BOP product, ensuring its continued popularity with both agents and customers.

It is interesting to note that, despite the popularity of do-it-yourself auto and homeowners insurance policies, in which the customer buys online directly from the insurer, BOP buyers still overwhelmingly prefer to work through agents. In the same way that some people prefer bank tellers to ATMs, those customers want an agent to walk them through any complexities and help them make sure they understand what they're getting. That works for insurance companies as well. The insurers understand that their exposure is better managed when a local agent has a relationship with the customer.

What's happening now
As carriers assess their BOP products and fight for market share, they evaluate which coverages they might successfully add to a BOP. One area being experimented with currently is EPL (employment practices liability) coverage. EPL, which covers risks such as gender or racial discrimination, sexual harassment, and other behaviors that create a so-called hostile work environment, has been a standard coverage for larger businesses for the last decade or so.

Litigation trends show that cases once limited to very large companies are now being filed against smaller firms. Judgments are getting larger as well. That has led smaller companies to clamor for the product. And several BOP products are beginning to offer the coverage.

EPL cases are much more difficult to predict than property damage, however, because they attempt to analyze human behavior rather than the more predictable risks of fire and theft. An insurer can say with some certainty that an office has a certain risk of fire based on office contents and the construction material used, and can also predict that a fire will cause damage in a known dollar range. It is much less easy to know whether the president of a given small business will create a pleasant or a hostile work atmosphere and how employees will react to other employees.

The evaluation is made more difficult by the sheer number of small businesses any given insurer works with. When an insurer grants a policy to a large company, its staff may spend three months evaluating that company's employment practices. It is simply not feasible to analyze every small company in great depth, so the insurer must make certain assumptions and group companies in certain risk categories without understanding all the specific facts relating to each insured.

The market is watching this trend very carefully, and there are many who doubt it can be successful. But, as smaller companies continue to demand the more complex coverages found at larger employers, insurers are bound to experiment with other EPL-like products in their BOPs.

Where are BOPs headed?
BOPs continue to be an extremely popular product, as they have lived up to their original purpose and helped protect small businesses efficiently. They have recently enjoyed a surge in sales with the advent of quick and easy online policy writing. They have been the right product for the demographics of our times, when the number of large companies is shrinking steadily and the number of small business is rapidly growing. They will continue to evolve as insurance risks change and as costs dictate, but it seems clear that BOPs are the marketplace standard and will remain a viable product for a long time to come.