Let’s talk about how to read an insurance policy, okay? Because I think this becomes so very, very important. If we do business with somebody, we often ask for the declaration pages. Well, the declaration pages are usually the first three or four pages of the policy that summarize the policy in terms of coverages, limits, dates, and premium. They’re the front pages. When you read the declaration pages, it says they cover everything. It says, I have coverages for general liability. I have coverage for product liability. I have all of these great coverages. But, if you read it from the back, which is what I encourage everybody to do—oh, they tell you what they don’t cover, is in the back. All of the exclusions of a policy are usually in the back of the policy.
So, I say, read the exclusions first. And it’s so basic, but if you read what the policy says it doesn’t cover, then you can start to look at it and say, okay, so you said you covered all of this, but when I take all of this away, what are you really covering for? And that becomes so very, very important. So, read them from the back. Make sure you read the exclusions.
And let’s talk about cost drivers. I get people who send me an application and we ask for financials. And you’re just starting out. You’re gonna open. And you tell me the first year in business, you’re gonna do $5 million worth of revenue. Well, you know what? I hope you do. But the reality is, is that you and I are gonna have a conversation because I’m not making you a loan. I’m charging you for insurance. So, we’re gonna have a conversation that says, let’s be conservative. Don’t give me your best case scenario—give me your worst case scenario and then some. Why? Because the carrier’s gonna charge you based off of how much you tell me you’re going to do.
So, if you tell me you’re gonna do $5 million worth of business, you’re gonna pay one price. If you tell me you’re only gonna do $500,000, you’re gonna pay another, which is gonna be a whole lot less than the $5 million. Now, mind you, all of these are [inaudible 0:02:22] policies. Which means, if you’ve underestimated, they’re gonna come back and charge you. So, let’s play this game. You go to the policy that says $5 million and they charge you X, alright? Now, what happens if you don’t get your $5 million number?
You overpaid. And how much do they give you back?
Zero. Exactly. You’ve played this game before. Okay. If you overestimate and you overpay, the insurance company doesn’t give you any money back. Okay? However, the flipside, if you underestimate, okay, if you put down $500,000 and you do a $1 million, what are they gonna do? They’re gonna charge you on the additional $500,000. That’s called their audit. So, when they audit the policy, if you underestimated then they’re gonna say, oh, you owe us for an additional $500,000. You’re gonna have to pay a little bit more. But the reality was, is you did the business. I don’t want you to overpay. I want you to be conservative and underpay. And, yeah, I’d rather you owe the insurance company a little bit of money rather than them not giving you any back. See where I’m going with this? It just makes good business sense to make it all happen.