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Question: How much insurance should you have?

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Dear Ken,
    Is there a formula that you recommend for the amount of E&O insurance an alarm company should have?  How much for each 1 million in annual recurring?  Or how much for each 1 million in total sales?
    Is 5 million enough or 15 million or more?  We have 5 million in sales of which 2.4 million is annual recurring.  
We are planning on buying 15 million of E & O for $15,000 per year.  Is that over kill?  After reading about Sonitrol and a 25 million dollar lawsuit, we want to be covered.
Thanks,
M
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Answer
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    I suppose there are a number of ways to approach this issue and no doubt you will get different opinions from different professionals.  I do not know of a formula, though I wouldn't be surprised if there was one.  On one side, those proposing more rather than less insurance, will probably be insurance brokers and lenders.  The brokers want the business and lenders want to be sure their business loan is not jeopardized, even though the lender will be secured and come ahead of a creditor.   On the other hand an accountant may look at what premium you can afford, and a lawyer may suggest that claims against you are defendable so less rather than more insurance is appropriate.
    Your alarm contracts, if you're using the Standard Form Contracts, require your subscriber to obtain enough insurance to cover its insurable interests.  That means enough insurance to cover whatever potential loss may be incurred.  That's good advice for you as well but unfortunately the risks you face and the potential loss you can suffer is not related to the value of your business, it's on top of the insurance you carry.  For example, if your business is worth 5 million, and you carry 5 million dollars insurance, the first 5 million loss will paid by your carrier but any excess claim will have to be paid by you; your business assets are at risk at that point.   
    The more you have to lose the more insurance you'll want to obtain.  An alarm business worth $300,000 needs the same level of protection as an alarm company worth $3 million.  It is true that the more the alarm company is worth, the more business it does and that will increase the risks it faces, thus higher premiums for more insurance.  
    Just like your subscribers are often constrained in the systems they agree to because of budget constraints, you may find that the insurance you'd like to carry is just beyond your budget.  Operating with less insurance than you are comfortable with is just another risk that you'll be taking, similar to providing alarm services without getting your alarm contract signed because the subscriber won't sign it.  You understand the risk and you accept it in order to do your business.
    I think you should carry as much insurance as you can afford.  I talk to many start up operations and I have often advised that they obtain the minimum coverage that is available, which I believe is one million.   This errors and omissions policy will provide defense cost, which hopefully will be the only monetary damage the alarm company faces.  You can't help getting sued, but you can expect that your alarm contract will provide protection to most suits and that your performance of your contractual duties will absolve you of exposure to damages.  
    For companies that are more established and have significant value, more insurance coverage is affordable, and advisable.  Minimum would be two million.  If you do commercial fire, 5 million.  If you can afford $15 million then all I would say, at the end of the year, is that luckily you didn't need it or lucky you had it because of the claim you now face.  There is never enough coverage, but you should be able to assess the potential risk by the type of subscribers you have, the type of systems you install and service and the contracts you use with your subscribers.  One more consideration, a serious self evaluation of your services.  Two alarm companies, both with RMR of $50,000, but one with large base of jewelry stores and the other subscribers with less to lose, would have different risks and should not carry the same insurance.  I say there is never enough because any one loss could be so horrific in injury or property damage or property loss, that whatever insurance you have will not be sufficient to cover the loss.  Of course the more insurance you have the more likely you will be able to settle within policy limits.  It would have to be a serious loss and your exposure great for a claimant against you to not settle for several million dollars of insurance coverage, assuming you can't rely on your contract protection.

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follow up comment on CO
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Ken,
    With winter coming, I thought it would be important to response about CO (Carbon Monoxide) , the CSAA  (Central Station Alarm Association) along with ANSI (American National Standards Institute) in 2008  drafted  a standardized central station response, The title of the standard is ANSI/CSAA CS-CO-01-2008. Its available on the ANSI website. The document only speaks to what the CS (Central Station) is supposed to do if they receive a CO alarm. To some this may seem extreme but this standard was put together by many different stakeholders including the fire service, UL (Underwriter’s Labs)  and insurance companies.

4.1.* If someone answers the telephone:
4.1.1. The occupants shall be instructed to leave the premises and move to fresh air.
4.1.2. The supervising station shall ask the following questions of the individual answering the
telephone:
a) Are all the occupants accounted for and are they out of the premises?
b) Is anyone nauseous, ill, have a headache or dizzy?
4.1.3. The supervising station shall instruct the occupants not to re-enter the premises until cleared by
the responding fire service.
4.1.4. The supervising station shall then immediately call the appropriate emergency response agency
to inform them of the alarm. The emergency response agency shall be informed that the occupants
answered the telephone, were told to leave the premises and of any reported symptoms.
4.2. If no one answers the telephone:
The supervising station shall then immediately call the appropriate emergency response agency and
report that a CO alarm was received from a particular premises and were unable to reach an occupant.
4.3.* In the case of 4.2, after dispatch, the supervising station shall contact the responsible party(s) in
accordance with the notification plan
4.3.1 If an answering machine or voicemail is encountered:
4.3.1.1. The supervising station shall leave a message including the date, time and alarm event and instruct
that all occupants evacuate the building.
4.3.1.2. The supervising station shall then immediately call the appropriate emergency response agency and
report that a CO alarm was received from a particular premises and were unable to reach an occupant.
5.0* Premises Access.
All buildings with a CO system or detector monitored at a supervising station shall be equipped with a means of
providing emergency access to all areas of the premises as required by the authority having jurisdiction.
Thanks for all you do in the industry.

Morgan Hertel
VP of Operations
Rapid Response Monitoring

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