CHICAGO — Having an insurance plan in place is essential for dry cleaners and other business owners to protect their assets and their business from disasters, both large and small. Rising rates and fewer choices in the insurance industry, however, are making cleaners re-examine their policies and their coverage plans.
In Part 1 of this series, we looked at problems some dry cleaners are experiencing when it comes to rising insurance premiums and dwindling choices available. Today, we’ll examine the market forces that are affecting the insurance industry, as well as potential new solutions from within the industry.
Insurance for Insurers
Insurance companies rely on the larger reinsurance market to cover claims once they get to a certain level — and this piece of the puzzle has been particularly problematic as of late, says Wayne Wudyka, CEO of The Huntington Company.
His company includes businesses such as Huntington Cleaners, Wesch Cleaners, Camelot Cleaners and the Certified Restoration Drycleaning Network (CRDN) franchise.
“The reinsurance market has been squeezed down to a handful of players, and they’re driving the prices,” he says. “So, they’re making reinsurance coverage more expensive for (the) Allstates and State Farms of the world.” This consolidation in the reinsurance market, he adds, has led to increased costs being passed down to end users.
“When you have an insurance company, a State Farm in the state of California, for example, and there’s a major event, State Farm only insures up to a certain dollar amount,” Wudyka says. “Then, they have another reinsurance company that takes the risk above that number.”
“Catastrophes such as wildfires, hurricanes and tornados — all of which have been on the rise — significantly drive insurance supply costs,” agrees Anne Cobb, customer service representative for NIE (National Fire & Indemnity Exchange), an insurance company specializing in drycleaner and laundromat coverage. “NIE’s reinsurance costs have risen drastically over the last several years. To relate this to dry cleaning, when your costs of hangers, chemicals and cleaners go up, so must your price to customers.”
Environmental regulations and contamination cleanup are also factors for reinsurance when it comes to covering drycleaning operations in certain geographic areas.
“Insurance is regulated on the state level, so each state takes a different view on how best to address environmental concerns,” Cobb says. “Some states like New Jersey and Indiana take aggressive approaches to pollution, such as perchloroethylene (PCE, or perc) contamination of soil and groundwater. These approaches include broad judicial interpretation of insurance coverage, including rewriting or voiding of pollution exclusions.”
This forces insurers to closely consider the political environments of each state, she says.
“Reinsurance is important for primary insurers and pollution claims have very long tails reaching all the way back to the early 1980s,” Cobb says. “These claims cause primary insurers to have to delve deep into 50-year-old records searching for recoveries from reinsurers that may not even be in business any longer. This also drives insurance rates up.”
New Industry Solution
In response to these challenges, Wudyka says he has been developing an insurance solution for dry cleaners through CRDN.
“We are starting a captive insurance company for the industry,” he says, “which will be owned by the members. We’re going to start with CRDN, but other members of the industry will be welcome to it. We’re kicking it off this quarter, and we’re getting our founding members established now.”
Wudyka says that the new offering, which has secured a reinsurance partner, will start with bailee coverage first, and once established, plans to add property, workers comp, building, auto and general liability. This initiative aims to provide appropriate coverage for the industry’s specific needs.
“We would like more qualified dry cleaners to become part of it because the more we have in, the more we spread the risk,” he says.
Part of this plan, Wudyka says, is being selective about the companies to cover as the company gets started.
“We want (owners) who are prudent, who are willing to take a higher deductible and who don’t make a lot of nuisance claims,” he says. “It’s an industry solution. We want to get the right members, even if they’re competitors (to CRDN) — that’s perfectly fine. We’ll bring them in because it’s a separate solution for a problem that everybody has, and coming together is the right way to address this situation. Many industries do this. It’s not unique to us.”
When to Make Claims
During a recent online presentation hosted by the Drycleaning & Laundry Institute (DLI), Select Risk Insurance President Harry Carranza says the very concept of insurance is to mitigate risk — the lower the risk a dry cleaner tolerates, the higher the premiums will be.
Rather than trying to insure against every possible loss, Carranza recommends a strategic approach to risk management: “I would urge you to take on as much bottom-level loss exposure as you can. In other words, take the highest deductibles that you can afford. We would rather have you obtain catastrophic coverage than insuring for a pair of jeans.”
“I would advise you to take as high of a deductible as you can,” Wudyka agrees, “because the higher your deductible, the lower your premium is going to be. And most owners are not going to make a claim for $1,000. They’re just going to self-insure. So, why pay for coverage that you’re not going to use? You’re really buying insurance for catastrophe — not for day-to-day business operations.”
“You can pay the penny and even dollar claims,” Carranza says. “Insurance is not meant to be a cash-flow-leveling mechanism. You really want to take on what you can in your loss layer so that you don’t have a claim frequency issue.”
Come back Thursday for the conclusion, where we’ll explore how dry cleaners can better position themselves to get the best policies and rates, as well as strategies to consider when in the market. For Part 1, click HERE.
Have a question or comment? E-mail our editor Dave Davis at [email protected].
