National Clothesline

Trick or treat! We are about to have the children knocking on our doors using the age-old greeting.

The Halloween holiday provided my business with an opportunity to have fun with our customers and counter staff. I had a contest with cash awards for the employees with the best costumes. The customers loved it and the employees did, too. Make your company different. Have fun!

Question of the month: “I recently purchased a drycleaning plant with one route. I do not think the insurance in place is what it should be. What coverage should I have?”

I do not pretend to be an expert at everything so I decided to contact an insurance broker with a great reputation.

I called Harry Carranza, an independent insurance broker, who is located in Long Beach, CA. His company, Select Risk, has clients throughout the USA. Harry was kind enough to spend hours with me answering questions about drycleaning business insurance.

Harry has been connected with the drycleaning industry for 15 years. He is also an expert on pollution insurance.

If you like what Harry has to say or have any further questions, you can contact him at (562) 216-9026 or e-mail HCarranza@SelectPrograms.com.

What is your role with respect to a drycleaning operation?

My role is to be a business consultant whose primary focus is to help my clients manage risk or exposure to financial loss. I employ a “total cost of risk” approach across the entire business enterprise.

I start with the basic assumption that the risk a business faces is represented by the following equation: Total Cost of Risk=Risk Transferred+Risk Retained.

Insurance is the most common vehicle used to transfer risk as you “transfer” a segment of your financial risk to a third (another) party (insurance company) by obtaining an insurance contract or policy in exchange for a premium.

What do you mean by “retained risk”?

Harvey, this interview will focus on commercial insurance for drycleaning operations. Before we address any specifics in that area, it is critically important for business owners to understand business risk is not eliminated solely by purchasing insurance policies.

There are two key reasons for this: First, insurance coverage may not be commercially available or designed for a number of “real-life” exposures.

Additionally, even if insurance is available, it may be cost-prohibitive or too limited in substantive coverage to merit serious consideration by the business owner.

Some examples of risk for which a commercial insurance solution might not exist include political, regulatory, adverse publicity, contractual and competitive exposures to loss.

Additionally, an example of a type of insurance, which we would recommend and is commercially available but may not fit into a typical drycleaners expense budget, is employment practices insurance. This is a liability insurance product that provides coverage for suits arising out of sexual harassment, wrongful termination, discrimination and other human resource liability exposures.

Harvey, because you spent $100,000 to resolve a harassment claim, I believe you can speak about the value of that type of insurance policy.

When a business owner cannot find acceptable insurance or chooses not to purchase it when available by default, he retains that risk. Therefore, it is critical for business owners to understand what exposures they retain and how they can employ meaningful loss reduction and mitigation strategies to minimize this risk.

In other words, in order to properly protect your business assets, i.e., lower your businesses “total cost of risk,” you must both design an effective insurance program and reduce, to the extent feasible, your uninsured or underinsured exposures.

So then, what types of commercial insurance should a drycleaner buy?

Commercial insurance is most commonly purchased by the business owners for the protection of your employees against injuries or illness arising out of or in the course of employment or “work-related” as well as the protection of your business assets against a wide variety of accidental or natural risk exposures.

In a general sense, if I were to prioritize what we would recommend for a drycleaning operation, I would include the following types of insurance:

1. Workers compensation.

2. Automobile insurance.

3. Bailee coverage.

4. General liability.

5. Property insurance.

6. Business income.

7. Machinery breakdown.

8. Environmental liability.

9. Employment practices.

10. Umbrella liability.

Why did you place them in that order of priority?

While all these types of policies are important components of a well-designed insurance program, in most states workers compensation and commercial automobile coverage are compulsory. That is to say, they are required by law. They are also leading sources of financial loss for drycleaners, especially those with routes.

Most drycleaners would probably tell you their customers are their greatest asset. This is why we believe bailee insurance, a coverage that protects the customer’s garments against loss and damage while they are in the care, custody, and control of the cleaner, is the next most essential coverage to purchase.

Harvey, I understand you learned this lesson the hard way. You assumed all policies have processing damage coverage.

Never assume your policy has that feature. Ask your insurance agent, or broker, if your policy includes that important coverage. As you found out, ink loads, or lipstick loads, can cost you thousands of dollars.

General liability insurance, which protects the business owner against third-party claims for bodily injury or property damage caused by the businesses operations in a very broad sense, is usually required by the landlord, after signing a lease, and prior to occupying a plant or dry store for operations.

In many cases if a triple net lease is signed, property insurance, which protects both real property as well as business personal property (“your stuff” or contents) against loss may be required as well.

Business interruption is known as a time-element insurance product. Coverage for this type of insurance is triggered by the occurrence of a covered cause of loss (as defined by the policy) from which the business suffers a temporary suspension of operations.

It is designed to replace net income less non-continuing expenses during this suspension of operations so that the business can survive during reconstruction.

This insurance is one of the most poorly understood areas of coverage and, unfortunately, probably the most important from an operational survival standpoint in the event of a catastrophic or total loss.

Obviously, with respect to cleaning and pressing equipment as well as boilers, returns, vacuum systems, piping, compressors, chillers etc. machinery breakdown insurance (also referred to as boiler and machinery insurance), which covers damage to the subject equipment and other related equipment in the event a covered accident or explosion, it of great importance as well.

Environmental insurance is also often a landlord requirement found in a facility lease.

As a drycleaner pollution insurance program manager for nearly five years, I have found this is also a coverage that is improperly utilized. It is inadequately constructed by the insurance industry, improperly adopted by the property owners and managers population, and poorly understood by both drycleaners and property owners and managers alike.

The real problem here is that all drycleaning operations with plants, regardless of the cleaning methodology, without exception, should carry properly constructed environmental insurance.

It does not matter if you use perc, glycol ethers, hydrocarbon, CO2, silicone, or even wetcleaning. This may not be a popular statement, but I will stand behind it through any argument: all drycleaning plant operations, to a varying degree, have potential environmental issues.

It all goes back to a simple analogy using the most empirical cleaning method possible that I have heard repeatedly in the industry. If you have a dirty rug and you simply bring it down to a local river and clean it using only the river water as the “solvent” and the stick to add physical action you still, to whatever minimal degree, contaminate the river.

Think of your plant and manage your environmental risk, however limited you believe it may be, as close to this manner as is possible and you will then truly approach being an environmentally friendly cleaner.

I will call employment practices the forgotten insurance. Most single location drycleaners do not believe they have an exposure to sexual harassment, wrongful termination or discrimination lawsuits with a relatively small staff of employees each having generally long tenure.

However, with the soft market the cost of this insurance has come way down, and the coverage has been broadened to, in some cases, include wage and hour claims as well as provide on-line or toll-free human resources legal consulting advisory services.

I have heard of employees working every angle within this industry.

Considering the subsequent disciplinary actions taken by owners, it is a wonder I have not seen a higher frequency of these claims. The few I have been involved with have gotten ugly, and the defense costs can be extremely expensive.

Lastly, umbrella or excess insurance is what we refer to in the industry as “sleep” insurance.

If structured properly it provides an additional layer of coverage over (hence the term umbrella) all of your liability coverage’s: general liability, employment practices, automobile, employee benefits liability (a general liability coverage extension), employer’s liability (a workers compensation component), as well as environmental liability if properly structured.

Do all insurers offer the same coverage for drycleaners?

This is a great question. Although commercial insurance policies written for drycleaners are written on two distinctly different platforms called package policies and business owners policies or “BOP” forms, the overwhelming majority of drycleaners are written on BOP forms.

These forms, which had been historically used primarily for small businesses or “mom & pop” shops, have become increasingly applicable for larger drycleaning operations as well. They are designed to include many key insurance components or “cover parts” needed by specific classes of business off the shelf. And while they are “pre-packaged,” they still include an amazing amount of flexibility based on the unique exposures of each individual business.

Also, because they are pre-packaged and do not involve a ton of administrative resources of the insurance company and are rated primarily off the business personal property values, they are almost always very competitive and afford a ton of great throw-in coverage extensions.

The main problem that exists with these forms, and frankly with all commercial insurance products, is the differences between companies and the understanding of your needs.

Remember that most insurance brokers take the “off-the-shelf” BOP and give you a proposal.

By and large, most drycleaners do not understand the unique nuances of coverage between companies and therefore look at one thing… price. This is a huge mistake. There are many unique attributes to both what the insurance companies offer and what the individual drycleaner needs.

For example, some carriers offer their BOPs on different year ISO (Insurance Standards Organization) forms and add or delete certain coverage extensions that can make coverage, in the event of a claim, vastly different.

Just a few important examples include how real property and business personal property is segregated and rated, what bailee extensions are included and at what locations your coverage is applicable.

Some examples on the unique attributes of the business include on-site restoration services, wedding gowns, high-value or heirloom garments, furs, storage for fees, goods in transit, third party processing (i.e. leathers and suedes), solvent history, workers compensation class code segregation, and lease provisions.

Harry, it sounds like insurance is a necessary evil. In summary, how should drycleaners approach commercial insurance for their operations?

First, work with an agent or broker who really understands your needs. I have seen more relationships ruined or damaged because a drycleaner placed their insurance with a high school friend or family member only to discover the coverage to be woefully inadequate at the time of a significant claim. This happens all the time because people usually do not have big claims. The ironic thing is this is when you need the coverage the most.

Second, ask your provider to obtain specimen policies of the various insurance contracts and clearly explain the differences. This need not be necessarily done every year as we are all busy, but do it initially upon switching to a new broker and then about every three years or when you have a significant change in your operations (i.e., add a service or acquire another location).

Set up a filing system to keep all your insurance documentation together in several distinct categories. Ask your broker what value-added services they have that can help you with those uninsured risks that I previously mentioned.

Finally, educate yourself and use your network and broker to guide you. We all have too many tasks and not enough time, but we are talking about your life-long assets and your ultimate safety net.

Do not skimp here. Insurance is a necessary evil and, unfortunately, the Devil is in the details. Do not be caught short.

Thank you Harry for the education you have provided my readers.

As you have read, Harry is very knowledgeable when it comes to drycleaning insurance. Harry also likes to talk about sports, so be prepared.