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Limited Risk Policies May Hurt Dealers

Published April 16, 2008


LAGUNA HILLS, CA—Wading through the intricacies of a comprehensive liability insurance policy causes huge headaches for specialty retailers, but shrugging off the task can turn into a nightmare if a claim is filed against your business.

“It’s not challenging to get insurance, but it’s challenging to find insurance that covers all your risks,” said Erik Saltvold, founder of the 15-store Erik’s Bike Shop chain in Minnesota and Wisconsin.

“Any retailer in this industry probably gets numerous calls from insurance companies—that’s pretty typical—but when you get into the realities of what they offer, what they may and may not cover...I think you’ve just got to be aware that not all insurance is equal.”

Steven W. Hansen, a Los Angeles attorney who defends retailers and manufacturers in product liability cases, said he regularly sees inadequate insurance in two areas: the type of coverage a retailer has and the plan’s dollar limits.

“I’d say 99 percent of retail stores do not know who their insurance company is nor do they know what their liability dollar limits are,” Hansen said.

Retailers too often allow insurance brokers to guide them through the policy buying process without asking questions, pay thousands of dollars for coverage and mark the chore off the checklist for the year, Hansen said.

Sometimes, brokers will try to sell bike shops a Business Owners’ Policy, or BOP, which is an inexpensive, one-size-fits-all policy for any business.

But, BOPs don’t take into account many of the risk factors specific to the bicycle industry such as sponsorship, offering test bikes, selling used bikes and running a rental fleet.

If a customer is injured on a bike during one of these activities and files a claim or a lawsuit against the shop, the insurance company will probably defend the claim, but likely won’t renew the policy.

“Now all of a sudden that retailer has to scramble to replace coverage, then they’ve got a blemish because they were non-renewed,” said Rob Martin, managing director of Horizon Agency in Eden Prairie, Minnesota.

Horizon has made a name for itself covering ski shops through its specialized Outdoor Sports Insurance program, and is poised to push deeper into the bicycle industry.

The Horizon program provides clients with a business policy, a risk management manual, waivers for rentals, test rides and some promotional group rides and a checklist for technicians to complete while inspecting rental/demo bikes before they go out the door.

Martin said he has seen some resistance from retailers who don’t want to take the time to shop around, preferring to buy the cheapest insurance they can find. “Until they have a problem, they’ll get away with that, and some day it’s going to come back to bite them,” he said.

It’s not only their own insurance retailers need to concern themselves with, according to Hansen.

He said retailers typically don’t ask upstream suppliers about their insurance coverage because they assume the products they’re buying are covered.

That’s not always the case.

“If you’re a retailer selling the product and the manufacturer does not have insurance, you could be left holding the bag in many states,” Hansen said.

While that doesn’t happen often, Hansen has seen it occur with a small manufacturer. Fortunately the retailer had enough coverage to pay the claim.

Start-up suppliers are especially vulnerable to this scenario, said Fred Clements, executive director of the National Bicycle Dealers Association. In the past, he’s heard of newer companies foregoing insurance in a cost-cutting effort to keep the business afloat.

Not surprisingly, cost is one of the main factors for retailers having inadequate or no insurance coverage.

A 1999/2000 study done by the Gluskin Townley Group showed retailers paid $2 built into every bike for liability insurance through the manufacturer; that price has likely doubled by now, according to Jay Townley.

Retailers also have to contend with Mother Nature. It’s not unusual for rates to skyrocket after a flood, hurricane or other natural disaster.

“Insurance is a cost of doing business that retailers have to absorb and it’s hard,” Clements said.

Clements often gets calls from members seeking a plan that offers better insurance prices, but the association isn’t big enough to negotiate lower rates, and doesn’t have a member policy.

Instead, the NBDA refers its members to the National Insurance Professionals Corporation, which offers a policy tailored toward bicycle retailers.

Hansen recommends retailers further protect themselves by incorporating their business and requiring signed waivers.

“You need to be conscious of risk management because in the long run, if you don’t have claims, insurance is going to be cheaper,” he said.

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