LIABILITY INSURANCE AND THE FAMILY CHILD CARE PROVIDER
Brenda Cude, Ph.D.
Division of Consumer Sciences
University of Illinois
Carol Volker, Ph.D.
Human Development and Family Studies
Iowa State University
Like other small business owners, family child care providers need adequate life, health, and disability insurance to protect their families from the loss of their income. Child care providers also face unique risks. Perhaps the most important of these risks is the financial loss that would result if the provider were found liable or responsible for the injury or death of a child or a child's parent. If a claim were filed against you as a provider, three different types of financial losses are possible: medical expenses, damages awarded to the victim or his/her family after a lawsuit, and court costs related to your defense.
The most common way to protect against the liability risk is to purchase liability insurance. Most consumers are familiar with liability insurance since it is an important part of automobile and home owner's insurance coverage. Liability insurance pays attorney fees and court costs as well as damage awards. Medical payments or accident insurance pays for physician and hospital bills and is often a part of, or required as, a companion policy to liability insurance. Yet, virtually all home owner's insurance policies and some personal automobile insurance policies exclude coverage for claims that are related to the operation of a home-based small business. Many home owner's insurance policies specifically exclude coverage for claims related to family child care.
Family child care providers may choose from three options to prepare for the liability risk. First, to self-insure, the child care provider establishes a fund to be used in the event of a liability claim. For example, you may choose to self-insure against the risk that you will be responsible for a child's minor injury. You would then set aside money to be used for that purpose. Unfortunately, to self-insure against the risk that you will be found responsible for a serious injury or death of a child, you would need to set aside at least $300,000.
A second option is to extend the liability and medical payments coverage of your home owner's insurance to your child care business. As mentioned earlier, virtually all home owner's insurance policies exclude child care except for the most limited operations. However, many companies do allow you to extend coverage to your family child care business if you buy an endorsement or rider in addition to your home owner's insurance. The premium for the additional coverage usually is low, but the coverage often is rather limited.
The third option is to purchase a commercial liability and an accident insurance policy. Total premiums for both policies can range from $400 to $800 or more per year, but the coverage often is comprehensive.
To explore liability and accident insurance for your child care operation, follow these guidelines.
1. Is an endorsement or rider available to extend my home owner's insurance coverage to my child care business?
Many of the major companies that sell home owner's insurance make endorsements available, but some do not. If you learn that the company with which you currently have a home owner's policy does not offer endorsements for child care, you have two choices. You may decide to move your home owner's insurance coverage to a company that makes child care endorsements available. Or you may purchase a commercial liability insurance policy.
Be aware that if you are providing child care services in your home and do not have either an endorsement to your home owner's insurance or a commercial liability policy, some companies will be reluctant to insure your home. Your business is exposing the company to additional risks that increase the possibility of a claim against your home owner's insurance. It is in your best interest as well as the company's for you to obtain coverage. Further, if your home owner's insurance is cancelled because of a business-related accident, it may be difficult for you to obtain a new policy.
2. If the company offers child care endorsements, do I qualify?
Most companies and agents that sell home owner's insurance are very conservative about extending coverage to child care services. They are concerned about the potentially huge claims that could result if just one child were injured or died. As a result, many companies use a number of restrictions to limit the risks they cover.
If you do not qualify for an endorsement, you again must evaluate your options. You may choose to move your home owner's insurance to a company that offers an endorsement you do qualify for, or you may purchase a commercial liability policy.
3. What is and is not covered by the endorsement?
Because of the conservative approach taken by most home owner's insurance policies, some activities that are a part of providing child care services may not be covered by an endorsement. Most policies exclude or are vague about coverage of activities that take place away from the child care home. For example, an accident that occurred while at the park may not be covered by some endorsements. Some endorsements also specifically exclude claims related to serving food or giving medications. And all home owner's insurance endorsements exclude claims related to mental, physical, and/or sexual abuse.
Liability limits (the maximum claim that would be paid in any policy year) vary from company to company. Often the limit on the endorsement will match the limit on your home owner's policy. Limits should be chosen by the provider and the insurance agent based on the provider's needs.
4. Are there deductibles?
A deductible is the amount of the claim that you pay. For example, if you had a $300 medical claim with a $100 deductible, you would pay the first $100. Choose the highest deductible that you can afford. A high deductible will lower your premiums.
5. What are the premiums?
Premiums for most endorsements range from about $30 a year to $150 or $175 per year. The premium depends on the amount and type of coverage and often on the number of children. Some policies, for example, charge one rate if you care for 3 or fewer children and another rate if you care for 4 to 6 children. Others charge the same premium regardless of the number of children. Expect higher premiums when you choose higher liability limits, when you care for 4 or more children, and when you choose lower deductibles.
Unlike home owner's insurance endorsements, most commercial liability policies do not directly limit the number of children in care. However, most commercial policies do require the provider to meet any applicable child care licensing, registration, or certification standards-standards that frequently do limit the number of children. Some companies require providers to belong to a specific professional child care providers' organization to qualify for coverage. Companies that sell commercial liability policies also have underwriting guidelines that providers must meet to qualify for insurance. These guidelines are similar to those for home owner's insurance. However, the company may simply charge a higher premium for a commercial policy if a risk factor such as a swimming pool or a pet is present, rather than denying coverage altogether. Other companies may not insure conditions that they consider unsafe.
A commercial policy is more likely to extend coverage to activities that occur away from the provider's home. Some also specifically include coverage for accidents that occur while transporting child care children in the car. Also, commercial policies sometimes include coverage for sexual abuse claims. However, the liability limit usually is lower and is intended to pay only for legal defense costs, and not for judgments that might be awarded to a child and his/her family that you would be obligated to pay. Many commercial policies also include specific coverage for claims related to food served to a child.
Most commercial policies today are occurrence form rather than claims made form. The distinction is an important one. With an occurrence form policy, the company will follow through on claims made after the policy has expired or you have gone out of business if the injury occurred while the policy was in force. With a claims made policy, the claim must be made during the policy period.
An example will help to explain the important difference between the two types of policies. If a child in your care were injured in June of this year, only the claims you filed between June and the end of your policy year would be paid by a claims made form policy. If the policy were occurrence form, claims related to that child's injury and filed next year or even several years from now would be paid, even if you no longer had the insurance policy.
Most insurers require clients who buy a liability policy also to purchase an accident insurance policy. The insurance companies believe that a liability claim is less likely to be filed by a parent if the provider has insurance to pay the medical expenses of the injured child or parent.
Expect commercial liability policy premiums to range from $350 to $500 or more per year for a $300,000 liability limit (the minimum recommended). Total premiums for both a liability and an accident insurance policy may be $650 or more per year. Premiums usually depend on the policy limits (higher limits mean higher premiums) and the amount of the deductible (lower deductibles mean higher premiums). Some companies' premiums also may depend on the size of the home and/or the number of children cared for.
Many insurance agents may allow premium payments to be spread out over the year. A typical arrangement requires you to make a down payment of $200 or $300 and pay the remainder in two or three payments.
Although $500 to $700 per year seems like a large sum of money, it may be well worth the price. Depending on the number of children in your care, you may be able to increase the rate you charge by only a small amount and recover much of the insurance costs. For example, the cost of a $675 policy is about $13 a week. If you care for 6 children, that is just over $2 per child per week. And, the full cost of a commercial liability policy (as well as the cost of a home owner's endorsement) is tax deductible as a business expense.
Ask to see a copy of a claim form and ask where you would send or take the form to file a claim. Ask whether the company would pay expenses directly or would reimburse you after you paid the expenses. Be certain to ask enough questions to understand the claim process before buying.
You may purchase a commercial policy through a local independent insurance agent (an agent who is authorized to sell insurance for more than one company). Because you may not be familiar with the companies that sell commercial policies, deciding from whom to buy the insurance is more important than usual. Insurance agents who are knowledgeable about insurance for child care providers usually can offer a choice of appropriate liability and accident insurance policies. Your state department of insurance may be able to give you a list of companies that sell liability or accident insurance to family child care providers.
Most commercial liability policies are written in the surplus lines market, often by insurance companies that are not required to meet state licensing standards. The companies may be financially sound and reputable but choose not to be licensed in a particular state. However, in a state with a guaranty fund, an unlicensed company is not backed by the fund. A guaranty fund would pay the claims of consumers if a licensed company became insolvent. Thus, as in all insurance decisions, it is important to learn all that you can about the insurance company before buying. (See question 3 in the following section.) Despite the disadvantages, companies in the surplus lines market are important because they are willing to write insurance to cover risks that other companies may not be willing to insure.
Whether you choose to extend your home owner's insurance coverage or to buy a commercial policy, the following questions are important ones to ask.
A policy limit is the maximum amount the policy will pay if there is a claim. Usually the limit is stated per claim or per person injured. There also may be an aggregate limit - a total amount the policy will pay in any one year regardless of the number of claims filed or persons injured.
Ask for rates for a minimum liability limit of $300,000 ($500,000 preferred) and a minimum accident/medical payments insurance limit of $10,000 ($20,000 preferred).
Check "Best's Insurance Reports" in your public library. Companies rated A or A+ are the strongest. If the company is not rated, check with the state department of insurance.
Ask friends who have experience with the companies. Ask your state department of insurance about the complaints received against various companies. The department may be able to provide the complaint ratio of each company. The complaint ratio is the number of complaints reported in relation to the number of policies sold. If the company requires you to meet licensing, registration, or certification standards, the government agency that sets those standards may have information about providers' experiences with the company. If the policy requires membership in a child care providers' association, the association may know about the company's reputation. You also can check "Consumer Reports" for recent ratings of home owner's insurance companies.
Is she/he willing to work with you? Listen carefully to the agent's answers to your questions. Some insurance professionals are more knowledgeable than others about options for family child care providers. Look for an agent who can answer your questions and seems interested in finding the best
arrangement for your situation.
If you transport children in your car, ask about extending your auto insurance coverage or purchasing a separate business use policy. Some commercial liability insurance policies also make available endorsements that extend coverage to autos. If your personal auto insurance policy does protect you, make sure your liability limits are adequate.
Even with information, your choice is not an easy one. It's not easy to decide how much insurance coverage you need, especially when the cost seems high. However, do not make the mistake of thinking that you cannot afford to have insurance coverage. It is far more likely that you cannot afford not to have the coverage. Also, do not assume that you can avoid the need to make a decision by asking parents to sign a legal waiver of responsibility. Legal experts agree that such statements are worthless. Do not assume that if the child's family has medical insurance you will be protected. If the child is injured while in your care, you may still be responsible for paying the medical bills.
To sum up, these are your insurance options:
1. Self-insure for some or all of the risks you face as a provider. However, if you plan to self-insure for all of the risks, you will need a minimum fund of $300,000.
2. Extend the coverage of your home owner's insurance to your child care business.
3. Purchase a commercial liability policy or a commercial liability and an accident insurance policy.
Regardless of which option you choose, most providers also can limit their liability by working to provide a safer environment for the children. Check toys and other play equipment regularly to see that they are clean and in good repair. Child-proof every room. Check the condition of your front walk, steps, porch, patio, and other areas where parents enter or children play. Take first aid and CPR courses. Establish good lines of communication with parents so that you are clear about their wishes concerning the child's food, medications, limits on play activities, and general care.
CLAIMS MADE POLICY - A policy for which claims are paid only if they occurred and were filed while the policy was in force.
DECLARATIONS - A section of an insurance policy that provides basic descriptive information about the insured person and/or property, the premium to be paid, the time period of the coverage, and the policy limits.
DEDUCTIBLE - A provision in an insurance contract stating that the insurer will pay the amount of any insured loss that exceeds a specified amount. The specified amount is the deductible.
ENDORSEMENT - An amendment or addition to the policy; also known as a rider.
ERRORS AND OMISSIONS - Insurance for the liability of a professional for losses that occurred because of his or her errors or oversights.
EXCLUSION - Clauses that narrow the focus and eliminate specific coverages broadly stated in the insurance policy.
INDEPENDENT AGENT - An agent who is authorized to write insurance for more than one insurance company.
LIABILITY - Legal responsibility for damage or injury caused by you. The responsibility usually is financial and usually is due to negligence. Negligence occurs when there is a breach of the duty owed an individual that causes injury or damages.
LIABILITY LIMITS - The maximum dollar amount that the insurance companywill pay for claims on the particular policy.
LICENSED INSURANCE COMPANY - A company licensed by your state; required to file rates and policies with the state; backed by the state insurance guaranty fund if the company becomes insolvent.
OCCURRENCE FORM - A policy for which claims are paid after the policy has expired or you have gone out of business, if the claim occurred while the policy was in force.
PREMIUM - The amount of money charged to a policy holder for an insurance policy.
SURPLUS LINES INSURANCE MARKET - Insurance written by companies that are not licensed in your state. Unlicensed companies write policies to cover risks that licensed companies choose not to insure; usually do not have to file rates and forms with the state department of insurance; and aren't covered by the state insurance guaranty fund.
UNDERWRITER - An employee of an insurance company who assesses the risk to the company of accepting submitted insurance applications.
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