By Ilona French
With any race business, there are virtually limitless possible situations that can occur that could cause financial hardship if not properly insured. And if there ever is a catastrophic event, there’s no doubt that you will want the best insurance coverage possible.
But determining the most favorable policy for your business is no easy task, since no two racing businesses are alike. After all, retailers, engine builders, fabricators, warehouse distributors, and even race teams all run their operations differently, with specific requirements.
The ultimate solution for lining up insurance is to speak candidly with an agent that specializes in the motorsports industry. Request a comprehensive review to determine your risk management and insurance program needs.
In the meantime, here are some important coverage options available to racing businesses. Each insurance company might offer slightly different variations on the options below, so always double check coverage details before signing on the dotted line.
Property insurance typically covers your shop (building) as well as the equipment, products, and inventory housed inside (contents). “If you own your building or by lease requirement are supposed to provide insurance to the building, you would want to purchase building coverage,” said Brian Finnerty from Arthur J. Gallagher Risk Management, Charlotte, North Carolina. “If you simply need to insure the contents within that building, you can buy only the business personal property coverage.” Finnerty warns that businesses should be careful in noting any equipment or property that may travel away from the shop.
“Business personal can pick up the fixtures, furnishings, raw materials, work in progress, tools, equipment and machinery as well as the finished inventory,” said Trevor Allan from San Diego, California-based Alliant Insurance Services. “In addition to the assets stored on the premises, coverage should be evaluated based on incoming and outgoing shipments. A few things to consider are as follows: When does a company take ownership of the shipments? What is the agreement with the freight/shipping company? How large and how many shipments per year? If overseas manufacturing exists, ocean cargo and inland marine protection should be evaluated.”
According to Allan, a property policy takes into consideration building ownership, its contents and the business interruption needed to keep the business afloat after a loss. “Breakdown coverage should be considered for manufacturing facilities that are highly dependent on processes performed on the premises,” he said. “This coverage is generally added to the property policy, but is sometimes purchased separate based on the exposure.”
According to Tom Johnson at Shepherd Insurance & Financial Services, Carmel, Indiana, if the property that you own leaves the building (like race cars, engines and tools), it would fall under off-track and storage coverage. Johnson recommends covering the building and contents first, and then discussing the property that could literally be anywhere. “It could be in a trailer that’s involved in an auto accident, and we take care of the equipment that’s inside the trailer. This is specific to race teams,” he said. “If it’s a repair shop or engine rebuilder, where he’s got other race car people’s property, then you cover the property that he has that doesn’t belong to him. So he moves from building the contents to mobile racing equipment, and then we start talking about, ‘OK, you’re an engine builder. How many customer engines do you have?’ If you have 10 customer engines that are $50,000 apiece, you need to cover those.”
Cases of coverage include fire, windstorm, lightning, vandalism, and theft—and flood can also be included if you’re in a flood zone. “I’ve never been one as an agent to want to skimp on what I give that customer because I don’t want that customer to have a loss and then I have to tell him, ‘Oh, well, we didn’t cover that,’” said Johnson.
According to Neil Want from MIS Motorsport, Guiseley, Leeds, United Kingdom, liability insurance protects against the legal liability and duty of care required to both independent third parties and persons falling under the definition of employee. “Consideration needs to be given as to whether coverage is required away from the premises and whether it includes ‘weekend warriors’ and other persons giving their services for free,” he explained.
When it comes to car builders, especially those building vehicles for other teams or drivers, general liability/product liability insurance can be crucial. “A lot of race car builders and parts manufacturers in the racing industry don’t think they have an exposure because the vehicle is only used on the track,” said Allan, from Alliant. “In reality, a lot of parts intended for ‘off-road use only’ usually end up on street vehicles at some point. There is also a misconception that because the vehicle is used on track, everyone is covered under the sanctioning body’s coverage. This is rarely true, and consideration should be made on what is being produced and/or performed to determine risk. Should something catastrophic happen at the track, multiple parties are usually named, forming a guilty-by-association defense.
“In addition to general liability/product liability, designers and engineers should consider errors and omission policies, which affords professional liability should an allegation of wrongdoing present itself that requires a legal defense,” Allan continued. “There are different ways to lower your exposure as an engineer/designer, and careful consideration should be made in reviewing the language in a contract that outlines the level of responsibility born by both parties. If someone designs for a third party, consulting with an insurance agent and lawyer is recommended should a disagreement unfold after work is performed.”
Keep in mind that waivers are not a replacement for liability insurance. “Even very strictly worded waivers fail in court, which could leave the business with an uninsured loss,” explained Justin Lanning from Fort Wayne, Indiana-based K&K Insurance Group. “Historically, coverage for this type of operation has been difficult to source in the market, so businesses were forced to rely on waivers. However, we at K&K do have an avenue for this special type of risk. As above, commercial general liability and products/completed operations would be the primary liability exposures.”
An auto policy typically covers liability and physical damage to automobiles, including tow vehicles and trailers. “Some trailers in motorsports are really mobile workshops,” said Johnson from Shepherd Insurance & Financial Services. “Trailers are filled with things that could be in somebody’s shop…. Some of those trailers are $250,000 and up. That’s unique to the racing industry that they have so much money tied up in their trailer. As far as building that trailer to a specification, a lot of race teams do this.”
With trailers that are actually rolling race shops, the company covers them as a blanket called inland marine coverage. “We cover them on a replacement-cost basis,” he said. “So if somebody owns a $250,000 trailer, it doesn’t depreciate like a regular, freight-hauling trailer would depreciate. Basically, we do cover those trailers for more than just collision on the road (commercial auto).”
Finnerty, from Arthur J. Gallagher Risk Management, agreed that the contents of the trailer that leave the shop and go to the track need to be listed under an inland marine policy. “This can cover the loss to the equipment inside the trailer while away from your insured premises,” he said.
“We often see tow vehicles registered to the owners of the company or race teams, but we suggest a commercial policy if crew members or employees will be driving the vehicle to and from the races,” added Allan from Alliant. “Non-owned and hired auto should also be added to the auto policy, which extends protection should a company get pulled into a lawsuit due to the usage of a vehicle not owned or rented by the company.”
Workers’ compensation is legislated insurance, according to Johnson. “It’s legislated by the state in which the team or business resides,” he said. “It’s so broad…it covers any work-related disease or injury. If the guy cuts his finger off, all the medical [expenses] get taken care of. He also gets paid—according to the laws of each state it’s a little different—for lost wages that he would have.
“A lot of racing people want to look past that and say, ‘Those people are independent contractors and we don’t need that.’ Let me tell you: When somebody gets seriously hurt, there are some teeth in that law that could really hurt the owner of the business if he chose not to buy workers’ comp,” he said.
Investigating Additional Options
Most performance-oriented businesses are advised to acquire the above-discussed options; but there are even more routes to consider. “There are some new areas that should be of concern that we have seen claim activity increase in over the last few years,” said Finnerty, pointing first to employment practices liability, which can provide defense costs for employment-related claims, such as wrongful termination, discrimination, harassment, etc. Second, he discussed cyber liability: “Smaller and mid-sized companies are becoming targets for cybercrime. There are many different state laws that suggest proper handling of breaches and even potential breaches. With the increased use of smart phones and tablets, there is much more exposure than ever before. Cyber insurance has become more and more important and should be looked at as part of your program.”
In addition to basic coverage, Want, from MIS, believes consideration should be given to the following: Transit, which enables the delivery of parts and materials to customers and also the transportation of your own and customers’ vehicles to events; and group travel, where people working on behalf of the business travel abroad. It also provides medical coverage, and it should additionally cover repatriation.
For some businesses, coverage while competing may be paramount. “The basic coverage would be on-track/on-event insurance, which represents the most popular type of insurance we offer,” said Want. “It provides accident damage coverage for cars while competing in circuit racing (on-track) or rallying (on-event). Accident damage insurance includes all aspects of the official race schedule—testing, qualifying and racing or, in the case of rallying, the shakedown and all timed stages. This type of insurance only covers accident damage to the insured vehicle with no element of liability coverage included.
“Clients can choose the level of coverage they require, but few will decide to insure for full value,” Want continued. “Instead, they will focus on the cost of a reshell and assess the level of damage that could occur from experience. If they are concerned about a total loss, they can opt to take out additional fire coverage, up to the total value. A deductible always applies and is determined by the total value of the car.”
Personal accident is another option; it provides coverage for injuries caused by accidents while competing. “Coverage is available on the basis of lump-sum payments and/or weekly benefits for physical injury and loss of earnings,” said Want.
Another consideration is director and officers coverage, which could be relevant for a race team sponsored by a public company. “Director and officers coverage is important for certain companies, especially if a company is financially leveraged, has multiple investment partners, or is trying to seek private or public funding,” said Allan.
Also, lately Allan has seen a major increase in non-owned auto claims stemming from freight/shipping companies. “Most people would assume they’re removed from the auto exposure of the freight company,” he said. “We’ve seen multiple cases this year where the freight vehicle was involved in a major accident and the companies with products in the truck were named in the lawsuit. Most people assume the freight company will have adequate limits, but in one case, the freight company only had the state minimum. As a good practice, we suggest requesting a certificate from your freight company. If using standard, common carriers like UPS and FedEx, this isn’t necessary.”
According to James Gornall from London, United Kingdom-based Ellis Clowes & Company, life insurance is an important option for race businesses and allows for peace of mind. “Having life insurance allows you to know that your loved ones will not be burdened financially upon your death,” he said. Additional options include prize indemnity, used by promoters to cover the payout and entice larger fields. “It is used to create money or insure against the payout of a large sum of cash for a great performance or a win…. Event cancellation [coverage] is used to recoup sunk costs for race promoters in the chance that an event doesn’t occur and is cancelled due to certain circumstances.”
Excess liability or umbrella coverage may also be an important option for race businesses. Johnson pointed to a situation where a race team’s sponsor asked the team to carry a $5 million limit. “[The driver] called me up and said, ‘What’s that all about?’ I said, ‘They don’t want anything with their name on it, where they could get sued, that they wouldn’t be covered for enough money,’” Johnson explained. “When you buy liability insurance for a vehicle or for general liability, we write it as a $1 million limit. Let’s say, in my example of [the driver], we did write a million-dollar limit on the auto, a million-dollar limit on the general liability. Then, the sponsor comes along and says, ‘We want to see $5 million with our name on it.’ What we did is we bought $4 million excess of the million in the primary. The auto policy and the general liability had a million; now we’ve got to buy $4 million more to satisfy [the sponsor]. We did that and that cost $4000 to buy that extra $4 million. [The driver] said, ‘Well, that’s not a good deal for me.’ I said, ‘Well, it is, in a way, a good deal.’”
Each individual business is different, with specific needs, so be sure to check with a race-savvy agent who can provide you with a coverage package tailored to your own requirements.