CHILD CARE HOME: LIABILITY INSURANCE
Elaine Wilson
Parenting Specialist
Oklahoma State University
Oklahoma State University extends credit to Brenda Cude and Carol Volker of Iowa
State University for the content of this unit.
Copyright/Access Information
Like other small business owners, child care providers need life, health, and
disability insurance to protect them from losing their income. Because they work
with children, day care providers face unique risks.
The greatest risk a day care provider faces is the injury or death of a child or
client. If an insurance company or a jury holds the provider responsible, he or
she could lose great amounts of money. Providers should prepare for the risk
now.
WHY YOU NEED INSURANCE COVERAGE
Child care providers risk three types of financial loss. If a child is injured,
a day care provider may have to pay the victim's hospital and doctor bills. If
there is a lawsuit, damages may be awarded to the victim or the victim's family.
In addition, a provider could have to pay court costs and attorney fees.
Medical or accident insurance will pay for the victim's doctor and hospital
bills. Most liability policies include medical and accident insurance. If your
policy does not, you might need separate coverage.
Liability insurance usually will pay for damages awarded by the court. These
policies also will pay the defense costs.
Some providers feel they do not need insurance because they have never had an
accident. Unfortunately, the future cannot be predicted - an accident could
occur at any time. However, a good safety record may be helpful in buying
insurance. Those people with a history of accidents will probably pay more for
insurance.
Sometimes providers try to substitute waivers signed by parents for insurance.
This is unwise. Legal advisers agree that waivers will not hold up in court.
Most consumers are familiar with liability insurance since it is an important
part of homeowner's and automobile insurance. Yet, virtually all homeowner's
insurance policies and some personal automobile insurance policies exclude
coverage for claims related to the operation of a home-based, small business.
Many homeowner's insurance policies exclude coverage for claims related to child
care.
OPTIONS FOR INSURING YOUR LIABILITY RISK
Self-insure. Establish a savings fund to use if someone files an accident claim.
For example, you may decide to put money into the bank to cover any damages to
your furniture made by children. Setting aside a few hundred dollars each year
may cover this risk. Most providers cannot afford to self-insure against the
possibility of the injury or death of a child. That would require a savings of
at least $300,000.
Extend your homeowner's coverage. Most insurance companies do not cover day care
operations under the regular homeowner policies. However, companies will extend
liability coverage by offering an endorsement or rider to a homeowner's policy.
The premium for the extra coverage is usually low, but the coverage is limited.
Buy a commercial liability and accident policy. This is a special policy usually
purchased by businesses. Premiums range from $350 to $700 or more per year. The
cost is higher because this type of insurance covers much more than a rider on a
homeowner's policy.
SHOPPING GUIDE FOR LIABILITY INSURANCE
To explore liability and accident insurance for your day care operation, follow
these guidelines:
- Evaluate all options carefully before making any decisions.
- Ask the same questions about each policy. Write down the answers so you can
evaluate the policy after discussing it with the insurance agent. Use the
worksheet at the end of this booklet to record information. Obtain a copy of the
policy from the agent.
- Ask questions until you are certain that you understand exactly what is and is
not covered by each policy. If you feel the agent is not knowledgeable about
insurance for child care home providers, ask to speak to someone else.
- Take your time in evaluating and comparing policies. Resist sales pressure to
make a decision before you are ready.
Once you have reached a decision, discuss it with the parents of children who
are in your care. Parents should know what your insurance covers, especially if
you include your insurance costs in the rates you charge.
ASKING QUESTIONS AND UNDERSTANDING THE ANSWERS
QUESTIONS ABOUT HOMEOWNER'S INSURANCE
Is an endorsement or rider available to extend my homeowner's insurance coverage
to my day care business?
Many of the major companies that sell homeowner's insurance make endorsements
available, but some do not. If the company issuing your current homeowner's
policy does not offer child care endorsements, you have two choices. You may
decide to move your homeowner's insurance coverage to a company that makes child
care endorsement available. Or you may purchase a commercial liability insurance
policy.
If you provide child care in your home without an endorsement to your
homeowner's insurance or a commercial liability policy, some companies will not
insure your home. Your business is exposing the company to additional risks that
increase the possibility of a claim against your homeowner's insurance. It is in
your best interest as well as the company's for you to obtain coverage. If an
insurance company cancels your homeowner's insurance because of a
business-related accident, it may be difficult to obtain a new policy.
If the company offers day care endorsements, do I qualify?
Most companies and agents that sell homeowner's insurance are very conservative
about extending coverage to child care services. They avoid potentially huge
claims that could result if just one child were injured or killed. As a result,
many companies use a number of restrictions to limit the risks they cover. Some
write day care endorsements when child care is an incidental activity and is not
a business.
Virtually all companies limit the number of children cared for by the provider.
Common restrictions are no more than three, four, or six children (usually not
counting your own).
Oklahoma limits the number of children in a licensed child care home to seven.
This number includes the child care provider's own preschool children under five
years of age living in the home.
Do not care for more children than the policy, endorsement, or licensing
regulations allow. The insurance company could refuse your claim or cancel your
coverage.
A few insurance companies require you to meet any applicable day care licensing,
registration, or certification requirements of the city, county, and state in
which you live. Oklahoma requires child care home licensing. You must meet legal
codes.
All insurance companies have underwriting guidelines. You must meet these
guidelines before you can purchase a policy. Underwriting guidelines are
conditions that must be present in the child care setting before the company
will accept you as a client. For example, one company may require fencing around
a swimming pool. Another company may not write the insurance if there is a pool.
Most companies advise the use of a public or private pool that carries its own
liability insurance and provides lifeguards and other safety precautions. Other
conditions may disqualify you for coverage or make coverage more expensive.
These include a previous history of accidents, pets in the home, a yard that is
not fenced, unsafe playground equipment, or a wood-burning stove. An agent may
visit your home to decide if you meet the company's underwriting guidelines. The
company may charge a fee for the agent's inspection.
All insurance companies require you to have a homeowner's or renter's insurance
policy with the company. You cannot purchase the endorsement alone.
If you do not qualify for an endorsement, you must again evaluate your options.
You may choose to move your homeowner's insurance to a company that offers you
an endorsement. You may purchase a commercial liability policy.
What do endorsements cover?
Most homeowner's insurance policies take a conservative approach. Some
activities that are a part of providing day care services are not 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 exclude claims related to serving food or giving medications.
In addition, all homeowner's insurance endorsements exclude claims related to
mental, physical, or sexual abuse. Liability limits, the maximum claim paid in
any policy year, vary from company to company. Often the limit on the
endorsement will match the limit on your homeowner's insurance policy. You and
your insurance agent should select limits based on your needs.
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.
What are the premiums?
With homeowner's insurance, coverage is fairly limited. This keeps premiums low.
In 1990, the yearly cost ranged from about $30 to $175 per year. The premium
depends on the amount and type of coverage and often the number of children.
Some policies charge a lower rate if you care for three or fewer children. The
rate increases if you care for four or five children. Others charge the same
premium regardless of the number of children. Expect higher premiums for higher
liability limits, four or more children, and low deductibles. This is a business
expense and it is tax deductible.
QUESTIONS ABOUT COMMERCIAL LIABILITY INSURANCE
Do I qualify for the coverage?
Unlike homeowner's insurance endorsements, most commercial liability policies do
not directly limit the number of children in care. However, most commercial
policies require the provider to comply with local legal codes. Oklahoma's child
care home licensing standards limit the number of children to seven. Some
companies require providers to belong to specific professional day care
provider's organizations 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 homeowner's
insurance. The company may simply charge a higher premium for a commercial
policy if a risk factor is present. These factors include a swimming pool or
pets. Other companies may not insure conditions that they consider unsafe. Some
reduce the premiums for accredited programs.
What does the policy cover?
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 day care children in the car. Also,
commercial policies sometimes include coverage for sexual abuse claims. The
liability limit for sexual abuse claims is usually low. It is intended to pay
only for legal defense costs. The insurance does not cover judgments that might
be awarded to a child and the family. You, the provider, are obligated to pay
those costs. Many commercial policies include specific coverage for claims
related to food served to a child.
Most commercial policies today are occurrence form rather than claims made form
policies. The distinction is important. An occurrence form policy pays claims
made after the policy has expired. It pays after you have gone out of business,
if the injury occurred while the policy was in force. A claims made form policy
covers claims 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, a claims
made form policy pays only the claims you filed between June and the end of your
policy year. An occurrence form policy pays claims related to that child's
injury filed next year or even several years from now. It pays even if you no
longer have the insurance policy.
Must I purchase a separate accident insurance policy?
Most insurers require clients who buy a liability policy to purchase an accident
insurance policy. The insurance companies believe parents are less likely to
file a liability claim if the provider has insurance to pay medical expenses.
What are the premiums? Are there deductibles?
Expect commercial liability policy premiums to range from $350 to $500 or more
per year for a $300,000 liability limit. Remember, $300,000 is 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. The amount of the deductible affects
the premium. Lower deductibles mean higher premiums. Some companies' premiums
depend on the size of the home and the number of children.
Many insurance agents spread premium payments over the year. A typical
arrangement requires you to make a down payment of $200 or $300. Then you pay
the remainder in two or three payments later in the year.
Although $500 to $700 per year seems like a large sum of money, insurance may be
well worth the price. You may be able to recover much of your costs. Increase
the rate you charge. The amount depends upon the number of children in your
care. For example, the cost of a $675 policy is about $13 a week. If you care
for five children, the cost is just over $2.60 per child per week. In addition,
the full cost of a commercial liability policy is tax deductible as a business
expense.
How do I file a claim?
Ask to see a copy of a claim form. Ask where you would send or take the form to
file a claim. Ask whether the company pays expenses directly or reimburses you
after you paid the expenses. Be certain to ask enough questions to understand
the claim process before buying.
Where do I buy a commercial liability policy?
You may purchase a commercial policy through a local independent insurance
agent. You may not be familiar with the companies that sell commercial policies.
Deciding from whom to buy the insurance is important. Contact insurance agents
who are knowledgeable about insurance for child care providers. They offer a
choice of appropriate liability and accident insurance policies. The Oklahoma
Insurance Commission and professional child care associations may give you a
list of companies. They will know companies that sell liability or accident
insurance to child care providers.
The surplus lines market writes most commercial liability policies. These
insurance companies do not meet state licensing standards. They may be
financially sound and reputable. They are not licensed. In Oklahoma, a guaranty
fund has been established which does not back an unlicensed company. Oklahoma's
guaranty fund pays the claims if a licensed company becomes insolvent. Thus, as
in all insurance decisions, it is important to learn all that you can about the
insurance company before buying. Despite the disadvantages, companies in the
surplus lines market are important. They are willing to write insurance to cover
risks that other companies may not be willing to insure.
OTHER IMPORTANT QUESTIONS
You may choose to extend your homeowner's insurance coverage. You may choose to
buy a commercial policy. In either case, the following questions are important
ones to ask.
What are the liability and medical payments limits?
A policy limit is the maximum amount the policy will pay if a claim is filed.
Usually, the policy states the limit per claim or per person injured. There also
may be an aggregate limit. This limits the total amount the policy will pay in
any one year. The limit applies regardless of the number of claims filed or
persons injured.
Ask for rates for a minimum liability limit of at least $300,000. Most providers
seek a $500,000 limit. Ask for a minimum accident/medical payments insurance
limit of at least $10,000. You will probably need a $20,000 limit.
What is the company's financial reputation?
Check Best's Insurance Reports in your public library. Companies rated A or A+
are the strongest. Check with the Oklahoma Insurance Commission about a company
that is not rated.
What is the company's claims and service reputation?
Talk to friends who have experience with the companies. Ask your Oklahoma
Insurance Commission 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. The Oklahoma Office of Child Care may have information about
providers' experiences with the company. Some policies require membership in a
day care providers' association. The associates may know about the company's
reputation if the policy requires accreditation. You can also check Consumer
Reports for recent ratings of homeowner's insurance companies.
How knowledgeable is the insurance agent?
Is the agent 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 child care providers. Look for an agent who can answer
your questions and seems interested in finding the best arrangement for your
situation.
Does my personal auto insurance policy provide coverage while I am transporting
day care children?
If you transport children in your car, ask about extending your auto insurance
coverage or purchasing in 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.
MAKING YOUR CHOICE
Even with information, your choice is not an easy one. It is 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. Do not assume that the child's family's medical insurance will protect
you. You may still be responsible for paying the medical bills for a child
injured while in your care.
INSURANCE TERMS
Claims made policy - A policy which pays claims 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 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.
Error 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 is usually financial and usually 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 company will pay
for claims on the particular policy.
Licensed insurance company - A company licensed in Oklahoma. The company files
rates and policies with the state insurance commission. The state insurance
guaranty fund backs to policies if the company becomes insolvent.
Occurrence form - A policy which pays claims after the policy has expired or
after the day care provider has gone out of business. The claim must occur while
the policy was in force.
Premium - The amount of money charged a policy holder for an insurance policy.
Surplus lines insurance market - Insurance written by companies not licensed in
Oklahoma. Unlicensed companies write policies to cover risks that licensed
companies choose not to insure. They usually do not have to file rates and forms
with the State Department of Insurance. The state insurance guaranty fund does
not cover their policies.
Underwriter - An employee of an insurance company who assess the risk to the
company of accepting submitted insurance applications.
Contact:
Oklahoma Insurance Commission
1901 North Walnut
P.O. Box 53408
Oklahoma City, OK 73152-3408
Phone: 405-521-2828
UPDATE
The Texas Supreme Court ruled that the vagueness of a business pursuits
exclusion clause in a homeowner's insurance would cover the death of a child in
child care. An 18-month-old child drowned in a pool of water on a tarp covering
the provider's swimming pool after crawling through a hole in the fence. The
insurance company was liable for the $480,000 judgment against the provider.
California law clearly states that child care providers must purchase as special
rider or purchase a separate policy for child care.
Know your coverage. Watch for specific clauses and revisions in homeowners
policies. Drowning continues to be a significant cause of death among children.
Be sure children are safe and supervised. [Source: Legal Update. (Fall, 1993).
The Child Care Law Center.]
There are real risks if you do not have an endorsement on your homeowner's
policy or a separate liability policy. Homeowner's insurance companies will not
pay claims related to a day care business. They may not pay other claims either
- even if they have nothing to do with the day care business. Insurance
companies may consider a homeowner's policy invalid if you do not inform them
that you are operating a business in your home. Also, the company may not renew
your homeowner's policy when they find out you provided child care without
special coverage.
LIABILITY INSURANCE WORKSHEET FOR CHILD CARE HOME PROVIDERS
What coverage do you have now? Ask your insurance agent(s):
1. What coverage is currently provided by my homeowner's (or renter's) insurance
policy?
2. What coverage is currently provided by my personal auto insurance policy?
3. What are my insurance options? Use this worksheet to compare policies.
QUESTIONS - Policy 1 - Policy 2
1. Policy Type:
Company Name:
Agent Name:
Address:
2. How does the company limit its risks?
Maximum number of children?
License, registration, or certification required?
Membership in professional association required?
Underwriting guidelines (pools, pets, fences, etc.)?
3. What is and is not covered by the policy?
Activities away from the home?
Transporting children?
Mental, physical, and/or sexual abuse?
Serving food?
Employees?
Giving medications?
Other conditions?
4. What are the liability and accident insurance (or medical payment) limits?
Per claim?
Per year?
5. What is the deductible?
6. What is the premium?
7. Is the policy an occurrence form or a claims made form?
8. What is the company's reputation? What did I learn from:
Best's Insurance Reports?
State Department of Insurance?
Consumer Reports?
Government agencies?
Professional associations?
Friends?
My own experience?
9. How do I file a claim?
10. Is the agent knowledgeable and helpful?
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DOCUMENT USE/COPYRIGHT
National Network for Child Care - NNCC. Part of CYFERNET, the National Extension
Service
Children Youth and Family Educational Research Network. Permission is granted to
reproduce
these materials in whole or in part for educational purposes only (not for
profit beyond the cost of reproduction) provided that the author and Network
receive acknowledgment and this notice is included:
Reprinted with permission from the National Network for Child Care - NNCC.
Wilson, E. & Burns, M. (1993). Liability insurance (HBB7-5). In Child care home.
Stillwater, OK: Oklahoma State University Cooperative Extension Service.
Any additions or changes to these materials must be preapproved by the author .
COPYRIGHT PERMISSION
Elaine Wilson
Parenting Specialist
233 HES
Oklahoma State University
Stillwater, OK 74074-6111
Phone: 405-744-6231
Fax: 405-744-7113
Email: emwilson@okway.okstate.edu
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