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.

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 mmaking any decisions.

- Ask the same questions about each policcy. 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 thaat 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 comparring 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.

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 a 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 thhe 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?