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  • Writer's pictureTanya Berndt

Industry Commodity Traps

Updated: Apr 20, 2018

Value vs. quality is apparent in most industries. Are you getting what you pay for and is it truly what you need?

There’s two types of customers in almost every industry. There’s those that care only about one thing – the price of the product. The product can be tangible such as a home or a car or it can be intangible, such as veterinary care, the service at a restaurant, financial guidance or advice on your business insurance. The other type of customer is not really a customer at all, but rather a client. Clients find price to be important, but it is not the only factor they take into consideration when making a decision. They rank factors such as value and quality as higher on their list. Why is it that when price isn’t a factor in deciding on a car, would most people choose to purchase a high-end automobile such as a Lexus, Mercedes, BMW, Infinity? My guess is that it could have something to do with value.

Quality and value should be taken into consideration when choosing an insurance agent. How often have you “shopped” for insurance rather than consulted with an insurance professional on the risk your company is willing to tolerate?

I received a call the other day from a prospect that was looking to insure his building located in Philadelphia for the least amount possible. They were calling around and researching online to find out the least amount of coverage they could insure their property for but still have insurance to satisfy the bank’s requirements.

When “shopping” around, the “cheap” prices they were receiving did not take into consideration a ton of factors. First and foremost, the cost to rebuild this building in Philadelphia with like and kind quality if there was, for example, a fire that destroyed everything, was close to 1 million dollars. Since the mortgage they received for the building was only $300,000 (the rest paid in by their own bank account), they agreed to insure for $300,000 because of the mortgagee requirements. I went on to explain to the prospect that if the fire destroyed the entire building and it was considered a total loss and they chose to insure the building at replacement cost, they would simply receive $300,000.

I also explained a co-insurance penalty that they were not aware of. They were required to insure their building at 80% of the replacement cost, which would have been, in the instance, $800,000. If they simply had a partial loss, they would be penalized by the insurance company. In fact, they would only be paid 36% of what their claim was worth. (An easy way to remember this is DID/SHOULD X LOSS). Say for example, their loss was $20,000, they would be very unhappy when they realized they would only be receiving $7,200 (maximum) from their insurance company.

Needless to say, the prospect was not willing to tolerate a loss of this magnitude. But, even if they were, they weren’t provided this information upfront, to make an educated decision. The word “shopping” could be detrimental in any industry. Purchase a “cheap” car and you receive headaches at your local auto shop. You purchase “cheap” veterinarian advice, you have a very sick animal three times as long. You purchase “cheap” insurance and you aren’t fully covered in the event of a loss and receive “headaches” from your insurance adjustor. My property or my business would be my livelihood and my life! My vote would be protecting it and my financial investments. No doubt I’d be sure I am getting what I am paying for, wouldn’t you?

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