Insurance is not only important to you in your business, but in your other business relationships as well. In this session you will discover the many types of insurance coverage available for small business, and which types will fulfill the requirements for your business in your location.
- Insurance Coverage For Small Businesses
- Business Property Insurance
- Liability Insurance
- Worker's Compensation Insurance
- Other Insurance Coverage
- Excess Liability Coverage
- Employment Practices Liability Coverage
- Life Insurance
- Suggested Activities
- Top Ten Do's and Don'ts
- Business Plan
Insurance Coverage For Small Businesses
The purpose of insurance is to transfer a risk that you can afford (i.e. the payment of a premium with no guarantee of its return) to cover a risk you cannot afford. For example, what homeowner does not ensure his or her personal residence from damage by fire?
Besides your attorney and accountant, another professional you will need to bring into the start-up process will be your insurance agent. It may be helpful to have one agent who can handle all of your insurance needs. There are policies available that are specifically designed to cover small businesses that, in one package, will cover most of your insurance needs.
Insurance is not only going to be important to you, but it will be important to your other business relationships. For example, if you choose to lease office space, the landlord will typically require that you furnish a certificate of insurance or be listed as an additional insured on your policy as assurance that your business will not disappear overnight in the event a loss occurs.
There is also a place for insurance when planning for family succession which is covered in Session 15 of the Business Expansion course.
Here are some of the risks that should be protected by insurance:
Business Property Insurance
Property insurance should include a broad form of coverage to protect you from a wide variety of losses. Your insurance should include:
- Buildings: Coverage would be required here if you own the building your business occupies. In the event you lease premises, your landlord should provide this coverage.
- Business personal property includes your tables, desks, chairs, and equipment. Also, you will want to include the tenant's improvements you might make to leased premises. An example would be a room divider you add, or a display case, or a custom-built counter that forms part of the reception area for your clients.
- Loss of Income
- Flood (which may or may not be available)
Keep in mind that an all-risk policy can be structured to cover all of your equipment, including computer hardware and software, plus your valuable records. A properly written policy will include loss of income that might result from breakdowns, as well as loss of income from other hazards that would temporarily close down your business.
A Comprehensive General Liability (CGL) policy is designed to provide coverage to third parties for the following:
- Personal and Advertising Injury
- Fire Legal Liability, which is often mandatory if you lease your premises. This protects you in the event your negligence results in damage or loss to your landlord's property. For example, you mistakenly leave a small electric space heater running and go home for the evening. During the night, the heater shorts and starts a fire, resulting in fire and smoke damage to your landlord's building. In this case, the negligent act of leaving the space heater on caused the loss. This is where Fire Legal Liability protects your investment.
- Products and Completed Operations
- Medical Expense or Medical Payments
- General Liability for your premises. The best illustration is the common "tripping over the torn carpet, resulting in an injury" loss.
- Damage control plans are covered in Session 1 of the Business Expansion course. Special industry related risks should also be included in your insurance planning. For example, in September 2011, as a result of a human error, electricity in San Diego went out for over a million customers....for 12 hours.
On occasion, some policies will exclude Products and Completed Operations and/or Personal Injury and Advertising Coverage depending on the services your business provides. In these instances, a Professional Liability, Malpractice, or Errors and Omissions Policy might be available for your type of operation that will cover the errors and omissions that might result in suits against your company. This is particularly true of professions that are held to a higher degree of care or standard, for example, attorneys, engineering consultants, insurance agents, realtors, doctors, and dentists.
Worker's Compensation Insurance
If your business has employees, worker's compensation insurance will be mandatory. Startup operations typically find that the State Compensation Fund can accommodate your needs. As the business grows, you can then "shop" for better prices for the coverage. In addition, some worker's compensation insurers provide additional services such as risk management and loss control services that may be beneficial to your business operation. These services are typically helpful in holding down claim costs over the long term. Do not confuse risk management with your taking part of the risk. The insurance company should assume 100 percent of the worker's compensation insurance risks.
- Auto coverage for company vehicles. (Liability, Comprehensive, Collision and Uninsured/Underinsured Motorists.)
- Here's a type of insurance you might not think about: when you're not there - and when only your answers will do - it is a good idea to have a guide prepared for your employees which contains critical information (what to do, who to call, where to find it). This will help maintain the consistency of your business in your absence.
Excess Liability Coverage
These are liability limits available over and above the maximum limit your carrier of choice may write. They can be accomplished in two ways:
- Excess limits can typically be added at extra cost to the underlying package policy in "chunks" of $500,000 or $1 million dollar layers sometimes up to $5 million.
- Purchasing what is called a "commercial umbrella." This can typically provide excess coverage over and above most underlying package policies, including the business policy, business auto, and worker's compensation.
SOMETHING TO KEEP IN MIND: Your carrier of choice may offer lower limits, which may look attractive from a premium standpoint. But savvy business owners should contemplate liability limits of at least one million dollars. The additional cost is usually affordable and, in today's litigious environment, makes good sense.
- Example: You, the business owner, suffer an auto accident in which you are determined to be at fault. In addition, the accident results in the victim being rendered a paraplegic. This type of loss can easily result in a multi-million dollar judgment against you.
Employment Practices Liability Coverage
Employment Practices Liability insurance is a coverage that is starting to be carried by more companies, with premiums exceeding $2,000 annually for $1 million of coverage. While employment practice liabilities are rarely encountered in a small operation, the threat of wrongful termination or sexual harassment lawsuits, which are excluded under most business policies, become more prevalent as the size of your organization grows.
As mentioned earlier, if you have a partner, your buy-sell agreement can be funded by life insurance in the event of the death of a partner. As your business grows this insurance can be increased.
- Before you start up, collect referrals to and references about lawyers, accountants, and insurance agents so you can select the most appropriate professional advisors well before the time you will need their services. Perhaps they will provide you with initial free consultations for considering them as members of your professional team.
Top Ten Do's and Don'ts
THE TOP TEN DO'S
- Bring an insurance agent into your start-up process and have policies in place.
- Consider using an insurance agent who can handle all of your insurance requirements.
- Include excess liability "Commercial Umbrella" coverage for your business.
- Use a broad form of business property insurance.
- Consider a health insurance policy to recruit and keep good employees.
- If you have employees, consider carrying employment practices liability coverage.
- Maintain a clean and safe environment in your workplace.
- Include your tenant improvements in your property insurance policy.
- Increase all your insurance coverage appropriately as your business grows.
- Consider maintaining a buy-sell agreement with your partners, funded by life insurance, in the event of the death of a partner.
THE TOP TEN DON'TS
- Consider self-insuring any part of your worker's compensation risk.
- Fail to recognize regular employees as employees and not contract workers.
- Overlook ongoing employee training on maintaining workplace safety.
- Feel that you can't afford insurance. You can't afford not to have it.
- Deal with contractors who cannot furnish insurance certificates.
- Permit your insurance policies to lapse for non-payment of premiums.
- Deal with insurance providers with substandard ratings.
- Withhold information from your insurance provider. Give the provider a complete picture of your risks.
- Go "uncovered" (uninsured) in any category of insurable and significant risk.
- Overlook flood or earthquake insurance if in an area of high risk.