With insurance, as with so much else in life, the devil is in the details.
If you own a house or a car, you may already have insurance that covers you in the event of theft or an accident. But if you own a small business, the fine print on those policies could expose you and your assets to catastrophic losses--and even confiscatory lawsuits.
Remember Murphy's Law: What can go wrong will go wrong, and at the worst possible moment. "Murphy is alive and well and living in every small business," warns Virginia Beauchamp, vice president of the National Association for the Self-Employed (NASE) in Washington, DC. "Everybody needs to understand that a sole proprietor is responsible for everything that happens in his or her business."
In fact, typical insurance coverage leaves wide gaps when it comes to protecting sole proprietors and small-business owners. Loopholes such as these can put you temporarily--or permanently--out of business:
- While traveling to see a client, your car is rear-ended and totaled as you sit patiently at a stoplight. Even though you're not at fault, you still may not be able to collect any insurance money, because your policy specifically excludes coverage for accidents that occur while using your automobile in the course of business.
- A fire in your kitchen spreads to the spare room, where your office is, destroying important files and seriously damaging your computer equipment. The claim for your equipment is denied, because your homeowner's insurance doesn't cover business-related losses.
In both scenarios, adequate coverage could have been available as "riders"--or extended agreements--to your existing coverage, and for relatively inexpensive annual premiums (generally, a few hundred dollars or less).
"Close to 80 percent of sole proprietors and small-business owners are not insured to the full extent they should be," says David Hanania, founder and president of the Home Business Institute (HBI), a national network of small-business owners in White Plains, New York.
Nevertheless, many small-business owners get blindsided, either because they don't read the fine print in their existing policies, or because they're too busy to take out the insurance coverage they really need.
"Insurance is an item these busy people don't get to quickly enough, especially if they feel they don't have any liability exposure," Hanania explains. "But in the litigious society we have, they may wake up one day and find they do."
But the growth of small and homebased businesses is urging insurance companies to offer more affordable coverage for entrepreneurs.
How much protection you should have depends on many factors, including a reasonable assessment of your risks, the vulnerability of your assets, the amount of protection available and how much coverage you want and can afford.
Freelance writer Christopher Kenneally answered the question: "Can You Start In 30 Days?" in the July issue of Business Start-Ups.
Unless you're lucky enough to have a spouse whose employer provides medical benefits for your entire family, health insurance is the most obvious form of insurance an entrepreneur needs.
Non-group health-insurance plans are more expensive than the group plans available to businesses. This holds true whether you pay for traditional indemnity coverage or choose to enroll in a health-maintenance organization (HMO). For example, an indemnity plan with Blue Cross and Blue Shield of Massachusetts that covers a family of three or more, does not include dental care and carries a $200 deductible, costs nearly $6,700 in annual premiums.
National associations such as HBI, NASE, the Independent Business Alliance (IBA) and the American Entrepreneurs Association (AEA), however, as well as state and local business associations--with tens of thousands of members each--can offer coverage at more affordable group-plan rates. And as a consolation for paying for your own health insurance--unquestionably, a major business expense--the IRS now allows self-employed businesspeople to deduct 40 percent of health-insurance premium costs. For more information on the specific IRS guidelines, request IRS Publication 533, Self-Employment Tax, and IRS Publication 502, Medical and Dental Expenses, by calling (800) 829-3676.
It's every businessperson's worst nightmare: a serious accident or long-term illness that can lay you up for months, or even longer. Disability insurance, sometimes known as "income insurance," can guarantee a fixed amount of income--usually 60 percent of your average earned income--while you're receiving treatment or are recuperating and unable to work.
Spending scarce insurance dollars on disability insurance, though, can lend a false sense of security, according to Hanania. Disability insurance only pays recipients for one year, and they must prove a loss of profit in order to receive any money. "People are better off taking out term life insurance," Hanania says. (Term life insurance is the industry's least expensive form of coverage.) Nevertheless, IBA's disability-insurance benefits extend up to five years for any illness, and up to age 65 for victims of accidents.
Recent growth in homebased business has led more and more insurance underwriters not only to offer business-related riders--usually for an additional premium of a few hundred dollars--to existing homeowner's and automobile policies, but also to develop specific products for the small-office/home-office market.
Many business insurance policies with annual premiums of a few hundred dollars now cover on-premises business liability (should, for example, a delivery person slip and fall on your steps), as well as loss of office contents, computer and business equipment and even data reconstruction. A typical plan may protect you for up to $15,000 on office contents, $10,000 on computer-related equipment and $500,000 for on-premises business liability, all for a $275 annual premium.
Business consultants should also consider liability insurance for so-called "errors and omissions." For example, a software consultant hired to analyze a firm's customer list may, through negligence or accident, cause the data to be lost--and become liable for the retrieval or reconstruction costs.
Insurance isn't a good place to cut corners; doing without it could cost you more in the long run.
Run For Coverage
Finding Small-Business insurance isn't easy. Start with a call to your industry association, the local office of the Small Business Administration or your state's insurance division. The following associations and organizations also offer small-business insurance:
- American Entrepreneurs Association (AEA): Available benefits include comprehensive major medical coverage, dental insurance, term life, disability income insurance and HMO and PPO plans, depending on your location. For more information, call (800) 482-0973, or write to 2392 Morse Ave., Irvine, CA 92614.
- Home Business Institute (HBI): Offers home-business liability protection, group medical insurance and life insurance. For more information, call (888) DIAL-HBI, or write to P.O. Box 301, White Plains, NY 10605-0301.
- Independent Business Alliance (IBA): Offers a wide variety of business-related insurance policies, including medical and dental; on- and off-premises liability; office contents and computer-related equipment; professional liability coverage; business interruption; and disability insurance. For more information, call (800) 559-2580, or write to 111 John St., New York, NY 10038.
- National Association for the Self-Employed (NASE): Member benefits include health, dental, accidental death and disability insurance. For more information, call (800) 232-6273, or write to 1023 15th St. N.W., #1200, Washington, DC 20005.
- Small Office/Home Office Association (SOHOA): Offers a range of insurance programs. For more information, call (888) SOHOA-11, or write to 1765 Business Center Dr., #100, Reston, VA 22090.
Home Business Institute, P.O. Box 301, White Plains, NY 10605-0301, (888) DIAL-HBI
Provident Mutual Life Insurance Co., P.O. Box 1717, Valley Forge, PA 19482-1717