From the September 2000 issue of Entrepreneur

We admit it: Discussing business insurance is about as exciting as, say, cleaning out the basement. Perhaps you're thinking of turning a few pages and skipping this article altogether.

But wait--you might want to reconsider. Because if you're operating your business with the wrong insurance, not enough insurance or--heaven forbid--no insurance at all, then you might as well be bungee jumping off a cliff without a cord. Insurance may one day be the only thing that prevents you from having your life's work destroyed in a few disastrous moments.

To help you, we asked leading industry experts for their do-or-die suggestions on how you can build (or maybe just strengthen) this strongest safety net for your growing business.

What To Consider When Choosing A Policy
Self-Insurance
Create A Basic Insurance Checklist
Change Insurance As The Business Changes
Insurance Policies With E-Commerce Sites
Pick An Agent Who Meets Your Needs
Consider The Different Coverage
Buying Online

Pamela Rohland writes about issues of entrepreneurship for a variety of regional and national business publications.

What To Consider When Choosing A Policy

After you figure out the types of insurance your business needs, assess whether your current policy is right for you. Too little insurance leaves your business vulnerable, while too much leaves you cash-poor from paying high premiums.

Industry experts advise that you consider these factors:

Actual value: When purchasing property insurance, know the true value of your property (what it would cost to replace it). Insure your most vital property for its full replacement value. Because that costs a lot, however, consider insuring only the property you absolutely need to continue running your business.

Lenders' stipulations: If you have a loan on property, the lender usually requires you to maintain insurance. If you don't, the lender may foreclose on the property or purchase insurance itself and charge you an exorbitant price for it.

Absolute minimums: When you're out shopping for liability insurance, check with your current agent to learn whether there are minimum insurance limits set by law. These are usually small, however, and you shouldn't expect them to cover you adequately in the event of a serious accident.

Here are a few good questions you want to ask yourself. Read Needs To Know to match up with the insurance you need.

Sole proprietorships usually need more liability insurance because the owners run the risk of losing personal as well as business assets. Businesses that are incorporated, however, require less liability insurance. Put simply, if a corporation is sued, only its assets can be seized.

Employees: Are your employees experienced professionals or high school kids? Are they accident-prone? If bad things seem to happen to you or your staff, buy more insurance rather than less.

Self-Insurance

Well, maybe. Self-insurance was a trend of a decade ago that didn't travel well into the new millennium. Commercial insurance is now competitively priced, and many companies that were self-insuring gave it up.

Still, some businesses-usually large corporations with plenty of cash--prefer to self-insure. According to Tepp, a company can do it one of three ways by:

  1. Agreeing to a large deductible, then using cash or credit to fund it.
  2. Self-insuring up to a certain amount (such as $250,000) then purchasing so-called excess insurance, which kicks in when losses above that amount occur.
  3. Joining with a group of businesses operating in a similar industry or region to establish your own insurance fund. Members pay premiums, plus a fee to join.

"Alone, these businesses wouldn't be large enough to self-insure, but together they are," says Robert P. Hartwig, vice president and chief economist for the Insurance Information Institute in New York City. "This way, you all have a stake in each other's businesses, and one bad claim won't wipe out a business. The problem is, if the companies in your group have a bad year, you'll be asked to pay more. If there are 100 companies in your group and 10 have fires and are burned to the ground, the premiums could cost much more than anyone expected."

Create A Basic Insurance Checklist

Kathy Posner, 46, unknowingly spent five years with a gap in coverage--but lucky for her, she was afforded the opportunity to make changes before disaster struck. As founder of Comm Inc., a Chicago communications consulting firm, she learned the hard way how essential it is for entrepreneurs to have the right types of insurance for their businesses. "When I started my company in 1990, I had a partner who took care of most of the business aspects," she says. "When I bought him out in 1995, I discovered that we had never had workers' compensation insurance. Companies are required by law to have workers' comp, and if anyone had ever gotten injured, I would have lost my business and all my assets!"

To evaluate the extent of your current coverage, check out the Business Insurance Oracle Web site. Developed by Jerry Glenn, CEO of Western Sentry Insurance Brokers in Thousand Oaks, California, the site provides a good starting point for entrepreneurs via a basic insurance checklist. Glenn's biggest piece of advice: Avoid buying policies á la carte, like you would Chinese food. Instead, purchase them as a package deal and you'll receive a lower price. You'll also have only one party to hold responsible in the event of screw-ups.

 

Change Insurance As Your Business Changes

Buy 'em, forget 'em: That's the strategy many entrepreneurs apply to their insurance policies. It's only when disaster strikes that they realize their policies, like string bikinis, won't stretch to cover everything. So take some advice from the experts and make it a point to review your policy on a regular basis.

How much reviewing will you need to do? "Someone who's running a couple of shoe stores probably doesn't need to re-evaluate extensively more than every three to five years, because things don't change too much in that business," says David Golden, director of commercial insurance lines for the National Association of Independent Insurers.

On the other hand, if you run a business in a rapidly changing industry--like e-commerce--you should make it a priority to meet with your agent twice a year (or even quarterly when necessary) for a full review. "As your business grows, there will be gaps in coverage you don't think about. You might add new vehicles with the company logo and believe they're covered under your personal auto insurance policy, when they're not," says Hartwig.

Another example: Growing companies that are using contract workers may not appropriately classify them, meaning they won't be covered under their workers' compensation policies. Case in point: A home-builder who sends his employees out to do jobs on a commercial site might not have them appropriately covered under his current policy.

The bottom line: Even the smallest of changes within your business can result in a disastrous lack of coverage, so the best thing to do is to check in often with your agent.

Insurance Policies For E-Commerce Sites

While battalions of businesses are venturing into e-commerce, few are aware of the pitfalls. "New liabilities are showing up monthly," says Golden. "It's all becoming very complicated, very fast."

Golden discovered one of those near disasters at the Web site of an unwitting engineering firm that reinforces buildings in earthquake zones. Golden recalls the evening he was helping his son complete a sixth-grade project on earthquakes. After the boy went to bed, Dad continued their Internet search, and at one point logged on to that engineering firm's Web site. Golden clicked on one of the site's links and landed in a cyberporn site.

Danger! Danger! Beware of sticky situations--read Cyber Safety to make sure your site is on the same side as the law.

"The ISP told me it was a new link that an outsider had attached to that firm's page," Golden says. "Apparently, the engineering firm's webmaster hadn't checked the site in a while. If I had been a litigious person and my son had been there with me, I could have sued for emotional distress." The lesson: Check your Web site often for "surprise" links that might have been attached by mischievous hackers.

Many dotcom entrepreneurs are aware of the new problems, such as identity theft, hacking and denial of service--and some policies now provide insurance coverage for them. Coverage is also available for problems caused by computer viruses, data theft, system failure and privacy issues. Check with your agent to determine which companies are offering it, and do some comparison shopping.

"This is a challenge for the insurance industry because it's all so new and the suits are just being filed," Golden says. "You need to find out how Internet-savvy your insurance professional is."

Pick An Agent Who Meets Your Needs

Too many entrepreneurs treat finding an insurance agent like going on a blind date. They randomly contact an agency, and then an agent is assigned to them. If coincidence played a role in the way you were matched with your agent, it might be high time to take stock of that relationship and start looking for a new one.

"Companies should market to a different agent every three years," advises Marcia Tepp, a director with Parker Services LLC and Sentry Insurance in Stevens Point, Wisconsin.

How do you decide whether your agent is meeting your needs? Ask: Does your agent have expertise in your industry? Is he or she up on the latest in commercial insurance? If not, don't be afraid to switch.

"The person who did a good job on your homeowners' or auto policy may not have a clue about insuring a business," says Glenn. "Personal insurance agents avoid most commercial policies like the plague. Some, however, take on projects well beyond their ability."

Jeanne Achille, founder and managing partner of The DEVON Group, a high-tech public relations and marketing communications firm in Red Bank, New Jersey, chose her company's first insurance agent based on a referral from her accounting firm. But she discovered that she wasn't getting the level of service she expected. "We switched because every time we called, they couldn't recall who we were or what products we had purchased from them," Achille, 44, says. She found her new agent through networking and by seeking referrals from professional associations in the community.

Your current agent should give you personalized service and be a lean, mean question machine, according to Gary W. Eberhart, executive vice president of the National Association of Professional Insurance Agents. The best insurance agents ask a lot of questions about the operation of your business-and they ask them often. To see whether your agent knows enough about your business, turn the tables and interview the agent. Eberhart suggests asking your current agent some general questions, such as: Can you recommend any new coverages? Does your company provide evaluation services? Why is this the best carrier? Have you asked me everything necessary to cover my exposures?

Again, if the answers fall short, start shopping for a new agent.

Consider The Different Coverage

Just as other industries-from coffee to computers-are letting customers customize, the insurance industry is offering more specialized coverage for business owners. Whether you're a bathing-suit designer, a barber, an accountant or an auctioneer, there are insurance policies geared to you.

But before picking from the growing number of policies to cover specific professions and incidents, entrepreneurs should look at policies offering broader coverages, says Madelyn Flannagan, director of research and information for the Independent Insurance Agents of America. She points to the following:

Employment practices: This coverage protects you in case of lawsuits by employees charging any type of discrimination or sexual harassment. It pays defense costs and damages of up to $15 million.

Electronic data processing: This covers the cost of replacement after computer hardware, software and mechanical breakdowns; it also compensates for lost income during downtime.

Valuable papers and records: Imagine the horror of losing key records and documents related to your business. This policy reimburses the holder for the cost of software and staff assistance required to recreate the documents.

International medical: Should you be injured or fall ill abroad, or if that happens to your international clients or suppliers in the States, this policy would pay for the care.

Tax audit: Sutter Insurance Co. offers policies paying for additional tax assessments and interest, says Glenn. But cheaters beware: The policy excludes fraud and intentional misrepresentation. Check out www.taxinsurance.com for details.

Homebased business: A number of insurance companies offer policies for homebased businesses that cover all equipment in case of damage on- or off-site. Policies are also available to cover damage that occurs affecting your additions or improvements made when you set up your home office.

If you need help choosing coverage for your business, consult an independent insurance agent who can create a customized policy from the many products available. "Forge a personal relationship with the best possible agent," Achille advises. "It's the one-to-one interaction that will come through for your company, in good times and in bad."

Buying Online

Web surfers can buy almost anything on the Internet-and business insurance is no exception. While many major insurance companies still use their Web sites mainly to provide information to potential customers, dotcoms are springing up to help you get quotes, comparison shop and buy. Some entrepreneurs view shopping for insurance on the Net as a great time-saver and convenience. Others, like Posner, prefer to exercise greater caution when buying insurance.

"I want to know that I have an experienced, educated person overseeing my insurance needs," says Posner. "I'm not in the insurance business, so why should I presume to think I know what is best for my company by shopping Web sites?"

Another factor to be aware of is that not all insurance offered on the Web can be sold in every state, as Achille discovered when she found her business's New Jersey location limited her options. On the plus side, online services make shopping for insurance easier, but Hartwig and other experts caution that most of the policies offered are too basic for an established business.

Despite the drawbacks, it might still be worth it to check out Web sites offering insurance. You can start with: BizBuyer.com, ebDirect.com and SimplyHealth.com.