Just being in business is risky. Beyond the most important risk--whether people will buy enough of your product or service to allow you to make enough money and grow--are a number of risks that could send any entrepreneur searching for a dark hole to hide in.
A fire could destroy your inventory, office equipment, records and building. A flood could cause thousands of dollars' worth of damage. Your business could be vandalized or robbed. A customer could sue you for an injury he or she suffered while on your property. A disgruntled employee could sabotage your computer system. You could be the target of an extortionist or a terrorist. The list of potential catastrophes businesses face is virtually endless.
When dealing with risk, you have three reasonable choices: eliminate it, accept it or shift the responsibility for it. Your other option is to pretend it could never happen to you. Anyone who has dealt with a business-related loss would be quick to explain the foolhardiness of this last approach.
In most cases, when you can't completely eliminate a risk, you'll use a combination of accepting and shifting to manage it. In insurance language, that's known as the deductible. Typically, the higher the deductible, the lower your premium. It sounds like a numbers game, and it is--but it's a very serious one that needs careful consideration.
In this quick guide, we take a look at business insurance to help you determine what you need, what you already have, and what could happen if you're not careful.
Jacquelyn Lynn is a business writer in Winter Park, Florida.
Not even the best agent is appropriate for every client. To find an agent who's right for you, ask for recommendations from people who have businesses like yours. You can also check with your industry's state and national trade associations for a referral or contact the Independent Insurance Agents of America. (See "Resources" at bottom of page.)
An agent can be a valuable asset in managing and growing your business. Bill Tallent Sr., a Sir Speedy Printing franchisee in Brentwood, Tennessee, has worked closely with his agent to build a customized insurance package. "He told us what coverage was necessary, but just as important, what coverage wasn't," Tallent says. "He's taught us when to call and when not to, when to file claims and when not to file claims, and how we can lower our rates."
Here are some questions to ask yourself when selecting an agent:
- Is the agent familiar with your industry? To help you determine the most appropriate coverage, an agent needs to understand how your business operates and the various risks you face. He or she also needs to know about any association-sponsored or industry-specific packages that might be available.
- Does the agent have access to the insurance carriers that offer the products you need? You need an agent who stays on top of industry changes and is always searching for new programs.
- How innovative is the agent? Look for an agent who shows creativity and innovation in responding to changes in the industry and within your operation.
- Will the agent help you prepare a bid and then negotiate with insurance companies on your behalf? Bidding and negotiating are two key elements of smart insurance shopping, and a good agent will see this as an opportunity to prove his or her skills and knowledge.
- Has the agent reviewed your contractual agreements? To completely understand your liabilities, the agent should review contracts such as property, equipment and vehicle leases; purchase orders; and other business agreements.
For many companies, insurance is the foundation of an employee benefits package. But what used to be a fairly simple process has turned into a vast array of confusing choices.
There are three basic types of health plans:
Indemnity plans offer traditional benefits and open access to service providers. These plans tend to be more expensive than the other options.
Preferred Provider Organizations (PPOs) develop a network of doctors, hospitals and other health-care providers, and negotiate discounts to maintain costs.
Health Maintenance Organizations (HMOs) contract with doctors, hospitals and other service providers to deliver care. Patients are typically required to see a plan provider for care.
Some issues to consider when choosing a health plan and provider include:
- Financial stability. Check out the insurer's financial health by contacting your state insurance department and reviewing the insurer's ranking from rating agencies such as A.M. Best Co. Inc., Duff & Phelps Credit Rating Co., and Standard & Poor's. Your agent can help you with this.
- Plan features, limitations and exclusions. Find out what the plan does and doesn't cover; then compare that with your employees' needs.
- Service record. How well does the insurer pay claims and respond to customer service and administrative requests? Check with your state's department of insurance and the Better Business Bureau to see if any complaints are on file. Ask to see the plan's latest member satisfaction survey results. And always ask for and check references.
If your employees are paying all or a portion of their health insurance premiums, allow them to pay with pretax dollars. Michael Hart, president and principal of Hart Associates Inc., an advertising agency in Maumee, Ohio, does just that for his 40 employees. "We were able to help our employees by creating a Section 125 program, which our agent administers for us, that allows our employees to pay their part of their health insurance premiums with pretax dollars," Hart says.
In addition to health insurance, consider other types of coverage as part of your benefits package. Many health insurers also offer dental and vision plans. Group life and disability coverage can help employees plan for their futures and protect their families, usually at rates lower than they can obtain on their own.
One of the most common objections to disability insurance is the cost--it's one of the more expensive types of coverage. That's because rates are based on the amount of risk the insurer is taking, and there is a much higher chance people will use their disability insurance than their life insurance. But group disability coverage is more affordable than individual policies.
Got It Covered?
Good insurance decisions are based on an understanding of what types of coverage are appropriate for the various risks you face. The basic types of business insurance include:
- General liability and property coverage. Liability insurance protects you if someone gets hurt while using your product or service or is injured while on your property. The insurer not only pays the damages but also funds and handles your legal defense. Property insurance covers your physical assets--building, equipment, furnishings, fixtures, inventory and so on.
- Umbrella policy. These policies provide additional liability coverage after the limits of your underlying policy are reached. For example, if someone was injured on your property and required $300,000 in medical treatment but the liability limit of your underlying policy is $250,000, your umbrella policy would cover the additional $50,000.
- Automobile. If you own and operate commercial vehicles, or if you use your personal vehicle for business purposes, the vehicles need to be appropriately insured. If business use of your car is minimal, the necessary coverage can probably be included in your personal policy.
- Professional liability. This type of insurance protects professional service providers, such as accountants, lawyers, doctors, dentists, pharmacists, insurance brokers and agents, and consultants, for negligence or errors and omissions that injure their clients.
- Life. Various types of life insurance can be designed to protect your company. Key-man insurance pays the company upon the death of a key person, usually an owner or senior executive, to help the company deal financially with the loss and replace those services.
- Workers' compensation. If you have three or more employees, you're probably required by law to provide workers' compensation insurance. This coverage pays an employee's medical expenses and provides some income replacement when a worker is injured on the job. Laws regarding workers' comp vary by state; check with your insurance agent and state insurance department to find out exactly what you need and how it's purchased.
- Business interruption. If you're unable to run your business due to a covered peril (fire, storm damage, vandalism and so on), business interruption insurance will replace lost income, pay ongoing expenses and pay costs involved in getting you set up in a temporary facility. You may also get an endorsement to your policy that protects you from financial losses due to the necessary suspension of your operations as a result of a problem at a "dependent property," which is defined as property not owned, operated or controlled by you but on which you are dependent for continuation of your normal business operation.
- Destroyed or damaged records. If your business records are destroyed or damaged by a covered peril, this insurance will compensate you for the inability to collect income and for the cost of reproducing the records.
Beyond the traditional types of insurance are a variety of specialty policies offering coverage you may or may not need. They include:
- Weather. The impact of weather on businesses is more complex than you might think. There's the obvious, such as coverage in case weather affects events like fairs, festivals, concerts, sporting events or filming. But many other businesses are weather-sensitive and can suffer loss of profits due to weather--too much or too little rain, snow, heat, cold, sun or wind.
- Flood and earthquake. Coverage for damage caused by floods and earthquakes is not included in ordinary homeowners and commercial policies. Flood insurance, which also covers damage caused by mud slides, is available through a program run by the Federal Insurance Administration; contact your agent or call (800) 427-4661 for more information.
Earthquake coverage is available as additional coverage to standard property and casualty policies. In earthquake-prone areas, this insurance is relatively expensive.
- Foreign-product liability. Often, foreign manufacturers don't understand U.S. product liability exposures or are unwilling or unable to accept responsibility in the event of litigation. If you distribute, or incorporate into your product, items that are manufactured by foreign suppliers, this coverage will protect you and your suppliers.
- Employment practices. Defending your company against an employment-related claim such as discrimination, sexual harassment or wrongful termination can be financially devastating. A number of insurers offer policies that pay both legal costs and damages.
What Price Is Right?
One of the most perplexing aspects of insurance is how rates are set. Rates are determined by the specific type and amount of coverage you get, the way a particular package is set up, the size and history of your company, and the degree of risk the insurer assumes. But rates are not set in stone; you can--and should--negotiate the cost of coverage with carriers.
Keep in mind that insurance companies offer discounts to customers who actively work to reduce risks, by installing smoke detectors or a security system, for example, or who buy multiple policies from the same carrier.
Everybody's talking about it, and nobody's really sure what's going to happen. Nonetheless, insurance companies are taking a serious look at the computer and equipment problems that may begin on January 1, 2000.
Serious equipment failures could result in bodily injury or property damage. Contact your insurance agent for a checklist that can help you recognize the problems you may have with the Y2K bug. Also, you need to determine what your insurance will and will not cover. Don't rely on insurance to take care of your Y2K problems, however. Some insurance companies may begin excluding Y2K-related problems from their general liability coverage.
Emotional Roller Coaster
If an event is serious enough to warrant an insurance claim, it will have a psychological impact on you and your employees. Dealing with your staff's problems is every bit as important as dealing with your insurance company.
"Grieving the loss caused by a disaster is a natural process, and to ignore that can have a negative impact on your recovery," says Jennell Evans, vice president of Strategic Interactions Inc., an organizational development firm in Vienna, Virginia. "While you have to attend to the business side of rebuilding, you also have to attend to the emotional functions of the group."
To do that, Evans advises, talk about the future and communicate the status of the recovery. If your employees' jobs are secure, they need to know that; if the future looks shaky, they have a right to know that, too.
Ron Ellman's experience supports Evans' position. Ellman is president of Ellman Batteries and Power Systems Inc., an industrial battery distributor in Orlando, Florida. In 1983, an electrical fire destroyed his former business. While insurance covered the building and its contents, replaced lost income and paid for other recovery efforts, Ellman was so devastated that he neglected his business, and two years later, it failed. "When [there's] a catastrophe, your employees will be as affected as you are," Ellman says. "I lost track of what was going on, and that crippled us."
If you're so distressed you don't feel capable of handling a crisis, consider bringing someone in to help with trauma counseling. Some insurance policies will pay for what Evans calls "critical incident debriefing."
As much as you'd like to, insurance isn't something you can take care of once and then forget. You need to do an annual review of your needs and your coverage.
If you make changes to existing policies, make sure the paperwork is completed. That's something Sandy Doerr, president of Corporate Marketing of America in West Palm Beach, Florida, learned the hard way when he added a vehicle to his automobile policy. Instead of making the change, the company canceled his policy--and Doerr didn't discover the error for several months.
If you switch policies or insurers, study your new policy carefully. Barbara Muret, owner of Fleece & Unicorn Companies in Stillwater, Oklahoma, didn't pay attention to this detail when she changed property insurance policies last year. Her previous policy had classified furniture, fixtures and office equipment in separate categories; the new policy grouped those items. Muret didn't notice the change until a fire in an adjacent store caused so much smoke and water damage to her store that nothing was recoverable. The insurance company paid promptly based on the terms of the policy, but the amount of coverage was much less than Muret intended it to be.
Finally, don't sacrifice coverage for rates. Rick Reetz, president of Robert C. Reetz Co. Inc., a custom equipment manufacturer and metal fabricator in Pawtucket, Rhode Island, discovered the true value of insurance last year when a fire severely damaged his plant. "We never expected a loss of this magnitude," Reetz says. But his agent was on-site within hours, coordinating the repair and restoration process, and providing Reetz with immediate funds as an advance to cover the loss-related costs. While he still insists on competitive rates, Reetz says his first priority is to make sure the coverage will protect his company if another disaster occurs.
- Your state insurance department. You can find the number in your local telephone directory under "government listings." This department can provide you with infor-mation about insurance such as how to avoid scams and how to be sure you meet the state's legal requirements.
- Employer Quality Partnership (EQP). A coalition of employer organizations that assists businesses in finding and purchasing health-care programs. Free brochures designed to help evaluate health plans are available at http://www.eqp.org or by calling (800) 260-3783.
- "Everything I Own!" This is a household inventory software program that would also work for a small office. The program is available from BlueCollar Software for $24.95. To download a demo, visit http://www.blucollsoft.com
- Insurance Information Institute. For help evaluating your needs and choosing the right coverage, call (800) 331-9146 or check out http://www.iii.org
- Independent Insurance Agents of America. Call (800) 221-7917 or visit http://www.independentagent.com for a referral to an independent agent in your area.
Corporate Marketing of America, 1000 S. Military Trail, Ste. D, West Palm Beach, FL 33415, firstname.lastname@example.org (initial character in this Web address is a one)
Ellman Batteries and Power Systems Inc., 1707 Demetree Dr., Winter Park, FL 32789, (407) 629-1956
Fleece & Unicorn Cos., Rte. 5, Box 368, Stillwater, OK 74074, http://www.cowboy.net/~muret
Hart Associates Inc., 1915 Indian Woods Cir., Maumee, OH 43537, email@example.com
Robert C. Reetz Co. Inc., 190 York Ave., Pawtucket, RI 02860, (401) 722-9025
Strategic Interactions Inc., 527 Maple Ave. E., #200, Vienna, VA 22180, http://www.strategicinteractions.com