Cover Charge

The ins and outs of insuring your small business
Magazine Contributor
8 min read

This story appears in the February 1996 issue of Entrepreneur. Subscribe »

Finding the right kind of insurance at a price that fits your pocketbook isn't easy. Drexel and Deanna Collins can testify to that.

The Cinnaminson, New Jersey, couple co-own DDAT (Distinguished Diversified Adventure Tours) Club Inc., which manufactures and sells T-shirts, jackets, lithographs, baseball cards and other paraphernalia from the Negro Baseball Leagues of the early 1900s. They sell their merchandise primarily through trade shows-and that was the crux of their insurance problem.

"At trade shows, we were always at risk because we didn't have any [show] insurance. And at one show, some of our things were stolen," recalls Drexel, CEO of the 4-year-old company. When the couple went looking for insurance, they found that some companies could provide liability but couldn't cover inventory if they didn't have a storefront or wouldn't protect them as they traveled. It took about two years, Drexel says, to find a company that could fulfill all their insurance needs.

Finding the proper insurance may seem like a daunting task, but it's essential to your business's continued success. And given all the things that can go wrong, putting in a little effort to protect what you've built doesn't seem like such a chore, after all.

Helping Hand

A qualified insurance professional can make the process a lot easier by guiding you to the coverage you need. "Personal referrals are your best resource for finding an insurance professional," says Gene Fairbrother, a consultant with the National Association for the Self-

Employed. "Call friends and people you know in the same business as you and ask for suggestions."

Sean Mooney, a senior vice president with the Insurance Information Institute, advises contacting your industry or trade association. In addition to providing referrals, some associations offer discounts on insurance or special insurance packages for members.

"Find a professional, qualified agent who understands your business's insurance needs," says Jim Belobraydic, a vice president with CNA Insurance Cos. in Chicago. "Make sure the agent represents at least one [insurance] company that specializes in your industry."

It's also a good idea to conduct an investigation of any company you're considering. Contact the Better Business Bureau, and call the state insurance commissioner or department to make sure the company is licensed to operate in your state.

Mooney also recommends checking the financial backgrounds of insurance companies, using publications such as Best's Agents Guide to Life Insurance Companies or Insurance Reports, Moody's Corporate Profiles, and Standard and Poor's Corporation Records. All are generally available in larger libraries.

Getting Covered

After choosing an insurance professional, the next step is determining what coverage you need. This is easier in some cases than others. The Collinses, for example, knew they needed liability insurance because their agreement with the Negro Baseball Museum, which licenses them to manufacture its products, requires it.

"Some forms of insurance are required," says Mooney. "In most states, for example, business owners [with employees] need to purchase workers' compensation insurance. You may also need to purchase property insurance as part of a lease, mortgage or agreement with suppliers."

Whether they are required or not, there are five basic types of coverage every business should consider, say Mooney and Fairbrother: property, liability, business interruption, life and disability, and workers' compensation.

The first three are typically included in a business owner's standard insurance package, which most insurance companies offer. However, not all policies provide the same type of coverage.

"Our business owner policies are somewhat tailored to different industries and try to respond to the [needs] of many businesses," says Richard Callahan, a vice president with Aetna Life & Casualty Co. in Hartford, Connecticut.

Homebased entrepreneurs should not assume their business is covered by their homeowner's policy; in most cases, it isn't. However, homebased business owners can buy standard business owners' policies, and several insurance companies are developing products especially for them. Chuck Moran of Bollinger Fowler Insurance in Short Hills, New Jersey, says RLI insurance, one of the companies he represents, targets entrepreneurs working from home.

Here's a closer look at the three types of coverage offered by most business owners' packages:

Property insurance covers your physical location, the contents of your business and, to a limited extent, portable equipment. When reviewing this part of the policy, Mooney advises making sure you're insured for the replacement cost of your equipment, not for what it's worth at the time of loss.

"General liability insurance is the most common coverage for retail, service and homebased entrepreneurs," says Fairbrother. It protects your business from accidents and unintentional injuries to others by covering damage to property and personal injuries. It also assists you financially and legally by paying legal costs if you're hit with a lawsuit.

Business interruption insurance covers lost income if your business cannot function normally for an extended period of time. It can also help pay for expenses above normal operating costs during this time, such as the cost of rebuilding.

Discuss business interruption coverage carefully with your agent because policies vary widely. Some cover business interruption by fire, floods, earthquake or civil unrest; others cover only some of these events or require the purchase of an additional endorsement or separate policy.

Life And Limb

Aside from basic business insurance, other coverages to consider include life and disability insurance. These are sold separately from standard business policies and from each other.

Disability is generally more important than life insurance to a small-business owner because it will replace your income and protect your family if you are disabled and unable to run the business, explains Fairbrother.

Short-term disability insurance covers the 90-day gap between the time a person is injured or gets sick and when workers' compensation kicks in. Long-term disability usually pays benefits after 90 days or longer.

Life insurance can be totally employer-funded, totally employee-funded or a combination of the two. Typically, employers offer life insurance policies equivalent to an employee's annual salary.

The cost of disability and life insurance is influenced by the age, number and demographic makeup of you and your employees, as well as your industry. On average, disability insurance costs one-half of 1 percent of payroll, while life insurance costs about 5 cents per $1,000.

Fair Compensation

All states except Texas and South Carolina require entrepreneurs to purchase workers' compensation insurance after reaching a certain level in terms of either payroll or number of employees. The core of the coverage includes paying medical bills and lost wages for employees injured on the job, and employer's liability, which protects the business owner should he or she be sued by the spouse or children of an employee who was permanently disabled or killed on the job.

Some states automatically include the business owner in the policy; others don't, and if you want to be covered, you must make special arrangements.

If you're looking to cut corners and figure that since you have health insurance, you don't need workers' compensation, think again, says Todd Muller of the Independent Insurance Agents of America. Most health insurance policies exclude work-related illnesses or injuries.

One cost-conscious alternative is to see if your state has a risk-sharing insurance pool. However, this is insurance of last resort and typically does not offer any of the discounts available in the voluntary market. (For more on cutting workers' compensation costs, see "Accidents Happen," July 1995.)

Added Protection

Although it isn't one of the top five insurance coverages required, Fairbrother suggests that as your business grows, particularly if it is a partnership, you should seriously consider "key man" insurance. This insures the lives of principals in partnerships and enables the survivor to buy the business from the estate of the deceased partner for a predetermined amount.

There is also key man insurance for key employees in a corporation. For example, if the salesperson who produces 80 percent of your business is killed, the insurance buys you time to reorganize and replace that individual.

If all this seems complicated, think of it like this, suggests Mooney: Insurance is a financial and legal shield that protects the capital and sweat equity you've put into your business from unexpected disaster. Take the time to carefully investigate before you buy, and when the unthinkable happens, you'll be prepared.

A Penny Saved

Protection doesn't have to be pricey. The Insurance Information Institute offers these tips for saving money on insurance:

Keep in touch with your agent and insurance company, and keep them apprised of what you are doing to prevent losses. If you have a good safety record, you may be able to get your premium reduced.

If you have a backup location from which to run your business in the event of a disaster, you may be able to save money on business interruption insurance.

Ask about any discounts available, and do whatever you can to qualify for them.

Take a higher deductible on your policy.

Involve your employees in all loss prevention and safety programs.

Talk insurance with others in your industry to pick up price trends and other developments you can discuss with your agent.

Contact Sources

Aetna Life & Casualty Co., 151 Farmington Ave., Hartford, CT 06156, (860) 273-5840;

Bollinger Fowler Insurance, 830 Morris Turnpike, Short Hills, NJ 07078, (800) 526-1379;

CNA Insurance Cos., CNA Plaza, #9W, Chicago, IL 60685, (312) 822-7054;

DDAT Club Inc., 2113 Land St., Cinnaminson, NJ 08077, (800) 603-5113;

Independent Insurance Agents of America, 127 S. Payton St., Alexandria, VA 22314, (800) 221-7917;

Insurance Information Institute, 110 William St., New York, NY 10038, (800) 331-9146;

National Association for the Self-Employed, 2121 Precinct Line Rd., Hurst, TX 76054, (800) 232-6273.


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