Pile It On
You've spent countless hours developing a business plan to secure financing. You've hired a talented staff and purchased office equipment to get things up and running. You've burned the midnight oil and worked numerous weekends to build your business. And should a lawsuit or natural disaster strike, or some other crisis send your company into a frenzy, your smoothly operating machine won't be derailed, because you've bought basic business insurance.
But what if you've been playing the game for several years now, and you've developed your business from a respectable hum to a pulsing buzz? As your business changes, so do your risks and exposures. It's only natural that the scope of your business insurance should grow accordingly. Whether you need additional coverage in your basic business owner's package policy (BOP) or you intend to purchase an insurance policy that addresses specific risks (such as product-related insurance), making sure your business has adequate protection should be an ongoing task.
A Case Study
For Davin Wedel, founder of Global Protection Corp. in Boston, business insurance was something he initially wanted to keep to a minimum. Back when his business was still in its infancy, controlling costs was crucial. In fact, Wedel, 33, wasn't really in the market for anything beyond workers' compensation, which is required by federal law, and a BOP, which lumps together liability and property coverage. When he purchased his BOP, the premium was $350 for $1 million in liability coverage, excluding products, and $5,000 in property coverage.
But because Wedel's company, which manufactures and distributes condoms, is in the business of protection, so to speak, it was inevitable that he'd eventually have to increase coverage and add supplemental insurance as his business took off. From the day he opened the doors for business, Wedel has worked closely with Tom Skelly at Skelly Insurance Inc. in Boston to determine what kinds of coverage to increase or add. "As an entrepreneur starting a company, you learn that the alliances you develop with certain service providers are just invaluable," Wedel says.
Since its inception, the $5 million company has either increased coverage or added supplemental insurance in the following areas: product liability insurance, vendors insurance, property insurance, employment practices liability insurance and general liability insurance. While there's always the balancing act of deciding when to add what and how much additional coverage you can afford, as long as you periodically review your policies--especially when your company experiences significant changes--you'll be on the right track to ensuring you have the right amount of protection.
In Wedel's case, it wasn't necessarily his own concerns that motivated him to consider tacking on supplemental insurance; it was often his customers' needs. "The first pressure was a business pressure," he says. "[I had] to have the insurance in order to get someone's business, like a distributor or chain of stores, for instance--that's what first prompted me to look into adding more insurance."
Another common factor for entrepreneurs to consider is that as assets increase, so does the need for more coverage. It's wise to re-evaluate your policies with that in mind whenever they're up for renewal. For Wedel, the demands of distributors and customers as well as the growth potential that came along with adding more insurance carried a lot of weight. If a certain distributor required a particular level of insurance coverage, Wedel evaluated the pros and cons. He recently purchased additional liability insurance. Although it will probably cost more during the first six months or even the first year than what his company will make from the distributor that requested it, Wedel was willing to do it because he believes it will lead to additional opportunities.
Taking on that kind of expense isn't routine for Wedel, however. "There have been times I've said no to customers who demand certain kinds of liability insurance because it wasn't profitable enough to justify the investment and wasn't going to lead to other opportunities," he says. Yet he often considers supplemental insurance to be a wise investment. So while Global Protection started slow with just a simple BOP, the company has since added, among other things, a products policy with a $16,000 premium for $500,000 in coverage, and its package policy now includes $85,000 in property coverage. It's critical to talk to your broker about risks specific to your business because there simply isn't a one-size-fits-all approach to business insurance. If you own a deli, for example, you'll need spoilage coverage. Say you have $15,000 worth of meat in the refrigerator. If the refrigerator breaks down and the meat spoils, you'll want that expense covered.
As Global Protection continues to grow and extend its reach to include international markets, Wedel has been forced to look at liability from the perspective of vendors in other countries. His efforts to find a supplier in Japan were hampered by media stories about lawsuits abounding in the United States. Foreign suppliers were concerned that they, too, would be vulnerable doing business with a company from so litigious a society. To forge a successful relationship with a supplier, Global Protection purchased vendors insurance to cover the company in Japan.
What about off-premises property? Property insurance protects your business against physical damage to, or loss of, your assets, covering the cost of repair or replacement. Assets, broadly defined, include the area where your business operates and the property housed there. But in the event your notebook computer is swiped while you're at the airport, you're going to want it covered. So keep in mind that insurance providers typically set sub-limits for property that's in transit or off the premises. With some providers, these limits are built-in, whereas others require you to add them on as supplemental coverage, as Wedel did.
Employment practices liability insurance (EPLI) is another area quickly becoming a common supplement for entrepreneurs. Global Protection recently added EPLI to protect against such situations as sexual harassment, age discrimination and wrongful dismissal. You may also want to check out an important, yet often overlooked, type of insurance that isn't included in general liability policies (or BOPs for that matter): directors and officers liability insurance, or D&O. If you are a board member and found to be negligent, your personal assets are at risk. With D&O insurance, you can deflect that risk. And remember, as all the supplemental coverages begin to add up, you should probably investigate lowering your premium. If, for instance, your goal is to increase your property coverage, you can lower the cost by taking just a few simple steps. Small changes, such as keeping duplicate records off-site, can result in premium savings.
After getting an idea of what additional liability insurance would cost him, Wedel focused on decreasing the rates. He and Skelly brainstormed and did some research that they presented to the insurance underwriters to illustrate what limited liability the company actually faced. By providing a thorough background on the condom-manufacturing industry, which not too many people are familiar with, and showing the underwriters how few lawsuits had been brought against condom companies, they were able to negotiate a lower premium.
Communicate with your broker about ways to save money. Even if it's an investment, such as installing an alarm system, you could end up saving money in the long run, because premiums add up quickly.
Whether it's coverage for products in transit or property insurance, don't dismiss supplemental business insurance as unnecessary extras. Because if you're hit with a lawsuit or a storm, "extra" could mean all the difference.
Business Insurance Supplements
The following are types of supplemental business insurance you should check out to make sure your company is fully protected:
- Auto insurance (or fleet insurance): Provides coverage for injury, damage or theft. It's wise to have coverage even if you don't have company-owned vehicles in case you (or an employee) get into an accident while driving a personal or rental car on company business.
- Business interruption insurance: Related to a business's inability to function due to losses incurred by covered perils like fire or storm damage. It provides compensation for lost income, ongoing expenses such as rent and the costs of setting up a temporary facility.
- Crime insurance: A type of crime/fidelity insurance that covers the cost of losses arising from employees' dishonesty or fraudulent acts such as forgery, burglary, computer fraud and extortion.
- Directors & officers insurance: Protects the personal assets of directors and officers from liability claims related to their organizational activities.
- Product-related insurance: Covers manufacturers' or sellers' liability for losses or injuries to a buyer, user or bystander caused by a defect or malfunction of their product.
- Umbrella insurance: Provides additional liability coverage above and beyond the limits of coverage as stipulated in your main policy.
Mie-Yun Lee is the founder and editorial director of BuyerZone.com, a premier online marketplace for growing businesses. Doreen Bentley contributed to this article. For more information on business insurance, go to www.buyerzone.com/business_insurance/index.html.