Upgrading Your Insurance Policy

Your business has grown beyond the needs of the basic insurance policy you bought in the beginning. Now what?

By Mie- Yun Lee

Opinions expressed by Entrepreneur contributors are their own.

You've spent countless hours developing a business plan tosecure financing. You've hired a talented staff and purchasedoffice equipment to get things up and running. You've burnedthe midnight oil and worked numerous weekends to build yourbusiness. And should a lawsuit or natural disaster strike, or someother crisis send your company into a frenzy, your smoothlyoperating machine won't be derailed, because you've boughtbasic business insurance.

But what if you've been playing the game for several yearsnow, and you've developed your business from a respectable humto a pulsing buzz? As your business changes, so do your risks andexposures. It's only natural that the scope of your businessinsurance should grow accordingly. Whether you need additionalcoverage in your basic business owner's package policy (BOP) oryou intend to purchase an insurance policy that addresses specificrisks (such as product-related insurance), making sure yourbusiness 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 aminimum. Back when his business was still in its infancy,controlling costs was crucial. In fact, Wedel, 33, wasn'treally in the market for anything beyond workers' compensation,which is required by federal law, and a BOP, which lumps togetherliability and property coverage. When he purchased his BOP, thepremium was $350 for $1 million in liability coverage, excludingproducts, and $5,000 in property coverage.

But because Wedel's company, which manufactures anddistributes condoms, is in the business of protection, so to speak,it was inevitable that he'd eventually have to increasecoverage and add supplemental insurance as his business took off.From the day he opened the doors for business, Wedel has workedclosely with Tom Skelly at Skelly Insurance Inc. in Boston todetermine what kinds of coverage to increase or add. "As anentrepreneur starting a company, you learn that the alliances youdevelop with certain service providers are just invaluable,"Wedel says.

Since its inception, the $5 million company has either increasedcoverage or added supplemental insurance in the following areas:product liability insurance, vendors insurance, property insurance,employment practices liability insurance and general liabilityinsurance. While there's always the balancing act of decidingwhen to add what and how much additional coverage you can afford,as long as you periodically review your policies--especially whenyour company experiences significant changes--you'll be on theright track to ensuring you have the right amount ofprotection.

In Wedel's case, it wasn't necessarily his own concernsthat motivated him to consider tacking on supplemental insurance;it was often his customers' needs. "The first pressure wasa business pressure," he says. "[I had] to have theinsurance in order to get someone's business, like adistributor or chain of stores, for instance--that's what firstprompted me to look into adding more insurance."

Another common factor for entrepreneurs to consider is that asassets increase, so does the need for more coverage. It's wiseto re-evaluate your policies with that in mind whenever they'reup for renewal. For Wedel, the demands of distributors andcustomers as well as the growth potential that came along withadding more insurance carried a lot of weight. If a certaindistributor required a particular level of insurance coverage,Wedel evaluated the pros and cons. He recently purchased additionalliability insurance. Although it will probably cost more during thefirst six months or even the first year than what his company willmake from the distributor that requested it, Wedel was willing todo it because he believes it will lead to additionalopportunities.

Taking on that kind of expense isn't routine for Wedel,however. "There have been times I've said no to customerswho demand certain kinds of liability insurance because itwasn't profitable enough to justify the investment andwasn't going to lead to other opportunities," he says. Yethe often considers supplemental insurance to be a wise investment.So while Global Protection started slow with just a simple BOP, thecompany has since added, among other things, a products policy witha $16,000 premium for $500,000 in coverage, and its package policynow includes $85,000 in property coverage. It's critical totalk to your broker about risks specific to your business becausethere simply isn't a one-size-fits-all approach to businessinsurance. If you own a deli, for example, you'll need spoilagecoverage. Say you have $15,000 worth of meat in the refrigerator.If the refrigerator breaks down and the meat spoils, you'llwant that expense covered.

As Global Protection continues to grow and extend its reach toinclude international markets, Wedel has been forced to look atliability from the perspective of vendors in other countries. Hisefforts to find a supplier in Japan were hampered by media storiesabout lawsuits abounding in the United States. Foreign supplierswere concerned that they, too, would be vulnerable doing businesswith a company from so litigious a society. To forge a successfulrelationship with a supplier, Global Protection purchased vendorsinsurance to cover the company in Japan.

Additional Protection

What about off-premises property? Property insurance protectsyour business against physical damage to, or loss of, your assets,covering the cost of repair or replacement. Assets, broadlydefined, include the area where your business operates and theproperty housed there. But in the event your notebook computer isswiped while you're at the airport, you're going to want itcovered. So keep in mind that insurance providers typically setsub-limits for property that's in transit or off the premises.With some providers, these limits are built-in, whereas othersrequire you to add them on as supplemental coverage, as Wedeldid.

Employment practices liability insurance (EPLI) is another areaquickly becoming a common supplement for entrepreneurs. GlobalProtection recently added EPLI to protect against such situationsas 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 liabilitypolicies (or BOPs for that matter): directors and officersliability insurance, or D&O. If you are a board member andfound to be negligent, your personal assets are at risk. WithD&O insurance, you can deflect that risk. And remember, as allthe supplemental coverages begin to add up, you should probablyinvestigate lowering your premium. If, for instance, your goal isto increase your property coverage, you can lower the cost bytaking just a few simple steps. Small changes, such as keepingduplicate records off-site, can result in premium savings.

After getting an idea of what additional liability insurancewould cost him, Wedel focused on decreasing the rates. He andSkelly brainstormed and did some research that they presented tothe insurance underwriters to illustrate what limited liability thecompany actually faced. By providing a thorough background on thecondom-manufacturing industry, which not too many people arefamiliar with, and showing the underwriters how few lawsuits hadbeen brought against condom companies, they were able to negotiatea lower premium.

Communicate with your broker about ways to save money. Even ifit's an investment, such as installing an alarm system, youcould end up saving money in the long run, because premiums add upquickly.

Whether it's coverage for products in transit or propertyinsurance, don't dismiss supplemental business insurance asunnecessary extras. Because if you're hit with a lawsuit or astorm, "extra" could mean all the difference.

Business Insurance Supplements

The following are types of supplemental business insurance youshould check out to make sure your company is fully protected:

  • Auto insurance (or fleet insurance): Provides coveragefor injury, damage or theft. It's wise to have coverage even ifyou don't have company-owned vehicles in case you (or anemployee) get into an accident while driving a personal or rentalcar on company business.
  • Business interruption insurance: Related to abusiness's inability to function due to losses incurred bycovered perils like fire or storm damage. It provides compensationfor lost income, ongoing expenses such as rent and the costs ofsetting up a temporary facility.
  • Crime insurance: A type of crime/fidelity insurance thatcovers the cost of losses arising from employees' dishonesty orfraudulent acts such as forgery, burglary, computer fraud andextortion.
  • Directors & officers insurance: Protects thepersonal assets of directors and officers from liability claimsrelated to their organizational activities.
  • Product-related insurance: Covers manufacturers' orsellers' liability for losses or injuries to a buyer, user orbystander caused by a defect or malfunction of their product.
  • Umbrella insurance: Provides additional liabilitycoverage above and beyond the limits of coverage as stipulated inyour main policy.

Mie-Yun Lee is the founder and editorial director ofBuyerZone.com, a premier online marketplace for growing businesses.Doreen Bentley contributed to this article. For more information onbusiness insurance, go to www.buyerzone.com/business_insurance/index.html.

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