Let’s face it: Starting and running any type of business hasrisks. Recognizing the risks in all areas of yourbusiness–management, marketing, contracts, personnel and theparticular ramifications of your product or service on customersand the market–is the first step in effective risk management.
One of the smartest moves any business owner can make is havingenough of the right kinds of insurance. Not only does this protectyour business’s assets from risks that could very well reduce themto nothing if a catastrophe struck, it also safeguards yourpersonal assets, which are often on the line, from a liabilitypoint of view.
What kind of risks should you be concerned about? If you haveemployees, you’re obligated to:
- Provide a safe place to work,
- Employ individuals reasonably competent to carry out
- Warn employees of danger,
- Furnish appropriate and safe tools, and
- Set up and enforce proper rules of employee conduct as theyrelate to safe working procedures.
You also owe a degree of safety and concern to your customers,clients, and the public–not only for their physical well-beingwhen they’re doing business with you but also to protect theirproperty.
The basic business insurance package (not including healthinsurance) consists of four fundamental coverages–workers’compensation, general liability, auto and property/casualty–plusan added layer of protection over those, often called an umbrellapolicy. In addition to these basic needs, you should also considerpurchasing business interruption coverage and life and disabilityinsurance.
Workers’ Compensation
According to the Independent Insurance Agents of America (IIAA),it’s often hard for small companies to get workers’ comp insuranceat reasonable rates. Consequently, some states have a risk-sharingpool for firms that can’t buy from the private market. Typicallystate-run and similar to assigned risk pools for car insurance,these pools generally don’t provide the types of discounts offeredin the voluntary market and thus are an “insurance of lastresort.”
Because insurance agents aren’t always up-to-date on the latestrequirements and laws regarding workers’ comp, you should checkwith your state, as well as your agent, to find out exactly whatcoverage you need. Start at your state’s department of insurance orinsurance commissioner’s office.
Generally, rates for workers’ comp insurance are set by thestate, and you purchase insurance from a private insurer. Theminimum amount you need is also governed by state law. When you buyworkers’ comp, be sure to choose a company licensed to writeinsurance in your state and approved by the insurance department orcommissioner.
If you are purchasing insurance for the first time, the ratewill be based on your payroll and the average cost of insurance inyour industry. You’ll pay that rate for a number of years, afterwhich an experience rating will kick in, allowing you torenegotiate premiums.
Depending on the state you are located in, the business ownerwill be either automatically included or excluded from coverage; ifyou want something different, you’ll need to make specialarrangements. While excluding yourself can save you several hundreddollars, this can be penny-wise and pound-foolish. Review yourpolicy before choosing this option, because in most states, if youopt out, no health benefits will be paid for any job-related injuryor illness by your health insurance provider.
A better way to reduce premiums is by maintaining a good safetyrecord. This could include following all the Occupational Healthand Safety Administration guidelines related to your business,creating an employee safety manual and instituting a safetytraining program.
Another way to cut costs is to ensure that all jobs in yourcompany are properly classified. Insurance agencies give jobsdifferent classification ratings depending on the degree of risk ofinjury.
General Liability
For example, suppose a visiting salesperson slips on a bananapeel while taking a tour of your office and breaks her ankle.General liability covers her claim against you. Or let’s say yourcompany is a window-sash manufacturer, with hundreds of thousandsof its window sashes installed in people’s homes and businesses. Ifsomething goes wrong with them, general liability covers any claimsrelated to the damage that results.
The catch is that the damage cannot be due to poor workmanship.This points to one difficulty with general liability insurance: Ittends to have a lot of exclusions. Make sure you understand exactlywhat your policy covers…and what it doesn’t.
You may want to purchase additional liability policies to coverspecific concerns. For example, many consultants purchase “errorsand omissions liability,” which protects them in case they are suedfor damages resulting from a mistake in their work. A computerconsultant who accidentally deletes a firm’s customer list could beprotected by this insurance, for example.
Companies with a board of directors may want to consider”directors’ and officers’ liability” (D&O), which protects topexecutives against personal financial responsibility due to actionstaken by the company.
How much liability coverage do you need? Experts say $2 millionto $3 million of liability insurance should be plenty. The goodnews is that liability insurance isn’t priced on adollar-for-dollar basis, so twice the coverage won’t be twice theprice.
The price you’ll have to pay for comprehensive general liabilityinsurance depends on the size of your business (measured either bysquare footage or by payroll) and the specific risks involved.
Auto Insurance
Pay attention to policy limits when purchasing auto coverage.Many states set minimum liability coverages, which may be wellbelow what you need. “If you don’t have enough coverage, the courtscan take everything you have, then attach your future corporateincome, thus possibly causing the company severe financial hardshipor even bankruptcy,” says Mike Fox, an account executive withWausau Insurance Companies. “I recommend carrying at least $1million in liability coverage.”
Property/Casualty Coverage
Make sure you get all-risks coverage. Then go the extra step andcarefully review the policy’s exclusions. All policies cover lossby fire, but what about such crises as hailstorms and explosions?Depending on your geographic location and the nature of yourbusiness, you may want to buy coverage for all these risks.
Whenever possible, you should buy replacement cost insurance,which will pay you enough to replace your property at today’sprices, regardless of the cost when you bought the items. It’sprotection from inflation. (Be sure your total replacements do notexceed the policy cap.)
For example, if you have a 30,000-square-foot building thatcosts $50 per square foot to replace, the total tab will be $1.5million.
But if your policy has a maximum replacement of $1 million,you’re going to come up short. To protect yourself, expertsrecommend buying replacement insurance with inflation guard. Thisadjusts the cap on the policy to allow for inflation. If that’s notpossible, then be sure to review the limits of your policy fromtime to time to ensure you’re still adequately covered.
Umbrella Coverage
Business Interruption Coverage
For that, you’ll need business interruption coverage. Manyentrepreneurs neglect to consider this important type of coverage,which can provide enough to meet your overhead and other expensesduring the time your business is out of commission. Premiums forthese policies are based on your company’s income.
Life Insurance
Term insurance is less costly than permanent insurance at first,although the payments increase each year. Permanent insurancebuilds equity and should be considered once the business has morecash to spend. The life insurance policy should provide for thefamilies of the owners and key management. If the owner dies,creditors are likely to take everything, and the owner’s familywill be left without the income or assets of the business to relyon.
Another type of life insurance that can be beneficial for asmall business is “key person” insurance. If the business is alimited partnership or has a few key stockholders, the buy-sellagreement should specifically authorize this type of insurance tofund a buyback by the surviving leadership. Without a provision forinsurance to buy capital, the buy-sell agreement may be renderedmeaningless.
The company is the beneficiary of the key person policy. Whenthe key person dies, creating the obligation to pay, say, $100,000for his or her stock, the cash with which to make that purchase iscreated at the same time. If you don’t have the cash to buy thestock back from the surviving family, you could find yourself withnew “business partners” you never bargained for–and wind up losingcontrol of your business.
In addition to the owners or key stockholders, any member of thecompany who is vital to operations should also be insured.
Disability Insurance
There are two basic types of disability coverage: short term(anywhere from 12 weeks to a year) and long term (more than ayear). An important element of disability coverage is the waitingperiod before benefits are paid. For short-term disability, thewaiting period is generally seven to 14 days. For long-termdisability, it can be anywhere from 30 days to a year. If beingunable to work for a limited period of time would not seriouslyjeopardize your business, you can decrease your premiums bychoosing a longer waiting period.
Another optional add-on is “business overhead” insurance, whichpays for ongoing business expenses, such as office rental, loanpayments and employee salaries, if the business owner is disabledand unable to generate income.
To find the right coverage for your business, work with an agentwho’s familiar with a variety of carriers. For more information oninsurance providers, contact the Insurance Information Institute.
