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Business insurance protects owners from losses that they risk in the administration and operation of their business. Since the size, function and infrastructure of each organization is unique, assessing material risks and purchasing the right business coverage can be a difficult and complex process.
Fortunately, business owners can follow a straightforward and step by step process to ensure that they are intelligently and thoroughly assessing their insurance needs with regards to each of the major types of coverage available.
While business owners frequently underestimate or completely overlook their insurance coverage needs, premiums paid on commercial insurance policies still make up the largest sector of the U.S. insurance market.
Assess Your Coverage Needs
In order to properly evaluate your insurance needs, you need to have detailed financial records and a list of possible risks to compare to the losses you could suffer. That means you should sit down and take an inventory of your major assets and risks to review with your broker. Start by putting together a full spreadsheet of your organization’s assets, financial obligations and the risks any sudden changes could bring to them.
Obviously, the format and prioritization of this inventory will depend on the type of business you run, how you produce value and what kind of product you deliver to your market. It’s best to cull all of this information from your existing business plan if you have one.
These are the most basic considerations you’ll want to cover, regardless of the type of organization you run:
- Property and vehicle damage: Can cover damage to a building, its contents and any other piece of equipment or vehicle owned by the company.
- Income lost due to business interruptions: Covers some of the expenses and income lost when a fire or another emergency causes a business to shut down
- Liability costs: Assumes the legal responsibility and costs a business may have to undertake when they cause harm to others
- Workers compensation: Pays for the medical care and a lost wages that a business is legally required to pay when an employee is injured, regardless of fault.
Ultimately, you want to assess the value and risks of all of your assets. For most businesses, this means listing assets in terms of potential losses related to property damage and liability costs. Measuring each risk will provide windows to other potential exposures and you will need to determine the best way to protect your business from losses related to each. For example, a fleet of company owned vehicles can produce damage to the vehicles as well potential legal liability if they are involved in an accident. Loss of vehicles can also produce loss of business income.
As you take this inventory remember to include physical properties like buildings, land, office equipment, and vehicles, as well as your intellectual and financial properties like investment capital, securities and current insurance policies. For each asset, source of income and operational cost, consider:
- What is this asset worth? Identify the replacement values and potential liability costs associated with each
- How critical is this asset our operations? Determine if/to what extent your operations could continue if one of these properties was damaged or lost
- How could this asset be lost and what would happen if was? Figure out what circumstance or events could lead to loss or damage of each asset or the ways in which you would be rendered unable to cover your current operational costs
Understand Your Policy Options
Now that you know your basic coverage needs, you can start shopping for policies that make sense for your organization’s budget. This sounds harder than it is — most small businesses require similar types of coverage, so now it’s just a matter of researching types of coverage and start working with an agent to find a best-fit business owner’s policy package. If you have an existing relationship with an insurance carrier that may be a building block for purchasing additional coverages. Here’s a breakdown of the coverage options available:
Business Owners Policies
These all-in-one package policies, often called BOPs, are often ideal for small to mid-size businesses that require standard coverages, such as small offices, stores and some types of small service and processing businesses. Eligibility for BOP packages depends upon:
- The size of premises and value of its contents
- The level of liability coverage required
- The type of commercial operation and extent of off-premises servicing
Private Sector Business Starts, 1993:Q1 — 2012:Q4*
Business starts were down nearly 20% in the recession, holding back most types of commercial insurance exposure, but are recovering slowly.
Business starts were up 2.8% in 2012 to 769,000 following a 2.2% gain to 748,000 in 2011. Start-ups could accelerate in 2013.
Source: Insurance Information Institute 2007 843,000 2008 790,000 2009 697,000 2010 742,000 2011 748,000 2012 769,000
As the startup rate of small businesses continues to rebound from recession-era lows, the range of commercial insurance coverage needs and options is also expanding.
Additional Coverage Plans
While BOP packages generally do not include coverage of professional liability, auto insurance or workers compensation, small business owners often find that paying for coverage add-ons as needed is still cheaper than purchasing individual policies through the same provider. Many of the following individual coverages, can be added to a general business owners policy:
General Liability Coverage
Liability insurance provides protection for claims of injury or property damage that a business may encounter. These include:
- Unforeseen damages to the business premises, building, and the contents contained therein
- Legal claims of negligence, libel, slander and contractual liability
- Costs of legal counsel and defense required in either case
Commercial Property Coverage
These policies cover damage or loss to specific physical property owned by the business. The coverage can be either all risk or specific peril depending on the needs of the business. Commonly, businesses buy commercial property policies that cover:
- Lost income, business interruption
- Computer equipment and systems breakdowns
- Loss of financial assets or records
Boiler and Machinery Coverage
Since commercial property coverage generally excludes damages as a result of the explosion or breakdown of heavy mechanical equipment or pressurized systems like boilers, this coverage can be critical for any organization that uses expensive machinery.
In the event of a breakdown, boiler and machinery policies will not only cover the repair and replacement of machinery but also cover organizational expenses for incomes lost until the equipment is back online. It’s a good idea to consider this coverage if your daily operations rely heavily on:
- Refrigeration or air conditioning equipment
- Mechanical or electrical systems that rely on piping, turbines, engines, pumps, compressors, blowers, gearing, shafting, electric motors, generators, transformers
Business Vehicle Coverage
Commercial property policies also usually exclude coverage of company-owned vehicles. Commercial auto coverage is a common and fairly affordable add-on, but business owners often forget to factor it into their policies or forget to include exact identification of each vehicle they intend to cover. Remember that even if your employees are driving their personal vehicles, you will be liable for damages incurred whenever the car is used for business-related purposes.
Policies for non-owned vehicles are limited and cheaper, poll your employees and designate which non-owned vehicles will be regularly used for company purposes and cover each of these individually.
Product Liability Insurance
These policies can cover property damage resulting from the manufacture, wholesaling, retailing or distribution of your product. This coverage is essential for any company that handles or moves a product regardless of whether or not they actually manufacture it. If product failure is at all a risk facing your business, these liability plans are the best and only way to protect yourself against future claims. (Consider that even groundless claims can be very costly to defend and that many liability claims are reported months or even years after an injury or damage occurs.)
Since consumer lawsuits are taken very seriously, they can haunt you long after you’ve overhauled a problematic design, manufacture or distribution processes. When you shop for product liability coverage, keep an eye out for this important term description:
- Occurrence-based coverage: This means your coverage is in effect at the time the damage occurred, no matter how much time has elapsed between the event and the date the claim is filed against you.
Home-based Business Insurance
These policies cover damage to business property as well as liability resulting from business activities. Homeowners policies generally exclude or limit coverage for business properties. If you work from home, but you have assets or equipment that requires coverage, you should purchase coverage designed for a home-based business.
Worker’s compensation coverage is mandatory in every state except for Texas, but coverage levels will vary by state and depend on the size of your firm. These policies cover employees that are injured in the course of their employment with you. Be sure that you are meeting the coverage levels required of your organization in your state. Typically, provider policies offered in your area will meet your legal workers coverage minimums for:
- Wages lost due to injury or illness
- Medical treatment and care
- Legal costs of negligence lawsuits brought against you by employees
Also known as errors and omissions coverage, professional liability policies cover legal costs and reparations you may have to pay for charges of malpractice, errors or negligence brought against your professional practice. Depending on the business, this could include any mistake or perceived mistake that causes damage to a client or customer.
Director and Officers Coverage
These policies protect against actions of directors and officers that affect the profitability or operations of your firm. This would include negligent acts, omissions or misleading statements that cause suits against the company. According to The Insurance Information Institute 58% of corporations purchased Directors and Officers coverage in 2012 to cover a variety of risk exposures.
Data Breach and E-Commerce Coverage
These data protection policies cover losses resulting from network security breaches that that threaten the security of a company’s financial information. This is particularly important if the business has sensitive data stored on private computers or servers or if they deal in e-commerce transactions. If a consumer’s financial information is compromised by an electronic transfer could include credit card numbers, other banking information or other forms of private data and software that the company stores or develops for its own purposes or its consumers.
Employment Practices Liability Insurance
These policies cover for violations of employee’s civil or other legal rights. This would include claims for sexual harassment and discrimination. Monetary awards for this type of claim can be astronomical and the legal fees are staggering.
Key Employees Insurance
This coverage for adverse financial impact if an accident, illness or death prevents a key employee’s from participating in the business. This would include such people as key creative or professional employees whose absence would adversely impact the company’s business success. In some cases, banks may require this type of insurance before approving a loan. Key Employee insurance can take the form of life insurance, disability insurance or health insurance and will also provide coverage for the time period necessary to recruit, hire and train a replacement.
Find Your Best-Fit Business Policy
Sifting through the number and variety of commercial business insurance options out there is enough to make a business owner’s head spin. If you’re like most of the world and you aren’t well versed in these policies and what standard-issue coverage is for a firm of your size and function, then you’re best bet is to consult a an insurance broker who specializes in BOPs.
You can find a reputable, experienced, licensed insurance broker who is knowledgeable about your particular type of business online. You can use the NAIC site to view listings of all the licensed insurance companies and brokers in your state.
Your agent should be a trusted partner in the success of your business. Choose someone who can facilitate a frank, open discussion of the potential risks you face and the best way to protect your company from exposure. Here are a few rules of thumb to review before you go into these talks:
- The Quality of Your Coverage is Only as Good as Your Provider: Shop around but be sure to choose an insurance company that is financially stable. Independent insurance agencies that represent more than one company may have more flexibility in finding you the proper coverage.
- Be Certain You Aren’t Paying for Duplicate Coverage Plans: It sounds obvious, but be sure you aren’t paying for the same coverage twice. Providers won’t mind at all if you’re overpaying, so make it a point to check your term(s) policies carefully for overlap. This is where an insurance professional can assist in explaining what each part of the insurance covers.
- Save Money By Choosing a Higher Deductible: Higher deductibles will reduce premiums but you need to be mindful of the financial burden that high deductibles can place on cash flow.
- Consider a Self-Insurance Option: Self Insurance options allow a company to take responsibility for some low-level risks. Usually this includes creating an insurance fund and managing that fund and claims that are filed. You can choose to handle the claims internally or use a third-party administrator which is usually an independent claims service that will investigate and evaluate a claim and provide settlement recommendations.
- Don’t Forget to Take Loss Protection Measures: Also known as “risk management plans”, loss protection measures include implementation of measures concerning workplace safety, disaster preparation and recovery and human resource intervention. Follow recommendations from your agent and comply with all government warnings and regulations. This would also include hiring practices and levels of information available to employees. For example, hiring practices may include background checks but access to any non-public information including personnel records should be restricted to certain personnel only. Employment of temporary personnel and contractors should also include restriction of access to certain sensitive information.
How to File a Claim
As soon as you are aware of a claim, it should be reported to your insurance agent. Insurance policies contain provisions pertaining to the reporting of claims so time is of the essence. Claims against business insurance can include a variety of matters so it is essential that you report even what you consider to be a minor or groundless claim. For example, if one of your employees is injured in the course of their employment, there should be a protocol for reporting the claim. Assessing the veracity or severity of a claim is something that should be done by an insurance professional.
Most insurance policies contain language concerning when you knew or should have known about a claim. Do not jeopardize your insurance coverage by ignoring a claim or trying to handle it yourself. The consequences can be very high and your business assets may depend on it. Here are a few tips to getting through this process fairly and mostly unscathed:
- Be professional. The process does not need to be hostile or adversarial. Open conflict will benefit no one and may adversely impact the process.
- Designate a claim handler. Depending on the size of your company it may be necessary to assign an employee to coordinate insurance claims. This person would be the contact point for the insurance carrier and be responsible for providing information and details concerning claims.
- Cooperate with requests for financial records. Some coverage such as business interruption coverage will require financial records that may cover a twelve month period. The speed of the handling of your claim may depend on your compliance.
- As a last resort, retain legal counsel. There may be times where you disagree with the handling and assessment of your claim. Your insurance agent or your state’s insurance commission can assist you in speaking with the insurance carrier, but it’s always a good idea to retain a legal adviser so you know that the guarantees of your policy are being upheld. Keep in mind that legal proceedings may significantly increase the time frame for resolving a claim.
Updating Coverage to Meet Your Current Needs
As your business grows, schedule periodic meetings with your agent to assess any changes and re-evaluate your coverage. If you are considering expansion of your business, changes in your insurance premium should be part of your business plan.
Areas that should be reviewed at least once a year are property insurance, general liability, workers compensation and automobile. Your numbers should be analyzed to make sure that you are carrying sufficient coverage to withstand potential losses.
Additionally, if you decide to add services to your company you will need to consider the possibility that additional insurance will be needed. For example, if you manufacture a product and decide to expand to e-commerce, specific insurance will be needed to protect any lost income or additional expenses due to computer hacking, computer viruses or another form of data breach.