How to Budget for Business Insurance
Having business insurance is vital, but how much coverage do you really need? This guide will help you decide and plan for the cost.
David Levesque has had an entrepreneurial spirit since his days in college, when he managed the vending machine service at Johnson & Wales University – a business that did $380,000 annually in sales. When he opened his first coffee shop nearly fifteen years ago in Rhode Island, his dream of self-employment became a reality. He now has five shops under the Brewed Awakenings name in the Providence area. But when a water main broke recently near one of the shops and flooded the entire store within 20 minutes, panic set in.
For many small-business owners, standard property insurance doesn't cover acts like flooding, earthquakes and terrorism. Levesque, however, had business interruption insurance with The Hartford, and within two days he had a check for $50,000 to begin repairs. The insurance policy he had purchased for a minimal investment covered all the repairs and allowed Levesque to pay his employees their salaries while the store was shutdown. Without it, he would have needed to lay off his employees while he repaired the damage.
According to a 2010 survey by Travelers Insurance, 94 percent of small-business owners are confident their business is protected against insurable risks, despite only 56 percent having disaster-recovery insurance. Levesque's story is actually a rarity in the business insurance world. Many business owners don't understand how small business insurance works, and how to budget for it correctly.
'For many small-business owners, there is a fear that the insurance will not be there when they need it most and that it will be too costly,' says Janice Co, vice president of strategy and CMO for The Hartford's small commercial insurance business. 'But the insurance is there to protect you in the things you're probably not thinking about. If you don't have a comprehensive policy covering business interruption, worker's compensation, liability and more, you're not covered in many instances.'
In this guide, we will cover the types of business insurance you absolutely must have, some optional coverage, the biggest mistakes made in the budgeting process and how to actually purchase the insurance.
Business Insurance Budget: Coverage You Must Have
As Co puts it, you need the coverage that will keep you out of the most trouble. To put it more bluntly, you'll want coverage for your property and business interruption, liability insurance, workers' compensation and commercial automobiles before you start thinking about other types of insurance. A Business Owners Policy (or BOP) can roll all of these together in a cost-effective manner, but if you want to get customize your policy, here is what you need to focus on.
Property & Business Interruption: Protects buildings and their contents, such as equipment, furnishings, and inventory, and is the most popular kind of protection for small businesses. It usually has some breadth to it and can include many different options, including business insurance. But it may also be an area in which you are overinsured: Companies with little invested in the space they occupy and little inventory can sometimes forgo it. For everyone else, it's as essential as homeowner's coverage (and inevitably required for financing). For business interruption, you might think your property insurance covers everything, but you need to read the policy to what is actually handled.
'You need to think about your business owners policy,' says Co. 'If you don't have a comprehensive property and business interruption policy, you might not be covered if your building floods, is terrorized, if there's an earthquake. Many people just buy this insurance and think everything with the property is covered, which is a large myth.'
General Liability Insurance: Many business owners purchase general liability to cover legal hassles that typically come about due to claims of negligence, or when you're being sued or faced with the threat of a lawsuit. These policies help to protect against payments as the result of bodily injury or property damage, medical expenses, the cost of de1fending lawsuits, and settlement bonds or judgments required during an appeal procedure.
Workers' Compensation: Required in every state except Texas, workers' compensation insurance pays for employees' medical expenses and missed wages if injured while working. For many small businesses, even if it is not required, you'll buy it because you value your employees as an extension of your family. So if something happens to an employee, you'll want to do right to protect them. The amount of insurance employers must carry, rate of payment, and what types of employees must be covered varies depending on the state.
Commercial Automobile Insurance: Namely for companies that own vehicles for business use or often use employees' vehicles for business. If employees' vehicles are used only occasionally, commercial general liability coverage may be sufficient. The main reason this is important is that almost all personal automobile policies do not include coverage if you are driving for business purposes. So if you work in sales and are on the road a lot, you are likely not protected.
For budgeting purposes, it again depends on your industry and several other factors. Depending on the general liability insurance company you end up using, your premium will be based on either your estimated gross receipts or your estimated payroll. The workers' compensation premium will be based on your payroll, and the property and business interruption will be based on if you are renting or own the property, size, where it is located and more. One thing to remember with small business insurance premiums is that they are nearly all tax deductible.
