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.
Dig Deeper: Buy The Right Insurance Coverage
Business Insurance Budget: How Much to Spend
Other important questions about insurance revolve around when to purchase it and how to budget for it properly. In an ideal world, you should be thinking about your business insurance options when you write your business plan, but Co says that many business owners look at options when there is an emotional turning point, or when they actually feel that it is a real business and no longer just an idea. In terms of budgeting, as a general rule, consider between 20 and 30 percent of predicted gross sales as the baseline budget for comprehensive coverage, including health and life insurance. However, this is likely too low for high-risk industries like construction and manufacturing and too high for home-based consulting and businesses not offering health insurance. Ask colleagues about their experience.
Dig Deeper: How to Start a Business Budget
Business Insurance Budget: Optional Coverage
There are plenty of add-ons you can purchase if you want to obtain comprehensive coverage. One of the most popular types of coverage is Employment Practice Liability (EPL). Depending on the type of industry you are in, the structure of your management, and what kind of risk is involved with your business, you can determine what types of insurance you may need to add, including:
On top of that, be sure to insure your two most important assets: your people and your customers. For your own employees, health and life insurance are important, but for customers, consider liability insurance so that they are covered in the event something happens to their property (requiring Property Liability Insurance).
These types of optional coverage can be costly, but shouldn't be more than between 5 and 15 percent of your overall budget.
Business Insurance Budget: Common Mistakes
Perhaps the biggest problem is realizing that you even need to purchase business insurance. Some entrepreneurs believe their personal auto or homeowners insurance policy will cover them in case of emergency or if they are sued, and they don't budget anything for insurance. But most personal insurance policies cover next to nothing for your business.
Another major mistake in the budgeting process can occur if your small business uses a lot of contract labor. In most states, you're required to have workers' compensation coverage regardless of the contractor's level of involvement. If the contractors don't have proof of coverage and workers' compensation, your company could be on the hook down the road if something were to happen.
One of the best ways to blow your budget on insurance is to choose the wrong agent to buy your insurance through. In most cases, small-business owners do not know enough about the insurance industry to put a package together themselves. Whereas big companies often have internal risk managers that put together custom coverage plans, you should rely on companies and agents that do this for a living. The most costly thing could be a mistake in the business insurance process, because if you're not covered when you thought you were, you'll end up paying more than you ever intended.
'I view the process of finding an insurance agent as very similar to finding a doctor you're comfortable with,' says Co. 'You want somebody who will ask the right questions, care about not only your business but also you as the owner, and who will interact with you the way you're looking for. They must know commercial insurance, and the best way to find them is typically via word of mouth, through a local professional organization or through a major insurance agent or carrier.'
Dig Deeper: How to Set an Annual Budget
Business Insurance Budget: How to Buy Business Insurance
The Internet has made it considerably easier for businesses to research their insurance options, determine their needs and figure out ways to get the most comprehensive coverage for the lowest cost. First, you want to study the subject and figure out ways you can save money, whether through higher deductibles or umbrella insurance. The good news is that many professional organizations and associations have group rates with insurance companies for their members. Check with your local Chamber of Commerce to see if they have any discount insurance options, and also take note of your risks to see if you can reduce them (the less risk, the lower the premium). Before you purchase business insurance, be sure to check in with the local and national Better Business Bureaus and SOHO to see which offers better business insurance discounts.