How to Properly Insure Your Business and Employees
Earthquakes, fires, mold, asbestos, employee hacker—there's any number of calamities that can shutter the doors of your business. When disasters happen—man-made or natural—you want to be able to rebuild when the time comes. But that can't happen without preparation.
According to the Insurance Information Institute (III), of all businesses that close down following a disaster, more than 25 percent never open their doors again. "Before you put your key in the door, to start your business, you need to get that coverage," says Loretta Worters, vice president of III.
There's risk in every endeavor and maybe none more so than that of an entrepreneur who may have mortgaged their home or emptied their life savings. To ensure that all your hard work isn't negated by some unforeseen circumstance, you need to secure adequate business insurance to protect you, your investment, your employees, and your bottom line.
The main challenge is determining the best coverage. Are you carrying the right kind of insurance to protect you, your company, your employees, and your customers? How much is too much? Are you underinsured? Insurance preparations need to be made in the early stages of crafting your business plan. Generally coverage is based on your risk exposure and the type of business you own. Larger businesses generally have a risk manager to assess possible complications and look at all of the variables. As a small business owner, that role will likely have to be filled by you. To help, you can download III's Business Inventory Software, to help you catalog your property.
How to Properly Insure Your Business and Employees: Choosing Coverage
As impossible as it may seem, insurance coverage is available for almost every possible risk your business may face. And naturally, the cost and amount of coverage of policies vary among insurers. Many insurers offer insurance packages (specific to certain industries) that combine several coverage options sold as a single policy at a price that is usually lower than if the same insurance was purchased separately. Marjorie Young, vice president of New York City-based EG Bowman, a commercial insurance brokerage, says when considering insurance and what to buy you first need to determine what you need to comply with the law, what your budget allows, and any coverage that may be required by lenders.
The most common type of package policy is the business owner's policy or BOP. BOPs often include property insurance, vehicle coverage, liability insurance, flood insurance, business interruption insurance, and crime insurance.
Below are the types of insurance most business owner's should consider:
• Property insurance protects a person or physical property against its loss or the loss of its income-producing abilities.
• Casualty insurance protects a person or business against legal liability for losses caused by injury to other people or damage to the property of others.
• Workers' compensation insurance pays for medical care and replaces a portion of lost wages for an employee who is injured in the course of employment, regardless of who was at fault for the injury. This is required coverage based on number of employees, varying from three to five, depending on the state, according to III. Some states also require that you carry disability insurance that replaces a percentage of income for employees or business owners due to injury and the inability to earn a living themselves. The U.S. Department of Labor offers contact information for each state's Workers' Compensation officials.
• General liability insurance covers legal matters due to accident, injuries, and claims of negligence. Policies protect against payments as the result of bodily injury, property damage (including if the property is damaged off-premise), medical expenses, libel, slander, the cost of defending lawsuits, and settlement bonds or judgments required during an appeal procedure.
• Commercial property insurance covers everything related to the loss and damage of company property due to events such as wind and hail storms, fire, smoke, civil disobedience, and vandalism. Also includes lost income, computers, business interruption, buildings, company papers, and money.
• Product liability insurance protects against financial loss as a result of a defect product that causes injury or bodily harm.
• Also known as errors and omissions insurance, professional liability insurance protects your business against malpractice, errors, and negligence in service provided to your customers.
• Despite urban legend, homeowners' insurance policies do not generally cover home-based business losses. Depending on risks to your business, you may add riders to your homeowners' policy to cover normal business risks such as property damage. However, homeowners' policies are limited in coverage and you may need to purchase additional policies such as home-based business insurance to cover other risks, such as general and professional liability.
• Business auto insurance provides coverage for autos owned by a business. It pays any costs to third parties resulting from property damage or bodily injury for which the business is legally liable, up to the policy limits.
Other policies to consider include:
• Key employee insurance life or disability income insurance compensates a business when certain key employees become disabled or die.
• Criminal liability insurance covers damages intentionally done by employees. Even when you've done your due diligence by conducting extensive background checks of each employee, criminal acts are completely unpredictable.
• Directors and officers liability insurance protects directors and officers of corporations or not-for-profit organizations if there is a lawsuit claiming they managed the business or organization without proper regard for the rights of others.
• Umbrella policies are designed to provide protection beyond the general liability and auto liability policies, or other policies, when the policy limits have been reached.
• Had a computer virus that wiped out your data? Do you have a disgruntled employee that is posting negative stories on social media sites? Denial of service, spamming, hacking, and pinging are just a few of the cyber assaults that can damage a business, according to III. Cyber insurance may offer a solution. Usually offered as a standalone policy, coverage can include protection form internally and externally launched attacks, as well as viruses that are specifically targeted against the insured or widely distributed across the Internet.
• As the name indicates, terrorism insurance provides coverage to individuals and businesses for potential losses due to acts of terrorism.
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How to Properly Insure Your Business and Employees: Special Cases
Some business owners will find that they need specialty insurance because of the nature of their service. It's always safe to check and see if your business requires coverage above and beyond what is usually necessary. As an example, dry cleaners fall into this group. Worters says owners of dry cleaners have liability needs that are unique and are not met in the standard businessowners' policy. Policies available for dry cleaners can also include:
• Bailee insurance pertains to the loss of garments or linen as a result of fire, water damage, loss or theft. There is also coverage for loss or damage to customers' property accepted for laundering, dry cleaning, pressing, dyeing, alteration, repairing or other similar work.
• Contamination/Pollutant cleanup and removal insurance. This provides coverage for cleanup and removal of pollutants often used in the cleaning process.
• Contents coverage. With most policies, property insurance for business contents covers furniture, fixtures, inventory, office equipment and other supplies stored at your facility or off-premises. You may insure those items for Replacement Cost or for Actual Cash Value, which pays only for the depreciated value of the property. Replacement Cost policies have higher premiums; however, they can help your business recover from a loss faster, since you can replace all of the lost or damaged property with new items. If you lease some of the equipment at your business, the leasing company may require that you insure the property at replacement value.
Another common example of businesses that would require additional and unusual insurance are any food service companies. Worters and Young both acknowledge that any business that serves food carries the risk that its product could cause food poisoning or transmit a communicable disease. Adding the Food Contamination Endorsement to your policy gives you protection for this risk. With most policies, the insurer will pay for lost income if the restaurant is closed down by a government authority and will also pay for clean up expenses, food replacement, and medical tests for infected employees and additional advertising expenses to restore your reputation. Other useful property policies for food service businesses are:
• Spoilage covers the value of property spoiled as a result of a breakdown of your temperature control system due to conditions beyond your control.
• Mechanical breakdown covers mechanical or electrical breakdown to your boilers, pressure vessels, refrigeration systems, piping and mechanical and electrical machines or apparatus that generate, transmit or simply use mechanical or electrical power.
• Outdoor signs covers an outdoor sign not attached to the building.
• Burglary and robbery covers the risk of theft by outsiders.
• Employee dishonesty covers some risks of theft by your own employees.
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How to Properly Insure Your Business and Employees: Hiring Help
If you're overwhelmed by the process, don't worry. You don't have to suffer through mounds of paperwork yourself. You can navigate the process with the help of an insurance broker, or independent agent, who is a licensed individual representing a small business owner and works on commission or a for a service fee. The broker tries to find the buyer the best policy by comparison shopping. An insurance agent, also known as a captive agent, is an individual licensed by a state to sell insurance for one or more specific insurance companies.
Contact business trade associations to see if they sponsor an insurance program designed specifically for your business. Tap your personal and professional network for recommendations and referrals. You can also go to the National Association of Insurance Commissioners website to find licensing information, insurance complaints, and key financial data. Young recommends seeking an adviser with at least five years or more experience. Young says the average broker service fee can be anywhere from 10 to 15 percent or more of the total premium, depending on the number of services the broker or agent provides. Commission-based fees can range from 7.5 to 20 percent of the premium, she says.
Here are some other factors to consider:
• Is the insurer a specialist in this area of insurance coverage?
• Will you be able to speak with a "live" person?
• Will you have an agent assigned to you that you'll be working with all the time?
• What is the claim paying process?
• Does the insurer give discounts on premiums for multiple policies?
• What is the carrier's financial strength, assets, paying ability?
Young advises small business owners to "make sure they're providing the same information to all parties to get the most accurate analysis." She says a small biz owner should get a minimum of two quotes, but she generally gets five or more.
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Determining the proper insurance for your business is one of the most critical decisions you will make. It's important to consult an expert in this matter but also you'll have to do your own homework. Knowing the above types of insurance is a good start. The next step is determining if you need any specialty insurance. The last step is hiring a professional that will not only craft the right mix of deductibles and premiums, but also do some price comparisons. The process may be tedious, but if calamity strikes you'll be happy that you're properly insured.