How to Buy the Right Business Insurance
Getting the coverage you need and (because no one likes to waste money) don't need.
Your business faces plenty of threats -- from fire to fraud, from dishonest employees to discontented customers to disconnected utilities. And yet for nearly every peril, some insurance company somewhere is willing to underwrite protection. Therein lies your dilemma: You can go broke keeping your company secure.
The agents, risk managers, and small-business consultants Inc. spoke with warned that insurance purchases can be driven by exaggerated fears, particularly of litigation. So before shopping for coverage, investigate what perils a company in your industry is most likely to face -- and which could threaten your company's survival. "It's not the run-of-the-mill loss you should be thinking about, but the home run, out-of-the-park catastrophe," says David Young, a former insurance broker and risk manager now advising at the Small Business Development Center in Seattle. Belinda Pillow, who runs the SBDC in Waco, Texas, and who used to sell insurance, recommends a call to your trade association. "Ask for any risk assessment tools for, papers on, or expert opinions about your particular industry," she suggests.
These pages will walk you through some of the most common types of coverage. You probably won't need them all; some you likely already have. Even if you think you're covered, however, you may be mistaken. Companies much larger than yours have gone to the mat with their insurers and come up empty-handed. Your task when buying insurance is to steel yourself for the mind-numbing language of the policy -- and to know precisely what's covered and what's not. If you don't see the coverage you're looking for, or you don't understand some of the terms, seek clarification from your agent.
Insuring Your Business
1. What Everyone Needs
Workers' compensation insurance is required virtually everywhere. (The requirement kicks in at different employee counts in different states.) For injuries sustained on the job, workers' comp covers medical expenses, lost income, and rehabilitation. If an employee dies, it pays death benefits to the heirs. Though it's not mandatory, be sure to cover yourself as well as your employees, something many owners neglect to do even though, Young says, "the premium for owners is usually dirt cheap."
Property insurance, which protects buildings and their contents, such as equipment, furnishings, and inventory, is the most popular kind of protection for small businesses. But it may also be an area in which you are overinsured: Companies with little invested in premises and little inventory can sometimes forgo it. For everyone else, it's as essential as homeowner's coverage (and inevitably required for financing). Be aware that basic policies may exclude certain perils and limit certain claims; for instance, losses from water, earthquakes, boiler problems, and utility failures are often excluded unless you add a rider.
General liability coverage is less common than property insurance among small companies but arguably more important, because a claim for serious injury could easily wipe you out. Liability (a.k.a. casualty) insurance covers any injury or damage your company might cause other people, their reputation, or their property. Any company with premises that other people (customers, suppliers, etc.) can enter, or with a product whose failure could hurt or destroy, should have it. Most standard policies provide $1 million of coverage per claim. You may need more to do business with certain companies, and that's typically purchased under an umbrella policy. An umbrella will often lump together other types of coverage. Insurers price liability premiums according to a variety of measures; revenue and retail square footage are common ones.
Business owner's policies combine property and general liability coverage. (Manufacturers and most construction companies are ineligible for BOPs, however.) Business owner's coverage is usually available to companies with up to $3 million in revenue, though sometimes larger companies can get it. It's less expensive than buying separate policies, and insurers usually throw in other coverage, such as business interruption (see below), for a nominal cost. "I'd say it's 25 percent or even 50 percent cheaper," says Joshua Smith of Insurance & Risk Managers in Brookhaven, Mississippi. "And it's less work on our end, so everybody wins."
2. For Growing Companies
Business vehicle insurance can be configured to cover cars and trucks your company owns, leases, rents, or simply uses. Experts recommend this coverage even when an owner or employee uses a personal car for work, because while personal auto insurance normally permits some business use, when an accident occurs, the insurer will defend only the car owner, not the business. And, Smith says, "any lawyer worth his salt will find out they were driving on company time and drag you into the lawsuit." (And if you drive a company car on your off hours, you'll need a rider to cover that.)
Employment practice liability insurance is a relatively new coverage that's widely recommended. The fact is, behaving decently to employees sometimes isn't enough to avoid a lawsuit these days. The median jury award in employment suits has grown by half in the past decade, but the big exposure is the cost of your legal defense. "The underwriter will throw in the claims for nickels," Young says. Elizabeth Milito, senior executive counsel for the National Federation of Independent Business, urges this coverage for companies with enough employees to be subject to state or federal civil rights laws. (It's not, however, a license to be a jerk. Says Smith: "You might get away with it one time, but if you get a history of that, you'll be uninsurable.")
Business interruption insurance. Hurricane Katrina taught small companies that it's not just the catastrophe you need to worry about; it's what comes after. Business interruption insurance can solve the problem of seeing you through while you rebuild your business by replacing lost income and paying normal expenses. It will also cover extra expenses you incur in getting back into the market quickly. In practice, however, insurers have successfully defended narrow interpretations of these policies. Among the terms you must negotiate with your agent are the waiting period before you can collect (akin to a deductible, it can be measured in either hours or days) and the period for which you'll be covered after business resumes but before it regains full strength. Most important, unless otherwise agreed, basic business interruption kicks in only after a physical loss of property shuts you down. A business owner's policy usually includes business interruption coverage.
