How to Buy the Right Business Insurance
3. For Special Circumstances
Key man insurance pays out when an invaluable team member dies or, more commonly, becomes disabled. For many small businesses, the only truly indispensable person is the owner -- in which case it may merely duplicate individual life and disability policies. The exceptions include partnerships, for which these policies are often used to buy out a member or his heirs, and companies in which a particular employee possesses technical or highly specialized skills or knowledge that can't be easily replaced. When you buy it, buy enough to cover the cost of finding a replacement and maintaining support staff and facilities until the new person begins to earn his keep. Key man disability is separate from key man life and usually limited to a percentage of the person's income.
Errors and omissions insurance, or professional liability coverage, is product liability when the product is a service. (Medical malpractice, for example, is a form of errors and omissions.) "If you hold yourself out as an expert giving advice, and someone could be financially damaged in taking that advice, you want to think about professional liability insurance," says Jeff Perlman, an agent in Lawrenceville, New Jersey. Again, the cost of litigation is at least as great as the claims paid out, so make sure the legal defense costs coverage is ample.
Directors and officers liability. Most small corporations don't need it: Their leadership is unlikely to be sued, and when litigation does arise, it's usually covered by another liability policy. D&O begins to matter when companies have outside investors -- according to one survey, nearly a third of private companies reported D&O claims from shareholders in the past decade.
Making A Claim
Here are five tips for making sure you come out ahead in any squabbles over how much your insurer will cover:
Keep Detailed Records. A record of all your transactions, inventories, and assets is key. Store up-to-date duplicates of these safely off-site.
Be Prompt. If you're slow to inform your insurer that you've been sued, and the insurer can argue that your delay prejudiced its ability to defend you, you can lose coverage. Timely notice is especially crucial with so-called claims-made policies, under which coverage is based on when the claim was made rather than when the event took place, says Jay M. Levin, an insurance litigator at Reed Smith.
Follow Up. Check in periodically with the insurer on your claim. If your insurer is mounting a liability defense on your behalf, cooperate with the lawyers the insurer has hired, and keep current on the case.
Know Your Rights. Most states have a version of a model law known as the Unfair Claims Settlement Practices Act, which sets standards for handling claims and prohibits policies that, for example, require you to sue to collect. Read it, and you'll be better equipped to know whether you are being treated fairly.
Hire a Lawyer. The first sign of trouble might come with a "reservation of rights" letter, in which an insurer informs you that while it will defend you in court, it may not (depending on the outcome) pay all of your claim.
Where To Buy It
Agent or broker? Agents may be "captive," working for one insurance carrier, or independent and writing policies on behalf of many companies. A broker is, by definition, independent. It's commonly said that brokers represent you while agents represent insurers -- but the line dividing them is blurring. In practice, "a good agent or broker is an impartial matchmaker, finding the right insurer for the client and the right client for the insurer," says Linda Christ of Cryst & Associates Insurance Agency in Fairfax, Virginia.
Find a specialist. Try to find an agent or broker who specializes in your industry. Such a person knows what risks are paramount to you and has a handle on litigation and settlement trends. You might find tailored and cheaper coverage through your trade association.
Don't trust the Web. If you're tempted by an attractive online quote, make sure there are live agents who can talk you through a policy before you buy it.
Resources
The Insurance Information Institute (iii.org/smallbusiness) has links to resources, including professional organizations, and a detailed guide to small-business insurance.
The National Federation of Independent Business (nfib.com) posts articles on insurance in the "tools and tips" part of its website.
The Small Business Administration offers helpful publications on insurance at sba.gov/tools/resourcelibrary/publications.
The National Association of Insurance Commissioners has a useful guide (insureuonline.org/smallbusiness) and links to state insurance department sites.
