chapter 22
COVER YOUR ASSETS
Getting Business Insurance
One of the most common mistakes startup business owners make is failing to buy adequate insurance for their businesses. It’s an easy error to make: Money is tight, and with so many things on your mind, protecting yourself against the possibility of some faraway disaster just doesn’t seem that important. “Oh, I will get insurance,” you promise yourself, “one of these days.” Soon, “one of these days” comes and goes, and you’re still uninsured. Only now, your business has gotten much bigger ... you’ve put a lot more into it ... and you have a lot more to lose. Everything, to be exact.
It doesn’t take much. A fire, a burglary, the illness of a key employee—any one of these could destroy everything you’ve worked so hard to build. When you think of all the time, effort and money you’re investing in your business, doesn’t it make sense to invest a little extra to protect it?
e-FYI
Internet businesses have unique needs—and now they have their own unique insurance. Companies like The Hartford offer insurance to protect against damage from web-based activities, including viruses and hacking, privacy violations, copyright infringement and more. Cyber policies are usually added to a business’s general liability coverage. Not all businesses qualify for such coverage, though, so talk to your insurance broker.
Following is a closer look at the types of business insurance available and what most entrepreneurs need, plus tips for keeping costs under control. (Health insurance is covered in Chapter 24.)
Basic Insurance Needs
The basic business insurance package consists of four fundamental coverages—workers’ compensation, general liability, auto and property/casualty—plus an added layer of protection over those, often called an umbrella policy. In addition to these basic needs, you should also consider purchasing business interruption coverage and life and disability insurance.
Workers’ Compensation
Workers’ compensation, which covers medical and rehabilitation costs and lost wages for employees injured on the job, is required by law in all 50 states.
Workers’ comp insurance consists of two components, with a third optional element. The first part covers medical bills and lost wages for the injured employee; the second encompasses the employer’s liability, which covers the business owner if the spouse or children of a worker who’s permanently disabled or killed decide to sue. The third and optional element of workers’ compensation insurance is employment practices liability, which insures against lawsuits arising from claims of sexual harassment, discrimination and the like.
“Employment practices liability protects the unknowing corporation from the acts of the individual,” according to a spokesperson at the Independent Insurance Agents of America (IIAA), an industry association. “Whether you need it depends on the size of your business and how much control you have over the daily work of employees.” This is something you may need to worry about as your company grows.
According to the IIAA, it is often hard for small companies to get workers’ compensation insurance at reasonable rates. Consequently, some states have a risk-sharing pool for firms that can’t buy from the private market. Typically state-run and similar to assigned risk pools for car insurance, these pools generally don’t provide the types of discounts offered in the voluntary market and thus are an “insurance of last resort.”
SAVE
Ask your insurance agent about risk-reduction tactics that you can use to help save money. Altering your business practices—for instance, installing better locks or brighter lights to prevent crime—can cut your premiums (and your risk). You may even want to change your business operations to get rid of a high-risk activity.
Because insurance agents aren’t always up-to-date on the latest requirements and laws regarding workers’ comp, you should check with your state, as well as your agent, to find out exactly what coverage you need. Start at your state’s department of insurance or insurance commissioner’s office.
Generally, rates for workers’ comp insurance are set by the state, and you purchase insurance from a private insurer. The minimum amount you need is also governed by state law. When you buy workers’ comp, be sure to choose a company licensed to write insurance in your state and approved by the insurance department or commissioner.
If you are purchasing insurance for the first time, the rate will be based on your payroll and the average cost of insurance in your industry. You’ll pay that rate for a number of years, after which an experience rating will kick in, allowing you to renegotiate premiums.
Depending on the state you are located in, the business owner will be either automatically included or excluded from coverage; if you want something different, you’ll need to make special arrangements. While excluding yourself can save you several hundred dollars, this can be penny-wise and pound-foolish. Review your policy before choosing this option, because in most states, if you opt out, no health benefits will be paid for any job-related injury or illness by your health insurance provider.
“Be smart, but never
show it.”
—LOUIS MAYER,
CO-FOUNDER OF
METRO-GOLDWYN MAYER
A better way to reduce premiums is by maintaining a good safety record. This could include following all the Occupational Health and Safety Administration guidelines related to your business, creating an employee safety manual and instituting a safety training program.
Another way to cut costs is to ensure that all jobs in your company are properly classified. Insurance agencies give jobs different classification ratings depending on the degree of risk of injury.
General Liability
Comprehensive general liability coverage insures a business against accidents and injury that might happen on its premises as well as exposures related to its products.
For example, suppose a visiting salesperson slips on a banana peel while taking a tour of your office and breaks her ankle. General liability covers her claim against you. Or let’s say your company is a windowsash manufacturer, with hundreds of thousands of its window sashes installed in people’s homes and businesses. If something goes wrong with them, general liability covers any claims related to the damage that results.
The catch is that the damage cannot be due to poor workmanship. This points to one difficulty with general liability insurance: It tends to have a lot of exclusions. Make sure you understand exactly what your policy covers ... and what it doesn’t.
You may want to purchase additional liability policies to cover specific concerns. For example, many consultants purchase “errors and omissions liability,” which protects them in case they are sued for damages resulting from a mistake in their work. A computer consultant who accidentally deletes a firm’s customer list could be protected by this insurance, for example.
THE NAME’S BOND
Sometimes confused with insurance, bonding is a guarantee of performance required for any business, either by law or by consumer demand. The most common businesses that bond employees are general contractors, temporary personnel agencies, janitorial companies and companies with government contracts. Bonding helps ensure that the job is performed and that the customer is protected against losses from theft or damage done by your employees.
Although you still have to pay on claims if your employees are bonded, bonding has the side benefit of making your business more desirable to customers. They know that if they suffer a loss as the result of your work, they can recover the damages from the bonding company. The difference between a bond and insurance is that a bonding company ensures your payment by requiring security or collateral in case a claim is made against you.
Companies with a board of directors may want to consider “directors’ and officers’ liability” (D&O), which protects top executives against personal financial responsibility due to actions taken by the company.
How much liability coverage do you need? Experts say $2 million to $3 million of liability insurance should be plenty. The good news is that liability insurance isn’t priced on a dollar-for-dollar basis, so twice the coverage won’t be twice the price.
The price you’ll have to pay for comprehensive general liability insurance depends on the size of your business (measured either by square footage or by payroll) and the specific risks involved.
Auto Insurance
If your business provides employees with company cars, or if you have a delivery van, you need to think about auto insurance. The good news here is that auto insurance offers more of an opportunity to save money than most other types of business insurance. The primary strategy is to increase your deductible; then your premiums will decrease accordingly. Make sure, however, that you can afford to pay the deductibles should an accident happen. For additional savings, remove the collision and comprehensive coverage from older vehicles in your fleet.
AHA!
Keep detailed records of the value of your office or store’s contents off-premises. Include photos of equipment plus copies of sales receipts, operating manuals and anything else that proves what you purchased and how much was paid. That way, in case of a fire, flood or other disaster, you can prove what was lost. It’s also important to be able to prove your monthly income so you are properly reimbursed if you have to close down temporarily.
Pay attention to policy limits when purchasing auto coverage. Many states set minimum liability coverages, which may be well below what you need. If you don’t have enough coverage, the courts can take everything you have, then attach your future corporate income, thus possibly causing the company severe financial hardship or even bankruptcy. You should carry at least $1 million in liability coverage.
Property/Casualty Coverage
Most property insurance is written on an all-risks basis, as opposed to a named-peril basis. The latter offers coverage for specific perils spelled out in the policy. If your loss comes from a peril not named, then it isn’t covered.
Make sure you get all-risks coverage. Then go the extra step and carefully review the policy’s exclusions. All policies cover loss by fire, but what about such crises as hailstorms and explosions? Depending on your geographic location and the nature of your business, you may want to buy coverage for all these risks.
Whenever possible, you should buy replacement cost insurance, which will pay you enough to replace your property at today’s prices, regardless of the cost when you bought the items. It’s protection from inflation. (Be sure your total replacements do not exceed the policy cap.)
PACKAGE DEAL
If figuring out what insurance you need makes your head spin, calm down; chances are, you won’t have to consider the whole menu. Most property and casualty companies now offer special small-business insurance policies.
A standard package policy combines liability; fire, wind and vehicle damage; burglary; and other common coverages. That’s enough for most small stores and offices, such as an accounting firm or a gift store. Some common requirements for a package policy are that your business occupy less than 15,000 square feet and that the combined value of your office building, operation and inventory be less than $3 million.
Basic package policies typically cover buildings, machinery, equipment and furnishings. That should protect computers, phones, desks, inventory and the like against loss due to robbery and employee theft, in addition to the usual risks such as fire. A good policy pays full replacement cost on lost items.
A package policy also covers business interruption, and some even offer you liability shelter. You may also be covered against personal liability. To find out more about package policies, ask your insurance agent; then shop around and compare.
For example, if you have a 30,000-square-foot building that costs $50 per square foot to replace, the total tab will be $1.5 million. But if your policy has a maximum replacement of $1 million, you’re going to come up short. To protect yourself, experts recommend buying replacement insurance with inflation guard. This adjusts the cap on the policy to allow for inflation. If that’s not possible, then be sure to review the limits of your policy from time to time to ensure you’re still adequately covered.
Umbrella Coverage
In addition to these four basic “food groups,” many insurance agents recommend an additional layer of protection, called an umbrella policy. This protects you for payments in excess of your existing coverage or for liabilities not covered by any of your other insurance policies.
Business Interruption Coverage
When a hurricane or earthquake puts your business out of commission for days—or months—your property insurance has it covered. But while property insurance pays for the cost of repairs or rebuilding, who pays for all the income you’re losing while your business is unable to function?
For that, you’ll need business interruption coverage. Many entrepreneurs neglect to consider this important type of coverage, which can provide enough to meet your overhead and other expenses during the time your business is out of commission. Premiums for these policies are based on your company’s income.
Life Insurance
Many banks require a life insurance policy on the business owner before lending any money. Such policies typically take the form of term life insurance, purchased yearly, which covers the cost of the loan in the event of the borrower’s death; the bank is the beneficiary.
Term insurance is less costly than permanent insurance at first, although the payments increase each year. Permanent insurance builds equity and should be considered once the business has more cash to spend. The life insurance policy should provide for the families of the owners and key management. If the owner dies, creditors are likely to take everything, and the owner’s family will be left without the income or assets of the business to rely on.
Another type of life insurance that can be beneficial for a small business is “key per son” insurance. If the business is a limited partnership or has a few key stockholders, the buy-sell agreement should specifically authorize this type of insurance to fund a buyback by the surviving leadership. Without a provision for insurance to buy capital, the buy-sell agreement may be rendered meaningless.
“I never let my
mistakes defeat or
distract me, but I learn
from them and move
forward in a positive
way.”
—LILLIAN VERNON,
FOUNDER OF LILLIAN VERNON
CORP.
The company is the beneficiary of the key person policy. When the key person dies, creating the obligation to pay, say, $100,000 for his or her stock, the cash with which to make that purchase is created at the same time. If you don’t have the cash to buy the stock back from the surviving family, you could find yourself with new “business partners” you never bargained for—and wind up losing control of your business.
In addition to the owners or key stockholders, any member of the company who is vital to operations should also be insured.
Disability Insurance
It’s every businessperson’s worst nightmare—a serious accident or a long-term illness that can lay you up for months, or even longer. Disability insurance, sometimes called “income insurance,” can guarantee a fixed amount of income—usually 60 percent of your average earned income—while you’re receiving treatment or are recuperating and unable to work. Because you are your business’s most vital asset, many experts recommend buying disability insurance for yourself and key employees from day one.
READ ALL ABOUT IT
Want to know more about insurance? Check out these publications and websites:
•
Insuring Your Home Business and Insuring Your Business Against a Catastrophe. Single copies of these brochures are available free from the Insurance Information Institute’s website at
iii.org.
•
101 Ways to Cut Business Insurance Costs Without Sacrificing Protection. Written by William Stokes McIntyre, Jack P. Gibson and Robert A. Bregman, this book is published by the International Risk Management Institute (IRMI) and is available at local and online bookstores or through the IRMI (
irmi.com).
•
The Self-Insurer. This monthly magazine is published by the Self-Insurance Institute of America Inc. A one-year subscription is $195.50. Subscribe at
siia.org.
•
WorkersCompensation.com. This website provides workers’ comp information, insurance quotes and provider names by state, as well as news and information of interest to employers. Go to workers
compensation.com.
There are two basic types of disability coverage: short term (anywhere from 12 weeks to a year) and long term (more than a year). An important element of disability coverage is the waiting period before benefits are paid. For short-term disability, the waiting period is generally seven to 14 days. For long-term disability, it can be anywhere from 30 days to a year. If being unable to work for a limited period of time would not seriously jeopardize your business, you can decrease your premiums by choosing a longer waiting period.
Another optional add-on is “business overhead” insurance, which pays for ongoing business expenses, such as office rental, loan payments and employee salaries, if the business owner is disabled and unable to generate income.
Choosing an Insurance Agent
Given all the factors that go into business insurance, deciding what kind of coverage you need typically requires the assistance of a qualified insurance agent.
Type of Agent
Selecting the right agent is almost as important, and sometimes as difficult, as choosing the types of coverage you need. The most fundamental question regarding agents is whether to select a direct writer—that is, someone who represents just one insurance company—or a broker, who represents many companies.
Some entrepreneurs feel they are more likely to get their money’s worth with a broker because he or she shops all kinds of insurance companies for them. Others feel brokers are more efficient because they compare the different policies and give their opinions, instead of the entrepreneur having to talk to several direct writers to evaluate each of their policies. Another drawback to direct writers: If the insurance company drops your coverage, you lose your agent, too, and all his or her accumulated knowledge about your business.
e-FYI
If you’re baffled by the many insurance options available for small-business owners, check out the
Business.gov website at
business.gov/finance/business-insurance. On this site, you can learn about the types of business insurance policies available and the insurance requirements for businesses with employees. The site also provides tips for buying insurance and links to useful industry resources.
Still, some people prefer direct writers. Why? An agent who writes insurance for just one company has more clout there than an agent who writes for many. So when something goes wrong, an agent who works for the company has a better chance of getting you what you need. Finally, direct writers often specialize in certain kinds of businesses and can bring a lot of industry expertise to the table.
Finding an Agent
To find an insurance agent, begin by asking a few of your peers whom they recommend. If you want more names, a trade association in your state may have a list of recommended agencies or offer some forms of group coverage with attractive rates (see the “Cost Containment” section in Chapter 24 for more).
Once you have a short list of agencies to consider, start looking for one you can develop a long-term relationship with. As your business grows and becomes more complicated, you’ll want to work with someone who understands your problems. You don’t want to spend a lot of time teaching the agent the ins and outs of your business or industry.
“Tell the truth, but
make it fascinating.”
—DAVID OGILVY, FOUNDER
OF OGILVY & MATHER
Find out how long the agency has been in business. An agency with a track record will likely be around to help you in the future. If the agency is new, ask about the principals; have they been in the industry long enough that you feel comfortable with their knowledge and stability?
One important area to investigate is loss-control service (which includes everything from fire-safety programs to reducing employees’ exposures to injuries). The best way to reduce your premiums over the long haul is to minimize claims, and the best way to do that is through loss-control services. Look for a broker who will review and analyze which of the carriers offer the best loss-control services.
Another consideration is the size of the agency. The trend in insurance is consolidation. If you’re looking for a long-term relationship, you want to avoid an agency that is going to get bought out. One way to get a handle on whether the agency you are considering is a likely acquiree is by looking at the agency’s owner. If he or she is older and is not grooming a successor, there’s a chance the agency will get bought out.
Verify the level of claims service each agency provides. When a claim arises, you don’t want the agent telling you to call some toll-free number. If that’s his or her idea of claims service, keep looking. An agency that gets involved in the claims process and works with the adjuster can have a positive impact on your settlement, while an agency that doesn’t get involved tends to minimize your settlement.
You want an insurance agency that will stay on top of your coverage and be on the spot to adjust it as your business changes. Of course, it’s always difficult to separate promises from what happens after the sale is closed. However, you might ask would-be agents how often they will be in touch. Even for the most basic business situation, the agent should still meet with you at least twice a year. For more complex situations, the agent should call you monthly.
POLICY POINTERS
Looking for some of the best small-business insurance resources on the web? Check these out:
•
Safeware (
safeware.com). This company covers computers against damage, theft, power surges and other high-tech disasters.
•
Insurance Information Institute (
iii.org). This site puts business insurance news, facts and figures at your fingertips. Click on “Insurance Topics” for links to a plethora of business insurance information.
•
Cigna (
cigna.com). Despite its bent toward larger companies, this user-friendly site contains a slew of informative and entertaining insurance-related resources.
•
AllBusiness.com (
allbusiness.com). This general business site, which is affiliated with D&B, harbors a treasure trove of small-business insurance information. Just search for “Small Business Insurance” or the variation you’re interested in to find literally thousands of articles.
You also want to make sure the company your agent selects or represents is highly rated. While there are numerous rating agencies, the most respected is A.M. Best, which rates the financial strength of insurance companies from A++ to F, according to their ability to pay claims and their size. You can find their rating book,
Best Rating Guide, at your local library or you can search Best’s ratings online at
ambest.com. You will have to register with the site for access, but searching is free. Look for a carrier rated no lower than B+.
STAKING YOUR CLAIM
Though you hope it never happens, you may someday have to file an insurance claim. These tips should make it easier:
• Report incidents immediately. Notify your agent and carrier right away when anything happens—such as a fire, an accident or theft—that could result in a claim.
• Take steps to protect your property from further damage. Most policies cover the cost of temporary repairs to protect against further damage, such as fixing a window to prevent looting.
• If possible, save damaged parts. A claims adjuster may want to examine them after equipment repairs have been made.
• Get at least two repair estimates. Your claims adjuster can tell you what kind of documentation the insurance company wants for bids on repairs.
• Provide complete documentation. The insurance company needs proof of loss. Certain claims require additional evidence. For example, a claim for business interruption will need financial data showing income before and after.
• Communicate with your agent and claims adjustor. Though your claim is against the insurance company, your agent should be kept informed so he or she can help if needed.
Also make sure the agent you choose is licensed by the state. The best way to find out is by calling your state insurance department, listed in the telephone book. If you can’t find a number there, call the National Insurance Consumer helpline at (800) 942-4242.
Ask for references, and check them. This is the best way to predict how an agent will work with you.
Last but not least, trust your gut. Does the agent listen to you and incorporate your concerns into the insurance plan? Does he or she act as a partner or just a vendor? A vendor simply sells you insurance. Your goal is to find an agent who functions as a partner, helping you analyze risks and decide the best course of action. Of course, partnership is a two-way street. The more information you provide your agent, the more he or she can do for you.
SAVE
The IRS allows self-employed businesspeople to deduct 100 percent of health insurance premium costs. For more information on specific IRS guidelines, request IRS Publication 533,
Self-Employment Tax, and IRS Publication 502,
Medical and Dental Expenses, by calling (800) TAX-FORM, or visiting
irs.gov, where you can download them instantly.
Insurance Costs
As with most other things, when it comes to insurance, you get what you pay for. Don’t pay to insure against minor losses, but don’t ignore real perils just because coverage carries hefty premiums.
You can lower your premiums with a higher deductible. Many agents recommend higher deductibles on property insurance and putting the money you save toward additional liability coverage.
How much can you afford for a deductible or uninsured risk? Look at your cash flow. If you can pay for a loss out of cash on hand, consider not insuring it.
You can also save money on insurance by obtaining it through a trade group or an association. Many associations offer insurance tailored to your industry needs—everything from disability and health to liability and property coverage. You can also help keep insurance costs down by practicing these good insurance habits:
• Review your needs and coverage once a year. If your circumstances or assets have changed, you may need to adjust your insurance coverage.
• Ask your insurance agent for risk-reduction assistance. He or she should be able to visit your premises and identify improvements that would create a safer facility.
• Check out new insurance products. Ask your agent to keep you up-to-date on new types of coverage you may want.
• Take time to shop for the best, most appropriate coverage. A few hours invested upfront can save thousands of dollars in premiums or claims down the road.
Business Insurance Planning Worksheet
| Types of Insurance | Required (Yes/No) | Annual Cost |
|---|
| 1. | Workers’ compensation insurance | | |
| 2. | General liability insurance | | |
| 3. | Automotive liability insurance | | |
| 4. | Property/casualty insurance | | |
| 5. | Product liability insurance | | |
| 6. | Errors and omissions liability insurance | | |
| 7. | Malpractice liability insurance | | |
| 8. | Web-based business insurance | | |
| 9. | Fire and theft insurance | | |
| 10. | Business interruption insurance | | |
| 11. | Overhead expense insurance | | |
| 12. | Personal disability | | |
| 13. | Key person insurance | | |
| 14. | Shareholders’ or partners’ insurance | | |
| 15. | Credit extension insurance | | |
| 16. | Term life insurance | | |
| 17. | Health insurance | | |
| 18. | Directors’ and officers’ liability insurance | | |
| 19. | Survivor-income life insurance | | |
| 20. | Care, custody and control insurance | | |
| 21. | Consequential losses insurance | | |
| 22. | Boiler and machinery insurance | | |
| 23. | Profit insurance | | |
| 24. | Money and securities insurance | | |
| 25. | Glass insurance | | |
| 26. | Electronic equipment insurance | | |
| 27. | Power interruption insurance | | |
| 28. | Rain insurance | | |
| 29. | Temperature damage insurance | | |
| 30. | Transportation insurance | | |
| 31. | Title insurance | | |
| 32. | Water damage insurance | | |
| Total Annual Insurance Cost | | $ |
