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.
Worker's 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 should 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," says Todd Muller
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. Muller says 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."
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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 standard health insurance provider.
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 or 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. But let's say
your company is a window-sash 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 up 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 type of insurance, for
example.
Companies with a board of directors may want to consider
"directors and officers' liability" (D&O). This
type of insurance protects top executives against personal
financial responsibility due to actions taken by the company.
How much liability coverage do you need? Generally, 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. 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.
Most experts recommend carrying at least $1 million in liability
coverage.
Property/Casualty
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.)
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 an 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 the four basic "food groups" of
worker's compensation, general liability, auto insurance and
property/casualty coverage, many insurance agents recommend an
additional layer of protection called an umbrella policy. This
protects you for payments in excess of your existing coverage.
Business Interruption Coverage
When a hurricane or earthquake puts your business out of
commission for days--or months--your property insurance has got 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, the
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 person" 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.
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 lose 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 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.
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.
Excerpted from The Small Business Encyclopedia, Start
Your Own Business and Entrepreneur magazine. All
information is intended to be general in nature, without regard to
specific geographical areas or circumstances, and should only be
relied upon after consulting an appropriate expert, such as an
insurance agent.