Insurance for Your Business
Author: Eran Salu, JD, MBA, CPA
The importance of insurance cannot be over-emphasized and neither can the danger of paying for insurance you don't need. It is strongly recommended you solicit the advice of an independent business insurance agent. Don't forget to SHOP! Talk to three or four independent agents and compare notes and prices. An insurance agent will lay out a vast array of insurance coverage much of which you simply may not need. Your situation will be unique and you must consider each insurance element carefully to ensure comprehensive coverage.
Whatever your final insurance program looks like, you should review it at least every six months. Your business can change rapidly, especially in the first few years and insurance needs change with it. Keep your program up to date by calling in your agent and reviewing your coverage. Make changes where necessary.
This is probably the most important element of your insurance program. Liability insurance provides protection from potential losses resulting from injury or damage to others or their property. Just recall some of the big cash awards you have read about that have resulted from lawsuits concerning liability of one kind or another and you will understand the importance of this insurance. Your insurance agent can describe the various types of liability insurance coverage that are available. If you will end up with a comprehensive general policy, make certain that the general policy does not include items you don't need. Pay for only the insurance you need. For example, your business may not need product liability insurance.
Do not confuse business liability coverage with your personal liability coverage, both of which you need. Your personal coverage will not cover a business-generated liability. Check to be certain.
Compare the costs of different levels of coverage. In some cases a $2 million policy costs only slightly more than a $1 million policy. This economy of scale is true with most forms of insurance coverage. That is, after a certain value, additional insurance becomes very economical.
KEY PERSON INSURANCE
This type of insurance is particularly important for the sole proprietorship or partnership where the loss of one person through illness, accident, or death may render the business inoperative or severely limit its operations. This insurance, although not inexpensive, can provide protection for this situation. Key person insurance might also be necessary for others involved in your business.
SGC was a small firm run by three partners, a software programmer, marketer, and a general manager. Their product was a complex computer program used by aerospace firms. Al, the programmer, was involved in a severe automobile accident, became totally disabled, and SGC lost their programming capability. The problem was that the computer program written by Al was essentially the company's sole product. Modifications to accommodate the customer became impossible and the time to bring another programmer up to speed was excessive. SGC lost considerable business as a result of this situation. These losses could have been offset by key person insurance.
You, as a business owner, should be covered by disability insurance whether or not you decide on key person insurance. This insurance, along with business-interruption insurance, described below, will help ensure your business will continue to operate in the unfortunate situation where you are unable to work. Your disability insurance policy needs to provide satisfactory coverage. Particular attention should be paid to the definition of ""disability,"" delay time until payments start, when coverage terminates, and adjustments for inflation.
Fire insurance, like all insurance is complicated and you should understand what IS and IS NOT covered. For example, a typical fire insurance policy covers the loss of contents but does not cover your losses from the fact that you may be out of business for 2-months while your facility is rebuilt. Fire insurance is mandatory whether you're working out of a home office or you have a separate facility. You should discuss a comprehensive policy with your agent. Take the time to understand the details. For example, will the contents be insured for their replacement value or for actual value at the time of loss?
Consider a co-insurance clause that will reduce the policy cost considerably. This means that the insurance carrier will require you to carry insurance equal to some percentage of the value of your property. (Usually around 85%.) With this type of clause it is very important that you review coverage frequently so you always meet the minimum percentage required. If this minimum is not met, a loss will not be paid no matter what its value.
If you are working out of your home, your existing homeowner's policy may not cover business property. If this is the case, have your insurance agent to add a home-office rider to your policy.
You probably already have automobile insurance but it might not include business use of your vehicle. Make sure that it does.
WORKER'S COMPENSATION INSURANCE
If you make the decision to hire employees, you will be required, in most states, to cover them under worker's compensation. The cost of this insurance varies widely and depends on the kind of work being performed and your accident history. It is important that you properly classify your employees to secure the lowest insurance rates. Work closely with your insurance agent.
BUSINESS INTERRUPTION INSURANCE
This protects against loss of revenue as the result of property damage. This insurance would be used, for instance, if you could not operate your business during the time repairs were being made as a result of a fire or in the event of the loss of a key supplier. The coverage can pay for salaries, taxes, and lost profits.
This will pay for unusual losses as the result of nonpayment of accounts receivables above a certain threshold. As with all policies, you must thoroughly understand the details so discuss it with your insurance agent. One of the largest providers of this coverage is American Credit Indemnity, Baltimore, MD. (800) 879 1224.
Comprehensive policies are available that protect against loss from these perils, including by your own employees. Make certain you understand what is excluded from coverage.
This policy covers the cost of rent for other facilities in the event your property becomes damaged to the extent that operations cannot continue in your normal location.
This insurance will pay you an amount each month slightly less than your current salary in the event you become disabled and are unable to work. Cost for this coverage varies considerably depending on your profession, salary level, how quickly benefits start, and when they end. Benefits paid are tax-free only if you, not your company, pay the premiums.
This list could be continued since it is possible to purchase insurance for just about any peril you can imagine ... if you can pay the premium! When considering your insurance coverage, use the following checklist:
INSURANCE COVERAGE CHECKLIST:
* Can you afford the loss?
* What coverage is required by Federal, state, or local law?
* What SPECIFIC items are covered by the policy?
* Are items to be insured for their replacement cost or original value?
* What SPECIFIC items are EXCLUDED by the policy?
* If there is a co-insurance clause, do you have adequate coverage?
* Have you chosen deductibles wisely in order to minimize costs?
* Do any of the policies you are considering duplicate or overlap one another?
* Do you need any insurance based on location, e.g., flood, earthquake?
Use the following checklist to review your insurance plans:
INSURANCE PLAN CHECKLIST:
* Employ an independent insurance agent rather than going to individual insurance companies. Ensure the agent shops for your insurance.
* Talk to and get quotations from at least THREE agents and pick the best one for you.
* Use money saving comprehensive policies, if possible.
* Perform periodic (every 6-months) reviews of your insurance program.
* Have business assets professionally appraised to determine coverage needs.
* Ensure existing personal insurance coverage includes business-related activities and add riders as necessary or obtain additional coverage.
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About the author: Eran Salu, JD,MBA,CPA is the Founder and CEO of TotalBusiness.com