Insurance Coverage: A Business Necessity

By Marc Davis AAA

Even when cash may be scarce, or revenues down, small businesses should not neglect their insurance needs. Businesses that are underinsured or without broad, proper and adequate coverage are taking needless risks, which could eventuate in serious financial problems, including bankruptcy. In a crisis, a business without insurance or which is underinsured can be totally destroyed.

Business owners must be thoroughly informed on what their insurance policies cover and what is excluded. A periodic review of insurance, therefore, is an absolute necessity, along with updates and adjustments in coverage as circumstances change. This article will discuss the various types of insurance available to small businesses and what you should do to best protect yourself against harmful claims against your business. (For related reading, see Asset Protection For The Business Owner.)

Historical Consequences
In the wake of tropical storms that ravaged New Orleans, Galveston, Houston and other hard-hit areas, countless owners of small businesses were underinsured, or carried no insurance at all, for natural disasters such as hurricanes and flooding and were severely hurt.

Many of these owners were either unaware that their companies were not covered by insurance, or decided not to buy storm-damage coverage because of a scarcity of cash. A number of owners were shocked to learn - when their insurance claims were denied - that they were not covered for the damages they reported even when they thought they had bought the right policies. (For further reading, check out Will Filing An Insurance Claim Raise Your Rates?)

Another insurance issue that requires the vigilance of small-business owners is the expiration date of their policies. In most cases, the insurance company, agent or broker from whom a business owner bought his or her policies will inform them when their policies are about to lapse or need to be renewed. But the prudent owner should make a note as to when a policy is about to expire, then renew it in advance so that there is no gap in coverage and no disappointment if claims are filed.

Types Of Insurance Coverage
Insurance products are contractual arrangements between the insured and the insurer. The contract spells out the following details:

  • What is insured
  • The cost of the insurance
  • The conditions under which a claim may be made
  • The terms of payment if the claim is honored

There is a wide variety of insurance categories and degrees of coverage that both the startup-business owner and the owner of an ongoing concern should investigate.

Deductibles and premiums vary in price. An insurance deductible is the amount of money the insured must pay toward a claim before the insurance company pays on the claim. Usually, the higher the deductible, the lower the premium - the cost of buying and maintaining the policy in force. Premiums may be paid on a variety of schedules, including annually (the most common), quarterly or monthly.

Business Owner's Insurance
A business owner's insurance policy offers broad-spectrum protection against financial loss resulting from damage to the owner's property. The damage may result from fire, flooding and other disasters. The policy will spell out what is covered. (For further reading on insuring your property against flood, read Do You Need Casualty Insurance?)

The business owner's policy can also cover the legal liability of the owner for any bodily injury suffered in any occurrence related to the business. An all-risk policy, in which comprehensive coverage is offered, is preferable to a named-perils policy, in which specific risks are covered. In an all-risk policy, every eventuality is covered, except for specifically cited exclusions. The all-risk policy minimizes the possibility that some problem won't be covered and also minimizes the possibilities of overlapping and unnecessary coverage. (To learn more, check out Cover Your Company With Liability Insurance.)

Among the risks that may be covered in a business owner's policy are:

  • Fire
  • Flooding
  • Other sources of property damage
  • Theft
  • Bodily injury
  • Business interruption for specified reasons, with exceptions specified

Product Liability
This type of insurance, which may be obtained at additional cost, may be a necessity if you sell a product that has the potential to injure a user. Even if you did not design, manufacture or distribute the product, if you sell it and it injures a user, you may have legal liability that should be covered. (For further reading, see Filling The Gaps In General Liability Insurance.)

Commercial Insurance
A commercial insurance policy may be required if your business is larger and more complex than a simple single-owner or partnership retail operation, or is a service-oriented business or professional practice. A professional practice may require malpractice insurance, which is covered below.

Sectors whose businesses may require a commercial insurance policy include manufacturing, restaurants and commercial real estate. A commercial policy is typically more expensive than a business owner's policy, but the risks are correspondingly higher and potentially more costly to the underwriter, the insurance company which issues the policy. (To learn more about insurance underwriting, read Is Insurance Underwriting Right For You?)

Professional Malpractice Insurance
Professions that give advice and/or provide services to consumers in which errors of commission or omission may eventuate in substantial liability, may require professional malpractice insurance.

These can include such businesses as:

  • Medicine
  • Dentistry
  • Law
  • Accounting
  • Advertising
  • Financial planning
  • Occupational therapy
  • Computer analysis
  • Journalism
  • Real estate

Premiums are calculated on actuarial data for risk, dollar damages and other factors and vary widely depending on the profession, its sub-specialties and the specific services or advice offered. Neurosurgery, for example, is a profession that carries a high premium for malpractice insurance. Coverage for a single-owner, private-practice accountancy would normally carry a smaller premium. (To learn more about the role of an actuary, read Insure Your Future With A Career As An Actuary.)

Coverage for low-cost legal representation is another option offered by insurance firms. A professional of any specialty who practices without error or omission may still be the target of a malpractice suit, even if the claim is without merit.

Homeowner's Insurance
As a complement to business owner's insurance, a comprehensive homeowner's policy is also a necessity, both for home-based businesses and for other business entities, such as partnerships and corporations, that are not operated from a private residence. (For more reading, check out Understand Your Insurance Contract and Insurance Tips For Homeowners.)

Homeowner's insurance will protect a residence from non-business-related injuries or other legal liability. Because a business and the personal assets of a business owner are connected, the homeowner's residential insurance coverage is a necessity. Comprehensive coverage is the policy most frequently written for homeowners, often referred to in the insurance business as "HO-3."

Usual coverage includes:

  • Home or personal-property damage caused by fire or storms, including lightning and wind
  • Medical costs of occupants' injuries caused by fire, storms, wind and lightning
  • Medical and legal expenses of persons accidentally injured in the insured home
  • Loss or theft of specified personal property, either in or away from the insured home

Some policies covering loss or theft may exclude certain properties, such as art, antiques, collectibles, jewelry and laptop computers. Items such as these may require special coverage, especially if their value is high. (For more on what to do if you're a victim of theft, read Deducting Disaster: Casualty And Theft Losses.)

An important risk not covered in a homeowner's policy is claims related to a business conducted in the residence. A customer or client who comes to your home, or a business vendor making a delivery, may be injured on your premises, and the claim arising from that injury would not be covered.

Under certain circumstances, if you have a home-operated business in which risks are minimal, a low-cost rider may be added to your homeowner's policy to cover damage to your business's assets, but some insurers will not let you cover your business if you do have customers, employees or clients over to your house. Coverage also may not apply to costly equipment or inventory used or stored on the premises, or if hazardous or combustible materials are used or stored on the premises. (For further reading, see Let Life Insurance Riders Drive Your Coverage.)

The Dollar Amount Of Coverage
The dollar amount of coverage for property damage or loss should be consistent with the replacement cost of the properties covered, including your home. Over-insurance in this area can be avoided and is usually a needless expense. Liability insurance is more difficult to calculate because of the intangible assets being insured.

Minimum insurance requirements for a business are often imposed by the state in which the business is located. Your agent or state insurance commission can provide these figures.

Parting Thoughts
Discuss your insurance needs in detail with your insurance agent or broker and be completely forthcoming and candid in describing your business so that coverage is adequate. Make sure you understand what is covered and if your policies are void if you have employees or clients to your home. Shopping for competitive pricing is a good idea, especially in tough economic times, when companies eager for your business are willing to adjust their prices accordingly. (To learn more about the impact of economic downturn on businesses, read Industries That Thrive On Recession and The Impact Of Recession On Businesses.)

And finally, be sure to include in your annual budget the cost of insurance. Hopefully, you will never file a claim or experience a claim against you or your business, but if and when either of these unfortunate circumstances occurs, you'll have adequate coverage.

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