Key Tips When Buying Business Insurance
Your business faces plenty of threats -- from fire to fraud, from dishonest employees to discontented customers to disconnected utilities. And yet for
nearly every peril, some insurance company somewhere is willing to underwrite protection. Therein lies your dilemma: You can go broke keeping your
Insurance purchases can be driven by exaggerated fears, particularly of litigation. So before shopping for coverage, investigate what perils a company in
your industry is most likely to face -- and which could threaten your company's survival. "It's not the run-of-the-mill loss you should be thinking about, but
the home run, out-of-the-park catastrophe.
Insuring Your Business
1. What Everyone Needs
- General Liability coverage is less common than property insurance among small companies but arguably more important, because a claim for
serious injury could easily wipe you out. Liability (a.k.a. casualty) insurance covers any injury or damage your company might cause other people,
their reputation, or their property. Any company with premises that other people (customers, suppliers, etc.) can enter, or with a product whose
failure could hurt or destroy, should have it. Most standard policies provide $1 million of coverage per claim. You may need more to do business
with certain companies, and that's typically purchased under an umbrella policy. An umbrella will often lump together other types of coverage.
Insurers price liability premiums according to a variety of measures; revenue and retail square footage are common ones.
- Property insurance, which protects buildings and their contents, such as equipment, furnishings, and inventory, is the most popular kind of
protection for small businesses. But it may also be an area in which you are overinsured: Companies with little invested in premises and little
inventory can sometimes forgo it. For everyone else, it's as essential as homeowner's coverage (and inevitably required for financing). Be aware
that basic policies may exclude certain perils and limit certain claims; for instance, losses from water, earthquakes, boiler problems, and utility
failures are often excluded unless you add a rider.
- Workers' compensation insurance is required virtually everywhere. (The requirement kicks in at different employee counts in different states.) For
injuries sustained on the job, workers' comp covers medical expenses, lost income, and rehabilitation. If an employee dies, it pays death benefits to
the heirs. Though it's not mandatory, be sure to cover yourself as well as your employees, something many owners neglect to do even though,
Young says, "the premium for owners is usually dirt cheap."
Business owner's policies combine property and general liability coverage. (Manufacturers and most construction companies are ineligible for BOPs,
however.) Business owner's coverage is usually available to companies with up to $3 million in revenue, though sometimes larger companies can get it.
It's less expensive than buying separate policies, and insurers usually throw in other coverage, such as business interruption (see below), for a nominal
2. For Growing Companies
- Business vehicle insurance can be configured to cover cars and trucks your company owns, leases, rents, or simply uses. Experts recommend this
coverage even when an owner or employee uses a personal car for work, because while personal auto insurance normally permits some business
use, when an accident occurs, the insurer will defend only the car owner, not the business, any lawyer worth their charges will find out they were
driving on company time and drag you into the lawsuit." (And if you drive a company car on your off hours, you'll need a rider to cover that.)
- Employment practice liability insurance is a relatively new coverage that's widely recommended. The fact is, behaving decently to employees
sometimes isn't enough to avoid a lawsuit these days. The median jury award in employment suits has grown by half in the past decade, but the big
exposure is the cost of your legal defense.
- Business interruption insurance. Hurricane Katrina taught small companies that it's not just the catastrophe you need to worry about; it's what
comes after. Business interruption insurance can solve the problem of seeing you through while you rebuild your business by replacing lost income
and paying normal expenses. It will also cover extra expenses you incur in getting back into the market quickly. In practice, however, insurers have
successfully defended narrow interpretations of these policies. Among the terms you must negotiate with your agent are the waiting period before
you can collect (akin to a deductible, it can be measured in either hours or days) and the period for which you'll be covered after business resumes
but before it regains full strength. Most important, unless otherwise agreed, basic business interruption kicks in only after a physical loss of
property shuts you down. A business owner's policy usually includes business interruption coverage.
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.
- 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.
4. 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.
- 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.
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