Legal and Insurance

Disaster Recovery

SBOCTeam — Fri, 09 May 2008 12:24:00 GMT

Don't be catch unprepared for the worst case scenario

By Chris Freeburn

A small business's survival can mean more than weathering the economy's ups and downs, or attracting consumer interest. Sometimes it means recovering from disaster. That disaster can come in the form of a fire that rips through your office, or the building housing it, a flood that soaks the business district in which your company is located, or a tornado or hurricane that batters your city. Such calamities can leave your business miraculously unscathed, moderately damaged but still functional, or reduced to ashes and debris. While such disasters are, thankfully, infrequent, planning for their possibility is something that every small business owners should do - before the unexpected happens.

Insuring your company's survival
Choosing the right insurance to protect your business from potential disasters should rank alongside choosing a location or buying office equipment as critically important tasks. Unfortunately, too many small business owners are so intimidated by the prospect of having to wade through complicated insurance offers, coverage options, and the specter of high premiums that they put insurance decisions off, or simply follow the recommendation of their insurance broker - often without understanding the details of the coverage they end up receiving.

Many small business owners, on the advice of their insurance agents, purchase a general business-owners plan (BOP), which is a set of combined insurance policies designed to address the needs of similar type businesses that face the same kinds of risks. Generally, BOPs include coverage for property, business interruption, and liability. While these plans offer a general range of coverage mostly adequate for small businesses, it is important to make sure that they address your company's specific needs.

Property insurance will generally cover any buildings or equipment owned (or leased?) [MKT1] by your business. But it is a good idea to review your coverage from time to time to make certain new equipment has been added to the policy. "One of the biggest mistakes small business owners make in regard to their insurance coverage is obtaining a general policy without ever reading through the details of the coverage," says Dave Bowman, chairman of TTG Consultants. "They assume that if they have property insurance, that means the insurance company will pay for any damage - no matter what caused it. That's a huge mistake." Make certain that your property insurance will cover any potential natural disasters that might strike. Many policies will not cover flood damage, or only do so under very specific circumstances. Does the area in which your business operates experience earthquakes? Brush fires? Hurricanes? Does the insurance policy cover damage from those specific events? What about damage resulting accidents or vandalism or other criminal activity?

Business interruption insurance can be a life preserver for any business. Many business owners understand the value of insuring their offices and equipment, but neglect to consider what will happen to the company's finances in the event the offices or equipment become unusable. If your business's location is destroyed, or rendered unusable by some disaster, will your insurance provide you with temporary income while you are getting back on your feet? Does it cover expenses related to operating from a temporary location or even relocation costs? If not, you might end up watching your business founder financially even if your property insurance completely covers the loss of your building or equipment. "Most creditors won't care that your business is shut down for a few days or weeks to recover from a fire, flood or other accident," Bowman says. "They expect to be paid on time because they have to pay their bills on time." Business interruption insurance will compensate you for the income lost while your business cannot make use of its property. This form of insurance covers the operating expenses and profits you would have generated during the period in question, based upon your existing business records. When reviewing your business interruption policy, make sure the coverage's time limit is reasonable enough to permit you to relocate and restart operations after the loss of your property.

While BOPs offered a good range of general protection, they do not provide coverage for other specific types of insurance, including health, workers' compensation, disability, automobile, and professional liability, all of which must be covered under other policies.

Extra expense insurance is another type of business insurance you may wish to consider. Related to business interruption insurance, extra expense insurance pays you a reasonable amount of money in excess of normal operation costs in order to speed your company's recovery.

Protecting your company's data assets
Having the right insurance will give you the financial boost needed to reassemble your office, repair or replace equipment, and give you enough funds to keep things going until your normal revenues pick up again, but insurance can't protect the one vital thing your business absolutely needs to get back on track - your company's critical data. Today, virtually no business, no matter how big or small can survive without the information stored on its computers. Consider for a moment just what information is stored on your company's hard drives: customer information (including purchase records, outstanding invoices, and account numbers) company tax records, employee records, your business plan, and all the daily records of financial transactions. Imagine trying to get your business up and running again if this information was irretrievably lost.

Traditional methods of backing up data
"The first line of defense against data loss is an automatic backup to a physical drive," says Boston-based data security expert Jim Mott. "There are many products that will perform automatic backups every few minutes or every hour, with absolutely no user intervention needed after setup," he adds. "But a surprising number of small businesses just don't take advantage of them."

Many small businesses choose to use an external hard drive as their primary data backup device because they are inexpensive and easy to set up (usually requiring nothing more difficult than plugging in a USB cable). External hard drives can be attached to individual machines, or to company networks, and most come with automatic data backup software. External hard drives offer protection if a network server or individual PC hard drive fails. Any disaster that heavily damages or destroys your office, like a flood or fire, on the other hand will likely destroy the external hard drive as well. Removable disk drives can guard against this possibility by backing up your company's data to high capacity data disks that can be removed from the drive and carried outside the business in emergencies, or even nightly. "Removable drives have come a long way," says Mott. The storage capacity of affordably priced removable disks now ranges from 50GB to 100GB, more than enough to preserve the data of most small businesses. As with external hard drives, most removable disks can be configured to automatically back up data on a periodic basis. "Of course, removable drives are reliable as a means of protecting data only to the extent that someone actually removes the disk from the drive before leaving the office," Mott cautions.

Online data storage
Once upon a time, only big companies with huge IT budgets could afford the luxury of transmitting their data for backup and storage in secure, remote locations. But the Internet has made this an option for even very small businesses. Online data storage is a rapidly growing field with both established names and newcomers all vying to store your company's data.

There are a number of benefits of storing and backing up your data offsite. Physical security is the best. If your offices are damaged or destroyed by fire, terrorism, or natural disaster, your critical business information will still be secure, miles away, whereas any on-site data storage device may not survive. Online storage also permits easier access to data, especially for companies with traveling representatives or multiple offices, without clogging up email systems or company servers with large files. Better still, online storage is far more easily expandable. No need to buy new equipment for the office and endure the disruption of installation if more storage capacity is required - simply purchase more storage space from the provider. Online storage also eliminates the need to maintain the storage devices or deal with technical issues on your own. Many online storage providers also offer software the automatically backs up all your company's data at set intervals, eliminating the chance of data loss due to forgetfulness. All your business needs is a high-speed Internet connection.

A number of other companies offer online data storage with similar services, including Verio (verio.com), Iomega (iomega.com), HyperOffice (hyperoffice.com), eVault (evault.com), C I Host (cihost.com) and iDrive (idrive.com). These companies offer a variety of data access, storage, and backup features at widely varying pricing structures. All offer secure, encrypted data storage and transmission and technical support.

Small business owners interested in storing their data online should make sure that the storage provider under consideration offers secure data backup facilities, preferably with their own security guards, fire protection, hard disk redundancy, and independent power supply in case of power failures.

Chris Freeburn is an associate editor/writer for Priority magazine

ARE YOU COVERED?

SBOCTeam — Tue, 22 Jan 2008 15:25:00 GMT

Too many small business owners fail to purchase business insurance or do so without knowing the details of their coverage

Choosing the right insurance to protect your business from potential disaster should rank alongside selecting a location or buying office equipment as among the most critical decisions a business owner has to make. Unfortunately, too many small business owners are so intimidated by the prospect of having to wade through complicated insurance offers, coverage options, and the specter of high premiums that they put insurance decisions off, or simply follow the recommendation of their insurance broker often without understanding the details of the coverage they end up receiving.

Many small business owners, on the advice of their insurance agents, purchase a general business owners plan (BOP), which is a set of combined insurance policies designed to address the needs of similar kinds of businesses that face the same kinds of risks. Generally, BOPs include coverage for property, business interruption, and liability. While these plans offer a general range of coverage and adequately address the needs of many small businesses, it is important to make sure that they address your company's specific situation.

Property insurance will generally cover any buildings or equipment owned by your business. But it is a good idea to review your coverage from time to time to make certain new equipment has been added to the policy. "One of the biggest mistakes small business owners make in regard to their insurance coverage is obtaining a general policy without ever reading through the details of the coverage," says Dave Bowman, chairman of TTG Consultants. "They assume that if they have property insurance, that means the insurance company will pay for any damage no matter what caused it. That's a huge mistake." Make certain that your property insurance will cover any potential natural disasters that might strike. Many policies will not cover flood damage, or only do so under very specific circumstances. Does the area in which your business operates experience earthquakes? Brush fires? Hurricanes? Does the insurance policy cover damage from those specific events? What about damage resulting from accidents or vandalism or other criminal activity?

Business interruption insurance can be a life preserver for any business. Many business owners understand the value of insuring their offices and equipment, but neglect to consider what will happen to the company's finances in the event the offices or equipment become unusable. If your business's location is struck by a disaster, will your insurance provide you with temporary income while you are getting back on your feet? If not, you might end up watching your business founder financially even if your property insurance completely covers the loss of your building or equipment. "Most creditors won't care that your business is shut down for a few days or weeks to recover from a fire, flood, or other accident," Bowman says. "They expect to be paid on time because they have to pay their bills on time." Using a calculation based on your existing records, business interruption insurance will compensate you for the income lost while your business cannot make use of its property. When reviewing your policy, make sure the coverage's time limit is reasonable enough to permit you to relocate and restart operations after the loss of your property.

While BOPs offer a good range of general protection, they do not provide coverage for other specific types of insurance, including health, workers' compensation, disability, automobile, and professional liability, all of which must be covered under other policies.

Extra expense insurance is one final type of business insurance you may wish to consider. Related to business interruption insurance, extra expense insurance pays you a reasonable amount of money in excess of normal operation costs in order to speed your company's recovery.

RESOURCES
Management Help -
A library of helpful articles on evaluating and purchasing business insurance.
www.managementhelp.org/insurnce/insurnce.htm
Insurance Information Institute -
Helpful information on types of business insurance, finding the right agent, and basic coverage issues.
www.iii.org/individuals/business/
Insure.com -
An online tool that helps determine what sort of coverage your firm requires based on size and type of business.
www.info.insure.com/business/smallbiztool.cfm

Nothing But Coverage

SBOCTeam — Fri, 19 Oct 2007 23:34:00 GMT

With costs rising in every category, insurance again tops the list of small-business woes.
By Reed Richardson

But carriers and small businesses can lessen the pain by getting creative. When Benjamin Franklin said, "In this world, nothing is certain but death and taxes," he obviously wasn't thinking about running a small business. If he had, insurance would have been right up there.

Many small-business owners treat insurance as a necessary evil, the annual visit to their agent ranking just under a trip to the dentist on the pain-o-meter. "It's one of the things you must have but don't want to deal with," says Pattie Harrington, co-owner of Standard Printing Company in Ypsilanti, Mich.

Even insurance professionals admit that updating policies each year isn't something small-business professionals are eager to do. "It's like going to the doctor for an annual checkup - people don't like to do it," observes John Hebden, assistant vice president at State Farm Insurance in Bloomington, Ill.

One reason for the avoidance, of course, stems from the typical entrepreneur's uncertainty over just what kind of coverage a business needs and how much to buy - not to mention the constantly rising premiums. The typical owner of a small firm must choose from a range of coverage options - depending on the type of business, how it's set up, annual sales and number of employees.

Sorting all this out isn't easy. "The biggest issue is the lack of understanding of their insurance needs," says Vince Tizzio, president and chief operating officer of AIG's Small Business division in Berkeley Heights, N.J. "Small-business owners are consumed with running their companies and making the payroll, and they often don't have an appreciation of the value proposition that insurance can provide their company. A liability claim can put you out of business."

Because your business changes during the year - and therefore creates new or greater risk of exposure - you should revisit the coverage you have. What types of changes might trigger the need for more insurance? Consider these: a bookstore adds a second location, a dress shop acquires the inventory of a failing competitor, or one law firm merges with another.

But how much do you need - and what kind? One way to find out is by sitting down with your insurance agent. "We just watch what's going on with the business and try to make the best decisions according to the situation," says Harrington. "Our agent watches out for us, and she's very conservative."

In general, small businesses need four types of insurance:

Property. Covers the business's buildings and contents - including equipment and inventory - against fire, theft, lightning and other hazards

Liability. Protects against being sued for personal injury and property damage. Businesses that give any kind of professional advice also need professional liability. For companies that make or sell goods, product liability insurance protects the business against claims of faulty merchandise.

Personnel. Includes workers' compensation as well as employee health and disability.

Income exposure. Pays for losses due to business interruption caused by natural disaster, fire or other calamity.

Many small businesses purchase a "business owner's package," an umbrella plan covering liability, property damage, business interruption, auto, computer liability, crime and more. However, these "BOPs" don't cover certain other essentials such as employee health coverage, life insurance, disability or workers' compensation. These tend to be purchased separately. "The role of the agent is to tailor the coverage of the BOP to fit your business," says J. Howard Kucher, vice president for product development at Zurich North America in Baltimore.

In addition to this basic coverage, most small businesses will want some important extras not provided by some of the BOP plans. These include creditor insurance to pay off business loans, insurance to support a buy-and-sell agreement in the event of the owner's death and "key person" coverage to pay for costs the business incurs due to the unexpected loss of an employee with a special talent, business contacts or reputation.

Creditor insurance is life insurance on the owner; it ensures that the bank or lender is paid off if the owner dies. "It's relatively easy to see whether you have enough," says Mark Johnson, president of Johnson Insurance Consultants in Duluth, Minn., and a member of the board of the Life and Health Insurance Foundation for Education in Washington, D.C., an insurance information resource. "You take the amount of the line of credit and carry that amount of coverage." As the loan is paid down, the amount of life insurance decreases accordingly.

A buy-and-sell agreement is an arrangement the owner or partners in a business set up to cover what happens to the business if the owner or one of the partners dies. "It says you own a policy on me, and I own one on you," explains Johnson. "If I die, you get the proceeds of the policy on me to buy my stock, and my heirs get the cash when you buy the business."

Key-person coverage provides for both the lost revenues that would have been generated through the special talents of a hard-to-replace employee and the cost of finding a qualified replacement. "If this is a person who is well-known in the industry and can get certain contracts with his connections, you may want a key-person policy on him or her," explains Timothy G. Ruecker, president of Nirvana Inc., a financial services planning and consulting firm in Phoenix.

Similarly, a so-called silent partner who handles the management of a professional firm may elect to take out a key-person policy on the partner who is the front person (i.e., the rainmaker who brings in the business). It's not uncommon for small businesses to attract and retain certain key people by offering them a tax-deductible deferred compensation plan if they stay with the firm for a specified amount of time.

Power in Numbers

One way to trim the cost of business insurance is to pool your insurance needs with those of others in your profession or trade. For instance, a contractor signing up alone may pay exorbitantly for workers' compensation for his crew. But by joining forces with other contractors through an association, he can obtain cheaper rates. "We see many small companies trying to consolidate their need - in effect, joining together to put together a bigger wheel," says James Barrington, a business consultant in Stinson Beach, Calif.

That's the case with workers' compensation coverage, the cost of which has been skyrocketing in many states. To save money, many small-business associations are going the self-insurance route by putting the money they would have spent on workers' comp into a pool. They then draw on the pool to pay injury claims.

In the past, self-insurance was available only to large companies, but in the past five years, smaller businesses with fewer than 50 employees have been able to employ it. "They have to be careful how they design the plan and how they set up their stop-loss. But over the long run, this can be the least costly way to provide workers' compensation coverage," says consultant Johnson. "One small business with about 45 employees can do it."

Because workers' compensation benefits tend to be a routine and fairly predictable risk, self-insurance pools are relatively easy for groups of employers to set up. To supplement its self-insurance program, a group may purchase insurance for catastrophic loss above a certain limit. A stop-loss aggregate contract pays for losses over a specified dollar limit. A specific excess contract covers losses over a stated limit per accident.

If, for instance, a stop-loss aggregate is set at $125,000, the employer or small group is protected against total claims beyond that amount. The idea is that in years when claims fall below an expected threshold (say, $100,000), the company or group doing the self-insuring pockets the difference - instead of paying it to the insurance company.

Health Care: All Together Now

Small companies are banding together to make health-care coverage more affordable too. More small companies are obtaining coverage through membership with other groups of small businesses in, for instance, local chambers of commerce.

"Health care is definitely a hot issue with anyone who has a small business," says Herb Bivins, co-owner of Black Oak Books, a chain of three independent bookstores in the San Francisco Bay Area. With a preponderance of what Bivins calls "gray hairs" on the payroll, the company recently saw its annual health-care premium nearly double, to almost $100,000. Bivins and his co-owners are shopping for other coverage.

"Our medical insurance costs are up 35 percent this year, and our workers' comp is up 30 percent," says Bill Essert, owner of Wooden Window, an Oakland, Calif., company that manufactures windows. His firm is working with a trade group, Associated General Contractors of California, to start an alternative workers' compensation insurance program. The program, a captive-insurance model, is similar in some ways to self-insurance.

"We figure companies participating in this plan will be able to save up to 30 percent on the cost of their workers' compensation insurance," says Marti Stroup, safety, health and regulatory services manager for Associated General Contractors. The captive program, still being formed, is aimed at companies with sales of $5 million to $25 million, Stroup says.

Some small businesses are dealing with rising health-care insurance costs by offering different combinations of deductibles and coverage to employees. One way to do this is via a flexible benefits plan; employees can choose to pay more per month (and have a lower deductible) or take a high deductible and pay less each month for the employee portion of insurance fees.

"We are seeing this kind of flexible- choice plan as one way to help control rising health-care insurance expenses," says consultant Johnson. Because the company can set aside funds for these flexible benefit plans on a tax-free basis, these plans are especially attractive.

So maybe Ben Franklin would alter his axiom today and say that nothing is certain but death, taxes and creating new ways to keep insurance costs low.