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.