Insurance is often an overlooked priority for small businesses due to cost considerations and the complexity of the coverage landscape. Different types of insurance have confusingly similar names. Your state, town, or county may have its own insurance requirements and many industries have coverage specific to them. In fact, the Insurance Information Institute estimates that about 40 percent of small business owners carry no insurance whatsoever.
All enterprises need to protect themselves from the impact of unforeseeable events on property and revenue. For small businesses in particular, who tend to have limited economic safety nets, investing in insurance is truly a case of “an ounce of prevention is worth a pound of cure.” While premiums can be somewhat expensive, the cost of operating without insurance can prove to be much more extreme. Fires, accidents and litigation are just a few examples of adverse events that can put your company out of business or into severe debt and threaten your financial security and livelihood.
Understanding Your Options
The first step to navigating the potentially daunting world of insurance is educating yourself about available alternatives. Insurance policies can insulate companies from a myriad of risks ranging from property damage to management negligence, but broadly, they fall into these areas of risk.
- Business assets and equipment
- Employee related
It’s useful to look at these categories as a framework for understanding which insurance policies may be most relevant for your business. As you conduct your research, your county or city clerk’s office, state insurance office, and/or local chapter of your industry association or chamber of commerce could serve as valuable sources of guidance and information.
If you decide to seek assistance from a professional, the following are a few recommendations to help you identify the right agent or broker partner for your business:
- Understand the difference between an agent and a broker – Whereas a broker is independent and sells for a multiple companies, an agent typically just represents one product or company. There are relative advantages and disadvantages to each. While brokers can offer more choices, agents tend to have more leverage to make plan changes. Moreover, brokers are generally paid on commission by the insurance company, which could be reflected in the premiums. Agents, on the other hand, are normally paid by the insurers, so the business is not charged for their services.
- Seek referrals from companies similar to yours in size and scope – This will help you identify candidates who are most likely to be knowledgeable about the types of products you may need and who will be experienced in working within your scale and budget parameters.
- Check licenses, registrations and disciplinary records – This information can usually be obtained from your state insurance commissioner’s consumer hotline. You may also want to consider conducting an internet search.
Types of Coverage
Though not exhaustive, the list below provides a sweeping overview of insurance alternatives you may want to consider. Prioritizing which policies are most pertinent for your business will involve determining the size of financial commitment you are comfortable making, assessing the needs of your particular operation, and identifying any state or professional requirements. Once you decide on a plan, review it annually with your agent or broker to make sure it remains relevant to your company’s needs.
- Business Owner's Policy (BOP) generally provides coverage for property (fire, wind, theft, etc.), liability (injury of someone in your business or by your product), business interruption, and, in some cases, workers' compensation. The components of each BOP are different, so be sure to confirm that your policy contains all the requisite provisions for your business’ needs. It is important to note that if your company has more than 50 employees, or very high-sales volume, you may not be eligible for a BOP and will have to purchase a package with the same elements at higher limits.
- General Liability Insurance covers personal injury or property damage that occurs on your premises, like a customer tripping in your store and breaking a leg. Similarly, this policy would kick in if you accidentally broke an expensive vase while visiting a client at his/her facility.
- Product Liability Insurance protects against harm to a user or user’s property stemming from a design flaw in a product (defined as anything tangible that can be touched, used or consumed) you manufacture and/or distribute. Many BOPs include limited product liability coverage but if the specific nature of your product runs an elevated risk of potentially inflicting harm (e.g. toys, food), you should probably consider purchasing a separate policy.
- Professional Liability (Errors & Omissions) Insurance is the equivalent of product liability but for professional services. This form of coverage is required by law in some states and for certain professions (physicians, attorneys, accountants and realtors). Moreover, professional liability coverage is increasingly becoming a condition of bidding for computer consulting and government services contracts.
- Umbrella Insurance becomes effective when you reach the limits of your primary liability policy.
- Property Insurance generally falls into two categories; building and personal property with the former covering damage to “real property” from such events as fire, lightning, wind, and vandalism and the latter protecting files, furniture, inventory, and equipment.
- Commercial Automobile Insurance applies to cars, vans, or trucks used primarily for work purposes. If you use your personal vehicle for business but don’t regularly drive customers, most insurance companies will allow you to pay a little extra to extend your existing policy. It is important to note that if you travel with demo units, samples, laptops, etc. you should make sure either your auto, or property policy, covers potential damage.
- Business Income/Extra Expense Insurance is incorporated into most BOPs and reimburses business owners for revenues lost during downtime caused by property damage. So, if a part of your facility experiences a fire, the business income component will compensate you for earnings missed while you could not occupy the building while the extra expense portion would help with the costs of leasing temporary space.
- Extra Equipment Coverage is a supplemental policy or rider to other insurance that provides an extra layer of protection for critical computer equipment. If considering this type of policy, you may want to consider a plan that also includes loss of data and breakdowns and failures caused by power surges, etc.
- Health insurance has been the focus of considerable debate and concern given the proposed reform mandates. As costs rise and the economic environment remains challenging, many small businesses are cutting back on healthcare coverage. In fact, according to the Kaiser Family Foundation research, approximately half of small businesses offer a health plan versus 99% of larger companies.
While healthcare costs are undeniably significant, the implications of foregoing insurance altogether can be devastating. For small businesses with limited staff, an illness or an accident can impede or even halt operations entirely. In fact, nearly half of small business employees believe that dealing with a health, or financial problem, affects their ability to get their job done. Therefore, before writing off health insurance as prohibitively expensive, we suggest that small business owners explore potential alternatives such as group insurance plans offered through trade and industry associations or even offering healthcare as a voluntary benefit to employees.
- Disability Insurance will cover a portion of your gross income if an illness or injury prevents you from working. This is particularly important for very small companies (especially sole proprietorships) whose survival hinges on one or two key individuals.
- Key Man Insurance is most relevant if the survival of your business depends on a critical employee. In the event of illness or death, it would replace the income that this person generated and/or the cost or replacing the functions he/she performed.
- Workers' Compensation Insurance is mandated by law in most states and is designed to help employers control liabilities when an employee is injured at work and pays for medical expenses and lost wages.
- Employers’ Liability Insurance is generally required for any business with more than one employee and shields your business from monetary damages and/or legal fees arising from lawsuits brought by employees or their relatives for work-related injuries or illnesses.
Entrepreneurship is the fine art of balancing risk and optimism. Insurance is a vital tool for mitigating vulnerabilities created by unexpected events and preventing the risk portion of the equation from weighing down opportunities and ultimately the future of the enterprise.
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