Small businesses, especially new start-ups, can be fragile during their first few years of existence. Entrepreneurs put a tremendous amount of effort, time and money into getting their businesses up and running. Unfortunately, all of that work can be lost through no fault of the owner.
A fire, a lawsuit or a robbery are just a few examples of disasters that can wipe out a small business and ruin an entrepreneur. It’s not difficult or time-consuming to take the steps needed to protect yourself.
Insurance is one way of protecting your business from such disasters. Here are the types of risks to consider and the kinds of insurance policies that can be written to cover them.
Property and Casualty Insurance
This is necessary for many small businesses. If you own the building in which you do business, loss or damage from a fire or other disaster would require spending a large amount of money to repair or replace the structure. That’s what an insurance policy will provide in the event of a disaster.
- Mortgage requirements. If there is a mortgage on the property, the lending institution will insist on up-to-date insurance coverage naming itself as an insured. Most mortgage financing agreements provide that the loans become immediately payable if there is major damage to the property. The proceeds of the policy, in effect, are their guarantee of repayment.
- Building contents. Your policy usually will have provisions that cover building contents as well. This means the machinery, equipment, inventories, supplies, tools, records, furniture and office equipment that you use in the business will be covered up to the limit of the policy. If you don’t own but rent or otherwise occupy your business location, your contents and the installations and improvements you have made must be insured on their own.
- High-value items. Special items of unusually high value like machinery, precision tools and high-value inventory can be declared on a special schedule attached to the policy. The premium is usually higher for such “scheduled” items than for contents in general. Automobiles and trucks are usually covered by different policies.
Interruption of Business / Extra Expense Policies
Two kinds of policies are closely related to casualty situations: the interruption of business policy and the extra expense policy.
The former policy deals with the delay in company operations which occur during any physical disaster situation, which will inevitably cause you to lose income during this period. This loss, and the costs of getting back into business, is covered by this type of policy.
The extra expense policy is for service businesses and others that would not lose much time in restarting after a disaster but would face expenses in getting the business up and going again.
In the normal operations of any business, there is always a risk that someone or someone’s property could suffer damage in an incident involving the company, its business or its employees. Death, personal injury or disability, damage to property and loss of the use of property are only some of the consequences of such occurrences.
The injured or damaged party will usually hold the company responsible — and its employees in some circumstances — and seek compensation through negotiation or a lawsuit. Today the trend is for legal action and high judgments. Worse, companies are more frequently being found responsible for circumstances and events over which they have little or no direct control.
The following instances have been found in the court to be legitimate grounds for holding a company responsible and awarding substantial monetary compensation:
- Direct or indirect action (or both) occurring on or off the business site by you or your employees.
- Damages or injury allegedly caused by your products, even if sold indirectly to the injured party.
Liability Insurance. Liability coverage is a must for a small business. It is the only practical way to deal with potentially ruinous claims. Fortunately, not every liability incident is that serious. Many are settled quite reasonably, in part, because insurance adjusters are skilled in negotiating a realistic agreement.
Your liability exposure can be insured in two “tiers:”
- “Normal” events such as accidents suffered on the premises by people not employed by you and damage inflicted by your employees while on company business off the premises.
- Limited liability coverage for your products and services.
This type of policy will cover liability claims, including the cost of defending you in a lawsuit, up to specified amounts for specified risks and situations.
Life and Other Personal Insurance
The loss of a key manager with irreplaceable knowledge would cause severe hardship to your company, or even force you out of business. You, your investors and banks which have loaned you money could face a loss in such an event.
- “Key-man” life insurance. Many businesses purchase insurance on the life of the owner and key managers, often referred to as “key-man” life insurance. In start-up situations, and particularly for sole proprietorships, this form of protection is almost always required as a condition for financing. Such policies are usually owned by the business, but the lender or investor is a beneficiary or loss-payee. Any cash value in the policy is a company asset.
- Protection for family. Don’t overlook your own family when considering life insurance. Many entrepreneurs put their savings into their start-ups, and may even pledge personal assets like a car and house to get the business going. If the owner were to die, very little would be left for survivors. Adequate life insurance is the only way a beginning entrepreneur can provide for his family’s security in the event of a personal disaster.
When buying life insurance, especially for business reasons, term insurance is what most people prefer. A term policy is valid for a specified period of time and provides a death benefit in return for the premium. It’s pure protection, nothing more.
- Premiums vary with age and health at the time of application but do not change during the term of the policy.
- The normal term is five years; upon renewal for another term, the premium is adjusted. Make sure your term insurance is automatically renewable for another term without further medical examination.
- Personal life insurance should contain a provision for keeping it in force should the insured suffer an accident making it impossible to earn income. Usually the premiums are waived in such circumstances.
Life, medical (including dental, drugs and vision coverage), accidental death and disability insurance for employees fall into the category of benefits, not protection for the business.
How Much Insurance Should I Buy?
- Buying insurance is not a matter of covering every possible risk and exposure. Rather, it’s making educated guesses about the things that could happen to your business and how you can protect yourself. Here are some tips for deciding how much insurance to buy:
- Start by assessing the kind of business you are in and the risks you are exposed to as a consequence. To do this, properly obtain advice from your accountant attorney and a good insurance broker or agent.
- Look at what you and your people do in the course of daily business, and at the way visitors, clients, and suppliers “interface” with the business. Don’t forget the way you product is sold, serviced, installed and finally used by customers.
- There is no way of calculating the probability of a natural disaster, a fire or other catastrophe. Insurance against these perils is a necessity but there are some things you can do to make your coverage as cost-effective as possible. Discuss these with your insurance agent to make sure you balance the cost and benefits to meet your needs.
In a large business, a self-insurance program is an organized effort to administer risk coverage. Financial reserves are set up to cover losses which are supplemented with insurance when deemed appropriate.
Most small businesses will have to self-insure some risks. The key to doing this safely is to start with the assessment of your business and its risks that referred to earlier. Carrying a part of the risk yourself can be a manageable proposition when the consequences can be estimated with some certainty and your financial resources can sufficiently cover claims for damages.
However, liability is one area where you want to be especially careful about self-insurance. In today’s atmosphere of “It doesn’t matter, the insurance company will pay,” plaintiffs’ lawyers almost always advise legal action and settlements (in or out of court) can be high.
How Should I Buy Insurance?
Select a company that is recognized as strong and reliable with a good record on settling claims. Here are some tips:
- Ask about their reaction time and promptness in paying
- Determine how their adjusters treat policyholders
- Check out the company in “Best’s Insurance Reports,” which your local library should have. This reference book will give you data and ratings on the financial condition of a company.
All insurance must be written by a company authorized to do business in this state, and may sell in these ways:
- Directly or through their own, employed sales force
- Through representatives handling only their company
- Through independent agents who sell for many other companies.
When making your choice, keep in mind that independent agents and brokers are experts in the field. Their income is dependent on satisfied customers and repeat business. When something happens, they are there to offer advice and assistance to get you back on your feet.
Agents can give more personal service, but may not have connections with as many companies as brokers. Although brokers can get the best quotes, they often prefer to deal with large clients and large pieces of business.
For a small business, it’s best to deal with an independent, experienced insurance agent at the beginning. After your business is established and you have some experience with your risk patterns, you can look for ways to lower your cost of insurance by shopping around.
How Can I Get the Most Out Of My Insurance Dollars?
Here are some tips for making sure you’re getting the most value possible from your insurance investment:
- Shop around. The market for property and casualty insurance is very competitive. There is little difference between the coverage of various companies, but shopping around can result in lower premiums. If dealing with an independent agent, ask him or her to do this for you. Ask the agent to show you at least three quotes from competing insurance companies.
- Watch the value of your premises and contents in comparison to the amount of property insurance carried. The policy should provide enough to rebuild or repair after a major disaster. Anything that is lost must be replaced at current prices, and construction costs often escalate with time. The value of your coverage should be reviewed periodically. Some policies will do this automatically. Most policies are written to pay the actual or market value, which means that a depreciation factor is applied to the original cost. Check the cost of “full replacement cost” coverage.
- Don’t take land into consideration in calculating replacement costs for insurance purposes. Some businesses simply insure for the property tax assessment which includes the value of the land.
- Take the actions you can to lower costs, such as improving building security, using fireproof construction and enhancing your sprinkler and alarm systems. All these features can change the rating on your premises and may affect the premium significantly.
- Emphasize safety and provide safe working conditions.
- Keep your company vehicles in good working order and operating under safe driving conditions. Your drivers should have experience and good driving records with the type of vehicles they operate.
- Mark every item to be used as directed. That includes your product, packaging and printed material, providing adequate instruction and statements that it be used as directed. Your exposure to a crippling liability settlement can be reduced by such a disclaimer.
- Work with a qualified insurance agent, accountant and attorney to design a package of protection suited to your needs. You may not be able to buy all of it at once, so start by protecting yourself against the worst and most probable kind of financial catastrophe. Then, depending on what else you can afford, cover yourself against other possible risks.
Do not decide that insurance is too expensive. A sizable loss or claim could wipe out your investment and your life’s dreams at a single stroke. That kind of protection is never too expensive.