FAQs About Your Business
Insurance
Created by the Independent Insurance Agents of America, this guide does
not represent the provisions of any particular policy, but it can serve
as a starting point to a complete package of protection.
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Yes, because the chance that you could suffer a loss begins with the
first day of business. You can't get help after the fact. If you suffer a
loss and have no insurance or have improper or insufficient coverage,
there is very little, if anything, your insurance agent can do to help
you. You must be prepared for the risks that are inherent in any business
and the losses, sometimes catastrophic, that they can cause.
Also, many
states and local jurisdictions require that businesses be insured to begin
operating. And if you rent space for your business, your landlord probably
requires that you be adequately insured as well.
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Every business has some property. And, when you think about it, your
business is your property. Just like your home and your car, your business
needs to be protected from loss, damage and liability. In addition, your
business is your source of income, so you need protection from the
potential loss of that income.
Generally, there are two types of
insurance - property and liability. Property insurance covers damage to or
loss of the policyholder's property. And if somebody sued for damages
caused by you or your possessions (other than a vehicle covered by your
insurance policy), the cost of the suit - both defending it and settling
it if necessary - would be covered by your liability insurance.
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It can be. Many small businesses are now insured under package policies
that cover the major property and liability exposures as well as loss of
income. A common package policy used by many small businesses is called
the Businessowners Policy (BOP).
Generally, these package policies
provide the small-business owner more complete coverage at a lower price
than separate policies for each type of insurance needed. Your agent can
help you decide which policy or policies are right for your business.
Additional coverage for property, liability or perils or conditions
otherwise excluded (e.g., flood protection) can be purchased as
endorsements to a standard policy or as a separate, second policy called a
difference-in-conditions (DIC) policy.
Because businesses vary, it
is impossible to have a standard policy to cover all contingencies. Also,
some businesses, regardless of their size, do not fit the profile of a
standard businessowners policy. For example, restaurants, wholesalers and
garages have special liability needs that are not met in the standard
businessowners policy. Your insurance agent can advise you of the best
policy (or policies) to protect you and your business.
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Your business may not possess all the following types of property, but
you can use this list to make sure that you have considered all the
property categories and any insurance coverage that may be warranted:
- Buildings and other structures (owned or leased)
- Furniture, equipment and supplies
- Inventory
- Money and securities
- Records of accounts receivable
- Improvements and betterments you made to the premises
- Machinery
- Boilers
- Data processing equipment and media (including computers)
- Valuable papers, books and documents
- Mobile property such as automobiles, trucks and construction
equipment
- Satellite dishes
- Signs, fences, and other outdoor property not attached to a building
- Intangible property (good will, trademarks, etc.)
- Leased equipment
To establish the amount of insurance you need on each, your insurance
agent can help you review the types of property you own and their uses.
Some of these items are covered in the basic policies. For others,
coverage can be added by an endorsement, or rider. And some, like money
and securities, may not be covered by a standard commercial policy and may
require a second, separate policy.
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The best thing to do is to take a complete inventory of all your
business property, determine their value and decide if each is worth
insuring. Then check to see that the items on the inventory list are
included in the basic business property policy and covered for the correct
amount. If not, ask your agent about the cost of purchasing additional
coverage to meet your needs.
You also need to consider your
business situation. Are you planning a major expansion? Does your
inventory have a decidedly peak season (like a toy store in December)? Or
does it fluctuate throughout the year (like a clothing store)? Is your
liability limit high enough in light of the new job contract you just
signed? Business policies are designed to be added to or subtracted from
to meet your needs. Be sure to discuss changes to your business with your
agent so that he or she can be sure your policy still provides adequate
coverage.
Some common additional coverages for business property
include (although this list is by no means
all-inclusive):
Boiler and Machinery Insurance
Even if you do not own a boiler, you may need this coverage. The term
"boiler and machinery insurance" is gradually being replaced with terms
such as "equipment breakdown" or "mechanical breakdown" coverage. This
insurance provides coverage against the sudden and accidental breakdown of
boilers, machinery or equipment, including computer systems and
telephones/communication systems. Coverage usually includes reimbursement
for property damage, expediting expenses (e.g., express transportation
charges), and business interruption losses.
Builders Risk Coverage
Covers buildings in the course of construction. Depending on the
policy, this coverage can be for either the building's value at the time
of loss or its full value at the time of completion.
Building Ordinance Coverage
Provides coverage when a community has a building ordinance stating
that when a building is damaged to a specified extent (usually 50
percent), it must be completely demolished and rebuilt in accordance with
current building codes rather than repaired. Special attention is required
when establishing the amount of insurance.
Business Interruption Insurance
Covers the loss of earnings as a result of damage or loss of business
property. Reimbursement for salaries, taxes, rents, and other expenses
plus net profits that would have been earned during the period of
interruption can be included.
Commercial Crime Coverages
Covers money and securities, stock and fixtures against theft, burglary
and robbery both on and off the insured premises and from both employees
and outsiders.
Debris Removal Coverage
Covers the cost of removing debris after damage from fire or other
covered peril that requires debris removal before reconstruction of the
damaged building can begin. This is not part of fire insurance coverage
and must be added as an endorsement.
Fidelity Bonds
Covers business owners for losses due to dishonest acts by their
employees.
Glass Coverage
Provides coverage for glass breakage such as store windows and plate
glass on office fronts.
Inland Marine Insurance
Primarily covers property in transit such as from warehouse to
warehouse or warehouse to retail store, as well as other people's property
left on your business premises, such as clothes left at a dry cleaning
business or an employee's personal effects left in the company locker
room.
Insurance for Loss of Lease Income or Value
Covers the loss of income when rental property is damaged or destroyed
and the loss of value when the owner of the rental property also used some
of its space for business. If the tenant of the destroyed or damaged
building is forced to rent space elsewhere at a higher cost, this is
called loss of lease value.
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There is no one answer to this because each business is different. You
can consult with your agent on the monetary limits needed to cover your
potential for loss. Obviously, a one-person accounting firm will need to
purchase less insurance than a store with a substantial inventory. But
each will need to make sure that all necessary business property is
covered, that the limits of liability are sufficient to protect the owner
and the employees, and that loss of income is protected.
In
addition, each business has unique needs and situations that must be
handled. If the store happens to be located on a flood-prone area, the
owner should invest in flood insurance. The accountant may wish to
purchase reconstruction-of-accounts-receivable insurance to cover the loss
of accounting records. The costs of reconstructing those records, money
borrowed because of delayed payments due to the records being lost, and
lost payments from those clients whose records cannot be reconstructed are
all covered.
Liability protection also will vary from business to
business. A retail business is more at risk for potential suits than a
business that is not open to the public. Also, in some states, courts tend
to respond more positively to lawsuits, increasing both the likelihood of
successful lawsuits and the amount of damages awarded. In today's
lawsuit-conscious society, higher liability limits are extremely important
and relatively inexpensive. Your agent can help you decide how much
coverage is needed for your particular business.
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Property insurance can be purchased on the basis of the property's
actual value, on its replacement cost, or on an agreed amount. The
differences between the three are:
Actual Cash Value
The replacement cost of the item minus depreciation. For example, a new
desk may cost $500. If your 7-year-old desk gets damaged in a fire, it
might have depreciated 50 percent. Therefore, you would be paid $250 for
it.
Replacement Coverage
The cost of replacing an item without deducting for depreciation. So
today's cost for a desk of a size and construction similar to the
7-year-old one damaged by fire would determine the amount of compensation.
If it costs $500 today, that would be the replacement coverage.
Agreed Amount
Art objects, antiques and other unique items are usually insured at an
amount agreed upon when the policy is being written. An appraiser values
the goods to be insured and the business owner and the insurer agree upon
an amount that the insurer will pay if the goods are destroyed due to an
covered peril.
Check your policy. If you prefer replacement coverage and do not
already have it, this coverage can be added to your policy.
Inflation-guard coverage, which automatically increases your insurance
amount a certain percentage, protects against rising construction costs.
Your agent can advise you of the costs involved.
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Basic property insurance policies generally cover losses caused by fire
or lightning and the cost of removing property to protect it from further
damage (e.g., removing inventory or equipment from a damaged building so
it won't be stolen). "Extended perils," including windstorm, hail,
explosion, riot and civil commotion, and damage caused by aircraft,
automobiles or vandalism, are usually covered in a standard policy. Other
important perils, often not covered and considered "optional" in almost
all standard policies, include earthquake and flood damage, building
collapse, and glass breakage.
Property insurance can be written as
either "named peril" policies or so-called "all risk" policies. A named
peril policy provides coverage for those perils specifically named in the
policy. An all risk policy covers loss by any perils not specifically
excluded in the policy. The term "all risk" does not mean that all perils
will be covered and, to avoid confusion, is often replaced with the term
"special form" or "special causes of loss" coverage.
Check with your
agent on the perils covered by your policy. If you wish, additional
coverage can be added.
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No business can afford to be unprepared for a lawsuit. Liability
insurance protects your business assets when the business is sued for
something the business did (or failed to do) that contributed to injury or
property damage to someone else. Liability coverage extends not only to
paying damages but also to the attorneys' fees and other costs involved in
defending against the lawsuit - whether valid or not.
The standard
businessowners policy provides liability coverage, as does a separate
policy known as a commercial general liability (CGL) insurance policy.
Generally, commercial liability insurance, whether purchased in a separate
policy or as part of a standard businessowners policy, will cover bodily
injury, property damage, personal injury or advertising injury. The
medical expenses of a person or persons (other than employees) injured at
the business or as a direct result of the operations of the business are
also covered.
Usually excluded from both types of liability
insurance policies are suits by customers against a business for
nonperformance of a contract and by employees charging wrongful
termination or racial or gender discrimination or harassment.
Check with your agent about the best liability protection covering
all types of situations that may arise in your business.
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Yes, but in addition to covering the vehicles you own for liability,
medical payments, uninsured motorist coverage, comprehensive and
collision, it also covers you when you rent a car and when your employees
are operating their personal cars for your business. Be sure to review
your auto exposures with your agent.
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Yes, and in most states there are legal requirements that must be met,
and for which you may be responsible. State laws vary, but most states
require that you carry some form of workers compensation insurance. This
protects the employee and also offers you the business owner a degree of
immunity from lawsuit by an injured employee.
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Yes. Whether you have one vehicle or several, you will need a business
automobile policy. Such a policy covers any motor vehicle used in your
business including cars, vans, trucks and trailers pulled by trucks, and
offers coverage if they are damaged or stolen. It also covers liability if
the business vehicle is in an accident and the driver is at fault. This
policy is not for truckers or commercial garages. They have special
liabilities and must secure special policies that deal with their
different needs. Businesses that have a fleet of vehicles will of course
have different needs than a business with one or two, and their policies
will reflect these differences.
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Whether the business lease is for a building or for equipment, the
agent needs to determine who is responsible for insuring the leased items
- you or the lessor. For leased buildings or building space, there are
other factors to be considered, such as who is responsible for plate glass
coverage and whether your landlord requires tenants to carry minimum
amounts of liability insurance, and the extent of a hold harmless
agreement. These and other situations covered in the lease affect the
amount and kinds of insurance you need.
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Yes, if your business transports, stores or uses toxic materials, you
are required by law to have a special environmental liability policy. If
these materials should be discharged accidentally into the water or leak
onto the ground due to a covered peril like fire, the cost of extracting
the pollutant from the business premises is covered up to the dollar
amount set forth in the property section of your policy.
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The standard businessowners policy contains coverage for loss due to
fire, including coverage for property of others the insured business was
repairing, storing, or otherwise servicing in order to earn money. The
coverage only applies, however, if the business is legally liable. Thus,
if lightning causes the fire, the business is not responsible because
lightning is out of the control of the business owner. There are other
policies, called Bailee's policies, that provide even broader coverage for
your customers' possessions. A Bailee's policy is often useful to help
maintain good customer relations.
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Shipping companies often carry insurance to cover their losses.
However, the shipping company's insurance may be too low or you may have
difficulty collecting on a claim after signing for the shipment.
Therefore, "property in transit" insurance is available to cover your
property being transported by truck, rail, ship, or other means of
shipment. Also, the firm you hire to transport goods and the contract you
sign with them may affect your need for coverage. Make sure you check with
your insurance agent.
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Yes, but on a very limited basis. Loss of business property is usually
reimbursed up to $2,500 in the house and up to $250 for business property
damaged or lost away from the premises. Even if your business is a
sideline such as a craft studio, these limits may be too low to cover all
the equipment and materials you have accumulated. It's also important to
know that no business liability coverage is included in a standard
homeowners policy. Your insurance agent can help you ascertain what, if
any, additional coverage you need. This additional coverage may be added
to your homeowners policy or found in a separate commercial policy.
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Most business policies include a "coinsurance" clause stipulating what
percentage of the total value of your property must be insured in order to
be fully reimbursed for a loss, even a partial one. (Most losses are
partial.) If you insure for less than that amount, your insurance company
may impose a "coinsurance penalty" on your claim.
Here's how
coinsurance works:
Let's say you have a building insured that
you believe would cost $100,000 to replace and a coinsurance penalty in
your policy of 80 percent. You insure the building for $80,000, thinking
you have fulfilled the coinsurance clause. A fire loss causes $60,000
worth of damage, so you submit a claim. Your insurance company
subsequently determines that the replacement cost of the building is
actually $150,000. To determine how much to pay on the claim, the insurer
divides the amount of insurance you purchased ($80,000) by the amount you
should have purchased (80% of $150,000 or $120,000). The result
(two-thirds, or $40,000) is the amount of your claim the insurer will
pay.
Thus, even for a partial loss within the monetary limits of
your policy, you will receive only two-thirds of the amount claimed. If
the building had been insured for at least $120,000, the insurer would
have reimbursed you for the full amount of the loss.
You should
check with your agent to make sure you have adequate coverage. Adding an
endorsement to the policy that automatically increases policy limits to
keep pace with inflation is a good idea.
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As long as you do not alter the products you receive from manufacturers
for resale, you have only a secondary liability. The product manufacturer
is the first liable party. General liability insurance usually covers this
secondary liability, but you should check with your agent to be sure your
business is adequately covered. Recognize, too, that your liability policy
will pay
defense costs, whether or not a judgment is rendered against
you.
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Employee benefits generally include health insurance (sometimes
including dental and vision benefits), term life insurance, and possibly a
retirement program. Group disability insurance is also available, although
employers and employees opt for this benefit less
frequently.
Employers can provide coverage for their employees
alone or for the employees and their families. Cost is usually the
determining factor. With the high cost of health insurance in the United
States today, employers are more likely to ask employees to pay some or
all of the costs of health insurance for their families and sometimes for
the employees themselves.
Depending on the size of the group to be
insured, the business may serve as the policyholder for the group's
insurance. However, for many small businesses, the insurer will pool them
together in a multiple-employer trust. The trust itself, rather than any
single employer, is the policyholder. This enables smaller businesses to
benefit from the lower premiums and other services enjoyed by large
groups.
Small businesses can also sometimes obtain employee
benefit insurance through their trade or professional association. Your
best bet as a small business operator is to find a way to join a larger
pool seeking benefits. Check with your agent on the options available to
you.
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Remember that all insurance premiums are based on the risks involved.
The insurance company evaluates the situation to determine the risks - or
potential for losses - and bases its rates on the results. Therefore,
deliberate steps you take to lower your risks not only can help safeguard
your business but also may make you eligible for lower insurance rates.
Consider these steps:
- Maintain adequate lighting throughout your business premises.
- Keep electrical wiring, stairways, carpeting, flooring, elevators,
and escalators in good repair.
- Install a sprinkler system, smoke and fire alarms, and adequate
security devices.
- Keep only a small amount of cash in the cash register.
- Keep good records of inventory, accounts receivable, equipment
purchases and the like. Consider keeping a second set of records
off-site, such as with your accountant, insurance agent or at home.
- Make sure your employees have good driving records.
- Make sure your employees know how to lift properly and use all
necessary safety equipment, such as goggles, gloves, and respirators.
- Consider using the services of a risk manager. Such an outside
consultant can advise you of any safety or environmental regulations you
may have overlooked or not been aware of and talk to your employees
about safety practices.
- You may also wish to raise your deductible where appropriate to
lower your insurance premiums. How high to raise the deductible should
be governed by how much you can afford to pay out of pocket. Be careful
not to raise it so high that you cannot cover it should a loss occur.
- Finally, make sure your agent is familiar with your business and the
risks inherent in it. He or she should be able to advise you on risk
management techniques and their benefits to both you and the insurer.
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Insurance is a heavily regulated industry. Every state has some sort of
department, administration or agency that regulates and monitors every
insurer operating within the state's borders. In addition to approving
rates, your state's insurance department is involved in all insurance
matters on behalf of private citizens and businesses. It also issues
operating licenses to insurers and agents, based on their ability to meet
the state's requirements for conduct and knowledge about insurance
issues.
Your insurance company and agent work closely with your
insurance department to make sure you are getting the best and fairest
possible service within the state's guidelines. If you ever have
difficulty settling a claim, work with your agent to resolve the
difficulty. However, you can also contact your state's insurance
department if you wish to know more about your options and rights as an
insurance consumer.
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Agents are there to help you. At the most basic level, any agent should
be able to answer all of your questions about insurance, provide you a
thorough assessment of your insurance needs, and offer you a choice of
insurance products to meet those needs. Also, any insurance agency should
provide you with prompt, quality service in the case of a
claim.
Just as important is the level of professional confidence
and personal comfort you feel with the agent. Many people stick with the
same insurance agent for decades, even generations. It helps to find an
agent you can get to know and trust.
An important, but sometimes
overlooked, factor to keep in mind is that there are two kinds of
insurance agents: those who represent only one insurance company and those
who represent more than one insurance company.
Agents offering
through their agencies only the policies of one insurance company often
are referred to as "captive agents," because the company they represent
does not allow them to offer their customers competitive
alternatives.
By contrast, agents offering through their agencies
the policies of more than one insurance company are called "independent
agents," because they can shop around for their customers for the best
insurance values among a variety of competing companies.
A nationwide
survey in 1994 showed that Americans prefer to work with independent
insurance agents by a 2-to-1 margin over captive agents. You can be sure
you are dealing with an independent agent when you see this
symbol on the agent's signs, letterhead and
business cards.
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