A small-business insurance primer
It can be difficult to determine which kind of insurance you need for your small business. 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.
Insurance is one of the most neglected small business responsibilities. Not having the appropriate insurance for your small business is a mistake because a disaster can shut down your company permanently, or at least wreak havoc on your assets.
The Insurance Information Institute (III) in New York City estimates that about 40 percent of small business owners have no insurance at all, because many falsely believe they can't afford coverage. The truth is a small business can't afford not to have adequate insurance. Without insurance, you're unnecessarily putting your livelihood at risk. That's also why many landlords, suppliers, and other entities you work with will probably require you to have coverage.
If you're having difficulty determining which kind of insurance your business should have, you might want to check with the following agencies:
- The county or city clerk
- A local chapter of your industry association
- The state insurance office
Below are some of the different types of insurance small businesses use. Click on the type of insurance to get a more detailed description.
- Insurance for Your Business
- Business Owner's Policy
- General Liability Insurance
- Property Insurance
- Professional Liability (Errors & Omissions) Insurance
- Commercial Automobile Insurance
- Umbrella Insurance
- Business Income/Extra Expense Insurance
- Product Liability Insurance
- Extra Equipment Insurance
- Specialized Equipment Insurance
- Insurance for You and Your Employees
A standard business owner's policy (BOP) 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 that your policy contains all the components your business requires.
BOPs were originally designed for small businesses, often retail, such as stationery or hardware stores. Today, BOPs are available for a broad range of businesses covering most major industries and professions. If your business 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.
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General Liability Insurance
Liability insurance (also known as casualty insurance) refers to coverage for injury to another person or damage to a person's property for which you are legally responsible. General liability is a standard element of most business owner's policies.
General liability insurance will cover your business in case of bodily injury to someone or damage to someone's property that occurs on your premises. For example, this type of insurance would cover you should a client trip over a loose phone cord in your conference room and break an arm. Similarly, if you were to accidentally knock over and break an expensive antique at a client's premises, your general liability policy would reimburse the client for the damaged property.
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As the name suggests, property insurance provides coverage to your business for loss or damage (such as fire or vandalism) to your property. Most business owner's policies include property insurance. Business property coverage typically falls into two categories: building and personal property:
- Building: This coverage is sometimes referred to as "real" property. It protects you should something happen to your building. Be sure to analyze your policy to see exactly what it includes - these policies typically cover damage caused by fire, lightning, wind, vandalism, or the weight of snow on your roof. Some things such as earthquakes, hurricanes and even general wear and tear are often excluded.
- Personal property: This covers a business for loss of, or damage to, the property inside its building, such as files, office furniture, inventory, materials, etc. Check to see if your policy includes your computers and your phone system; your insurer may consider these to be "special" property and require additional coverage.
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Professional Liability (Errors & Omissions) Insurance
Professional liability insurance, also commonly referred to as errors & omissions coverage, is the service equivalent to product liability insurance. It protects you financially in the case of a claim against you for negligence, errors, omissions, or wrongful acts in the performance of your duties. It includes coverage for malpractice, errors, and omissions.
Some states and professions require this coverage by law; for example, doctors are required to carry malpractice insurance, which is a form of professional liability coverage. In other cases, companies you do business with will require you to have it. For instance, computer consultants bidding for corporate contracts often must prove they have errors and omissions coverage, since errors in their work can put a corporation's computer system out of commission. It is also a common requirement in government services contracts. Even if you are not mandated to have it, it is wise to carry a policy if the service you provide could inadvertently harm another person. The professions for which it is recommended or required include, but are not limited to, computer technicians, systems analysts, accountants, hairdressers, lawyers, and consultants.
A good place to start your search for professional liability coverage is your trade association, since it will be familiar with the requirements for your profession. Often, these industry groups offer specialized liability coverage, or if they don't, can point you in the direction of a carrier that does. When you are shopping for professional liability insurance, be sure to ask if the coverage includes the cost of legal fees. Some policies are now being written with exclusions and limits on coverage for legal fees and court costs.
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Commercial Automobile Insurance
If you use your personal car in the course of your business and you infrequently have customers in your car, most insurance companies will let you pay a little more for business use under your personal auto policy. However, if you have cars, vans, or trucks used primarily for business, you will likely have to buy a separate business auto policy.
Auto policies cover physical damage to the car, but do not cover the contents of a car, so if you travel outside the office with valuables (such as demo units, computers, samples, etc.), make sure your property policy covers loss outside your business. If other people will be driving your car for the business, put their names on your policy to ensure coverage in the case of an accident.
If your employees use their own cars in the course of working for you, you may need to get a non-owned auto insurance policy that provides coverage in case something happens when they are working for you.
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These types of policies offer extra liability coverage that kicks in for losses when the limits of your primary liability policy are reached. Umbrella coverage often applies to either business liability or automobile liability insurance. Using an umbrella policy, you can often purchase several hundred thousand to more than a million dollars worth of extra coverage for as little as a few hundred dollars.
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Business Income/Extra Expense Insurance
This is an extremely important add-on to property coverage, and is part of most BOPs. Business income coverage reimburses your business for revenues you lost during downtime caused by damage to or loss of your property. Extra expense insurance reimburses you for expenses incurred to avoid or minimize the suspension of business. Say, for example, your building roof collapses after a heavy thunderstorm. The business income policy pays for the income you lost while you could not occupy the building, while the extra expense policy covers rent for a temporary office space while your building is being repaired.
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Product Liability Insurance
Product liability insurance protects you in case a product you produce or provide causes harm to a user or a user's property. A "product" is anything that is tangibly used, touched, or consumed. This type of insurance is recommended for every business that manufactures a product, but is especially important for companies that produce food, clothing, toys or anything else that could conceivably cause harm to someone.
Most business owner's policies include limited product liability coverage. If, for some reason, you do not have this coverage through a business owner's policy and your product runs the risk of inflicting harm on other people, you may need to buy product liability separately. Similarly, if your product presents a higher risk of injury (for example, it contains a hazardous material), you may need to purchase additional coverage.
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Extra Equipment Coverage
If your computer equipment is not adequately covered by your other insurance, you can buy a rider or separate policy to cover it. Look for insurance that not only covers the physical computer equipment, but also damage to or loss of data. Some companies will write policies that pay for time spent on data restoration. Since some high-tech equipment is also prone to failure due to things like power surges, electrical arcing, or other forces, you may need a policy that covers types of equipment breakdowns that are not part of your regular property policy.
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Specialized Equipment Coverage
Special coverage may be available for equipment that doesn't fit easily into standard coverage or is used in unusual ways. For example, "off-premises" coverage can be applied to expensive equipment such as professional cameras, computers, analysis gear, or other items that are used by your company away from your premises. They would be covered in case of off-site theft, loss, or destruction.
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A surprising number of small business people don't have health insurance, either because they don't know where to look for coverage, or can't afford it once they find it. This is a mistake, since an illness or accident can devastate your business if you don't have proper coverage.
When you're looking for health insurance, either an individual or a group plan, keep the following in mind:
- Look for guaranteed renewal. Make sure your contract has the words "not cancelable by company" or "guaranteed renewable" in it.
- You want a company that pays benefits based on customary costs, not by a fixed schedule. Strict limits on what an insurer will pay may result in medical bills beyond your deductible. Also, look out for coverage that only pays for in-hospital care, or leaves out a long list of medical treatments.
- Many business or industry associations offer members the option of being part of a group insurance plan. This can be a good way to go, but these policies are also often overpriced, so don't automatically assume that your professional association is giving you the best deal.
- HMOs and other managed care companies aren't always the least expensive option either, because they historically have been more liberal about who they insure; the cost of covering these people may be passed on to you.
- You may choose to buy insurance through a PPO, an organization which allows you to choose a doctor from a list of providers or go outside of its network if you pay a deductible. If you buy coverage through a PPO, be sure to check for hidden expenses such as "hospital admission expense."
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Disability (or loss of income) insurance covers you in case you cannot work because of illness or injury. Disability policies typically insure 40 to 60 percent of your gross income. Look for insurance that covers you against an inability to perform your current occupation, since many policies may pay benefits only if you can not do any work at all.
Disability coverage is extremely important for a one-person business, since a sudden illness or injury that prevents you from working can put the survival of your company at stake. To get disability insurance, you may need to convince an insurer that your one-person business is stable, so be prepared to show a record of growth and consistent revenues through long-term contracts, certified financial statements, and other documents. In some cases, if you want to cover yourself for disability, you can also set up your company as a corporation, and cover yourself with workers' compensation.
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If you have only yourself to worry about, even insurance agents admit that you may be better off putting your money back into your business than investing it in life insurance. If you have a family or other people depending on you, life insurance is recommended.
As a business owner, you may also want to look at how your life insurance policy can be used for your business. For example, you may be able to use it as collateral for a business expansion loan from your bank. Only cash-value policies (which build up in tax-deferred investment accounts) can be put to business use.
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Consider this coverage if you are in a partnership, or if the survival of your business depends on a key employee. Keyman insurance is essentially a form of life insurance that covers you if this person dies. It may cover income this person generated, or the cost of replacing the functions he or she performed for your company. In the case of a partnership, keyman insurance may make it easier for the surviving partner or partners to acquire the deceased partner's shares from his or her heirs.
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Workers' Compensation Insurance
This insurance covers employees in case of work-related accidents. Most states require you to have workers' compensation insurance for any employees, even part-timers. Some states only require workers' comp insurance for companies with three or more employees.
To keep the cost of your workers' compensation as low as possible, be sure your employees are classified properly. If you do not inquire about this, all your workers may be lumped into the highest - and most expensive - category of coverage. Some states also require you to purchase disability insurance that covers employees in case of any accident regardless of where it happens.