All businesses face a risk of accidental losses. While large businesses may have the financial wherewithal to absorb a big loss, small businesses do not. One large loss may put a small company out of business. Thus, small business owners must ensure their company is adequately insured.
I. Types of Business Insurance
Business insurance includes many types of coverage. Most of the coverages purchased by businesses fall into the category called Commercial Property/Casualty Insurance.
This category includes commercial property, commercial liability, commercial auto, and workers compensation insurance.
Commercial Property Insurance
Commercial property insurance protects your company from financial losses caused by damage to physical assets like buildings and equipment. It is a first-party coverage, meaning it makes claim payments directly to you, the policyholder. The property coverages most often purchased by businesses are described below.
Commercial Property Policy
If your business owns property, you will likely need a commercial property policy. It covers buildings you own, and personal property you own or lease from someone else. The policy covers the kinds of property used by a typical business, such as furniture, appliances, office equipment, raw materials, and finished products.
A major advantage of a commercial property policy is its flexibility. There are many coverage options to choose from. For instance, you can elect named perils or "all risks" coverage. You can insure your property based on its actual cash value or its replacement cost.
A wide variety of endorsements are available, so you can add, expand, or remove coverage as you choose.
Business Income and Extra Expense
Business income and extra expense coverages are often added to a commercial property policy. Unlike most property coverages, they do not cover physical damage to property. Instead, they cover two consequences of physical damage, namely loss of income and additional expenses.
Business income insurance protects your company against an income loss that could occur if your business is forced to shut down due to a physical loss. For example, a fire damages a restaurant you own, forcing you to cease operations until the building is repaired.
Your business income insurance will cover the net income you would have earned, had no loss occurred, plus continuing expenses you must pay (such as electricity and rent). This coverage is sometimes called business interruption insurance.
Extra expense insurance covers expenses you incur to avoid or minimize a shutdown of your business operations after your property has sustained a physical loss. It covers costs that are over and above your normal expenses. For example, the building in which you operate your bakery business is damaged by a sinkhole. The building cannot be used until the damage is repaired. Your extra expense insurance will cover your additional costs of renting a temporary facility and moving your equipment there so you can continue your bakery operations while your building is being repaired.
Inland Marine Insurance
Commercial property policies are intended to cover property that remains at fixed locations. They provide little coverage for property you use away from your premises.
You can insure movable property, such as cameras, laptop computers, cargo, and construction equipment, by purchasing inland marine coverage.
There are many types of inland marine policies. Each is designed to insure a certain kind of property. For instance, a contractors equipment policy covers hand tools, generators, backhoes and other equipment you use at construction sites. An inland transit policy covers property you deliver to customers in your company-owned trucks. If you use movable property in your business, you should consider purchasing inland marine insurance. Your agent or broker can advise you on the type of coverage that is right for you.
Crime insurance protects a firm against losses caused by acts of criminals (other than company owners or principals). It is designed to cover certain losses that aren't covered by commercial property policies. For instance, most property policies exclude thefts perpetrated by employees. They also exclude loss or damage to money, currency, securities, food stamps and similar property.
You can safeguard your firm against thefts perpetrated by employees of money, securities, or other property by purchasing employee theft coverage. Losses caused by theft (other than theft committed by employees), damage or destruction of money or securities can be insured under money and securities coverage.
Commercial Liability Insurance
Liability insurance protects a business from lawsuits filed by customers, clients, visitors, or members of the public. Liability insurance is called a third-party coverage because it covers claims filed by someone other than the insured. There are three types of liability insurance that are often purchased by businesses: general liability, umbrella liability, and errors and omissions liability.
General Liability Insurance
A general liability policy covers third-party claims or suits against your business for bodily injury, property damage or personal and advertising injury. It safeguards your business against a variety of lawsuits. These include:
- Bodily injury claims resulting from slip-and-fall incidents on your premises
- Bodily injury or property damage claims stemming from accidents that occur at a job site
- Claims that result from injury or damage caused by your products or completed work
- Claims alleging libel, slander, false arrest, or advertising injury
A commercial umbrella policy protects your firm against catastrophic liability claims. It usually provides a limit of $1 million or more. Your umbrella steps in when your primary liability policy has been used up in the payment of claims. It should provide broader coverage than your general liability policy. That is, your umbrella should afford coverages that aren't included in your primary policy. If you have purchased auto liability and/or employers liability coverages, your umbrella policy should apply on an excess basis over those coverages as well.
Errors and Omissions Liability
Errors and omissions (E&O) liability insurance covers claims that arise from your negligent acts or your failure to provide the level of advice or service your customers expected. It is also called professional liability insurance. You may need E&O insurance if your business performs a service or provides advice to others in exchange for a fee. Many types of businesses purchase this coverage, including architects, engineers, consultants, lawyers, building designers, medical professionals, and accountants. Some businesses purchase a type of E&O insurance called directors and officers liability coverage.
Commercial Auto Insurance
If your business uses autos, you need commercial auto coverage. A commercial auto policy includes auto liability and physical damage coverages. It may also include no-fault, and/or uninsured and underinsured motorist coverages. These coverages are required in some states and optional in others. A commercial auto policy is flexible. You can insure trucks, private passenger autos, or both under your policy. You can insure individual vehicles only, or categories of autos, such as "owned autos" or "hired autos."
Don't assume that your personal auto policy will cover claims against your business. Personal policies are designed to cover individuals and their family members, not business entities. They also contain exclusions for business-related activities.
Workers Compensation Insurance
Workers compensation insurance is mandatory in most states. If your business employs workers, you are likely obligated to purchase workers compensation coverage.
State workers compensation laws create a mutual compact between employers and workers. If employers fulfill their end of the bargain by purchasing workers compensation insurance, employees are (mostly) barred from filing suits for on-the-job injuries.
A workers compensation policy consists of two parts. Part One, Workers Compensation Insurance, pays the benefits prescribed by law to workers injured on the job. Part Two, Employers Liability, protects your firm against lawsuits by injured employees. Employers liability coverage is important because workers compensation laws exclude some workers.
In addition to the property/casualty coverages described above, your firm may purchase employee benefits. Examples are health insurance, pet insurance, and a 401K plan. Many small businesses offer such benefits to help them recruit and retain skilled employees.
Some businesses also purchase key person insurance. This coverage protects a business against the death or disability of a key executive or employee. It may include a life policy, a disability policy, or both.
II. Buying Business Insurance
While some insurers sell policies directly to buyers, most distribute their products through insurance agents and brokers. If you need insurance and have not already established a relationship with an insurance intermediary, this should be your first step. Look for an agent or broker who is licensed to sell property/casualty insurance. He or she should be familiar with your industry. When seeking recommendations, here are some sources to consider:
- Business colleagues and associates
- Professional or trade organizations
- Family and friends
- Insurance company websites
Some small business owners may prefer to buy insurance online. Internet shopping is convenient since websites operate around the clock. Moreover, policies purchased online may be cheaper than those obtained through an agent or broker. However, an online agent is unlikely to provide the same level of service as an agent you meet face-to-face. You should avoid buying policies online if your business is new, or if you have no idea what coverages your business needs.
III. Cost of Insurance
How much will your insurance cost? That question is difficult to answer. The price you pay for a policy is determined by a variety of factors. Here are some of them:
- Nature of Your Business: Rates vary widely across industries. Tree trimming is riskier than clothing sales, so a tree trimmer will pay more for liability and workers compensation insurance than a clothing store.
- Years in Business: Insurers prefer to insure businesses that have a successful track record. This means that a startup may pay more for insurance than a long-established company.
- Loss History: Insurers rely on prior loss experience to predict future loss experience. Thus, businesses with a good loss history generally pay less for insurance than those with a poor loss history.
- Location: Insurance rates vary from state to state, and city to city.
- Type of Coverage: The type and scope of coverage affect the price you pay. Broader coverage generally costs more than narrower coverage.
- Insurer: Some insurers charge more or less than others. When shopping for a policy, ask your agent to obtain quotes from several insurers.