What Types of Insurance Should a Small Business Consider?
To protect your business you must accurately assess the risks you face and choose insurance accordingly. To protect against losses that may occur to your business, insurance policies are available that cover equipment, real property and buildings, inventories, and other business assets. If you run your business out of your home, don't assume that your homeowner's policy covers your business property or any liabilities you incur in the course of running your business.
Securing the right types of insurance as well as the right amounts can make the difference between a successful business and one that is crippled due to non-insured or under-insured losses. That being said, insurance can be quite costly so to avoid spending money on coverage you don't need, consider carefully the various types of insurance customarily available to small businesses, before you talk to your insurance agent:
- business owner's insurance
- homeowner's insurance
- auto insurance
- professional malpractice insurance
- other insurance
Business Owner's Insurance
A comprehensive business owner's policy protects against economic losses caused by damage to the owner's property and by legal liability to others for bodily injury and property damage involving the business.
If you work out of your home, don't assume that your business equipment will be covered by your homeowner's policy. In fact, most homeowner's policies contain a business use exclusion that denies coverage to business equipment, supplies, and inventories.
A business owner's policy primarily applies to your business facility, not your home. But if you operate a business out of your home and can't get you business covered by way of a rider (an additional provision that you and the insurance company agree to add to a policy, almost always at an additional cost to you), you'll need to purchase separate business owner's insurance.
A business owner's policy covers the same kind of perils that the typical homeowner's policy does, but it does so for business property.
A large tree is uprooted during a storm and crashes onto the roof of your business facility. The roof repair costs $20,000 and water damage to a couple of the computers inside the facility requires that they be replaced at a cost of $2,500 per computer, for a total cost of $5,000.
In this example, generally, the full $25,000 of these costs would be covered if you had a business owner's policy.
Insuring your equipment. In shopping for property insurance for your equipment (and we do suggest that you comparison shop among different insurance companies when purchasing any insurance), consider the following:
- All-risks vs. named-peril policies. Generally, a policy that's written on an "all-risks" basis as opposed to on a "named-peril" basis is a better fit for most business owners. An all-risk policy generally provides coverage for all risks or perils, excepting only those that the policy specifically identifies. In contrast, a named-peril policy covers only the specific risks and perils that the policy identifies. In theory, you may require a number of named-peril policies to provide the same scope of coverage offered by a single all-risk policy. For this reason, an all-risk policy reduces the chance that you'll have gaps in coverage or duplication of coverage. If you should decide to go with an all-risk policy, carefully review the enumerated exclusions. For those exclusions that you believe create an unacceptable risk to your business, try to get coverage on a named-peril basis.
- Replacement value coverage. We also suggest that you carefully consider whether it's worth the extra premiums to secure a policy that provides replacement value coverage. Under this type of policy, you'll be covered for the cost of replacing your stolen or damaged equipment (subject to your policy's limit) rather than only for what you initially paid for the equipment.
Business interruption coverage. In addition to this coverage, you can receive coverage at extra cost for income lost. Business interruption coverage covers lost business profits. The size of the benefit is often measured by the business's historical income levels.
Bodily injury and property damage liability. This is probably the most important part of the business owner's policy — certainly if you have business visitors in the course of running your business. And if you operate your business out of your home, it will cover injuries to your business visitors, whether they were injured in the "personal" or in the "business" portion of your home.
Product liability. Another type of coverage that you can add to a business owner's policy for extra cost is for product liability. If your business includes the selling of a product, you may be sued if someone is injured using the product. This can happen even if you just distributed the product, and had nothing to do with its design or manufacture. Depending on how potentially dangerous the product is, who the user will be, and in what part of the country it will likely be sold or used, the cost for this additional coverage could be reasonable or extremely expensive.
Do You Need a Commercial Policy for Your Business Insurance?
A business owner's policy is often the most economical way to protect against a broad range of risks that may befall your business. This type of policy is available for many specified types of lower-risk small businesses (such as retail shops and professional offices).
However if your business does not qualify for a business owner's policy, such as if you operate a restaurant or manufacturing business, you'll need what is known as a commercial policy.
Commercial Insurance Policies
A commercial policy is usually more expensive than a business owner's policy, but is more flexible. It's also more difficult to understand, since unlike a business owner's policy, a commercial policy is written to protect against certain basic risks, with protection against other risks to be accomplished through the purchase of additional coverage, based the specific needs of your business.
Because obtaining adequate coverage under a commercial policy depends on identifying, and specifically insuring against all risks beyond those covered in the core policy, your selection of an insurance agent or broker becomes more important if your business needs a commercial policy. In this case, it is vital that your agent or broker is familiar with the operation of your business, as well as knowledgeable about the commercial policies that he or she offers.
Different insurance companies have their own rules for what types of businesses will qualify for their business owner's policies (which will usually be significantly cheaper when compared to identical coverage under a commercial policy). So if one insurer won't cover your business under a business owner's policy, ask your agent or broker to check whether it could be obtained through another company.
Unlike a business owner's policy, a homeowner's policy protects you from the economic harm associated with home ownership, as well as other covered risks listed in the policy. Even if you have incorporated your business or formed a limited liability company (LLC), you and your business are joined economically. Any economic disaster that hits you will make it hard for you to give your business the time and monetary support that it needs. A homeowner's policy can help insure that a non-business loss will not drag down your business.
If you have a home-based business, you'll be especially concerned about shielding your residence from possible casualties or liabilities.
What's covered by a homeowner's policy? There are several different types of policy in terms of the types of risks that are covered. The most common type of homeowner's policy in use today (known as "comprehensive coverage" or "HO-3" in the insurance industry) covers a variety of risks beyond what you might expect.
Here are some of the major kinds of risks that are covered by a comprehensive coverage homeowner's policy:
- damage to home and personal property caused by fire, lightning, wind, or storm damage
- medical payments for occupants for injuries caused by fire, lightning, wind, or storm damage
- medical and legal liabilities to persons injured by accident while in the home
- loss or theft of personal property, even if not in your home, with some restrictions on things like jewelry or laptop computers
- liability to others for accidental damage to their property, even if not in your home
- liability for unintentional personal injury to others caused by the homeowner or his or her family
- liability for intentional personal injury to others caused by the homeowner's children who are below a specified age
- liability to others hurt because of your participation in a sporting event (for example, while playing golf, you accidentally strike someone with a golf ball)
- liability for damage or injury caused by pets (but damage caused by exotic pets — such as a cheetah — will not be covered)
- damage caused by vandalism, riot or civil unrest
- damage caused by falling objects (such as tree limbs)
What's not covered by a homeowner's policy? It's important to know the types of risks your homeowner's policy covers. Just as important — and possibly more so — is to know what risks your policy does not cover. For our purposes, the three main risks that your comprehensive policy normally does not cover are:
- flood damage (including the water damage caused by a hurricane)
- damage caused by ground movement (such as earthquakes and soil erosion)
- claims arising from a business use of the premises.
Claims arising from a business use of the premises are, by far, the most important exclusion for home-business operators.
We say "normally does not cover" because some states require insurance companies to cover some of these risks (for example, California requires coverage of earthquakes).
Policy riders. You can often obtain coverage by purchasing — at additional premium cost — a policy rider. A policy rider is an additional provision that you and the insurance company agree to add to a policy, usually at an additional cost to you.
Business Use Insurance Exclusions and Insuring Vehicles
The business use exclusion to homeowner's insurance coverage must be addressed by business owners running a business out of the home. Dealing with this exclusion is vital. You don't want to ignore it, hoping that it won't apply to your home business situation. It will — and possibly in ways that are even worse than you imagined!
Unless you have taken steps to have your home business covered, your homeowner's policy will exclude it from coverage. The result? The insurance company will not reimburse you for liabilities that arise from the home business, or pay claims on damaged or destroyed business property. Such uninsured losses may be devastating:
A large tree is uprooted during a storm and crashes onto the roof of your home. The roof repair costs $20,000 and water damage to a couple of your personal computers inside the house that you use in your business requires that they be replaced at a cost of $2,500 per computer, for a total cost of $5,000. When a computer technician comes into your business area of your home to set up the two new replacement computers, she trips and falls, breaking her collarbone (medical bills and liability payments = $15,000).
If your policy does not cover losses arising from a home business, which of these damages (if any) will be reimbursed by the insurance company? This depends on your policy. If it merely excludes the business from coverage, you would still be covered for the $25,000 damage to your roof and computers. However, if your policy becomes void upon the discovery of a home business on the premises, you will receive no compensation for any of the damages and will have to search for a new homeowner's policy, since your policy is no longer in force.
What if you rent? Renter's insurance offers liability and property coverage for renters that is similar to that available under homeowner's policies. Renter's insurance policies are subject to the same exclusions that apply to homeowner's policies, most particularly the business use exclusion.
You should be upfront with your insurance agent about your home business. If your business does not involve the coming and going of customers or employees, or the storage of hazardous materials or large quantities of valuable inventory in your home, your agent may be able to offer to cover your business by way of a relatively inexpensive rider to your existing policy.
You have two choices if your present insurance company will not offer a policy rider:
- investigate whether other insurers will offer such coverage; or
- purchase a business owner's policy.
Insuring Business and Personal Vehicles
Even if it is totally unrelated to your business, an auto accident that leads to a large legal judgment against you can be hazardous to your personal economic health and to that of your business. Because of this, it's important that you have an adequate amount of coverage on your car to cover both business and personal-related accidents and damage to your auto.
Auto insurance has two main components:
- liability insurance
- insurance for property damage.
Liability insurance is the most important. It provides compensation to persons who would be able to sue you for personal injuries, medical payments, loss of earnings, or damage to their property arising out of an auto accident.
Property damage coverage includes such collision and comprehensive coverage, which compensate you for damage to your car, and assorted damage to it caused by such things as fire, theft, and vandalism.
Do you need auto insurance? In most states, all motorists are required to have a specified amount of liability insurance, although it's usually not enough to protect you or your business.
If your auto is financed through a bank or other commercial lender, the lender will require you to carry both collision and comprehensive coverage. If your car is not financed, you don't have to carry this coverage, although most people do so if they have fairly new cars (or valuable older ones).
If you use your car in connection with your business, it's important that you find out if your policy will cover business-related accidents. Considering the devastating effect that a large legal judgment could have on your personal and business finances, you don't want to find out after the fact that you were not covered. If your policy does not cover business travel, you usually can get coverage by way of a policy rider (an additional provision for coverage that you and the insurance company agree to) for a reasonable amount.
Insurance for vehicles driven by employees. If you have employees drive your car on business, you should have what is known as "non-owned" coverage. This coverage pays for injury to people and property damage caused by the employee.
What is this insurance going to cost? If you are wondering how much auto insurance is likely to cost you, or you would like more information on how to lower your auto insurance premiums, you could start with the Insurance News Network's coverage on this topic. In addition to a discussion of some basics, you'll find valuable links to the crash safety, theft, and state data that drives most insurance rates. For example, you can determine how likely it is that someone would steal your vehicle based on its model and year.
Should Your Business Carry Professional Malpractice Insurance?
Various professions can benefit from malpractice insurance. Among the types of insurance policies available to small businesses, you may overlook this one, thinking it doesn't apply to you. Perhaps you associate the term "malpractice" only with doctors or lawyers. The fact is, however, that malpractice insurance isn't just for doctors and lawyers anymore.
This type of insurance is actually called a variety of names:
- malpractice insurance
- professional insurance
- errors and omissions protection
Regardless of the name, the coverage is designed to help you manage the risks associated with making a costly mistake while advising, or serving, a client.
Suppose you worked as a computer programming consultant and committed an error that caused a client to lose valuable data. A professional insurance policy could cover the costs of the client's losses.
If you provide advice or services to the public where significant liability could result if something went wrong, you may want to consider obtaining professional insurance for a couple of reasons.
- First, depending on your profession, you may be required to carry such insurance by law.
- Second, certain policies will provide you with low-cost legal representation in the event you are sued.
Keep in mind, even if your work is flawless, a customer could still claim that you did something wrong. A good professional insurance policy would help you defray the costs of any lawsuit, regardless of whether the underlying claim has merit.
Here is a sampling of occupations for which some form of professional insurance is available:
- advertising agencies
- computer analysts
- data processors
- financial planners
- occupational therapists
- real estate agents
General principles of professional malpractice insurance. Whatever your occupation, here are some general principles to keep in mind as you explore your options:
- Most policies do not, as a rule, cover intentional wrongdoing. If you — or an employee — intentionally harm a client or a client's property, you will most likely be on your own.
- Some policies include attorney services in the event you are sued, but some do not. Because the costs of defending even frivolous malpractice claims can be substantial, it pays to get this added protection if it is available.
- Not all mistakes are discovered at the time they are made. In fact, it may take years before a computer programming error, or piece of bad financial advice comes to light. For this reason, pay particular attention to the time period covered by your policy. One policy may, for example, only pay on claims filed while the coverage is in effect. If you get this kind of policy, you'll have to maintain it for a number of years after you go out of business. Another, usually more expensive policy may be tied to when the alleged mistake is made. Be sure that you get the type of coverage best suited to your business.
- Malpractice insurance is not a license to be careless. Remember that the level of protection you get is limited to your policy's maximum. Big mistakes can result in damages that greatly exceed such policy limits leaving you, or your company, potentially liable for the difference.
Industry specific insurance. Your trade association, business group, or union should be able to provide you with information about coverage available in your line of work. In fact, such groups often negotiate with insurance carriers to provide their members with protection at reduced rates.
Insurance Not Directly Related to Business
Business owners should incorporate other types of insurance not directly related to their business as part of minimizing their risk and protecting their business--you can consider them as part of your overall insurance strategy. These types of insurance include life, disability and health insurance. You may even be able to save money by purchasing one, or more, as part of a package or "umbrella policy" with the rest of your insurance.
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