Reviewing Your Basic Business Insurance Needs

The basic business insurance package consists of four fundamental coverages--workers' compensation, general liability, auto and property/casualty--plus an added layer of protection over those, often called an umbrella policy. In addition to these basic needs, you should also consider purchasing business interruption coverage and life and disability insurance.


Worker's Compensation:

Workers' compensation, which covers medical and rehabilitation costs and lost wages for employees injured on the job, is required by law in all 50 states. Workers' comp insurance consists of two components, with a third optional element. The first part covers medical bills and lost wages for the injured employee; the second encompasses the employer's liability, which covers the business owner should the spouse or children of a worker who's permanently disabled or killed decide to sue. The third and optional element of workers' compensation insurance is employment practices liability, which insures against lawsuits arising from claims of sexual harassment, discrimination and the like.

"Employment practices liability protects the unknowing corporation from the acts of the individual," says Todd Muller at the Independent Insurance Agents of America (IIAA), an industry association. "Whether you need it depends on the size of your business and how much control you have over the daily work of employees." This is something you may need to worry about as your company grows. Muller says it is often hard for small companies to get workers' compensation insurance at reasonable rates. Consequently, some states have a risk-sharing pool for firms that can't buy from the private market. Typically state-run and similar to assigned risk pools for car insurance, these pools generally don't provide the types of discounts offered in the voluntary market, and thus are an "insurance of last resort."

Because insurance agents aren't always up to date on the latest requirements and laws regarding workers' comp, you should check with your state, as well as your agent, to find out exactly what coverage you need. Start at your state's department of insurance or insurance commissioner's office.

Generally, rates for workers' comp insurance are set by the state, and you purchase insurance from a private insurer. The minimum amount you need is also governed by state law. When you buy workers' comp, be sure to choose a company licensed to write insurance in your state and approved by the insurance department or commissioner.

If you are purchasing insurance for the first time, the rate will be based on your payroll and the average cost of insurance in your industry. You'll pay that rate for a number of years, after which an experience rating will kick in, allowing you to renegotiate premiums.

Depending on the state you are located in, the business owner will be either automatically included or excluded from coverage; if you want something different, you'll need to make special arrangements. While excluding yourself can save you several hundred dollars, this can be penny-wise and pound-foolish. Review your policy before choosing this option because in most states if you opt out, no health benefits will be paid for any job-related injury or illness by your standard health insurance provider.

A better way to reduce premiums is by maintaining a good safety record. This could include following all the Occupational Health and Safety Administration guidelines related to your business, creating an employee safety manual or instituting a safety training program.

Another way to cut costs is to ensure that all jobs in your company are properly classified. Insurance agencies give jobs different classification ratings depending on the degree of risk of injury.


General Liability:

Comprehensive general liability coverage insures a business against accidents and injury that might happen on its premises, as well as exposures related to its products.

For example, suppose a visiting salesperson slips on a banana peel while taking a tour of your office and breaks her ankle. General liability covers her claim against you. But let's say your company is a window-sash manufacturer, with hundreds of thousands of its window sashes installed in people's homes and businesses. If something goes wrong with them, general liability covers any claims related to the damage that results.

The catch is that the damage cannot be due to poor workmanship. This points up one difficulty with general liability insurance: It tends to have a lot of exclusions. Make sure you understand exactly what your policy covers...and what it doesn't.

You may want to purchase additional liability policies to cover specific concerns. For example, many consultants purchase "errors and omissions liability," which protects them in case they are sued for damages resulting from a mistake in their work. A computer consultant who accidentally deletes a firm's customer list could be protected by this type of insurance, for example.

Companies with a board of directors may want to consider "directors and officers' liability" (D&O). This type of insurance protects top executives against personal financial responsibility due to actions taken by the company.

How much liability coverage do you need? Generally, experts say, $2 million to $3 million of liability insurance should be plenty. The good news is that liability insurance isn't priced on a dollar-for-dollar basis, so twice the coverage won't be twice the price.

The price you'll have to pay for comprehensive general liability insurance depends on the size of your business (measured either by square footage or by payroll) and the specific risks involved.


Auto Insurance:

If your business provides employees with company cars, or if you have a delivery van, you need to think about auto insurance. The good news here is that auto insurance offers more of an opportunity to save money than most other types of business insurance. The primary strategy is to increase your deductible; then your premiums will decrease accordingly. Make sure, however, that you can afford to pay the deductibles should an accident happen.

For additional savings, remove the collision and comprehensive coverage from older vehicles in your fleet. Pay attention to policy limits when purchasing auto coverage. Many states set minimum liability coverages, which may be well below what you need. If you don't have enough coverage, the courts can take everything you have, then attach your future corporate income, thus possibly causing the company severe financial hardship or even bankruptcy. Most experts recommend carrying at least $1 million in liability coverage.


Property/Casualty:

Most property insurance is written on an all-risks basis, as opposed to a named peril basis. The latter offers coverage for specific perils spelled out in the policy. If your loss comes from a peril not named, then it isn't covered.

Make sure you get all-risks coverage. Then go the extra step and carefully review the policy's exclusions. All policies cover loss by fire, but what about such crises as hailstorms and explosions? Depending on your geographic location and the nature of your business, you may want to buy coverage for all these risks. Whenever possible, you should buy replacement cost insurance, which will pay you enough to replace your property at today's prices, regardless of the cost when you bought the items. It's protection from inflation. (Be sure your total replacements do not exceed the policy cap.)

For example, if you have a 30,000-square-foot building that costs $50 per square foot to replace, the total tab will be $1.5 million. But if your policy has a maximum replacement of $1 million, you're going to come up short. To protect yourself, experts recommend buying replacement insurance with an inflation guard. This adjusts the cap on the policy to allow for inflation. If that's not possible, then be sure to review the limits of your policy from time to time to ensure you're still adequately covered


Umbrella Coverage:

In addition to the four basic "food groups" of worker's compensation, general liability, auto insurance and property/casualty coverage, many insurance agents recommend an additional layer of protection called an umbrella policy. This protects you for payments in excess of your existing coverage.


Business Interruption Coverage:

When a hurricane or earthquake puts your business out of commission for days--or months--your property insurance has got it covered. But while property insurance pays for the cost of repairs or rebuilding, who pays for all the income you're losing while your business is unable to function?

For that, you'll need business interruption coverage. Many entrepreneurs neglect to consider this important type of coverage, which can provide enough to meet your overhead and other expenses during the time your business is out of commission. Premiums for these policies are based on your company's income.


Life Insurance:

Many banks require a life insurance policy on the business owner before lending any money. Such policies typically take the form of term life insurance, purchased yearly, which covers the cost of the loan in the event of the borrower's death; the bank is the beneficiary.

Term insurance is less costly than permanent insurance at first, although the payments increase each year. Permanent insurance builds equity and should be considered once the business has more cash to spend. The life insurance policy should provide for the families of the owners and key management. If the owner dies, the creditors are likely to take everything, and the owner's family will be left without the income or assets of the business to rely on.

Another type of life insurance that can be beneficial for a small business is "key person" insurance. If the business is a limited partnership or has a few key stockholders, the buy-sell agreement should specifically authorize this type of insurance to fund a buyback by the surviving leadership. Without a provision for insurance to buy capital, the buy-sell agreement may be rendered meaningless.

The company is the beneficiary of the key person policy. When the key person dies, creating the obligation to pay, say, $100,000 for his or her stock, the cash with which to make that purchase is created at the same time. If you don't have the cash to buy the stock back from the surviving family, you could find yourself with new business partners you never bargained for--and lose control of your business.

In addition to the owners or key stockholders, any member of the company who is vital to operations should also be insured.


Disability Insurance:

It's every businessperson's worst nightmare--a serious accident or long-term illness that can lay you up for months, or even longer. Disability insurance, sometimes called "income insurance," can guarantee a fixed amount of income--usually 60 percent of your average earned income--while you're receiving treatment or are recuperating and unable to work. Because you are your business's most vital asset, many experts recommend buying disability insurance for yourself and key employees from day one.

There are two basic types of disability coverage: short term (anywhere from 12 weeks to a year) and long term (more than a year). An important element of disability coverage is the waiting period before benefits are paid. For short-term disability, the waiting period is generally seven to 14 days. For long-term disability, it can be anywhere from 30 days to a year. If being unable to work for a limited period of time would not seriously jeopardize your business, you can decrease your premiums by choosing a longer waiting period. Another optional add-on is "business overhead" insurance, which pays for ongoing business expenses, such as office rental, loan payments and employee salaries if the business owner is disabled and unable to generate income.