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If
you own your own business or are a partner in one, you're
probably already familiar with risk. After all, few things
in life are riskier than launching and runnin
g your own small
business. Part of the risk of any small business is the loss
of critical tools and property or liability to others. Either
of which can cause loss of income or even force you to close
your doors.
Large companies employ full-time risk managers
to keep their risk-taking to a minimum. But chances are that
as a small-business operator, you are your company's risk
manager, along with its personnel director, office manager
and possibly the entire staff all rolled into one.
While juggling all the jobs that need to
get done to make your firm a smooth-running and profitable
operation, you may already be asking yourself: “Who
has time to think about insurance?”
Keeping risks and losses to a minimum is
a cornerstone of business success, especially for small businesses.
Take a few minutes now to check your risk factors, find out
your insurance needs and learn the many options available
to you. And remember choosing the right agent is as important
as choosing the right insurance.
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.
Business Insurance 101 Questions and Answers
I'm
just getting my business started. Do I need insurance right
away?
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 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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I
don't have any major business assets. Why do I need insurance?
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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Is
insurance coverage different for different businesses?
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 agent can advise you of the best policy (or policies)
to protect you and your business.
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What
types of property do I need to insure?
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 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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What
types of property insurance should I consider buying?
The best thing to do is to take a complete
inventory of all your business property, determine all of
its 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
This 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%), 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
This 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
This 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
This covers business owners for losses due to dishonest acts by their employees.
Glass Coverage
This 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
This 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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How
much property insurance do I need to buy?
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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Who
decides how much my business property is worth?
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 among 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%. Therefore, insurance would pay you $250.
Replacement Coverage
This coverage pays 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 a 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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What
kinds of events does business insurance cover?
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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Everybody
seems to be suing everybody else these days. What if someone
sues my business?
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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What
about the cars and truck that I have in my business? Is the
coverage like what I have on my personal car?
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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Will
I need to protect my employees in the event they are injured
on the job?
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, and a degree of immunity from lawsuit by an injured employee.
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I
keep one auto strictly for business. Do I need a separate
policy?
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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I
just signed a 3-year lease to open my business. Why does my
insurance agent want to see my lease?
Whether the business lease is for a building
or for equipment, your 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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My
business requires that I store gasoline on the premises. Do
I have to have special insurance?
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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I
run a dry-cleaning business. What happens if fire destroys
many of my customers' clothes that were stored in the building?
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 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, which 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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What if the clothes I manufacture are damaged
in shipment. Does the shipping company reimburse me or do
I put in a claim to my insurance company?
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 agent.
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I
work out of my home. Will my homeowners insurance cover my
business?
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 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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What
is coinsurance all about?
Most business policies include a "coinsurance"
clause stipulating what percentage of the total value of your
property must be insured 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 of $60,000 is $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 Trusted Choice®
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
a retailer, do I need to worry about product liability?
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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Now
that my business is established, I think it is time to offer
my employees some benefits. What do I need to know?
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, 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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Who
keeps an eye on the insurance companies?
Insurance is a heavily regulated industry.
Every state has a department 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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