Profit Minded

Why you should start the year with a small business insurance re-evaluation

As a small business owner, being under- or uninsured can cost you your company and land you in jail. Greg Bivona, a retired insurance industry executive who now helps entrepreneurs as a SCORE mentor, recalls a 2005 case in which a Bloomfield, Conn., trucking company owner met both those fates when one of his uninsured dump trucks caused a catastrophic accident that resulted in 5 fatalities.

That owner was found to be willfully negligent, but business owners are frequently unaware that they are insufficiently insured. “A lot of people don’t understand the pitfalls and risks [of being under-insured],” Bivona says. “Often they minimize what they should have, they go cheap. I understand why; I was in the business. They’re between a rock and a hard place. But you don’t want to go too cheap and have exposure.”

The start of a new year is a good time to conduct an annual re-evaluation of your business insurance coverage. If your staff, office space, or business has reduced in recent years, you might even find ways to save money. Yahoo! Small Business Advisor asked Bivona for a quick insurance tutorial like one he offers small business owners in local SCORE workshops.

He recommends that every business owner tap an insurance agent for advice just as you would a lawyer, an accountant, or a banker. And, he says, you should shop around to get the best deal. A good insurance agent can help you design the right package of coverage for your business without overspending. Here are some basic insurance policies that Bivona says every small business owner needs to consider, as well as a few esoteric types of coverage to explore.

Mandatory insurance for workers. It might be pointing out the obvious, but if you have employees you very likely need to carry workers’ compensation insurance. (You also have to pay unemployment insurance taxes, and in California, Hawaii, New Jersey, New York, Puerto Rico, and Rhode Island you must carry disability insurance.) Rules differ by state and, in many cases, are all but impossible for a business owner to decipher alone. The National Federation of Independent Businesses points to workers’ comp insurance as a top-ten headache for small business owners, and Bivona warns that “trying to play the 1099 game”—treating workers as contractors instead of employees to avoid carrying workers’ comp insurance—is no way to go if you are engaging workers for 40 hours during any given week.

In most states, employers are permitted to purchase workers’ comp insurance through a commercial insurance carrier. In five states as well as Puerto Rico and the U.S. Virgin Islands, employers must insure through a state Workers’ Compensation Insurance program.

Rates are “minimal” for office workers, Bivona says, but employers in higher-risk industries need to budget for this expense. How to figure out what you’ll pay? The Small Business Administration advises speaking with your state’s workers’ compensation office, but a quick perusal of several states’ websites hints at what a bureaucratic hassle that is likely to be. Bivona suggests tapping an insurance advisor, or calling the company that insures your home or automobile. Many of them now provide small business insurance packages, and if they don’t, the agent might be able to point you to someone who does.

Commercial vehicle insurance is mandated by law for trucks, vans, and cars used in business. But you might also consider a comprehensive auto policy to cover any vehicles used in your business, whether you own them, hire them, or neither. Bivona explains: “Say I have a store and I ask my employee to drop off a package on his way home. At that point he is acting as an agent of mine driving his own car. If he gets into an accident, an injured party would go after him. But they could also come after me if they find out he was running this errand for me.” Comprehensive auto insurance would also cover vehicles you rent while yours are under repair. Again, Bivona recommends starting with your personal auto insurance carrier.

Commercial property insurance protects the building where your business operates and its contents. This is what kicks in if your office or warehouse is robbed, damaged, or destroyed due to weather events, crime, or fire.

Home-based business insurance can be purchased separately or added as a rider to your homeowners’ policy to cover equipment used to run your business that is not covered under your homeowners’ policy.

General liability insurance covers medical expenses and legal expenses if you or any of your employees cause physical harm to a person or damage to property that you’re working on, or if someone is injured on your business premises. Bivona says this can also protect companies or individuals in slander or libel suits. “With my insurance hat on I would say everybody needs some liability insurance,” Bivona says.

Product liability insurance covers you if a product you manufacture, wholesale, distribute, or retail harms somebody. “At the end of the day, every store selling a product that could cause injury needs product liability insurance,” Bivona says. It might be the product manufacturer, not the seller, who is truly responsible, but if the injured person gets a lawyer, you can be sure you will be named in a lawsuit, he says. Product liability insurance will pay for you to defend yourself in court.

Professional liability insurance is another category of insurance to cover you in the case of malpractice, errors, or negligence when providing services to customers. Some professionals, such as physicians, are required in certain states to purchase this type of insurance.

Catastrophe or business interruption insurance covers an interruption in your ability to generate revenue such as in the case of a power outage, a fire, or some other catastrophe. “If the business has to shut down, this insurance will cover the costs of getting back to business quicker and will pay for loss of revenue while you’re out of business,” Bivona says. “There are certain things that are expected of you; you’re to do everything possible to get back into business to mitigate loss of revenue. This will cover that loss. Think of a business that can’t operate for weeks unless it pays extra to airship stock immediately or rent another location.”

A standard business owners policy, or BOP, is a comprehensive way to cover many of the aforementioned exposures, excluding automobile and workers’ compensation insurance. “A BOP covers buildings and their contents, and improvements and betterments to the building, office, factory, or store. It includes general liability, product liability, and a myriad of basic business coverage such as glass windows in your building and consequences of employee dishonesty, pilfering, theft, or robbery,” Bivona says.

Disability insurance could be a wise investment for the business owner. In some states, the owner cannot be covered by the worker’s compensation insurance policy. Even when the owner can be covered, workers’ compensation only covers you when you are disabled by an on-the-job injury. Bivona asks, “If you become disabled on vacation or at home and can’t go back to work, who’s going to run the business and take care of your family?” Disability insurance can be fairly expensive depending on your occupation, he warns.

Key person life insurance covers the loss, not necessarily by death, of the person who runs the business or is the brains behind the business. Bivona suggests asking yourself, “If something happens to my partner or this key person, do I need to bring someone into the business to perform that function?” If the key person is no longer there, you might need to liquidate the business at only half or a third its value. Key person insurance would pay the beneficiary for that loss.

A few final bits of advice: Bivona recommends reading all of the exclusions in your insurance policies, holding your agent accountable for finding the best insurance deals on the market for you, and keeping your agent informed of any changes in your business. If you add a vehicle or increase the amount of stock you have in your store, for instance, tell your insurance agent. While your homeowners’ insurance company will annually increase your coverage based on inflation, that does not necessarily happen with commercial insurance unless you have a policy with some kind of inflation guard. An annual review could save you costs on insurance, or save you from the dire consequences of being underinsured when catastrophe strikes.

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