Taking the risk out of your insurance decisions

5 minute read

You’re considering starting a small business. You’ve leased a
location, developed your product and hired your staff, selected suppliers and obtained
legal and accounting advice. What’s missing?

Insurance. Think of anything that can go wrong and there’s
probably insurance coverage to protect you, from fires, earthquakes and floods,
to car accidents, theft and slips on your store floor. If you own the business
and the property, should both be insured? What about health insurance for you
and your staff?

Experts said
businesses buy insurance for the same reasons people purchase insurance
individually: to protect themselves, their employees and customers from
financial harm. The cost of providing that insurance is determined by assessing
the frequency and severity of that harm’s risk and whether the exposure to loss
is common or rare.

Some kinds of insurance are mandatory. Small businesses with employees are legally
required to purchase workers’ compensation insurance and unemployment insurance. And in some
states employers must also buy disability
insurance.

Where to
begin

Holly Wade, director of research and policy analysis for the
National Federal of Independent Businesses (NFIB), recommended small business owners or those
considering launching small businesses talk to others operating similar businesses
to theirs and solicit insurance advice. Wade said that business associations
often provide a wealth of industry-specific resources to their members.

“Because every business is different, owners must look
carefully to see what applies to them,” she said. “Depending on the state in
which the business is located, its size and the industry it serves, whether it
is home or office based, will determine the type of insurance that a business
needs.”

Wade said many industries and associations have established partnerships
with insurers that extend discounted rates to members. “It’s always good to
shop, but sometimes going through an organization beats scrolling through the Yellow
Pages.”

Check your coverage

Monica Lindeen, Montana Commissioner of
Securities and Insurance and the president of the National Association of
Insurance Commissioners (NAIC), said home-based business owners sometimes erroneously
believe their homeowner’s insurance policy covers them for business-related
items, such as damage to equipment or materials used in their businesses.

“Most homeowner policies exclude
business operations. If you have a fire, you need to make sure you have the appropriate
business insurance to cover those operations. Small business owners sometimes
think that their company’s motor vehicles are covered under their personal auto
insurance, including people who drive for services like Uber. But if you’re in the
business of transporting someone, your personal auto policy won’t cover you for
damages in the course of your work.”

She urged small businesses to
check with their state insurance commissioner’s office to verify whether their
insurance agent is licensed or the subject of complaints.

She said most states require
insurance agents to undergo a rigorous application and continuing education process
to obtain and maintain their licenses, including fingerprinting and criminal
background checks. And state insurance commissioners are empowered to
investigate and revoke the licenses of agents who don’t follow state laws.

Lindeen said word of mouth from
trusted sources is usually a good place to begin when selecting prospective
insurance agents.

“Talk to other small business
owners,” she advised.

She recommended that small
business owners who have partners obtain “key person” life insurance policies
on each other, so that if one dies, the
life insurance payout can compensate the company for losses and help it to
continue to operate, while paying out benefits to the deceased partner’s heirs.

Katie Vlietstra, vice president of government relations and
public affairs for the National Association for the Self-Employed, said small
business owners should explore and budget for insurance when they formulate
their business plans.

Vlietstra said insurance is a cost of doing business and
owners need to know which forms of insurance are required in their state or
county.

“Failing to comply could mean big consequences down the
road,” warned Vlietstra, who said NAEC experts are available to members seeking
to learn more about insurance requirements.

She advised small business owners to become involved in local
organizations or associations to find a business mentor.

“It’s tough to know everything when you’re just starting out,”
she said. “You don’t want to be over insured or underinsured, so it can be
helpful to find someone in your field with applicable experience,” she said.

She also recommended shopping around to competitively bid
insurance policies, not just the first year, but every year or two.

Jim Whittle, assistant general counsel for the Washington,
D.C.-based lobbying and membership organization, the American Insurance
Association, said some types of insurance coverage can be estimated. Whittle
said workers’ compensation is based on payroll expenses.

“You’re compensating employees injured on the job based on
their wages,” he said. “And while calculating property insurance is not
formulaic, you can get a good sense of what your needs are relatively quickly
by asking yourself: what would it cost to replace the property you own? The
value of that property helps you to benchmark how much property insurance you
will need.“

Do not underestimate…

Whittle said the most common mistake small businesses make
when buying insurance for the first time is underestimating their needs.

“Too often after catastrophes we see that people did not have
enough insurance,” he noted. “Perhaps they were too cost conscious and didn’t
want to overpay, despite their risk exposure.”

He advised small business owners to schedule annual reviews
with their agents to make sure their appropriately insuring their assets.

“Being proactive with this is important,” he said. “You can’t
just … look at it as an afterthought. Suffering a bad loss could kill your business.”

Whittle said one type of frequently overlooked but important
insurance is business interruption coverage.

“This type of policy will cover your business in the event of
a loss from something that closes down your business,” he explained. “If a
tornado wrecks your business, you’re not earning money, but you can be
protected from the losses directly related to the losses you suffer while
you’re out of business.”

One size
doesn’t fit all

Dave Golden, senior
director of commercial lines policy for the Property Casualty Insurers
Association of America, said when someone purchases business insurance, the financial
protection is customized to the unique needs of each business.

‘One size does not
fit all,” Golden said, noting that a traditional brick and mortar bookstore
faces different risks than a bookstore that sells online.

Golden said anyone
doing business on the Internet should consider cybersecurity insurance
policies.

“Things can go wrong
and business owners can be sued,” he said, citing confidential patient medical
records, customer credit information and privacy concerns as new challenges to
small business owners. “If a data breach occurs, that information could be in
the hands of criminals and the financial well-being, privacy and even
reputations of customers could be adversely impacted or ruined.”

Golden said some small
owners should explore liability coverage, which protects businesses from “slip
and fall” accidents. Liability, also known as casualty insurance, includes a
variety of coverage types”

Manufacturers
should consider product liability.

  • Repair shops should
    examine “completed operations” policies that cover work performed.
  • Architect and
    lawyers are often required to purchase professional liability insurance, often
    mandated by state licensing boards.
  • Physicians and
    other medical providers are required to purchase medical malpractice insurance.
  • Bars and restaurants
    serving alcohol, depending upon the state, are required to carry “dram shop” insurance
    to protect themselves from customers who get drunk and sue.
  • Businesses that
    take in products to clean or repair, like computer repair shops or drycleaners,
    often buy ‘bailee’ insurance to cover theft, fire or other damage to goods left
    in their care.
  • Car repair shops
    protect their customers’ cars with “garagekeepers’ policies.

Resources for Small Business Insurance

National Association of Insurance
Commissioners
(NAIC):
state insurance commissioners regulate insurance companies within their states
and assist consumers, including small businesses: http://www.insurance.naic.org/

NAIC Insurance
University: an online insurance tutorial www.InsureUonline.org

U.S. Small Business Administration: offers advice on state insurance
requirements and other resources: https://www.sba.gov/content/insurance-requirements-employers

American Insurance Association (AIA):
AIA’s website features several useful links, including:

Insurance Glossary: http://www.aiadc.org/aiapub/content.aspx?id=357528

Property-Casualty
Insurance Basics
: http://www.aiadc.org/AIAdotNET/docHandler.aspx?DocID=319988

National Federation of Independent Businesses (NFIB): Offers resources to members, including information about
business insurance and this survey: http://411sbfacts.com/sbpoll.php?POLLID=0027