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 insurance agent can do to help you.
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.
Is insurance coverage different for different businesses?
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 Business Owner’s 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 pur-chased 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 business owner’s policy. A professional independent insurance agent can advise you of the best policy (or policies) to protect you and your business.
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:
- Furniture, equipment and supplies
- Money and securities
- Records of accounts receivable
- Improvements you made to the premises
- Data processing equipment
- 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
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 their 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.
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.
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 between 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 percent. Therefore, you would be paid $250 for it.
Replacement Coverage
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 re-placement 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.
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 business owner’s 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 business owner’s 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.
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 homeowner’s policy. Your insurance agent can help you ascertain what, if any, additional coverage you need. This additional coverage may be added to your homeowner’s policy or found in a separate commercial policy.
Can I do anything to lower my insurance premiums?
- 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, etc. Consider keeping a second set of records off-site, such as with your accountant, insurance 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 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.
What should I look for in an agent?
Agents are there to help you. At the most basic level, any agent should be able to answer all of your questions about insurance, provide you a thorough assessment of your insurance needs, and offer you a choice of insurance products to meet those needs. Also, any insurance agency should provide you with prompt, quality service in the case of a claim.
Just as important is the level of professional confidence and personal comfort you feel with the agent. Many people stick with the same insurance agent for decades, even generations. It helps to find an agent you can get to know and trust.
An important, but sometimes overlooked, factor to keep in mind is that there are two kinds of insurance agents: those who represent only one insurance company and those who represent more than one insurance company. Agents offering through their agencies only the policies of one insurance company often are referred to as “captive agents,” because the company they represent does not allow them to offer their customers competitive alternatives. By contrast, agents offering through their agencies the policies of more than one insurance company are called “independent agents,” because they can shop around for their customers for the best insurance values among a variety of competing companies. National surveys have shown that Americans prefer to work with independent insurance agents by a 2-to-1 margin over captive agents.
Bonding
What is a bond?
A bond guarantees the fulfillment of a legal obligation. It’s a three-party agreement or promise where a third party (surety company) guarantees to a second party (obligee or owner) the payment or successful performance of the first party (principal). A bond is not an insurance policy calculated to cover losses. Rather, a bond is an extension of credit with the assumption that there will be no loss. The bond premium paid to the surety covers only the underwriting expenses of the surety company. When losses occur, they have a significant impact on the surety company’s financial results.
Types of Bonds
Bonds cover numerous aspects of operating a business. Typical bonds are surety and fidelity.
Benefits of Surety Bonds
Surety bonds are a risk transfer mechanism. The risk of doing business with the principal is shifted from the obligee to the surety company. Federal, state and local governments often require surety bonds to guarantee that business owners and individuals will comply with various laws protecting public funds. For example, license bonds protect the public from business misconduct. Contract bonds protect taxpayers by guaranteeing that projects are completed properly, on time and without liens.
Types of Surety Bonds
Different surety needs are met by different classes of surety bonds:
Contract Bond guarantees that an entity awarded a contract will meet its obligations under that contract.
License & Permit Bonds guarantee that individuals granted a license or permit to operate a business or to exercise a privilege will meet the obligations under that license or permit.
Miscellaneous Bonds guarantee a variety of non-classifiable obligations. These include utility, lost securities, workers compensation premium payments, and sales tax payments.
Types of Fidelity Bonds
Companies are vulnerable to a wide variety of commercial crimes, including employee theft or dishonesty; forgery; loss of money, securities and other property on premises; computer fraud; disappearance or destruction of property; robbery and burglary. Different security needs are met by different classes of fidelity bonds:
- Pension Trust (ERISA) Bonds are designed to protect the investors and the money in these funds.
- Blanket & Schedule Bonds provide protection against employee theft. These bonds cover the loss of money, merchandise or other property owned by the insured when such a loss is due to employee dishonesty.
- Janitorial Services bonds are specifically designed to provide protection for customers since they have access to customers’ assets, equipment, supplies and personal belongings.
Underwriting Process
A surety company must determine the probability of a loss should the principal be unable to complete their obligations under the bond. Since a bond is an extension of credit, the surety com-pany must analyze the principal’s financial standing and business aptitude to determine if the principal has the financial strength and business knowledge to support the bonded obligation. This is called the underwriting process. Surety company underwriters evaluate risks in ways similar to banks evaluating loan applications. Underwriters consider business and personal financial statements, cre-dit reports, credit references and other factors.
Collateral
A surety company may request collateral to reduce the risk of the bond. Forms of collateral include cashiers checks, certificates of deposit or irrevocable letters of credit. In addition, collateral reduces the risk a surety company assumes when issuing a bond. After all obligations of the bond have been met, collateral is returned to the principal and the obligee releases the surety company from their obligation under the bond.
Choosing a surety
Surety companies handle a wide range of surety products, and sell different products at many different rates. When selecting a surety company, make sure the company is listed with the U.S. Department of the Treasury. The Treasury Department lists all surety companies that are qualified to write bonds for federal contracts. To be an acceptable, the company must qualify financially under the regulations of the U.S. Department of the Treasury.
Check on the rating of the company. An acceptable surety company is rated “excellent” or better by the A.M. Best Company, an insurance rating service. You can get a copy of its annual Best Rating Report from the surety company.
Make sure the surety company is licensed to do business in your state by calling the state’s Department of Insurance. The lowest rate does not always guarantee you are getting the best deal. Check out the surety company before you decide to place your business with them.