The basics of business insurance. Stimulating topic, I know. So pour yourself your beverage of choice and take a quick read to ensure that your business is covered, or at least you know what it is covered for and what it’s not. And unfortunately, there is no bad decision insurance. You have to cover that one all on your own.
Basic Insurance Philosophy
First, I’m going to start with general insurance guidelines that I am repeating from Eric Tyson’s Personal Finance for Dummies. He has a philosophy on insurance that I think is very helpful.
Law I: Insure for the big stuff; don’t sweat the small stuff. Insurance is to prevent financial catastrophes. So if an incident wouldn’t be a catastrophe, don’t insure for it. And take the highest deductible you can afford.
Law II: Buy broad coverage. If a policy is too specific, don’t buy it. His example for personal policies is cancer insurance. Buy medical coverage instead that covers all illnesses. Fortunately, business insurance doesn’t tend to offer as many of these narrow coverage policies, but you might run into one.
Law III: Shop around and buy direct. Buying direct has gotten easier and easier. Just watch TV. Within one hour, you’ll have four insurance companies that would love for you to log in and save. Though they generally advertise auto policies, many of those companies offer business coverage as well. And I will add, don’t forget to look into insurance affiliations with professional organizations that might give you coverage. If you are a member of an industry group, check what they offer in insurance. Also, the National Federation of Independent Business (NFIB) offers business coverage to its members.
When Do I Need Business Insurance?
If you’re a start-up and have no revenue, I honestly wouldn’t sweat insurance for a bit. It’s probably not a good use of your funds at this point. But, if you start generating revenue, adding employees and investors, you need to think about it. You want a hard cut-off? I would get insurance as soon as:
- You raise money from an outside investor
- You hire your second employee
- Your revenue exceeds $500,000
There are all sorts of exceptions to the above, but you wanted a hard cut-off, so I gave you one. I once had a business with 7 employees and $1 million in revenues and didn’t have business insurance, but I’m a bad example. And extremely lucky nothing happened.
Here’s something else to think about when you consider buying business insurance. The insurance company defends your business in the case of a claim. They don’t want to pay out claims, so their attorneys will handle the lawsuits for you. That’s a pretty big benefit.
The Business Insurance Policies
So let’s run through the most typical types of business policies and what they cover. And every time I say policy (singular or plural), take a drink.
Business Owner’s Policy
This is just a package that includes several coverages for your business and usually gives you a discount by bundling several policies together.
Worker’s Compensation Insurance
This coverage is mandatory in every state except Texas and provides coverage for employees who are injured on the job. The coverage is usually offered by a different carrier than your BOP or other coverages, because it’s very state-specific and a heavily-regulated coverage. The cost is based on an employee’s job classification (again, defined by law) and their annual salary. Many policies have moved to a Pay-As-You-Go policy that you pay with each payroll, which makes life much easier and cash flow manageable.
Commercial Property Insurance
This policy covers your physical assets: buildings, equipment, and inventory. It can include Business Interruption Coverage, which provides the company money if you cannot operate your business for a period of time. If you are renting your space, your landlord may require that you carry Commercial Property Insurance. Their policy will probably not cover any of your items.
Commercial General Liability Insurance (CGL)
This coverage protects you from lawsuits from almost any outsider that claims your company caused them bodily injury, property damage, or personal damages. This is everything from the delivery driver falling off your dock to a customer claiming your lip gloss poisoned them. As you might imagine, the rates vary depending on your revenues and type of business. And, how much mercury you put in your lip gloss.
Professional Liability Insurance a/k/a Error & Omissions Insurance (E&O)
This policy covers negligent acts or malpractice made by businesses that provide services, such as accountants, attorneys, and engineers. Rates vary by profession and revenues of the company. And an interesting difference about Professional Liability policies is they are usually written as “claims-made” policies versus “occurrence” policies.
In the case of professional liability, the claim may be made years after the event actually occurred. Therefore, with a professional liability policy, the carrier at the time of the claim is responsible, not the carrier when the malpractice occurred. So when you are signing up for Professional Liability insurance, the carrier is taking on ALL previous acts for which a claim has not been made.
Employment Practices Liability Insurance (EPLI)
This coverage provides protection for the company if an employee or contractor sues for anything regarding employment, such as wrongful termination, discrimination, or sexual harassment. The carrier will provide (up to your maximum coverage) legal defense for the suit and any award to the defendant.
Commercial Auto Insurance
If you have company-owned vehicles, this covers the vehicles, the drivers, and potentially, the other vehicles and drivers involved in the accident. It is very similar to your own personal auto coverage, but usually more expensive. (More to lose here.) If you or your employees use their own autos for work, such as for deliveries or client meetings, you should look into non-owned auto liability coverage. The employee’s coverage will also come into play in an accident, but the company can also be sued if they were driving for work.
Employee Theft Coverage
This policy covers the company if an employee is stolen by a competitor. Not really, but wouldn’t that be great? It actually covers the company if an employee steals from you. These policies can be written on a “claims-made” or “occurrence” policy. (See Professional Liability Insurance above.)
You can also get a fidelity bond on a specific employee instead of the more general policy. I have mixed feelings about this coverage. If it’s reasonably priced and is bundled with a BPO policy, sure get it. But don’t rely on it. Make sure you have good internal controls and implement procedures that prevent employee theft in the first place.
Data Breach Liability Insurance a/k/a Data Compromise Coverage
This is one of the newer coverages available to businesses. It protects a company in the case of a data breach, covering legal fees and possibly identity theft monitoring for affected individuals. Check with your insurance carrier, but I believe you would only need this coverage if you were storing or transmitting sensitive data such as Social Security numbers or credit card data. In many cases, your company has probably outsourced that task to a third party, so you would want to know what protection the third party offers you in terms of protection. Your own policy may not be necessary.
Directors and Officers Insurance (D&O)
This policy covers the company, directors, and officers in case of a lawsuit brought for alleged wrongful acts in their capacity as directors and officers. It does not cover intentional wrongful acts, however. If you bring on outside Directors and Officers, they will probably insist that you get this coverage. It is usually not very expensive for small, private companies.
Key Man Life Insurance
This policy covers the business in case the “key person” dies or is disabled. The proceeds of the policy can be used to pay off debt the key person guaranteed, it can be used to buy out the widow of the key person, allowing the other partner to continue the business on their own, or it can just be used to sustain the company until another leader is found. If the key man life insurance policy is written correctly (ask your agent for specifics on this) the proceeds to the company should be tax-free.
Fascinating, Wasn’t It?
So now you know the basic types of business insurance. And had yourself a lovely beverage as well (or two if you followed my instructions).
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