Do You Need Business Insurance?
Good luck and positive thinking will probably not protect your business from losses. Unfortunately, bad things happen to the most conscientious business owners. That is why you need insurance. Like the following examples, if you can reasonably imagine it happening to you, it might.
You pull a healthy tooth from your patient’s mouth, and she sues you for malpractice.
Your secretary needs surgery and months of physical therapy to correct her carpal tunnel syndrome.
You arrive at work one morning to find that all of your computer equipment has been stolen.
One of your salespersons does an interview with a newspaper and calls a competitor an “idiot” and jokes that he has been known to date underage girls. The competitor promptly sues you for defamation.
A customer slips on a just-washed floor in your market and breaks her ankle.
One of your warehouse employees has been taking electronic equipment and selling it from his house.
A number of children have severe allergic reactions after eating cookies you manufacture–you forgot to list whey in the ingredients.
While driving a client from the airport to a meeting, one of your employees hits a guardrail and injures herself and the client.
The building where your business is located is damaged in a fire; the damage to the building and your equipment keeps you from operating for three months. Between lost profits and continuing business expenses you lose $150,000.
One of your senior executives has a heart attack after you tell him that he is being transferred to a small town and getting a pay reduction.
Individuals who have donated large sums to your nonprofit organization sue the board of directors for mishandling donations.
One of your employees leaves on a coffee maker and it burns down the building where you lease office space.
Your employees have been complaining about feeling unsafe because your parking lot lights have been burned out. Partly because it’s a low priority expense and partly because you just keep forgetting to take care of it, the lights have been out for a number of months. One night, an employee is robbed and severely beaten on the way to her car. * Shortly after the resignation of your accountant, you discover that she has been writing company checks to herself and family members for the past fifteen years.
A UPS delivery person slips on your icy driveway while delivering office supplies to you for your home office.
An entire shipment of evening dresses you have designed and manufactured is destroyed by a warehouse flood.
After months of negotiations, you finally sign a contract for the shipment of $10,000 of parts. Shortly thereafter, your building burns down and you have to cease operations for a number of months. You then contact your distributor, who has already invested a significant amount of time and money into fulfilling your order, to tell him that you cannot fulfill your obligation. He then sues you for breach of contract.
You fire an employee who was constantly late for work and alienated customers. He turns around and sues you for wrongful termination.
Your nonprofit organization throws a wine tasting fundraiser using employees and volunteers as bartenders. The wine is free and the guests are encouraged to drink as much as they like, even though they become clearly inebriated. On the way home from the event, one of the guests gets into a car accident and injures a family of four.
You need business insurance, To cover up your business from these type of losses.
Types of Business Insurance
The most common types of commercial insurance are property, liability and workers’ compensation. In general, property insurance covers damages to your business property; liability insurance covers damages to third parties; and workers’ compensation insurance covers on-the-job injuries to your employees. Depending on your business, you may want additional specialized coverages. Listed below are some of the different types of business insurance.
Property insurance pays for losses and damages to real or personal property. For example, a property insurance policy would cover fire damage to your office space. You can purchase additional coverages for business property, including:
Boiler and Machinery Insurance
Boiler and machinery insurance, sometimes referred to as “equipment breakdown” or “mechanical breakdown coverage,” provides coverage for the accidental breakdown of boilers, machinery, and equipment. This type of coverage usually will reimburse you for property damage and business interruption losses. For example, this coverage would cover fire damage to computers.
Debris Removal Insurance
Debris removal insurance covers the cost of removing debris after a fire, flood, windstorm, etc. For example, a fire burns your building to the ground. Before you can start rebuilding, the remains of the old building have to be removed. Your property insurance will cover the costs of rebuilding, but not of removing the debris.
Builder’s Risk Insurance
Builder’s risk insurance covers buildings while they are being constructed. For example, a Builder’s risk policy would cover losses if a windstorm takes down your partially constructed condominium complex.
Glass insurance covers broken store windows and plate glass windows.
Inland Marine Insurance
Inland marine insurance covers property in transit and other people’s property on your premises. For example, this insurance would cover fire-damage to customers’ clothing from a fire at your dry cleaning business.
Business Interruption Insurance
Business interruption insurance covers lost income and expenses resulting from property damage or loss. For example, if a fire forces you to close your doors for two months, this insurance would reimburse you for salaries, taxes, rents, and net profits that would have been earned during the two-month period.
Ordinance or Law Insurance
Ordinance or law insurance covers the costs associated with having to demolish and rebuild to code when your building has been partially destroyed (usually 50 percent). For example, your three-story building is 100 years old. A flood destroys the basement and first two stories. Because more than 50 percent of your building has to be rebuilt, a local ordinance requires that the building be completely demolished and rebuilt according to current building codes. Property insurance covers only the replacement value, not the upgrade.
Commercial leases often require tenants to carry a certain amount of insurance. A renter’s commercial policy covers damages to improvements you make to your rental space and damages to the building caused by the negligence of your employees.
Crime insurance covers theft, burglary, and robbery of money, securities, stock, and fixtures from employees and outsiders.
A bond company covers losses due to a bonded employee’s theft of business property and money.
Liability insurance covers injuries that you cause to third parties. If someone sues you for personal injuries or property damage, the cost of defending and resolving the suit would be covered by your liability insurance policy. A general liability policy will cover you for common risks, including customer injuries on your premises. More specialized varieties of liability insurance include:
Errors and Omissions Insurance
Errors and omissions (“E & O”) insurance covers inadvertent mistakes or failures that cause injury to a third party. The act must actually be an inadvertent error, and not merely poor judgment or intentional acts. For example, an E & O policy would cover damages arising from an insurance agent failing to file policy applications, or a notary forgetting to fill out notarizations properly.
Malpractice/Professional Liability Insurance
Malpractice insurance, or professional liability insurance, pays for losses resulting from injuries to third parties when a professional’s conduct falls below the profession’s standard of care. For example, if a doctor makes a mistake that other doctors of his specialty would not have made, his patient might sue him. A malpractice policy will pay his defense costs and any judgment or settlement. Malpractice insurance is available for doctors, dentists, accountants, real estate agents, architects, and other professionals.
Commercial automobile policies cover the cars, vans, trucks and trailers used in your business. The coverage will reimburse you if your vehicles are damaged or stolen or if the driver injures a person or property.
Directors’ and Officers’ Liability Insurance
This type of insurance is generally purchased by corporations and nonprofit organizations to cover the costs of lawsuits against directors and officers.
Workers’ Compensation Insurance
Workers’ compensation insurance covers you for an employee’s on-the-job injuries. Businesses with employees are required by various state laws to carry some type of workers’ compensation insurance. In most cases, workers’ compensation laws prohibit the employee from bringing a negligence lawsuit against an employer for work-related injuries.
Consult Our Commercial Insurance Specialist about the type of business property insurance best suited for your small business.
Home-Based Business Insurance
Contrary to popular belief, homeowners’ insurance policies do not generally cover home-based business losses. Depending on risks to your business, you may add riders to your homeowners’ policy to cover normal business risks such as property damage. However, homeowners’ policies only go so far in covering home-based businesses and you may need to purchase additional policies to cover other risks, such as general and professional liability.
Need more help? Please Contact our Commercial Insurance Specialist for more information or help
Introduction to Liability Insurance
If someone falls while visiting your business premises, or a customer is hurt by a product your business sells, you can be held responsible. That’s the risk that liability insurance covers.
In a 2004 survey released by the National Federation of Independent Business (NFIB), 30 percent of small business owners ranked the cost and availability of liability insurance as the second most important insurance concern they faced. (Health insurance ranked first, while workers’ compensation ranked third.) Concerns about liability insurance are significantly increasing. In a 2000 survey, only 11 percent of small business owners cited cost and availability of liability insurance as a critical issue.
Liability insurance, also called Commercial General Liability (CGL), covers four categories of events for which you could be held responsible: bodily injury; damage to others’ property; personal injury, including slander and libel; and false or misleading advertising. CGL coverage pays for the injured party’s medical expenses. It excludes your employees, who are covered by workers’ compensation. (For details see workers’ compensation section of this site.) Bear in mind that even trespassers can sue you if they fall and get hurt on your business premises!
There are three types of legal damages people may sue you for that are typically covered by a CGL policy:
Compensatory damages: financial losses suffered by the injured party and future losses they may suffer resulting from an injury they claim in the lawsuit.
General damages: non-monetary losses suffered by the injured party, such as “pain and suffering” or “mental anguish.”
Punitive damages: additional penalties and charges the defendant must pay.
Standard liability insurance does not protect a business against:
Claims from sexual harassment, wrongful termination of employees, failure to employ or promote, or race and gender lawsuits. These and other employee-related claims are covered by employment practices liability coverage. The cost of employment practices liability coverage depends on a business’ number of employees, whether there is a history of the company having been sued in the past, and other business risk factors. The policy also pays for legal costs associated with a company’s defense of a lawsuit related to employment practices.
Claims related to operating an automobile or truck. If you own vehicles for your business, whether for deliveries or client consultations, you will need separate commercial automobile coverage to protect you and your employees against liability claims resulting from car accidents.
Automobile liability insurance is required by most states. It covers medical expenses and damages to another person’s property as a result of a motor vehicle accident caused by the insured’s negligence. Some states mandate “no fault” auto insurance, which provides coverage for medical expenses, rehabilitation, funeral expenses, lost wages and in-home assistance to the driver and his or her passengers, regardless of who is held at fault in an accident.
Many policies offer or include uninsured or underinsured motorist protection, which provides coverage for the insured and his or her passengers if they are injured in a collision caused by an uninsured or underinsured motorist. If your vehicle is primarily used for business, make sure your company’s name is on the policy instead of your personal name to avoid complications later should you need to file a claim. (For details, see commercial auto insurance section of this site.)
Professional Liability insurance — or Errors and Omissions insurance — is coverage for wrongful practices by professional service providers (e.g. healthcare providers, lawyers and consultants). This type of insurance covers faulty service (errors) or failure to provide a service altogether (omission). Malpractice insurance is a specific type of professional liability policy that protects physicians and other licensed professionals from liability associated with bodily injury, medical expenses and property damage, as well as the cost of defending lawsuits related to such claims.
As with other liability insurance policies, premiums for professional liability coverage depend on the type of professional service being provided and its level of risk.
Claims related to workers’ compensation insurance. As explained in the workers’ compensation insurance section of the site, workers’ compensation insurance protects a business owner from claims by employees who suffer a work-related injury or illness. In all states, most companies are required to carry workers’ compensation insurance for their employees. Typically, workers’ compensation covers the employee’s medical expenses, rehabilitation costs and missed wages. You will need a separate policy for this type of coverage. Check with your state insurance department for specific requirements in your area.
According to the Small Business Administration, business owners, independent contractors, domestic employees in private homes, farm workers and unpaid volunteers are usually exempt from workers’ compensation eligibility. If this is the first time you’re purchasing workers’ compensation insurance, the rate will depend on your payroll and your industry. After a few years, your premiums may be based on the actual experience of your company.
Other types of liability insurance include:
An umbrella liability policy provides extra protection above a standard policy. Umbrella policy coverage limits are typically within the $1 million to $5 million range and are appropriate for business owners who have large assets or may be especially vulnerable to lawsuits.
Crime Insurance protects businesses from theft and malicious damage, such as employee embezzlement.
“E–insurance” or Internet Business Insurance covers Web-based businesses for damages caused by computer hackers and viruses.
Tips & Considerations Concerning Liability Insurance
Liability insurance premiums are typically based on a business’ sales and payroll estimates provided prior to policy inception. If the actual amounts turn out to be higher after the policy has been issued, you may need to pay an incremental premium. Conversely, if the amounts are less than estimated, you could get a refund.
Other factors that influence your liability premiums include your type of business and the risks generally associated with it. For example, a toy manufacturer may pay $3 per $1,000 of sales. Thus, on $10 million of sales, the premium would be $30,000. A company that manufactures a less “risky” product or engages in a less risky business, such as a florist, may pay $1.50 per $1,000 of sales, or $15,000.
Insurance companies evaluate a business’s risk for liability coverage based on numerous factors: the number of claims filed within an industry or probability of a claim for a similar type of company; the financial stability and longevity of a business; state laws; business products and/or operation; and a business’ approach to handling and preventing potential risks.
If you have solid, documented practices and safety procedures in place, you may be considered a lower risk by an insurance company for liability insurance and therefore be charged lower premiums.
Introduction to Property Insurance
Property insurance protects small business owners from losses due to damage to physical space or equipment and as a result of theft. For insurance purposes, a business’ property includes the physical building in which it resides, as well as its other assets. All of the following, owned or leased, can be considered business property:
The actual building
Furniture, equipment and supplies
Computers and other data processing equipment
Valuable papers, books and documents
Artwork and antiques
Television sets, DVD players, satellite dishes
Signs, fences and outdoor property not attached to a building
Non-tangible items such as trademarks and copyrights
There are three types of property insurance plans:
Basic form, which includes losses resulting from a fire, lightning, windstorm, hail and explosion, plus the cost of removing property to protect it from further damage.
Broad form, which includes basic plus extended coverage for other types of perils, such as a roof collapse (e.g. caused by snow or ice), riot and civil commotion, etc.
Special form, which includes basic and broad, and covers all direct physical losses except conditions specifically excluded as listed in the policy.
With property insurance you can buy either actual cash value or replacement cost insurance.
Replacement Cost Vs. Actual Cash Value
When buying a business property insurance, you must decide between actual cash value and replacement cost insurance.
The difference is depreciation:
Actual cash value reimburses the current market value of the damaged item, taking depreciation into account.
Replacement cost covers the cost to purchase a brand new item of similar quality, ignoring depreciation.
Replacement cost coverage is a bit pricier, but it may be worth it.
Actual cash value insurance reimburses you for the value of lost, damaged or stolen goods after depreciation is taken into consideration. Replacement cost insurance reimburses you the amount it would take to replace, rebuild or repair damages with materials of similar kind and quality, without deducting for depreciation.
Introduction to Business Owner’s Policy: A Package Solution
Many small business owners purchase a business package policy called a “BOP” – a business owner’s policy. A BOP typically includes property insurance, business interruption/continuation insurance and liability insurance. Often it is a less costly option for small businesses than buying a set of individual policies. Many insurers customize BOPs for specific types of businesses.
However, a BOP does not cover professional liability (liability claims arising from wrongful practice by professionals), auto insurance, workers’ compensation, health or disability insurance – all of which need to be purchased separately.
Not all businesses qualify for a BOP. For example, a factory or jewelry store would probably not qualify for a BOP. Those businesses – because of their unique risks – usually require more customized coverage than what’s included in a standard BOP.
A home-based business or a company with only a few employees may start out with a BOP and then expand its coverage as it grows.
Tips & Considerations for Reducing Business Risk
As a small business owner, you can take steps to minimize risk in the workplace, thereby helping to lower your insurance premiums. Here are some tips that could benefit your business, employees, customers and clients:
Install fire and security alarms.
Plan and train employees for an emergency on the premises, such as fires and evacuations.
Have employees keep wallets and other personal items in a secure place. Keep the business’ cash and other valuables in a safe.
If employees work with machinery, provide goggles, gloves and other recommended safety gear to help prevent injuries.
Keep office space in good physical condition. Maintain carpeting and railing on stairs. Make sure telephone and computer wiring is in good working condition and does not create any hazards.
If your employees operate a company car, make sure they have clean driving records and are trained properly.
Insurance Requirements for Employers
Businesses with employees are required by law to pay for certain types of insurance: workers’ compensation insurance, unemployment insurance, and, depending on where the business is located, disability insurance.
Workers’ Compensation Insurance
Businesses with employees are required to carry workers’ compensation insurance coverage through a commercial carrier, on a self-insured basis, or through the state Workers’ Compensation Insurance program. Visit your state’s Workers’ Compensation Office for more information on your state’s program.
Unemployment Insurance Tax
Businesses with employees are required to pay unemployment insurance taxes under certain conditions. If your business is required to pay these taxes, you must register your business with your state’s workforce agency.
Some states require employers to provide partial wage replacement insurance coverage to their eligible employees for non-work related sickness or injury. Currently, if your employees are located in any of the following states, you are required to purchase disability insurance:
What Determines Business Insurance Costs?
Business insurance costs fluctuate and are based on a few simple factors. Learn which factors determine business insurance costs by following simple things.
major factors affecting business insurance cost:
Type of industry – A company in a high-loss/high-risk industry will pay higher business insurance costs. For instance, construction businesses have above-average workers’ compensation and general liability losses, so the higher rates than a company whose employees are office-based.
Coverage limits – Obviously, business insurance costs more when it covers more. An example, a four-employee business with $1,000,000 in liability coverage will pay substantially lower rates than a 60-employee business with $10 million in liability coverage.
Location, Location, Location – If a business is located in a severe weather area, high-crime locality, etc., business insurance costs will be higher. Additionally, businesses at-risk for flood and earthquake damage will require separate flood or earthquake business insurance policies to cover for these disasters.
Optional coverages – Do employees travel for business purposes or drive company vehicles? Does the company purchase specialty policies such as business interruption insurance? If so, the company will require additional coverage, resulting in higher business insurance costs.
Claims history – Similar to other forms of insurance, if a business has a history claims, insurance companies may view as high-risk and will charge a higher premium.
Now that you know exactly how rates are calculated, shop around for a more affordable policy online. Comparing quotes is the best way to lower business insurance costs.
Tips for Buying Business Insurance
Use these steps to assess what types of insurance are best for your business, and how to secure coverage to provide adequate protection and minimize risks.
1. Assess Your Risks. Insurance companies determine the level of risk they’ll accept when issuing policies. This process is called underwriting. The insurance company reviews your application and determines whether it will provide all or a portion of the coverage being requested. Each underwritten policy carries a premium and a deductible. A premium is the price you pay for insurance. Premiums vary widely among insurance companies, and depend on a number of risk factors, including your business location, building type, local fire protection services, and the amount of insurance you purchase. A deductible is the amount of money you agree to pay when making a claim. Generally, the higher deductible you agree to pay, the lower your premium will be. However, when you agree to take on a high deductible you are taking on some financial risk. So, it’s important to assess your own risks before you go shopping.
2. Shop Around. The extent and costs of coverage vary from company to company. Some brokers specialize in insuring specific types of business, while others can connect you with policies specific to your business activities. For example, if you operate a tow truck service, you’ll want to find an agent that can help find policies that specifically cover automotive service businesses. Often specialist brokers can get you the best coverage and the best rates.
3. Consider a Business Owner’s Policy. Insurance can be purchased separately or in a package called a business owners’ policy (BOP). Purchasing separate policies from different insurers can result in higher total premiums. A BOP combines typical coverage options into a standard package, and is offered at a premium that is less than if each type of coverage was purchased separately. Typically, BOPs consist of covering property, general liability, vehicles, business interruption and other types of coverage common to most types of businesses. BOPs simplify the insurance buying process and can save you money. However, make sure you understand the extent of coverage in any BOP you are considering. Not every type of insurance is included in a BOP. If your business has unique risks, you may require additional coverage.
4. Find a Reputable, Licensed Agent. Commercial insurance brokers can help you find policies that match your business needs. Brokers receive commissions from insurance companies when they sell policies, so it’s important you find a broker that is reputable and is interested in your needs as much as his own. Make sure your broker understands all the risks associated with your business.
Finding a good insurance agent is as important as finding a good lawyer or accountant. You should always look for one that has a license. State governments regulate the insurance industry and license insurance brokers. Many states provide a directory of licensed agents.
5. Assess Your Insurance Coverage on an Annual Basis. As your business grows, so do your liabilities. You don’t want to be caught underinsured should disaster strike. If you have purchased or replaced equipment or expanded operations, you should contact your insurance broker to discuss changes in your business and how they affect your coverage.
A surety bond or Surety is a promise to pay one party (the obligee) a certain amount if a second party (the principal) fails to meet some obligation, such as fulfilling the terms of a contract. The surety bond protects the obligee against losses resulting from the principal’s failure to meet the obligation.
A surety bond is a contract or an agreement among at least three parties:
The obligee – the party who is the recipient of an obligation,
The principal – the primary party who will be performing the contractual obligation,
The Surety – who assures the obligee that the principal can perform the task
To protect the interests of taxpayers and consumers, many state statutes or ordinances require public officials to obtain a bond. Public official bonds guarantee that a public official comply with statutes such as handling money or other assets entrusted to him or her with honesty, and the bond may also guarantee that the official faithfully performs his or her duties.