Small business insurance:
Insure for the worst, hope
for the best

Few things in life are riskier than launching and running your own business. You needn't compound that risk by neglecting your business insurance needs. Protecting your business from financial disaster will not only preserve all your hard work and long hours, but it will also help you sleep better.

Three types of small business insurance are needed: Property, liability, and workers compensation.

There are three types of small business insurance you need, including one that is mandatory. While business property and liability insurance is necessary, you're not legally obligated to have them, whereas employers must provide state-mandated coverages for injuries and illnesses that are job-related through workers compensation insurance.

With that said, however, under no circumstances should a business be uninsured for its property, equipment, and inventory, as well as against its potential liabilities, in this litigious society.

Small business property insurance

You can insure your property by categories or by events, such as fire, theft, or vandalism.

Basic property insurance will generally cover your losses in the event of a fire or a lightning strike, and will pay the cost of removing property to protect it from further loss. Additionally, a standard small business policy will usually cover losses from windstorm, hail, explosion, riot and civil commotion, and damage caused by aircraft, automobiles, or vandalism. Optional coverage can insure against earthquakes, floods, building collapse, and glass breakage. Property insurance can be categorized by what is insured and by the events leading to a loss.

The Independent Insurance Agents & Brokers of America offers a checklist:

• Buildings and other structures, leased or owned
• Furniture, equipment, and supplies
• Leased equipment
• Inventory
• Money and securities
• Records of accounts receivable
• Improvements and betterments you made to the premises
• Machinery
• Boilers
• Data processing equipment and media, including computers
• 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 (goodwill, trademarks, etc.)

Taking stock of your business property

You should take a complete inventory of all your business property, determine its value, and decide what's worth insuring. Make sure the items you do want to cover are provided for in the basic policy; if not, buy more coverage.

For example, you'll want to make sure your building is covered, as well as your inventory, furniture, equipment, and supplies. Even if your business rents space, your lease might require certain types of insurance coverage that you must carry. However, just because the building owner carries all the necessary insurance on the building in which you operate, doesn't mean it will cover any of your equipment, furniture, and other business possessions.

Named-peril policies will cover certain losses resulting only from those perils that the policy names; all-risk policies offer coverage for all perils except those specifically named in the policy. An all-risk policy is usually sufficient for the average small business, but keep in mind that all businesses, and thus their insurance needs, are different.

Find a company specializing in small-business insurance

If your company has a variable growth pattern, you may want to adjust your coverage annually.

SPECTRUM is a good example of what you may be able to include in your property insurance through a rider called Stretch: accounts receivable coverage up to $25,000 (higher limits are available); coverage for contractors' equipment that is both at the job site and that is in transit; building materials that will become a permanent part of the structure, plus the labor involved with completing the installation; and peak-season coverage that automatically increases your limits by 25 percent during peak inventory periods.

Deductibles for property insurance can be calculated on a per-claim or on an aggregate basis. The out-of-pocket cost for per-claim deductibles is often lower, so if you're in a business that has a relatively low chance of filing a claim, you might consider this. Companies with a lot of claims would do well to consider calculations on an aggregate basis.

Make sure the full value of an item is insured and check the terms for reimbursement. Just because you may have $1 million in coverage doesn't necessarily mean the whole amount is going to be applied in a given category of property. Also, think about whether or not you want the policy to automatically renew each year. If your company has a variable growth pattern, you may want to adjust your coverage annually.

Liability insurance

Many businesses have difficulty figuring out how much liability they need. There are some guidelines to consider, but no standard formula.

Liability insurance will not only pay the cost of the damages but also the legal fees and other costs associated with your defense in a lawsuit. The expenses of defending yourself against such claims in court can be substantial, regardless of whether or not the lawsuit has merit.

However, liability insurance will not protect you against claims arising from nonperformance of a contract, wrongful termination of employees, sexual harassment, or race and gender lawsuits. Usually a surety bond is taken out as performance insurance. Employment practices liability insurance (EPLI) protects your business against employment-related claims, such as sexual harassment.

Many small businesses have difficulty figuring out how much liability insurance they need. There are some guidelines to consider, but no standard formula. Determining the amount of liability insurance to buy is an important task, since the sky's the limit on lawsuits. You could use a recent liability settlement in an industry related to yours as a guide, or you could base the amount on your business' total assets. Either way, discuss it with your agent and check for recommendations from your trade association.

Some occupational licenses might require a set amount of liability insurance. If you rent your business property, check your lease, as it could require a set amount of liability. Then buy what you can reasonably afford, because the cost of the insurance will be far less than the cost of a lawsuit.

Business owners policies

Even if you have a BOP, you'll want to consider adding coverages that might not otherwise be included. Property insurance can be tailored to fit your needs since no two businesses are the same. For example, a restaurant has different needs than a furniture store; a retail business with a lot of customer interaction and builders who are contractually obligated to, say erect an office building, may face a greater amount of liability than, say, a two-person accounting office. Therefore, liability above and beyond a BOP package should be considered.

Last updated July 26, 2004