“Shopping for Business Insurance”

Buying personal insurance is confusing enough. If you think auto, homeowner, life, health and disability coverages are complicated, the real test comes when you must purchase insurance for your business.

Commercial products include key-person life insurance, employee theft protection, employment practices liability insurance and business interruption coverage. Some insurers now tailor policies for high-tech startups, with a package of specialized coverages (including errors and omissions) that have only been available to larger firms in the past.

The challenge for fast-growth entrepreneurs: find a knowledgeable agent who’s willing to invest time to learn your business. Some salespeople peddle prepackaged policies, hoping that entrepreneurs won’t know the difference between a boilerplate insurance product and a customized set of appropriate coverages.

In this Quick-Read you will find:

• How to shop smart for business insurance.
• Products or coverages that may relate to your business.
• Ways to streamline your insurance paperwork.

SOLUTION [top]

Insuring your business begins with risk management — identifying what can go wrong financially and devising strategies to guard against crippling losses. Some policies, such as workers compensation, are mandated and regulated by state law. Other insurance products fill specific needs.

Two common types of risk involve:

1. The death of you or your key employees.
2. A range of financial perils, such as fire, lawsuits or employee theft.

Life insurance

If you or your key employees were to die or become disabled, it could sink your business. That’s why you need a business continuation insurance plan to prevent profit erosion, maintain your firm’s credit standing and provide a safety net while your company hires replacements and transitions into a new phase.

You can buy key-person life insurance to cover your life or the life of a partner or valuable employee who makes critical decisions or makes a hard-to-replace, prized contribution. This insurance provides funds to sustain your business if such a person dies. It’s particularly important when an entrepreneur runs a one-person show, lacks a sufficient liquid surplus in case of emergencies and has no clear succession plan.

When someone with a stake in your business agrees to buy another person’s financial interest in the business when that person dies, the parties may establish a "buy-sell agreement." After the second person’s death, the stakeholder would use the life insurance payout to acquire the deceased person’s interest.

Other commercial coverages

In addition to protecting your buildings, vehicles and contents from direct loss or damage, you may need other, less obvious types of insurance. Take business interruption insurance, which covers many costs that flow from the temporary loss of use of office space or decline in customer traffic. It usually pays for loss of business income (defined as net income plus continuing operating expenses, such as taxes, rent and debt payments), extra expense that arises during restoration and other indirect losses caused by a temporary shutdown.

Employee practices liability insurance (EPLI) pays for legal defense and back pay that a court may award if your firm faces certain kinds of lawsuits, such as discrimination or sexual harassment. Some small-business insurers include EPLI in a basic package of coverages. But beware: Some policies contain a "hammer" that lets the insurer stop paying defense costs when it recommends a settlement acceptable to the plaintiffs. Also realize that EPLI probably won’t pay punitive damages. Note: Don’t confuse EPLI with general liability insurance that pays for defending your business against other types of legal judgments, including charges of property damage or bodily injury.

While theft from outside your business is covered by property insurance, fidelity insurance protects against employee theft. As a general rule, buy fidelity coverage that equals at least 10% of annual sales.

You’ll also want to investigate professional liability coverages, including policies that protect your board of directors and officers. E&O insurance pays for financial loss resulting from errors and omissions made by board members or officers. Any bodily injury or property damage they cause is often excluded.

REAL-LIFE EXAMPLE [top]

At fast-growing Container Consulting Service Inc., a packaging firm in Gilroy, Calif., Jack Dewsen works closely with his insurance agent to make sure the company’s coverages keep up with its ever-expanding needs.

"As our company has grown, we’ve taken steps to anticipate our liability exposure and obtain coverage at higher limits," says Dewsen, the accounting manager. For example, Dewsen’s agent recently suggested that he buy an umbrella policy to increase the firm’s liability limits from $1 million to $2 million per incident.

"For the same $7,000 a year in premium we were paying before, we get twice the liability coverage with the umbrella," he says. "It’s more cost-effective because it saves us from having to raise the liability limit individually on each of our five trucks."

Dewsen’s six salespeople use their own cars. He requires that they submit proof of insurance before he lets them drive on company business.

To simplify paperwork, Dewsen consolidates all the company’s policies so that he only needs to review them once a year. He prefers to administer them as a package, rather than evaluating each policy piecemeal throughout the year.

DO IT [top]

1. Have your business interruption insurance written as "actual loss sustained on an unlimited basis." This affords more protection than setting a specific amount that caps the coverage.
2. For property and casualty coverage, make sure you’re not underinsured. Calculate how much it would cost to replace property or rebuild an office, and confirm your policy limit corresponds to these amounts.
3. Ask your agent if there are any new insurance products designed specifically for your type of business. Examples: In July 2000, Chubb launched "Innovator," a set of coverages geared for emerging information technology firms. Also, St. Paul Fire & Marine Insurance Co. has introduced "VisionPak," a property/liability insurance package targeted to high-tech startups, especially those companies in info technology, electronics manufacturing and medical/biotech industries. If your business involves hazardous materials or engages in high-risk activities, then find an agent who specializes in finding insurance for your special needs.
4. Consult your insurance agent before you acquire new property or make building plans to determine how much your risk and property damage premiums will be affected by location and construction options, such as wood-frame vs. cement and dry- vs. wet-sprinkler systems.
5. Be honest on your insurance application. Never withhold relevant facts or deny that you work with dangerous products or materials for fear of paying higher rates. Reason: Your premiums may not necessarily rise as much as you think, and even if they do, an insurer can deny your claim if it determines you falsified information.
6. In addition to buying your own life insurance, consider having your top investors buy coverage on you, too. This way, they can cover their expected returns if you die. Beware: The proceeds from the policy may be subject to the claims of all corporate creditors.

RESOURCES [top]

Books

Insuring the Bottom Line: How to Protect Your Company from Liabilities, Catastrophes and Other Business Risks by David Russell (Merritt, 1996).

Risk Management and Insurance, 11th edition, by James S. Trieschmann, Sandra G. Gustavson and Robert E. Hoyt (Thomson/South-Western College, 2001). A college textbook. Part 2, "Commercial Risk Management Applications: Property-Liability," lists and describes types of insurance a businessperson should consider.

Internet Sites

"Emergency Management Considerations," Section 2 in Emergency Management Guide for Business and Industry, 1993. See the insurance question checklist near the end.

"Determining Your Insurance Needs." SBA Women’s Business Center Online, 1997.

Operations: Business Insurance. Topical Site Search at Inc.com.

Insurance (business insurance checklists) from the Insurance Information Institute

Insure U for Small Business.

Writer: Morey Stettner