Must-Have Insurance for Small Businesses
Author: Laurie Kulikowski, The Street
Small businesses are feeling the bite as states toughen up on enforcing federal mandatory insurance coverage like workers’ compensation. If these same businesses do not also consider purchasing optional coverage like general liability insurance, they may be setting themselves up for liability or damage costs that far outstrip the price of insurance. For more on this continue reading the following article from The Street.
Whatever size company you run, insurance is not something to take lightly.
From customers hurting themselves in your store to employee wrongful termination suits, if you want to protect yourself and your business, take precautions and buy an insurance policy. It can come in various forms, though, from general to specialized, depending on the size of your company, industry, locations and preferences.
Large commercial carriers, including Travelers(TRV), The Hartford(HIG), Nationwide and Allianz’s(AZ) Fireman’s Fund Insurance, cater to small businesses alongside bigger clients; others are expanding to incorporate the segment into their customer lineup.
“For a few thousand dollars, most small companies should be able to adequately cover themselves,” says Steve Kantor, executive vice president of KEH Insurance. “Things start getting more complicated when you add employees, when you add people in the business that drive cars on behalf of the company, when you add data or private information, such as taking credit card transactions and accepting personal information, medical and financial information.”
“You now assume liability and, unfortunately, many of these smaller companies are just not properly insured to address this risk,” Kantor says.
The options can be overwhelming for a business owner.
Experts say it’s important to work with an insurance broker to assess pricing and premiums and ensure there’s enough coverage, customer service availability and, most importantly, compliance with all laws and regulations.
Professionals such as lawyers and doctors will need to get professional coverage before they start a firm or practice, but any business owner is expected to be covered even before lighting the “open” sign for the first time under a general liability policy as well as commercial auto insurance, if applicable. Depending on whether the facility that the business is housed in is leased or owned, property insurance is also a necessity.
“Those three things are probably going to need to be in place before you open your doors,” says Kevin Lynch, an assistant professor of insurance at The American College and a former owner of a financial planning practice. “All of the other things … can simply be identified, prioritized and — as funds are made available — implemented.”
Insurance costs should be roughly 10% of operational costs, lower if you can get it, Lynch says. For start-up firms, insurance can be as much as 12% to 15%.
Policies come in various shapes and sizes. Here are some of the more important — and possibly overlooked — coverage areas small-business owners should consider:
1. General liability insurance and commercial auto insurance
These are the two most common insurance policies small-business owners will need.
Let’s say a customer slips and falls in your clothing store. She sues you. General liability insurance is there to protect your business and pay the claim.
“General liability is a very broad form of insurance depending on the type of business you’re in. It’s going to protect [business owners] from any actions or someone that works for you from a liability standpoint,” Lynch says.
Many times when a business tries to secure financing, such as a bank loan, the lender will require general liability business insurance. A bank may require being included as a loss payee, Lynch says.
Auto insurance is a must-have for any business using a company car, whole fleets or delivery vehicles.
Whether it’s a fleet of delivery trucks or extermination vans, “someone eventually is going to get into an auto accident,” Lynch says. “You’ve got to have the appropriate coverage.”
2. Workers’ compensation insurance
Workers’ compensation is “on-the-job” insurance for injured workers and is mandated by law in most U.S. states. It includes coverage for employee medical expenses (at a reasonable level), lost wages and disability and death benefits.
Employees typically give up the right to sue the company for negligence in exchange for workers’ compensation, according to The Hartford.
While requirements vary, states play an active role in workers’ compensation and collect premium taxes from the insurance companies.
“States have really been cracking down in the last couple of years and going after businesses that don’t have workers’ compensation,” says Janice Co, vice president of marketing and strategy for The Hartford’s small commercial insurance unit.
“In a bad economy where premiums are depressed, premium taxes are also depressed,” Co says. “In a time where the economy is down and everyone is hurting for revenue, the states are being pretty vigilant by not [letting businesses] avoid or evade what is required.”
States are also being aggressive in making sure businesses are classifying employees properly, so the actual amounts of the premium are correct, Co says.
Co emphasizes that workers’ comp is one of the most important risk-management tools a business owner can have, regardless of industry. An employee who has a desk job is just as able to incur a work-related injury as, say, one at a manufacturer or construction company.
On the flip side, industries in which safety is high priority may not take the proper workers’ comp precautions because they assume their safety measures will prevent workers from getting hurt.
They need the insurance too, Co says.
Workers’ comp insurance is based on an estimate of payroll typically made in the beginning of the year. The difference is typically settled at the end of the year.
3. Environmental protection insurance
Many small-business owners overlook the need for environmental coverage. They shouldn’t. Even relatively benign businesses — those that don’t make potentially hazardous or environmentally unfriendly materials, but might use them — can carry risk, possibly through storing or emitting hazardous waste materials, according to ACE USA, the U.S. division of global insurance company The ACE Group.
For instance, “I’m operating a small printing operation and I am using chemicals as part of the inks and I have a problem where I have a spill onsite. It damages my property and my neighbor’s property. The environmental policy will respond by cleaning up that situation,” says Gerry Rojewski, vice president of ACE USA’s Environmental Risk segment.
Environmental insurance provides coverage for potential clean-up costs and liability issues associated with environmental conditions at a property or project.
“Whether you’re a small business or a large business, your general liability is not one-size-fits-all,” Rojewski says. “You need to resort to specialized insurance carriers for certain things.”
For small businesses there are three primary coverage areas: premise pollution liability, contractors’ pollution liability and insurance coverage for any business that owns tanks, such as gas service stations, marinas and auto dealerships, Rojewski says.
Business owners can buy coverage for a single tank for as little as $300, which will provide $1 million for indemnity and liability and $1 million for legal defense measures, Rojewski says. Coverage can also be much more expensive, with the minimum premium for contractors pollution liability at $1,500 and the minimum premium for premise pollution liability starting at $5,000.
Legal defense is another primary component of coverage, which can cost up to 60% of the overall cost related to the incident, ACE executives say. Real estate transactions are another motivator for buying a policy; buyers or seller may need it, because of prior or projected use of a site.
The protection can also help business owners wade through the ever-changing environmental regulations, Rojewski adds.
“Sometimes you could be held liable for something you did 10 years ago” even though the regulations just changed, he says.
4. Business interruption insurance
A look at the news recently in tornado-ravaged areas across the South will show the need for business continuity or business interruption insurance.
If your business is devastated by a natural disaster or even from a terrorist attack, how can the business stay viable when there is no business to run?
Business continuity policies “pay to a business person the dollars necessary to maintain the business, the employees, the cost of inventory, the cost of goods — it will do everything except pay income to the owner,” Lynch says.
The coverage goes beyond that of fire or flood coverage, which would address cleanup at a store, warehouse or office but not lost profits.
And who needs this type of insurance?
“Everybody who’s got a physical location, especially manufacturers, retailers, processors, wholesalers, etc.,” says Frank Darras, an insurance lawyer and owner of DarrasLaw . “These aren’t stay-awake premiums. It’s based on likelihood of fire or coverage disaster.”
Business owners that buy a policy — typically added to a comprehensive business package or property and casualty policy — should make sure there is no waiting period, so reimbursement starts immediately after a disaster, Darras says. He also suggests asking for weekly rather than monthly reimbursements.
There is also coverage for businesses affected when a vendor’s business shuts down. “I can still recover my net profit even if I don’t get my goods from my vendor,” he says.
5. Intellectual property insurance
Got a unique software invention or really cool widget? You may want to think of buying intellectual property insurance, which covers trademarks, patents, copyrights and the like.
This would be especially important for technology companies, Kantor says.
“Owning intellectual property can be extremely expensive,” he says.
Enforcement or abatement policies are one kind of intellectual property insurance. It protects a business owner’s property and provides capital to cover the costs associated with enforcing ownership or if another company comes after the business with a claim.
6. Employment practices liability insurance
The moment a business owner hires an employee, employment practices liability insurance should be in place.
EPL, as it is known, protects business owners from wrongful termination suits or employee issues such as claims regarding age, race or gender discrimination.
“We’ve seen a lot of claims recently arising from EPL,” says Jamie Roush, sales executive for commercial lines at SIA Group. “When the economy shifted and people were let go, this is the first thing they came back with. Everybody wished they had it once they get sued.”
They found out that without EPL coverage, even the cost of retaining a lawyer can put a small company out of business, Roush says.
“It’s a very important coverage to have for small businesses,” he says. “No size business is immune to this.”
7. Cyber-liability or data-breach insurance
Threats resulting from compromised confidential customer information is on the rise, and the Epsilon security breach in late March is a reminder cyberthreats are a concern for any size firm.
Small businesses in a number of industries, including medicine, restaurants that take credit cards and any company that does business online are vulnerable to data breaches, which is why insurance to cover potential problems is a hot topic.
The policy can be bought alone or as part of a more comprehensive fund.
“You hear about the disgruntled employee who leaves with patient [information] from a doctor’s office or what happens if somebody leaves a mortgage company,” Kantor says. “The smaller firms — accounting, medical practices — they have so much exposure, and greater than 50% are not carrying cyber-liability or data-breach insurance.”