Taking the risk out of your insurance decisions
You’re considering starting a small business. You’ve leased a location, developed your product and hired your staff, selected suppliers and obtained legal and accounting advice. What’s missing?
Insurance. Think of anything that can go wrong and there’s probably insurance coverage to protect you, from fires, earthquakes and floods, to car accidents, theft and slips on your store floor. If you own the business and the property, should both be insured? What about health insurance for you and your staff?
Experts said businesses buy insurance for the same reasons people purchase insurance individually: to protect themselves, their employees and customers from financial harm. The cost of providing that insurance is determined by assessing the frequency and severity of that harm’s risk and whether the exposure to loss is common or rare.
Some kinds of insurance are mandatory. Small businesses with employees are legally required to purchase workers' compensation insurance and unemployment insurance. And in some states employers must also buy disability insurance.
Holly Wade, director of research and policy analysis for the National Federal of Independent Businesses (NFIB), recommended small business owners or those considering launching small businesses talk to others operating similar businesses to theirs and solicit insurance advice. Wade said that business associations often provide a wealth of industry-specific resources to their members.
“Because every business is different, owners must look carefully to see what applies to them,” she said. “Depending on the state in which the business is located, its size and the industry it serves, whether it is home or office based, will determine the type of insurance that a business needs.”
Wade said many industries and associations have established partnerships with insurers that extend discounted rates to members. “It’s always good to shop, but sometimes going through an organization beats scrolling through the Yellow Pages.”
Monica Lindeen, Montana Commissioner of Securities and Insurance and the president of the National Association of Insurance Commissioners (NAIC), said home-based business owners sometimes erroneously believe their homeowner’s insurance policy covers them for business-related items, such as damage to equipment or materials used in their businesses.
“Most homeowner policies exclude business operations. If you have a fire, you need to make sure you have the appropriate business insurance to cover those operations. Small business owners sometimes think that their company’s motor vehicles are covered under their personal auto insurance, including people who drive for services like Uber. But if you’re in the business of transporting someone, your personal auto policy won’t cover you for damages in the course of your work.”
She urged small businesses to check with their state insurance commissioner’s office to verify whether their insurance agent is licensed or the subject of complaints.
She said most states require insurance agents to undergo a rigorous application and continuing education process to obtain and maintain their licenses, including fingerprinting and criminal background checks. And state insurance commissioners are empowered to investigate and revoke the licenses of agents who don’t follow state laws.
Lindeen said word of mouth from trusted sources is usually a good place to begin when selecting prospective insurance agents.
“Talk to other small business owners,” she advised.
She recommended that small business owners who have partners obtain “key person” life insurance policies on each other, so that if one dies, the life insurance payout can compensate the company for losses and help it to continue to operate, while paying out benefits to the deceased partner’s heirs.
Katie Vlietstra, vice president of government relations and public affairs for the National Association for the Self-Employed, said small business owners should explore and budget for insurance when they formulate their business plans.
Vlietstra said insurance is a cost of doing business and owners need to know which forms of insurance are required in their state or county.
“Failing to comply could mean big consequences down the road,” warned Vlietstra, who said NAEC experts are available to members seeking to learn more about insurance requirements.
She advised small business owners to become involved in local organizations or associations to find a business mentor.
“It’s tough to know everything when you’re just starting out,” she said. “You don’t want to be over insured or underinsured, so it can be helpful to find someone in your field with applicable experience,” she said.
She also recommended shopping around to competitively bid insurance policies, not just the first year, but every year or two.
Jim Whittle, assistant general counsel for the Washington, D.C.-based lobbying and membership organization, the American Insurance Association, said some types of insurance coverage can be estimated. Whittle said workers’ compensation is based on payroll expenses.
“You’re compensating employees injured on the job based on their wages,” he said. “And while calculating property insurance is not formulaic, you can get a good sense of what your needs are relatively quickly by asking yourself: what would it cost to replace the property you own? The value of that property helps you to benchmark how much property insurance you will need."
Whittle said the most common mistake small businesses make when buying insurance for the first time is underestimating their needs.
“Too often after catastrophes we see that people did not have enough insurance,” he noted. “Perhaps they were too cost conscious and didn’t want to overpay, despite their risk exposure.”
He advised small business owners to schedule annual reviews with their agents to make sure their appropriately insuring their assets.
“Being proactive with this is important,” he said. “You can’t just … look at it as an afterthought. Suffering a bad loss could kill your business.”
Whittle said one type of frequently overlooked but important insurance is business interruption coverage.
“This type of policy will cover your business in the event of a loss from something that closes down your business,” he explained. “If a tornado wrecks your business, you’re not earning money, but you can be protected from the losses directly related to the losses you suffer while you’re out of business.”
Dave Golden, senior director of commercial lines policy for the Property Casualty Insurers Association of America, said when someone purchases business insurance, the financial protection is customized to the unique needs of each business.
‘One size does not fit all,” Golden said, noting that a traditional brick and mortar bookstore faces different risks than a bookstore that sells online.
Golden said anyone doing business on the Internet should consider cybersecurity insurance policies.
“Things can go wrong and business owners can be sued,” he said, citing confidential patient medical records, customer credit information and privacy concerns as new challenges to small business owners. “If a data breach occurs, that information could be in the hands of criminals and the financial well-being, privacy and even reputations of customers could be adversely impacted or ruined.”
Golden said some small owners should explore liability coverage, which protects businesses from “slip and fall” accidents. Liability, also known as casualty insurance, includes a variety of coverage types”
Manufacturers should consider product liability.
Repair shops should examine “completed operations” policies that cover work performed.
Architect and lawyers are often required to purchase professional liability insurance, often mandated by state licensing boards.
Physicians and other medical providers are required to purchase medical malpractice insurance.
Bars and restaurants serving alcohol, depending upon the state, are required to carry “dram shop” insurance to protect themselves from customers who get drunk and sue.
Businesses that take in products to clean or repair, like computer repair shops or drycleaners, often buy ‘bailee’ insurance to cover theft, fire or other damage to goods left in their care.
Car repair shops protect their customers’ cars with “garagekeepers’ policies.
Resources for Small Business Insurance
National Association of Insurance Commissioners (NAIC): state insurance commissioners regulate insurance companies within their states and assist consumers, including small businesses: http://www.insurance.naic.org/
NAIC Insurance University: an online insurance tutorial www.InsureUonline.org
U.S. Small Business Administration: offers advice on state insurance requirements and other resources: https://www.sba.gov/content/insurance-requirements-employers
American Insurance Association (AIA): AIA’s website features several useful links, including:
Insurance Glossary: http://www.aiadc.org/aiapub/content.aspx?id=357528
Property-Casualty Insurance Basics: http://www.aiadc.org/AIAdotNET/docHandler.aspx?DocID=319988
National Federation of Independent Businesses (NFIB): Offers resources to members, including information about business insurance and this survey: http://411sbfacts.com/sbpoll.php?POLLID=0027
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