An extensive guide to assist the Small Business Owner
Providing an in-depth overview of business insurance as a whole with further detail into what coverages are legally required, what may be required via contract, & what is simply a good idea to have.
Running a small business presents a multitude of challenges. As a small business owner, it’s important to minimize the risks of financial loss that your business can face.
While you may consider some risks to be acceptable, unacceptable risks can threaten the ultimate closure of your business should you experience a loss. These risks can be transferred to an insurance company. This guide is designed to help most types of small business owners make informed decisions regarding the insurance their business needs.
Why do Small Businesses Need Property and Casualty Insurance?
Small businesses need property and casualty insurance to:
• protect their assets
• replace property damaged by loss or theft
• provide for lost income
• cover liability for negligent acts
• provide coverage for auto, workers’ compensation, crime, etc.
Without adequate insurance, you risk losing everything that you’ve worked so hard to create!
Businesses of all sizes should protect themselves from financial loss. An important part of such protection revolves around insurance coverage for property loss exposures, which include the costs to repair or replace the real property or your business personal property in the event of a covered loss.
As claims occur daily around the country, property and casualty insurance plays a major role in keeping the American economy moving. It provides economic protection for individuals, business owners and professionals from losses resulting from damage to or loss of property, and from legal liability arising out of their actual or alleged negligence.
There are a few types of insurance every business needs. If you’re already a business owner, you may have purchased policies that covered those areas when you first opened.
Types of Insurance
Business Owners/Package Policies
Many insurance companies have bundled property and liability coverage into what is commonly called a business owner’s policy (BOP), or a commercial package policy (CPP). It allows you to obtain broad coverage with affordable premiums.
Since no two businesses are the same, property insurance can be tailored to fit your needs. For example, a furniture store has different needs than a restaurant; a two-person accounting office has liability exposures that are different from a retail business with lots of customer interaction or a builder with a contractual obligation to erect a building.
Monoline policies provide a single line of insurance, for instance solely fire, liability, or auto. Combining two or more monoline coverages is where you get those BOPs and CPPs.
There are occasions where insurance for your type of risk may not be available as a package policy. Thus, it would be necessary to purchase your property and liability coverage as separate policies.
It’s prudent for any business to purchase a number of basic types of insurance. Some are required by law; others simply make good business sense. The types of insurance listed below are among the most commonly used.
Property insurance protects the buildings and contents of your business against fire, theft and many other perils. There are many different types of property insurance and levels of coverage available.
It’s important to determine the property you need to insure for the continuation of your business and the level of insurance you need to replace or rebuild. You must also understand the terms of the insurance, including minimum requirements to avoid coinsurance penalties (which we’ll discuss later) and any limitations or exclusions.
Consider increasing your deductible to reduce your premium, and spend the savings by increasing your coverage. Learn the difference between replacement cost, actual cash value, agreed amount and functional replacement cost.
Casualty insurance includes the coverage commonly referred to as “liability insurance”. Liability insurance should protect your assets in the event that you, or your employees, are negligent and cause bodily injury or property damage to another.
Businesses may incur various forms of liability in conducting their normal activities. This is what covers the cost of lawsuits stemming from accidents that cause bodily injury (i.e., a customer slips on your steps) or property damage (you sell a defective lubricant that burns out a customer’s car engine), and other miscellaneous claims such as libel, slander and false advertising. Liability insurance will not only pay the cost of the damages, but also the attorney fees and other costs associated with your defense in a lawsuit, whether or not the lawsuit has merit.
However, liability insurance might not protect you against claims arising from non-performance of a contract, wrongful termination of employees, sexual harassment, or race and gender lawsuits.
This is another good reason to carefully read your policy - but keep in mind that many of these coverages can be added to your policy, or purchased separately.
While property insurance may pay enough to replace damaged or destroyed equipment or buildings, how will you continue to pay expenses such as taxes, utilities and payroll, during the period between when the damage occurs and when the property is replaced?
Business interruption (or business income) insurance can provide sufficient funds to pay your fixed expenses and lost business income during a period of time when your business is not operational.
“Business income” means the net income (net profit or loss before income taxes) that would have been earned or incurred, as well as continuing normal operating expenses incurred, including payroll. Extra expense coverage will reimburse you for covered expenses while temporarily relocated at another premise during your reconstruction due to a covered loss.
It may seem obvious that a vehicle owned by your business should be insured for both liability and physical damage. What is less obvious is that you may also need special insurance called “non-owned automobile coverage” if you or your employees use your personal vehicles on company business.
It's important to realize that if you send an employee out to pick up pizza for the crew and he/she gets in an auto accident, your business could get sued even if the vehicle is not company-owned.
This policy covers the business’s liability for any damage that may result from such usage. This policy may also cover rental cars when you travel on business. Read the fine print or ask your agent to be sure. Hired and non-owned coverage is a real bargain.
Workers' compensation insurance covers workers against a job-related accident or disease. This statutory insurance pays for medical bills, disability income benefits, and death benefits to dependents of an employee whose death is job related. Rates are based on payroll, and depend heavily on your industry, i.e., rates for clerical payroll are nominal, while a roofing company will be charged much more.
If your workforce is expanding, you should update your workers’ comp coverage as you go along to avoid being hit with an audited additional charge at the end of the year.
New York Disability Benefits Law (NYDBL)/Paid Family Leave
Disability benefits are another employee disability coverage mandated by New York State. They provide disability income for employee injury or illness off-the-job.
This wage continuation starts after the seventh day of off-the-job illness or injury and continues for up to six months.
Paid family leave is another mandated coverage that has been added to the NYDBL policy, and is used to cover “bonding time”, such as time spent caring for loved ones or for dealing with a military exigent event.
Excess Liability is commonly referred to as an “umbrella” policy.
What happens when a lawsuit filed against you brings in a verdict that exceeds the limits of your primary liability protection? It’s bad news for you, unless you have adequate limits of liability coverage.
An umbrella policy kicks in only when the limit of the basic, underlying policy is reached. Buy an umbrella policy and you can dramatically extend your coverage for a relatively small additional cost.
How much coverage do you need? How much can you afford?
That’s a decision, that should hinge on the total value of your assets. Your insurance agent should be able to guide you in picking an amount of coverage that will bring you peace of mind.
Employment Practices Liability
Ten years ago, this coverage was virtually non-existent, but now it is widely available. It’s also widely needed. In the last couple of years, it has been a “loss leader” nationally.
Under this coverage, you are protected if any employee sues your company for wrongful termination, job discrimination or any of the other increasingly popular claims alleging failures in your employment practices.
Officer and Director Liability
Under some circumstances, officers and directors of a corporation may become personally liable for their actions on behalf of the company. This type of policy covers such liability.
The theft of information is another “loss leader”. This is a relatively new coverage and therefore, unlike many other insurance coverages, there is no standardization. Therefore, coverage forms vary greatly. Losses of this type can be surprisingly expensive.
Business at Home
If you’re establishing a business in your home, it’s a good idea to contact your homeowners’ insurance company to inquire about your coverage. Certain types of losses can in some cases negate your entire homeowners policy. If allowed by your company, you should update your policy to include coverage for stock, equipment and business liability.
This coverage is not automatically included in a standard homeowners policy. Even storage of business personal property in your home/garage can negate homeowners coverage.
In general, personal insurance coverage and business insurance coverage are mutually exclusive of each other. Each type of coverage is designed to cover completely different types of losses. Please do not assume that your personal insurance covers any business exposure, or that your business insurance covers any personal exposure…likely, they do not.
If you (and/or any other individual) are so critical to the operation of your business that it cannot continue in the event of your illness or death, you should consider “key person” insurance. This type of policy is frequently required by banks or government loan programs. It also can be used to provide continuity in operations during a period of ownership transition caused by the death or incapacitation of an owner or other key employee. This can/should be written as both a life policy and a disability policy.
Professional Liability can be incurred by a number of professions. When you hold yourself out as having a “special knowledge”, or have to be licensed or certified in some manner to conduct your business, there is an exposure where you should know more about a subject than the average consumer.
Offering bad advice, incorrectly performing your job, or failure to do a procedure correctly, can cause a professional liability event. This is not included under a standard business liability policy. Most commonly, physicians, nurses, attorneys, architects, insurance agents, beauticians, realtors, even contractors could be sued for negligent acts occurring as professional.
All-In-One Package Policies
Too many choices? Insurance companies understand that busy entrepreneurs don’t want to spend days studying the minutiae involved in evaluating numerous policies. The result is an increasing popularity of one-stop shopping policies, combining many coverages under one policy, usually at a competitive price.
A package policy offers protection for:
• buildings and other structures,
• furniture, equipment and supplies
• leased equipment
• business income
• extra expenses
• business liability
• medical expenses
• losses from crime
Specific Industry Coverage
Many insurance companies have determined that certain businesses are eligible for a specifically designed insurance program. These policies usually include specialty coverage that is advantageous to those businesses. Some of these special classes include, but are not limited to:
• Artisan Contractors
• Barber and Beauticians
• Engineers and Architects
• Funeral Directors
• Garages and Auto Dealer
In the next part of this series, we will discuss choosing the right insurance company, ensuring you get the right coverage, and the many other advantages of working with an independent insurance agent or agency. We’ll also dive into how insurance companies determine policy premiums.
In the meantime, should you have a question on your insurance or a general insurance inquiry, please don’t hesitate to reach out. You can contact us at (607) 535-6501, Info@sidleinsurance.com, or stop in our office at 219 S Catherine St, Montour Falls, NY.