Essential Business Insurance

Updated: May 06, 2009

Issue

It's tempting to skimp on insurance when you're just starting a business, or when money gets tight. After all, when you buy insurance you're betting that you will need coverage sooner than the insurer thinks! But the insurer has all those actuarial tables and is seldom wrong. Insurers make hefty profits by taking in more premium money than they lay out in claims. You might as well try to beat the house in Las Vegas. Insurance is a sucker's bet — at least according to some.

More sophisticated business owners look at insurance as a way to manage risk. It's not a question of whether you will suffer a financial loss, but of when and how big it will be. Paying insurance premiums over time divides the inevitable loss into little, predictable chunks. If you can predict your expenses, half the battle for profit is over. (The other half is predicting your revenues, of course.) So smart business owners buy insurance that covers their significant risks. Here are some of the risks you can't afford to leave uninsured.

Considerations

1. Key person insurance: Key person insurance protects the business against the incapacitation of a valuable employee. Sure, they're all valuable, but some are so valuable your business would suffer significant losses if they got gravely ill or died suddenly. A key person, for insurance purposes, is valued according to the profits he or she generates. You may be the founder, but your key person premium and benefit may be smaller than those of your top sales rep. Key person premiums also depend upon the health of the person insured and the riskiness of what he or she does. Look closely and dispassionately at your HR roster and ask yourself, "What would happen to my bottom line if so-and-so didn't come in Monday?"

2. Business property insurance: This insurance protects against damage to your money-making property: equipment, building, furniture, computers, machinery, inventory, raw materials, supplies, transportation, cell phones, etc. Experts recommend "all-inclusive" coverage that protects against hailstorms, explosions, falling ice from airliners and every other inconceivable event. The cost of business property insurance depends on the size of the property, its location relative to known risks like ammonia tanker trains and earthquake zones and the value of the property.

3. Business interruption insurance: Business interruption insurance covers profits, payroll and accounts payable in the event your business is forced to close for more than a specified period of time due to a covered cause. Premiums are easily tailored by adjusting the list of covered causes and the out-of-business time you must endure before coverage commences; think of the latter as a deductible. The amount of coverage depends upon your profit history, payroll size, average accounts payable and other factors. Generally, the higher your business income the more you will pay.

4. General liability insurance: This protects you and/or your company against lawsuits arising from any accidents or injuries that occur on your property. It doesn't matter if someone breaks a leg while breaking into your building, you can still be sued and incur massive legal bills. General liability insurance protects you from these scenarios and other, more reasonable events.

5. Umbrella coverage: Umbrella coverage insures your out-of-pocket costs if losses exceed the coverage limits of existing insurance policies: business auto insurance, property and liability. It's a second line of defense against losses that are bigger than estimated when policies were written. Because this type of coverage is rarely invoked, it tends to be cheaper than raising coverage limits on existing policies, i.e., $100 to $300 per million dollars in coverage.

6. Workers compensation insurance: This type of insurance is required by law in every state. Skip this one and you are in for serious legal penalties. Workers comp, as it's called commonly, covers workers' injuries incurred "during the course of employment." That vague phrase has spawned a vast network of lawsuit-happy lawyers. Workers comp premiums depend on the size of your staff, the risks of your industry and each occupation in your company, and most of all the number and size of claims that arise out of your company. Safety training for all employees can help keep workers comp claims under control. Diligently contesting bogus claims also helps keep workers comp costs down, but you don't want to gain a bad reputation as an employer who fights legitimate workers comp claims.

Recommendations

Many insurers offer an all-in-one "business owner's policy" that includes all of the aforementioned types of coverage and more. Buying one policy from one insurer is simpler than shopping and paying for many policies. It can also get you a single premium that is lower than the sum of individual policies providing the same coverage, even if they were all purchased from the same insurer.

For more information on finance issues facing businesses, consult the Financial Services Resource Center, where you'll find comprehensive research, topical research briefs and advice from Focus Experts.

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