Common Types of Insurance
Business insurance is crucial to protecting your business. A simple, obvious statement, we know, but when people are trying to save a few bucks, they sometimes make the very large mistake of foregoing business insurance. To put it plainly, business insurance may save your company someday. Buy it. We strongly discourage business owners from taking the attitude that they can just be extra careful about providing customers a safe environment or making their products safer, and thus avoid the need for liability insurance. You cannot cover every possible risk; it would be too time-consuming and too expensive. (For a discussion of the common reasons businesses are held liable for injuries to people please see the Litigation page found in the Legal Section.) Buy insurance instead and focus on your business.
Some common types of insurance policies that smaller companies should purchase are:
- Liability Insurance
- Worker's Compensation Insurance
- Property Insurance
- Business Interruption Insurance
- ``Key-Person" Insurance
- Surety Bonds
Liability Insurance: We do not need to explain to any American why you need liability insurance against the standard ``slip-and-fall" lawsuit--in America, lawsuits are as ubiquitous as lawyers and hamburgers. So you need to protect your business from the legal expenses and settlement or judgement expenses of a lawsuit. Liability policies typically cover business losses for (1) payments to victims of bodily injury or property damage caused by your business, (2) medical expenses of victims, and (3) attorney fees and investigation expenses associated with legal proceedings. General liability insurance is as close to a must have as you may get when operating a business.
Besides general liability insurance, business insurance comes in more narrowly-defined versions so businesses can get coverage for specific risks. For instance, automobile insurance is required for all trucks or other vehicles operated by a business. Automobile liability insurance will cover losses and liability arising from theft, collision, fire, etc. The cost of such insurance depends, of course, on the value of the vehicle, where your business is (i.e., the crime rate), the driving records of your drivers (only let good drivers work for you!), and the other proxies for the risk of something untoward happening. Product liability insurance is another especially important type of insurance if a business is going to sell manufatured or assembled products. (But note that service-providers can also be subject to product-liability. Architects who draft injury-causing designs, electicians, mechanics and others are all subject to a sort of product liability. The cost of product liability insurance depends on the type of product you are producing.) Obviously, product liability for a lawn-mower (which is inherently dangerous and thus at high risk for product liability) is different from large, soft rubber balls (which are not as dangerous). Even if product liability insurance is expensive, businesses should have it. In fact, the more expensive products liability insurance is, the more you probably need it since this is an indication that your product will cause a lawsuit. It is not uncommon, however, for a general liability insurance policy to cover products liability as well, so you should check into whether your general liability policy covers products liability as well.
Workers' Compensation Insurance: Typically, workers' compensation insurance is required by state, local or federal law, so you have no choice but to buy it. The fact of the matter is that if one of your employees gets hurt on the job, you can expect a lawsuit and the employee will probably win. And he or she will probably deserve to win. (You were too focused on the business to worry about worker safety, remember?) And even if one of your workers was injured due to the stupidity of a co-worker, you can expect to pay the bill anyway. Hospital bills, attorney fees, lawsuit awards, lost wages, etc. are all collectible from an employer when an employee is injured. This is not even including punitive damages! Avoid the misery, buy workers' compensation insurance.
Property Insurance: Property insurance protects the building, office machines, office furniture, inventory (maybe) and other property owned by a business. Losses arising from flood, fire, theft, vandalism, storms, and other causes of damage will be covered by this type of policy. Your best bet is to get some sort of comprehensive property insurance covering as much as possible (including automobiles) and then supplement it with some of the other types of insurance discussed on this page.
Business Interruption Insurance: Natural disasters such as earthquakes, fires, floods, and severe weather can cause a business to close temporarily. But just becasue your business cannot make deliveries, take orders, or perform its other basic functions does not mean that the business will not have to pay taxes, salaries, and other expenses. Business interruption insurance can help a business avoid disaster at such times.
Key Person Insurance: Most small business, and almost all start-up businesses, depend on the talents or abilities of a few people who, if they shuffle off this mortal coil, will cause the business to fail. Key person insurance is a way for businesses to insure against this kind of loss. A type of life insurance, these policies can also provide the surviving partners or owners the money to buy the dead partner's stake from the dead partner's spouse or children (who are usually happy to cash out). Premiums paid are not deductible as a business expense. Proceeds are not taxable as income.
Surety Bonds: Surety bonds guarantee to other businesses that your business will fulfill the contracts you sign with those other businesses. This is a way for your small business to get other businesses to take a chance and go with your small, unknown company, a company which would otherwise be too unproven for other businesses to rely on. These types of bonds are commonly found in the construction industry, but they are used elsewhere. If you apply for a surety bond, be prepared for a thorough background check by the insurance underwriter (think full body-cavity search).
2. Buying Insurance
Step one: Swing a dead lawyer. Step two: Ask the five insurance agents you hit to beat the prices and insurance terms offered by other four. Seriously though, finding a person to sell you insurance is not too hard. Making sure that you get the best coverage is more tricky. There are some standard rules to buying insurance. First of all, insurance policies are notoriously difficult to read. In fact, judges with decades of legal experience have been known to throw up their hands in frustration when reading insurance contracts. (This is usually followed by the insurance compnay getting screwed by a pissed-off judge.) So do not feel bad if you have a hard time reading the insurance contract offered to you. What you should do, however, is ask the insurance agent to slowly explain the contract's terms to you and take notes on what he says. Then file those notes with the contract in your records. (General Tip: Note taking is always a good idea when having business discussions.)
There are five variables to consider when purchasing insurance: (1) Price, (2) coverage offered, (3) specialization of insurance company, (4) reputation of the insurance underwriter, and (5) size of the deductible.
- Price: Going after the lowest price is almost never the smartest way to buy insurance. Insurance is a competitive business, and companies that can offer to beat their competitors can often do so only because they offer less extensive coverage or they are difficult to collect claims from. Also, low premiums at first may be offset by higher premiums later in the life of the insurance contract. Try to find a policy with a relatively simple price structure rather than one that bills itself as an ``investment" paying dividends. You are starting a business which needs insurance, the business is your investment, not the insurance policy covering the business. Also, keep in mind that the insurance salesman earns a commission for selling the policy, so there is an incentive on his part to get you into those policies that garner the salesman the highest commission. That policy may not be the best one for your business.
- Coverage Offered: Beyond the basic terms that insurers offer, you should negotiate for them to cover more in most categories and include other risks not mentioned in the policy. Insurers are pretty reluctant to include additional provisions or extend the coverage of the ones already included in a policy unless the insurer can quantify the risk (and thus charge an appropriate price for the additional coverage).
- Specialization of the Company: Each business and industry has its own risks. Bars need different types of coverage than software manufacturers. That much is obvious. And if you can find an insurance company specializing in offering policies to your industry or type of business, you are likely to have an easier time when negotiating its terms. It may also be cheaper because the insurance company is better at quantifying the risks involved.
- Reputation of the Insurance Company: First off, NEVER sign a policy that is assessable unless nonassessable policies are not available. Assessable policies are ones that allow an insurance company to charge its customers additional policies if the insurance company (yes, the insurance company) gets a little short on cash. This is a tip-off that the insurance company may not have much financial resources. And you do not want to buy insurance from a firm that may not have enough money to pay claims, right? A good way to check on the financial stability is to find out the rating given to it by a publication called Best's Insurance Reports. If the company is not rated as a A+, A, or B+, you may want to look elsewhere for your insurance.
- Deductible: Remember to pay attention to the deductible. Higher deductibles will increase the amount you will have to pay for insured losses, but they also reduce the amount of the premiums paid. Basically, when haggling over the premium, you need to keep in mind how often you think that you will suffer the loss or injury being insured against, and then you must estimate how much of that loss you could afford. Your deductible cannot be above that number (and probably should be below it).
Overlapping Coverage is when you have one or more policies covering the same risk. This is a bad thing because you are paying for the same thing twice. You will not collect the full amount of your loss from both insurers, so they are getting a windfall everytime you pay your premiums. Avoidance overlapping coverage is one argument for finding one honest, skilled insurance agent and buying all of your insurance from him or her.
Direct Writers or Agents? Tastes great ... Less filling. Direct writers are people who work for insurance companies. Agents represent these companies and write policies on behalf of the companies, but they are independent business owners who may represent more than one company. Which one is the better choice? Who knows. The direct writers may be specialists in a specific type of business, so he can fine-tune the policy he offers you to meet some specific needs. Policies written by direct writers are also usually cheaper than those written by agents. But direct writers work for the company, so they may not provide you with the best service. Agents, on the other hand, are more apt to provide you with the best possible service and since they write out many different types of policies, they can offer a broader range of policies, making them a one-stop-shopping insurance provider. But they are generally more expensive.
Whatever you do, remember that whoever is writing your insurance policies is doing so because he or she earns commissions on those policies. So your interests and theirs may not always agree. This means that you should shop around, negotiate and always be on the look-out for a better deal. Just like you would in your business.