ConsumerU

Insuring Your Business

Introduction

Obtaining the right type of insurance is an important part of running a business.  Most businesses need to purchase different types of insurance, based on the type of business it is as well as the type of risk it carries.  In this module, we will focus on the following:

  • What Insurance Should My Business Have?
  • How Much Insurance Does My Business Need?
  • How Can I Keep Premium Costs Low?

In each of these sections, you will be given information to consider for your own business.  We strongly recommend talking to an insurance agent to review your specific needs once you have reviewed this material.

WHAT INSURANCE SHOULD MY BUSINESS PURCHASE?

Standard Business Insurance Coverage

Most businesses purchase at least the following four types of insurance:

  • Property Insurance
  • Liability Insurance
  • Business Vehicle Insurance
  • Workers Compensation Insurance

Let’s take a brief look at each type of insurance above so you will have a better understanding of each.

Property Insurance

Property insurance compensates you if the property you use for your business is lost or damaged as the result of different types of situations.  Property insurance covers the building and structure where your business resides, as well as personal property of your business, such as office furnishings, computers, machinery, raw materials, and other key items that are vital to your business operations.  Additionally, it can provide operating funds during a period after a catastrophic loss.  Depending on the type of property insurance policy you have, it may include coverage for the removal of debris after a fire or other destructive event, as well as different types of water damage or other losses.

Liability Insurance

Liability insurance protects your business against lawsuits and other claims against your business.  This type of insurance coverage will pay damages if your business is found liable (up to policy limits), as well as attorneys’ fees and other legal defense expenses.  Furthermore, it will pay the medical bills of anyone injured by your business.

Business Vehicle Insurance

If you use your own vehicle for business purposes, you should discuss with your insurance agent whether or not a business vehicle insurance policy is a better option for you.  Many personal auto insurances policies exclude coverage if the vehicle involved in an accident is mainly used for business purposes.  A business vehicle policy may pay any costs to third parties resulting from bodily injury or property damage for which your business is legally liable, up to the policy limits.  Additionally, the insurance may pay to repair or replace your vehicle because of damage resulting from an accident, theft, flood, or other event.

Workers Compensation Insurance

In all states but Texas, an employer must have workers compensation insurance where there are more than a certain number of employees (varies from three to five), depending upon the state.  This type of insurance pays for medical care and replaces a portion of lost wages for an employee who is injured in the course of employment, regardless of who was at fault for the injury.  Additionally, if a worker dies as a result of injuries sustained while working, workers compensation insurance provides compensation to the employee’s family. 

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Other Business Insurance Options

There are other types of insurance you may want to consider based on the type of business you own. Let’s take a look at other options to consider based on the type of business you have:

  • Umbrella Policies
  • Specialized Liability Policies
  • Terrorism Insurance

Umbrella Policies

Umbrella policies provide coverage above and beyond what your other liability policy covers.  These policies are designed to protect against unusually high losses, primarily when the regular policy coverages are used up.  For a typical business, an umbrella policy may provide protection over and above general liability and vehicle liability policies, including higher limits.

Specialized Liability Insurance Policies

Some businesses may need specialized liability policies based on what type of business it is and the risk involved with that business.  The following are some different types of specialized liability insurance policies used:

  • Errors and Omissions Insurance (E&O)/Professional Liability Insurance:  If your business involves services, such as giving advice, making recommendations, designing products, providing physical care or representing the needs of others, you may be sued by those you assist claiming your failure to perform your job properly.  E&O or Professional Liability covers these situations and will pay any judgment for which the insured is legally liable (up to policy limits).  Furthermore, it will provide for legal defense costs, even when there has been no wrongdoing.) 
  • Employment Practices Liability Insurance (EPLI):  This type of insurance pays damages for which an employer is legally liable for violating an employee’s civil or other legal rights.  Additionally, it covers legal defense costs even if there has been no wrongdoing.)
  • Directors and Officer Liability Insurance (D&O):  This type of insurance protects directors and officers of corporations or not-for-profit organizations if there is a lawsuit claiming they managed the business or organization without proper regard for the rights of others.  It also covers legal expenses even if there is no wrongdoing on the part of the organization.)
  • Business Identity Theft Insurance:  This type of insurance provides legal liability coverage to businesses that are victims of data theft.  It can also provide coverage for the costs of notifying customers whose personal identification information may have been compromised as well as pay for customers to recover from any loss.)

Terrorism Insurance

Prior to September 11, 2001, standard commercial insurance policies included terrorism coverage as part of the package, which was usually free of charge.  However, in today’s environment, terrorism coverage is generally offered separately at a price that more adequately reflects the current risk.  Insurance losses attributable to terrorist acts under these commercial policies are insured by private insurers and reinsured or “backstopped” by the federal government pursuant to the Terrorism Risk and Insurance Act, which was enacted in 2002. 

HOW MUCH INSURANCE DOES MY BUSINESS NEED?

When purchasing business insurance, it is important you don’t buy too much or too little.  To help you determine the correct amount of insurance required for your business, you should first list all of your business assets, including the following:

  • property
  • equipment
  • inventory

You can buy insurance based on the value of your assets or on the basis of the amount it would take to replace the assets.  Furthermore, some insurers combine a number of coverages into a package.  The advantage of a package may be a lower price with broader coverage; however, you may get more than you need as well. 

It is best to work with an insurance agent you trust to review your company’s assets, look at the risks of your operations, and determine a reasonable amount of coverage required to protect your business. 

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HOW CAN I KEEP PREMIUM COSTS LOW?

There are several different ways you can keep your insurance premium costs low.  The following outlines six different ways to consider:

 1.     Shop Around

As with all products and services, prices for insurance will vary from company to company. Get several quotes before you make any decisions. Work with brokers or companies who specialize in your type of business so you will be able to find the best deals possible. Additionally, you need to make sure you pick an insurance company that is financially stable and rated highly. 

 2.     Choose a Higher Deductible

Deductibles represent the amount of money you pay before your insurance coverage begins; therefore, the higher the deductible, the lower your premiums will be.  However, you will need to be careful that you do not set the deductible so high that it will be a financial burden on you should you suffer a loss.

 3.     Buy a Package Policy

Many times a package policy will cost less than individual policies for your business.  Just be sure that you are not “over insuring” your business and only getting what you need.

 4.     Work Close With Your Agent

The more you share with your insurance agent, the more he/she will be able to meet the needs of your business.  Your agent will provide you with invaluable advice.  Ask questions if you do not understand anything, or if you feel you are getting too much or too little for your business.  Additionally, you should meet with your agent annually to make sure you are continuing to meet the changing needs of your business.

 5.     Follow Recommendations of the Insurer

Insurers usually have recommendations for businesses to follow to lower costs and expand coverage.  Such tips can include workplace safety, disaster preparation, and certain devices to reduce your losses (e.g., alarms, sprinklers, etc.).  When you take the recommendations of the insurance agency, you will receive premium discounts and other incentives.

 6.     Avoid Losses

Insurance works a lot like credit.  Costs are lower for those with better claim histories; therefore, the more losses you have, the higher your premiums will be.  If your loss history is bad enough, you may have trouble obtaining insurance from a private insurance company in the future.

CONCLUSION

Having the right insurance for your business is critical to its future success. Take the time to work with an agent you trust to determine what you need today, and then continue to review your insurance coverage on an annual basis so you continue to have what you need when you need it.

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