Small Business Insurance Basics

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There are about 45 million businesses in the United States of which more than 99 percent are considered small businesses. More than 40 million of those small businesses have fewer than 20 employees. All businesses, small and large share a common need for protection against the unexpected, and small business insurance satisfies that need. Unlike, big businesses that can have policies tailored to their exact needs, small businesses must rely on off the shelf solutions.

The challenge when it comes to small business insurance is twofold, having the right coverage and enough of it to provide adequate protection. The answers to both challenges are unique to the individual business, however, making a decision about how much insurance is necessary cannot be done without knowing what kind of insurance is needed. To help decode the myriad business insurance offerings, we’ve created an overview of each of the different business insurance products available.

Types of Small Business Insurance

Business Owner Policy

When small businesses set-up shop the most common type of insurance they get will be a Business Owner Policy. The reason for the ubiquity of this policy is its ability to customize to meet the particular needs of different businesses. This is possible because a BOP allows a small business owner to package a variety of coverages under the cover of a single policy. This simplifies administration for you by having only one premium and renewal date to keep track of.

At the heart of all Business Owner Policies is business interruption insurance, which may also be called business income insurance. Its purpose is to replace part of all of your lost income in the event your business is unable to operate because of a disaster that forces you out of your place of business. In addition to replacing lost income due to disaster events such as fire you may be eligible to receive additional funds to help defray the added costs of operating from a temporary location.

As a bundled coverage policy, you can add other types of coverage to your BOP based on your particular needs. Additional coverage can be added for things as disparate as outdoor signs and e-commerce protection for viruses or other cyber attacks that inhibit your ability to conduct business online. Each of the additional types of insurance you add increase your base premium and share the same renewal dates as your original policy even when they are added at different times.

While having much or all of your business insurance in a single policy has the advantage of convenience, there can trade-offs that should be considered. The foremost of these is cost, which can be higher. For example, in many cases the separate premium for business car insurance may be lower than it would be if it is part of a BOP bundle. A popular school of thought is to bundle as much as possible under a single BOP when a business is new and insurance needs are limited and to break out coverage into separate policies as the business grows and it becomes cost effective to do so.

Property Insurance

This popular component of a business owner policy can be purchased separately and tailored to your needs. Property insurance offers protection for two types of business property, structures and contents and is sometimes called fire and theft insurance. The structural portion of commercial property insurance insures your business premises from damage, whether you own or lease. It also covers certain exterior features such as signage fencing and landscaping against loss or damage due to covered risks.

The contents portion of a business property insurance policy covers loss or damage to what’s inside your place of business. You furniture, computers, equipment and inventory are all covered for loss or damage. Work product items, like architectural drawings or client files are also covered. For example, if a fire occurs in an adjacent office and your business has damage from smoke and water you will be paid for the damage and the cleanup costs associated with the incident.

Liability Insurance

Like business property insurance, liability protection is often added into a BOP for new and very small businesses with limited liability risk. An uncomfortable reality for all businesses is the possibility of being sued due to faulty service or a bad product. Liability insurance also provides protection in the event someone is hurt by your business or while at your place of business. Liability insurance will pay for the medical expenses of those injured up to the limits of your policy. In addition to providing for actual damages this insurance will pay for an attorney and court costs associated with defending your business.

Workers Compensation

Workers compensation insurance will pay for the medical expenses and a portion of lost wages of covered employees who are injured while working for you. The requirements for workers compensation insurance vary from state to state with the exception of Texas which does not require it. The majority of states require that your business has coverage if you have one or more employees. A small number of states do not require workers compensation for less than three to five employees. It is important to check with your state’s department of labor because not having required insurance can result in substantial fines and penalties.

Business Auto Insurance

The insurance portion of business vehicle insurance works exactly the same way it does with your personal car insurance. In most cases you will not need this separate coverage if your car is used for both personal and business. However, if the vehicle is exclusively for business use you will need a separate policy. The same types of coverage are available, liability, collision, comprehensive, personal injury protection and uninsured\under-insured motorist. A significant difference is that a business auto policy may only cover drivers that are named on the policy. While this can be bundled with a BOP policy it often pays to shop for the best rate separately.

Errors and Omissions

This is similar to liability insurance in that it protects you against lawsuits, but it is for professional services which why it is also known as professional liability insurance or malpractice insurance. It is intended for businesses that provide services to consumers, such as doctors, lawyers, accountants. This insurance should also be considered by certain other service type businesses such as advertising or insurance. In fact, any business where the customer is relying on the opinion and expertise of the business should consider E&O insurance.

Employment Practices Liability Insurance

Once, only large corporations had to be concerned with employee claims that their rights had been violated but in recent years the number of suits against small businesses has skyrocketed. Employment practices liability insurance, EPLI works by defending you against claims such as; sexual harassment, discrimination, wrongful termination, negligent evaluation and other employee initiated suits. If a claim is successful EPLI will pay the claim. EPLI will not pay for punitive damages or fines. Small businesses that want this protection can have it added to the BOP policy as an endorsement.

Not all insurance companies that offer business owner policies offer an employment practices liability endorsement and those that do usually have rigorous underwriting requirements. Rates for this coverage are based on several factors, including the number of employees and your company’s history of disputes and lawsuits.

Directors and Officers Liability Insurance

This type of coverage can be summed up as personal protection for professional decisions. Directors and officers liability insurance insures managers and board members in the event they sued personally for actions they took as managers or board members. D&O coverage is primarily of interest to businesses that operate outside of the United States at least a part of the time since such lawsuits uncommon in the U.S.

D&O liability insurance is often confused with errors and omission insurance because both protect against lawsuits that result from bad decisions where the company is the plaintiff. Coverage is based on claims made basis, which means directors and officers are only protected while the policy is in force. Any legal actions that are initiated after the policy is cancelled are not covered even if the incident occurred while the policy was in place.

Key Employee Insurance

Key employee insurance is life insurance with the specific business purpose of providing money to ease the cost of losing an important employee. A key employee life insurance policy is one that is owned by the business and has the business as the beneficiary of the policy. The purpose of this type of insurance is to provide income or funds to help with expenses while a replacement for the deceased employee, manager or even owner is found. This coverage could also be used as a means to replace income that results from the untimely death of a business’ top salesperson which can be particularly devastating if they were responsible for generating new business rather than servicing existing customers.

Key employee insurance may even be required by some lenders when credit is based on the contribution of the key employee to the business. Since these policies are permanent forms of life insurance such as whole life the accumulated cash value is often given to the employee upon retirement as compensation. The IRS does not allow companies to deduct the premiums as an expense unless the policy has been assigned to a third party such as a lender. The IRS does not treat proceeds of the policy as taxable as part of the employee’s estate even if the employee was the owner of the company as long as the beneficiary is the company and not an individual or estate.

Data Breach/Cyber Liability Insurance

Businesses understand that protecting the personal information entrusted to them by customers is of the highest priority, but still data breaches can and do occur.  Data breach and cyber security insurance protects against the loss of electronic and paper records by thieves. This coverage may be purchased as a stand alone policy or added to a BOP as an endorsement. Policy terms vary from one company to another, but generally help offset the costs of notification, public relations and legal and liability expenses resulting from the breach.

Umbrella Policies

As the name implies umbrella insurance provides protection over and above the limits of other policies. For example, if a company has a $1 million or more umbrella policy and it is sued successfully for $1.5 million as part of a personal injury suit and only has $1 million of liability coverage the umbrella policy would provide the additional $500,000 to satisfy the claim rather than the company having to make the payment.

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