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Business Insurance—Things Every Owner Should Know

By: A. J. Shah Email By: A. J. Shah
February 2011
Business Insurance—Things Every Owner Should Know

Do small business owners really need insurance?The answer is simple—yes, all business owners should consider insuring against some of the common risks that could affect their operations.Most of us don’t hesitate to purchase insurance for our home and automobile to protect us financially in case of an accident or disaster.The same applies to insuring your business.

Some common reasons business owners rationalize not buying insurance are:

1. My business does not make enough money to warrant insurance.

Certain types of insurance are a necessity no matter the size of your business. Every company faces risks on a daily basis: lawsuits, natural disasters or computer shutdowns that could cause irreparable harm or even shut down your operations. Having insurance funds available to pay for those costs may save your business in the long run.

2. My business operates as a corporation. This protects me from personal responsibility and liability. I don't need insurance.

Operating as a corporation may protect the owners and managers from personal liability, but does not help protect your corporation from exposure to the risks of doing business. However, in most states, you could still be liable as the owner.This means, without insurance, your personal assets—your home, your business, and your car—could be at risk.Having business insurance minimizes personal exposure.

3. If I become disabled or die, my partners and family would work out what to do with the business.

Family members and business partners rarely work things out after the primary owner passes away. Most often, there isn’t enough cash flow to pay off the family of a deceased partner. Key Person Insurance and a Buy-Sell Agreement funded by insurance can help ensure that each partner and their estate is properly protected and compensated for their share of the business.

The basic types of business insurance available are:

1. Workers’ Compensation: Workers’ compensation is a state-mandated insurance that pays benefits to workers injured on the job to cover medical care, part of lost wages and permanent disability.Usually, companies with five or more employees are required to carry this insurance.Companies with fewer than five employees may elect this coverage. Those that do not are exposed to civil lawsuits by injured workers.

2. Property Insurance: Property insurance covers everything related to the loss and damage of the property of a business due to a wide variety of events such as fire, smoke, wind, hailstormsand vandalism. The definition of “property” is broad, and includes lost income, business interruption, buildings, computers, company papers and money.

3. General Liability: General liability insurance covers legal costs and other expenses arising out of accidents, injuries and claims of negligence against a business. This type of insurance protects against payments for bodily injury, property damage, medical expenses, libel, slander, the cost of defending lawsuits and settlement bonds or judgments required during an appeal. Types of general liability claims include injuries from customer slips and falls on your business premises, breach of contract lawsuits and products liability.

4. Business Owners’ Policy (BOP): BOPs combine property and liability policies into one package. BOPs target small and medium-sized businesses, such as professional offices, convenience stores, motels, liquor stores, restaurants, and mailbox stores, and include business interruption insurance, which provides reimbursement for up to a year of lost revenue resulting from an insured property claim.

5. Commercial Automobile: If your business uses automobiles in some manner, collision and liability insurance can be purchased on behalf of the business.

6. Professional Liability: Businesses providing services such as legal, accounting, and computer maintenance should consider carrying professional liability insurance (also known as Errors and Omissions insurance). This coverage protects businesses against costs related to malpractice, errors, and negligence by their employees when providing services to your customers. Some professional may be required to carry such coverage.

7. Key Person Insurance: A company can purchase a policy on the life of its key employees, providing funds to hire another similar worker and to compensate for losses that may be suffered in the interim.

8. Buy-Sell Insurance: The policies are purchased by companies, or more commonly by owners, to provide funds to buy out the shares of a deceased or disabled partner. A buy-sell agreement will need to be entered into between the parties to address the complex issues of how and when the insurance funds are to be used.

9. Umbrella/Excess Liability: Umbrella liability or excess liability policies add another layer of protection in addition to the other polices that a business may carry, and pick up risks that may not be otherwise covered.

Businesses face a number of ongoing risks, from employee error to natural disasters. Insurance can play a key role in minimizing those short and long-term business risks.

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