Properly insuring your business is a matter of thinking the unthinkable.
by Heidi Prescott Wieneke
None of us would buy insurance if we didn't have to. Insurance agents acknowledge this and consumers admit it. And when it's time to consider coverage, we are bombarded and barraged with advertisements that feature catchy slogans, memorable mascots or singsong jingles and promises of service and savings.
When someone opens a new small business, insurance companies advise the entrepreneur, who might be purchasing commercial coverage for the first time, to take enough time to sit down with an agent who can guide the owner in the right direction.
“The most common mistake is treating insurance as a purely price-driven commodity. An insurance policy is a very complex contract and it is of paramount importance to understand how a policy will respond in the event of a claim,” says Andy Taylor, commercial lines agent at General Insurance Services in Valparaiso.
It is important, even vital, for a small business owner to work with an agent who takes the time to understand the business so the agent, who should have experience specifically with commercial insurance, can tailor the policy accordingly.
The best way for a new owner to explain his or her business model to an insurance agent is to show the agent a written business plan and pro forma of expected costs for the services the business is going to provide or the items it is going to sell, says Mark Bates, president of Pinnacle Insurance Group of Indiana, which has offices in Crown Point and Hobart.
“When a small business owner is organized and knows what they're going to do going forward, then we can get a better outcome on insurance. So many small businesses fail because they didn't get out of the gate on the right step,” Bates says.
Looking at and poring over a business plan helps the insurance agent create an alignment of services that match up with key business goals and initiatives to help ensure the entrepreneur's success, says Colin MacNab, executive vice president and principal at MJ Insurance in Indianapolis, which services clients in Northwest Indiana.
“Insurance is a very personal purchase,” MacNab says. “The value of having a good broker or agent is having someone to talk with about the known-knowns, the known-unknowns and the unknown-unknowns. With insurance, you are buying a piece of paper that outlines an agreement between you and the insurance company and what you are getting for your money. And it can be a world of gray.”
Just as you would not drive your car without insurance, small business owners should not open their doors without purchasing at least four basic types of insurance: property, liability, workers compensation and auto insurance. In each of these instances, it is not worth taking the risk should someone get hurt or an accident or catastrophe happens. And catastrophes happen.
Here's a look at the four basic types of insurance all small business owners should have.
Property insurance: Business owners have property to insure, whether their office or store is located in a building they own or rent. Most small business owners are moving out of their house or garage and into a neighborhood shopping center, and they need to insure the business personal property they have inside the space.
Many leases have a provision that specifies insurance requirements for a tenant, so it is important for an insurance agent to have a copy of the lease in hand so he or she can review it and make sure coverage adequately meets the terms of the lease. Sometimes first-time small business owners sign a lease without knowing exactly what it is they are signing.
Business personal property can include anything from a desk or computer in an office to a deli slicer in a restaurant, that could be stolen or damaged, says Larry Meyers, president of Schererville-based HIA Insurance Co.
Liability insurance: Accidents happen. For this reason, it is necessary for every small business owner, who has people visit the office or store or provides someone with a service, to have general liability insurance. Contractors are exposed to risks on the job. Liability insurance will cover the business and small business owner if their products or services cause someone damage or harm, and it will safeguard contractors in the case of an accident.
Workers compensation: This type of insurance provides coverage for someone who is injured on the job. The cost will vary depending on the degree or severity of the job, however. It may cost more to insure someone working in the field for a steel erection company and less to cover clerical office employees, Meyers says. But states require workers compensation that would provide lost wages and medical benefits to the person who is injured.
Auto insurance: Some business owners might have a sales staff and provide vehicles for them to drive. Should the employee get into an accident, auto insurance is critical for covering damages sustained to the vehicle. Vehicles can be covered for damage and collision.
“The most common mistake small business people make, whether they are starting a new business or are insuring an existing business, is that they never think a loss is going to happen to them,” Meyers says. “They lowball the amount of insurance they buy and that comes back to bite them. What we try to do is say, ‘Look, don't reduce the amount of insurance you have, take a higher deductible. You still need the right type of protection for catastrophe.”
After the four basic types of insurance, there are several additional options available to small business owners. These options include: crime insurance, which is important for businesses that keep certain monies in-house overnight; employee dishonesty coverage, to cover a business if an employee is caught stealing from it; and cyber liability insurance.
Hackers can break into a small business website the same way they have been able to compromise the data of millions of consumers at TJ Maxx and Target Corp.
“Cyber and data breach coverage is an optional coverage, but it is becoming more and more prevalent,” says Bates. “Small business owners need to know what safeguards they have on their automated systems to prevent hacking as much as they need to consider insurance to cover any losses from hackers. When customer information is compromised, a business has to notify its customers. Coupled with the expense of providing a credit watch for customers over a period of time, those costs could be detrimental to a small business.”
Business interruption insurance is another type of coverage a small-business person can choose that would cover the loss of income should the business experience a catastrophe.
“If you're a restaurant and your building catches fire, you might have to close for a while. This means you're losing your lifeblood because there's no cash flow,” MacNab says. “Business interruption insurance covers your lost income and extraordinary expenses until you reopen.”
Professional liability insurance is necessary for the small-business person who is providing advice to clients. “Someone who operates a beauty salon has an exposure if someone gets burned by hair color or an infection from a manicure,” Meyers says. It's very similar to a doctor who carries medical malpractice insurance, he says, because it protects professionals from claims of damage by their clients.
Insurance policies are usually an annual contract, so insurance experts recommend that a small business owner spend time reviewing the plan individually, and then with an agent a couple of months before policy renewal, says MacNab of MJ Insurance.
“The changes you make might be very subtle, but I'd say half the time the owner has their policy in the right alignment and has the right fit for what is happening in the business, and half the time they do make changes,” MacNab says. “Reviewing your policy on an annual basis is a very good habit to get into.”
And any time an accident or catastrophe occurs, and a small business owner does not understand the language of the policy or whether damage or loss is covered, it's time to schedule a meeting or call the insurance agent.
“Even if the insurance company says something is not covered under your policy, you might be able to find coverage in another part of the policy or by interpreting the policy language differently,” MacNab says. “People will ask, ‘Is this covered?' And I tell them it always depends. It depends on the variables in the situation. You want to make sure you turn over every stone with your insurance agent should an incident or accident happen to make sure you can get something out of the coverage for your loss.”
Many times, new small business owners simply underestimate the extent of their true insurance needs and only buy the bare minimum, says Jennifer Burton, client executive with the business and private client group at Gibson Insurance Group in South Bend.
Burton recommends against looking solely at the bottom line. “Paying a low price won't help you if it doesn't provide beneficial coverage that the business owner is exposed to,” Burton says. “Be aware of who you're working with and choose an advisor that can talk to you and provide advice. Getting a quote off the Internet is not the best idea in this situation.”
Small business owners also should not be afraid of disclosing information about their business to the broker or agent. “The insurance agent can't build an appropriate risk management program unless they know what your true risks and exposures are,” she says.
Everyone has their own tolerance for risk from a financial standpoint, says Meyers of HIA. And that tolerance must be weighed against the possibility that an incident or accident could otherwise put you out of business without the right insurance in place.
“For a small business with $30,000 in equipment and storage racks, could they pay out of pocket to retool and regroup if they had a disaster? Or why would you want to dig into your own pocket if someone tripped and fell in your business and racked up a $100,000 medical bill? Would you have the where-with-all to pay out of pocket?” Meyers says. “It's not worth taking the risk.”
