Insurance Overview for Small Business Owners

This article is a reprint of Wise Bread's contribution to OPEN Forum from American Express -- where small business owners can get advice from experts and share tips with each other.

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Running your small business is a multi-faceted task, of which risk management plays a vital role. And insurance in turn is a crucial element to risk management. Following is an overview of the different types of insurance suitable for small business owners. Although you may not need every type of insurance outlined, you may be surprised (and initially overwhelmed) with the number of insurance policies you do need. Never fear: you’ll find some tips at the end of this article to make your search for insurance a little easier.

Property Insurance

Property insurance covers damage to the business premises. For example, if a fire rips through your building, your property insurance policy will help you replace items such as equipment, furniture, carpeting, lighting, and inventory. If you operate a business whereby customers leave objects with you (for servicing or maintenance, for example), then their items will be covered too.

You can also bulk up your property insurance policy by adding in protection against fraud, robbery, employee theft/embezzlement, and electronic protection against viruses or hackers.

If you rent your business premises, be sure to check if there is property insurance coverage through your landlord, or if you are required to provide your own protection.

Casualty Insurance

Although property and casualty insurance are often combined into one policy, they are actually two different types of insurance, so it behooves you to ensure you are covered for both. Where property insurance covers damage to the business premises itself, casualty insurance insures the less tangible things such as the loss of income that results from the sorts of disasters as above. It may also cover your costs to operate from a temporary location while your original premises are repaired or while you find a new permanent location.

If you do business in other countries, casualty insurance may also cover business losses if there is political strife or governmental changes that affect your ability to do business there. Businesses that rely heavily on the internet will also want to ensure that their casualty insurance policy includes identity theft and other forms of cyber-protection.

Liability Insurance

Don’t assume that having an LLC (Limited Liability Company) or Corporation excludes you from personal responsibility against certain liabilities. Here are the different types of Liability Insurance you may want to consider in the scope of your small business:

• General Liability Insurance: General liability insurance will cover you if somebody is injured on your premises or in the scope of your business, if you (or an employee) damages somebody else’s property, or if there is an advertising claim. It is one of the most important forms of insurance your business can have, and is also referred to as Commercial General Liability insurance.
   
• Professional Liability: This one is especially popular (and at times legally required) in the medical, financial, and technology industries, and is also referred to as Errors & Omissions insurance. It will protect you against negligence, malpractice, and errors. It’s easier than you think for this to happen; a painter friend of mine recently got paint on some cars parked (illegally) near where he was spraying, and despite the fact that he personally cleaned the cars, he received an outrageous bill from a car owner for detailing.
   
• Product Liability: If you manufacture or sell a product that could somehow result in the injury of your customer, then product liability insurance is for you. Remember to think outside the box when considering your need for this type of insurance; funny things happen.

You can sometimes get a “Business Owners Insurance” policy which combines Property, Casualty and Liability insurance.

Commercial Auto Insurance

Company vehicles require a commercial auto insurance policy. Beware of using a personal auto insurance policy for small business needs; you may find that it excludes any business use of the vehicle, or worse yet — that your policy is voided if the insurance company discovers you are using your vehicle for business use at all. To reduce the need for this type of insurance, consider car sharing for businesses.

Workers’ Compensation

This form of insurance is often legally mandated if you have employees, and covers employees who are injured in the course of their work, or on the business premises.

Health Insurance

Although health insurance is optional, it increases your attractiveness as an employer if you offer a health care plan. The scope of and options for this type of insurance are wide, covering things such as dental, optical, and medical expenses. Many health insurance plans also include life and disability coverage for employees as well. You as the business owner have the option of participating in this plan, or purchasing your own life/disability coverage separately.

Disability Insurance

If you are ill or injured such that you can’t do your job, disability insurance will help to replace your income. The chances of your becoming disabled in your career are alarmingly high, so don’t rest in the notion that you will be able to work irregardless of your physical — or mental — condition. Within the disability insurance realm, you can look at short-term disability (STD) and long-term disability (LTD) options. STD usually covers the first three to six months of a disability, and LTD kicks in after that, providing income for a set period (which ranges from a few years, to covering age ranges such as to age 65).

Business Overhead Expense

Your personal disability policy will replace your personal income, but does nothing to cover the continuous expenses incurred by your business, such as rent/mortgage payments, taxes, utilities, and maintenance. Without an overhead expense policy (or the cash to cover these expenses throughout the time you cannot work), you may not have a business to return to. The good news is that premiums for business overhead expense insurance are usually tax-deductible.

Key-Man Insurance

Key man insurance will protect the business from suffering if a key employee is disabled or dies. It incorporates two different types of policies, being disability and life insurance. Both will help cushion the time and effort required to find a suitable replacement employee, cover a lack of cash flow due to lower sales or lack of productivity, and other financial detriments that go along with losing (even temporarily) a key person to the business.

Shareholder Protection

If your small business is a corporation with shareholders, the death or disability of one of the shareholders could negatively affect the business and its ability to survive. Ideally you have a shareholders agreement which outlines the plan of action if something happens to a shareholder, but funding this arrangement is something else entirely which can be covered with life and disability insurance.

• Life Insurance: If a shareholder dies, the shareholder’s agreement probably outlines how the deceased shareholder is to be bought out by the remaining shareholders. However most companies don’t have enough cash in the coffers to fund this sort of purchase, which is where life insurance comes in. It is specially structured and owned for tax-efficiency and legal purposes, so it is best to consult your financial team (lawyer, accountant, and financial planner) to determine the best policy structure.
   
• Disability Insurance: If a shareholder becomes disabled for a prolonged period of time, the shareholder’s agreement may state that their share of the company is to be bought out. Again funding this sort of purchase can be difficult without insurance.

General Insurance Tips for Small Business Owners

• Comparison shop/use a broker: Don’t assume that all policies are created equal or follow the same premium scale. Shop around for rates, and comb through the policy language to ensure your needs will be met. Consider using an insurance broker, who can do a lot of this leg work for you (a wise way of outsourcing this daunting job).
   
• Check your association for coverage: Some industry association memberships offer insurance coverage at attractive rates, and in some cases coverage is automatically provided with membership. Check to see if you are already covered for some forms of insurance.
   
• Don’t rely on homeowner’s insurance: If you operate your business from home, don’t expect your homeowner’s insurance policy to cover your business insurance needs. Often the replacement value of business equipment is minimal, and liability insurance is not included. In fact, your policy could even be voided if the insurance company discovers that you operate your business from home and don’t have the proper coverage.
   
• Watch for the fine terms: When it comes to property and auto insurance for example, there is a difference between “replacement cost” and “actual cost” of lost or damaged items; replacement cost means the insurance company will pay to replace the property, and actual cost means they will only pay you what is considered “current value” of the property that was lost.
   
• Bundle your policies: You can often get a discount for bundling different types of insurance policies with one carrier. This also makes maintenance of and changes to the policies much easier to handle.