WHAT INSURANCE SHOULD MY BUSINESS HAVE?
Most businesses need to purchase at least the following four types of insurance:
- Property Insurance
- Liability Insurance
- Business Vehicle Insurance
- Workers Compensation Insurance
Property Insurance – Property insurance compensates you if the property you use in your business is lost or damaged as the result of various types of common “perils” such as fire or theft. Property insurance covers not just a building or structure but also what insurers call “personal property,” meaning office furnishings, inventory, raw materials, machinery, computers and other items vital to your business operations. Property insurance can do more than protect your physical assets. It may also provide operating funds during a period when you are trying to get the business back on track after a catastrophic loss. Depending on the type of policy you have, property insurance may include coverage for equipment breakdown, removal of debris after a fire or other destructive event, some types of water damage and other losses.
Liability Insurance – Any enterprise can be sued. People may claim that your business caused them harm as the result of, for example, a defective product, an error in a service or disregard for another person’s property. Or someone may allege that you created a hazardous environment. Your liability insurance pays damages for which you are found liable, up to the policy limits, as well as attorneys’ fees and other legal defense expenses. It also pays the medical bills of any people injured by your business.
Business Vehicle Insurance – If you use your own car for business purposes, discuss this with your agent. Many personal auto insurance policies exclude coverage if the vehicle involved in an accident is used mainly for business. A business auto policy provides coverage for autos owned by a business. The insurance pays any costs to third parties resulting from bodily injury or property damage for which your business is legally liable, up to the policy limits. Depending on what kind of coverage you buy, the insurance may pay to repair or replace your vehicle because of damage resulting from accidents, theft, flooding and other events.
Workers Compensation Insurance – In all states but Texas an employer must have workers compensation insurance when there are more than a certain number of employees, varying from three to five, depending on the state. Workers comp insurance, as this coverage is generally called, 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. When a worker dies as a result of injuries sustained while working, the insurance provides compensation to the employee’s family.
INSURANCE FOR A HOME-BASED OR VERY SMALL BUSINESS
An extremely small business, such as one operated by one or two people out of a home, may not need workers compensation insurance. But it often needs more property and liability insurance than is provided in a typical homeowners policy. Many people think their homeowners policy is all they need but a typical homeowners policy may not provide enough coverage and most homeowners policies specifically exclude business liabilities. There are three ways to provide more property and liability insurance for your in-home business. The right choice will depend on the nature of your business, its annual receipts and the amount of coverage you need. They are:
- Endorsement to Your Homeowners Policy
- In-Home Business Insurance Policy
- Businessowners Policy (BOP)
OTHER TYPES OF POLICIES YOU MAY NEED
In addition to the basic coverages highlighted above, there are various other policies needed by some businesses. They include:
- Umbrella Policies
- Specialized Liability Policies
- Terrorism Insurance
As the name implies, an umbrella liability policy provides coverage over and above your other liability coverages. It is designed to protect against unusually high losses, when the policy limits of one of the underlying policies have been used up. For the typical business, the umbrella policy would provide protection over and above general liability and auto liability policies. If you have Employment Practices Liability Insurance, Directors and Officers Liability or other types of liability insurance, the umbrella could provide protection over and above those policy limits as well.
Specialized Liability Insurance Policies
Some businesses need specialized liability policies. They include:
- Errors and Omissions Insurance (E&O)/Professional Liability Insurance
- Employment Practices Liability Insurance (EPLI)
- Directors and Officers Liability Insurance (D&O)
- Business Identity Theft Insurance
- Contractors Liability Insurance
- Product & Completed Operation Liability Insurance
- Liquor Liability Insurance
- Employment Practices Liability Insurance
For Contractors, some common examples of potentially covered lawsuits are as follows:
- – Child wanders onto construction site and is injured while playing
- – Worker is digging a ditch and severs a utility line
- – Faulty plumbing results in water damage 1 year after completion
- – Faulty electrical wiring causes the house to burn down 5 years after completion
- – Your Subcontractor installs faulty gas lines that cause the house to burn down
Errors and Omissions Insurance/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 could be sued by customers, clients or patients claiming your failure to perform your job properly had harmed them in some way. Errors and Omissions or Professional Liability Insurance covers these situations. The policy will pay any judgment for which the insured is legally liable, up to the policy limit. It also provides for legal defense costs, which can be substantial, even where there has been no wrongdoing.
Employment Practices Liability Insurance. Employment Practices Liability Insurance pays, up to the policy limits, damages for which an employer is legally liable for violating an employee’s civil or other legal rights. In addition to paying a judgment for which the insured is liable, it also provides for legal defense costs, which can be substantial even where there has been no wrongdoing.
Directors and Officers Liability Insurance. Directors and Officers Liability 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. The policy will pay any judgment for which the insured is legally liable, up to the policy limit. It also provides for legal defense costs, which can be substantial even where there has been no wrongdoing.
Business Identity Insurance. Business Identity Theft Insurance provides legal liability coverage to businesses that are victims of data theft. Such policies can also provide coverage to notify customers whose personal identification information may have been compromised and pay for services to provide identity theft recovery services for customers.
Prior to the terrorist attacks of September 11, 2001, standard commercial insurance policies included terrorism coverage as part of the package, effectively free of charge. Today, 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 (TRIA), enacted by Congress in 2002. The Act was renewed for two years in December 2005 and renewed again in 2007 for another seven years. Under TRIA, owners of commercial property, such as office buildings, factories, shopping malls and apartment buildings, must be offered the opportunity to purchase terrorism coverage. This requirement also applies to your Businessowners Policy (BOP)—your insurer must offer terrorism coverage as mandated by TRIA. In some cases insurers still include terrorism for no additional premium. In other cases there is a separate charge. You should confirm with your agent or broker whether or not your BOP or other package policy provides terrorism coverage. It is important to note that TRIA excludes certain lines, such as burglary and theft and commercial auto. Workers compensation is the only line of insurance that automatically covers acts of terrorism.
SHOULD I BUY A PACKAGE POLICY?
Insurers often combine a number of coverages into a package that is sold as a single contract. The advantage of a package policy is that it offers a broad variety of coverages for small businesses at a price that is usually lower than if the same coverages were bought separately. The most common type of package policy is the Businessowners Policy or BOP (see below).
Many insurance companies have their own unique names for the package policies they offer, and the coverages may vary somewhat from company to company. Often, these policies are created specifically for businesses that generally face the same kind and degree of risk. There are, for example, package policies designed especially for restaurants, undertakers, hair stylists, accountants and many other enterprises.
WHAT IS A BUSINESSOWNERS POLICY (BOP)?
A Businessowners Policy (BOP) combines coverage for all major property and liability insurance risks as well as many additional coverages into one package policy suitable for most small businesses.
The term “BOP” specifically refers to insurance policy language developed (and revised as needed) by experts at ISO. ISO provides sample insurance policy language, research and a variety of other products to insurance companies.
A BOP includes business income insurance. This compensates you for the business income you may lose following a disaster. Disasters typically disrupt operations and may cause you to vacate your premises. The BOP also covers the extra expense you may incur if you must operate out of a temporary location.
To cover specific risks associated with your business, you may purchase a variety of additional coverages to add to the basic BOP. For example, the BOP doesn’t cover outdoor signs unless you specifically add coverage and pay an additional premium. If your business relies on electronic commerce, you may want to add coverage for lost income and extra expenses in the event your ability to conduct e-commerce is slowed down or stopped due to a computer virus or hacker.
Only small- to medium-sized businesses that meet certain criteria are eligible for a BOP. Factors insurers consider include the size of the premises, the required limits of liability, the type of business and the extent of offsite activity. Premiums for BOP policies are based on those factors plus business location, financial stability, building construction, and security features and fire hazards.
A BOP does not include all the coverages you may need. It does not cover professional liability, auto insurance, workers compensation or life, health and disability insurance. You will need separate policies for those.
HOW MUCH INSURANCE DO I NEED?
When purchasing business insurance it’s important to obtain the right amount. Be sure that your company is neither overinsured nor underinsured. To help you decide the amount of property insurance you need, list all your company’s assets—including property, equipment and inventory. You can buy property insurance on the basis of the property’s actual value (the replacement cost minus depreciation) or its replacement value (the cost of replacing the item without deducting for depreciation).
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