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Pay attention to policy limits when purchasing auto coverage. Many states set minimum liability coverages, which may be well below what you need. If you don’t have enough coverage, the courts can take everything you have, then attach your future corporate income, thus possibly causing the company severe financial hardship or even bankruptcy. You should carry at least $1 million in liability coverage.
Property/Casualty Coverage
 
Most property insurance is written on an all-risks basis, as opposed to a named-peril basis. The latter offers coverage for specific perils spelled out in the policy. If your loss comes from a peril not named, then it isn’t covered.
Make sure you get all-risks coverage. Then go the extra step and carefully review the policy’s exclusions. All policies cover loss by fire, but what about such crises as hailstorms and explosions? Depending on your geographic location and the nature of your business, you may want to buy coverage for all these risks.
Whenever possible, you should buy
replacement cost insurance
, which will pay you enough to replace your property at today’s prices, regardless of the cost when you bought the items. It’s protection from inflation. (Be sure your total replacements do not exceed the policy cap.)
PACKAGE DEAL
 
I
f figuring out what insurance you need makes your head spin, calm down; chances are, you won’t have to consider the whole menu. Most property and casualty companies now offer special small-business insurance policies.
 
 
A standard package policy combines liability; fire, wind and vehicle damage; burglary; and other common coverages. That’s enough for most small stores and offices, such as an accounting firm or a gift store. Some common requirements for a package policy are that your business occupy less than 15,000 square feet and that the combined value of your office building, operation and inventory be less than $3 million.
 
Basic package policies typically cover buildings, machinery, equipment and furnishings. That should protect computers, phones, desks, inventory and the like against loss due to robbery and employee theft, in addition to the usual risks such as fire. A good policy pays full replacement cost on lost items.
 
A package policy also covers business interruption, and some even offer you liability shelter. You may also be covered against personal liability. To find out more about package policies, ask your insurance agent; then shop around and compare.
For example, if you have a 30,000-square-foot building that costs $50 per square foot to replace, the total tab will be $1.5 million. But if your policy has a maximum replacement of $1 million, you’re going to come up short. To protect yourself, experts recommend buying replacement insurance with inflation guard. This adjusts the cap on the policy to allow for inflation. If that’s not possible, then be sure to review the limits of your policy from time to time to ensure you’re still adequately covered.
Umbrella Coverage
 
In addition to these four basic “food groups,” many insurance agents recommend an additional layer of protection, called an
umbrella policy
. This protects you for payments in excess of your existing coverage or for liabilities not covered by any of your other insurance policies.
Business Interruption Coverage
 
When a hurricane or earthquake puts your business out of commission for days—or months—your property insurance has it covered. But while property insurance pays for the cost of repairs or rebuilding, who pays for all the income you’re losing while your business is unable to function?
For that, you’ll need business interruption coverage. Many entrepreneurs neglect to consider this important type of coverage, which can provide enough to meet your overhead and other expenses during the time your business is out of commission. Premiums for these policies are based on your company’s income.
Life Insurance
 
Many banks require a life insurance policy on the business owner before lending any money. Such policies typically take the form of term life insurance, purchased yearly, which covers the cost of the loan in the event of the borrower’s death; the bank is the beneficiary.
Term insurance is less costly than permanent insurance at first, although the payments increase each year. Permanent insurance builds equity and should be considered once the business has more cash to spend. The life insurance policy should provide for the families of the owners and key management. If the owner dies, creditors are likely to take everything, and the owner’s family will be left without the income or assets of the business to rely on.
Another type of life insurance that can be beneficial for a small business is “key per son” insurance. If the business is a limited partnership or has a few key stockholders, the buy-sell agreement should specifically authorize this type of insurance to fund a buyback by the surviving leadership. Without a provision for insurance to buy capital, the buy-sell agreement may be rendered meaningless.
“I never let my
mistakes defeat or
distract me, but I learn
from them and move
forward in a positive
way.”
—LILLIAN VERNON,
FOUNDER OF LILLIAN VERNON
CORP.
 
 
The company is the beneficiary of the key person policy. When the key person dies, creating the obligation to pay, say, $100,000 for his or her stock, the cash with which to make that purchase is created at the same time. If you don’t have the cash to buy the stock back from the surviving family, you could find yourself with new “business partners” you never bargained for—and wind up losing control of your business.
In addition to the owners or key stockholders, any member of the company who is vital to operations should also be insured.
Disability Insurance
 
It’s every businessperson’s worst nightmare—a serious accident or a long-term illness that can lay you up for months, or even longer. Disability insurance, sometimes called “income insurance,” can guarantee a fixed amount of income—usually 60 percent of your average earned income—while you’re receiving treatment or are recuperating and unable to work. Because you are your business’s most vital asset, many experts recommend buying disability insurance for yourself and key employees from day one.
READ ALL ABOUT IT
 
W
ant to know more about insurance? Check out these publications and websites:
•
Insuring Your Home Business and Insuring Your Business Against a Catastrophe
. Single copies of these brochures are available free from the Insurance Information Institute’s website at
iii.org
.
•
101 Ways to Cut Business Insurance Costs Without Sacrificing Protection
. Written by William Stokes McIntyre, Jack P. Gibson and Robert A. Bregman, this book is published by the International Risk Management Institute (IRMI) and is available at local and online bookstores or through the IRMI (
irmi.com
).
•
The Self-Insurer
. This monthly magazine is published by the Self-Insurance Institute of America Inc. A one-year subscription is $195.50. Subscribe at
siia.org
.
•
WorkersCompensation.com
. This website provides workers’ comp information, insurance quotes and provider names by state, as well as news and information of interest to employers. Go to workers
compensation.com
.
 
There are two basic types of disability coverage: short term (anywhere from 12 weeks to a year) and long term (more than a year). An important element of disability coverage is the waiting period before benefits are paid. For short-term disability, the waiting period is generally seven to 14 days. For long-term disability, it can be anywhere from 30 days to a year. If being unable to work for a limited period of time would not seriously jeopardize your business, you can decrease your premiums by choosing a longer waiting period.
Another optional add-on is “business overhead” insurance, which pays for ongoing business expenses, such as office rental, loan payments and employee salaries, if the business owner is disabled and unable to generate income.
Choosing an Insurance Agent
 
Given all the factors that go into business insurance, deciding what kind of coverage you need typically requires the assistance of a qualified insurance agent.
Type of Agent
 
Selecting the right agent is almost as important, and sometimes as difficult, as choosing the types of coverage you need. The most fundamental question regarding agents is whether to select a direct writer—that is, someone who represents just one insurance company—or a broker, who represents many companies.
Some entrepreneurs feel they are more likely to get their money’s worth with a broker because he or she shops all kinds of insurance companies for them. Others feel brokers are more efficient because they compare the different policies and give their opinions, instead of the entrepreneur having to talk to several direct writers to evaluate each of their policies. Another drawback to direct writers: If the insurance company drops your coverage, you lose your agent, too, and all his or her accumulated knowledge about your business.
 
e-FYI
 
If you’re baffled by the many insurance options available for small-business owners, check out the
Business.gov
website at
business.gov/finance/business-insurance.
On this site, you can learn about the types of business insurance policies available and the insurance requirements for businesses with employees. The site also provides tips for buying insurance and links to useful industry resources.
Still, some people prefer direct writers. Why? An agent who writes insurance for just one company has more clout there than an agent who writes for many. So when something goes wrong, an agent who works for the company has a better chance of getting you what you need. Finally, direct writers often specialize in certain kinds of businesses and can bring a lot of industry expertise to the table.
Finding an Agent
 
To find an insurance agent, begin by asking a few of your peers whom they recommend. If you want more names, a trade association in your state may have a list of recommended agencies or offer some forms of group coverage with attractive rates (see the “Cost Containment” section in Chapter 24 for more).
Once you have a short list of agencies to consider, start looking for one you can develop a long-term relationship with. As your business grows and becomes more complicated, you’ll want to work with someone who understands your problems. You don’t want to spend a lot of time teaching the agent the ins and outs of your business or industry.
“Tell the truth, but
make it fascinating.”
—DAVID OGILVY, FOUNDER
OF OGILVY & MATHER
 
 
Find out how long the agency has been in business. An agency with a track record will likely be around to help you in the future. If the agency is new, ask about the principals; have they been in the industry long enough that you feel comfortable with their knowledge and stability?
One important area to investigate is loss-control service (which includes everything from fire-safety programs to reducing employees’ exposures to injuries). The best way to reduce your premiums over the long haul is to minimize claims, and the best way to do that is through loss-control services. Look for a broker who will review and analyze which of the carriers offer the best loss-control services.

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