Insurance FAQ

All small businesses should have Business Owners / Package Policy, Workers Compensation, Auto, and Umbrella policies. A Business Owners (or Package Policy) can provide special property coverage on your building, contents, business income and computers. It can also provide crime/fidelity and equipment coverage. The policy will include liability coverage for your premises, operations, product and completed operations tort liability exposures.

Workers Compensation: statutory limits for accidents, disease or illness which occurred on the job and are incidental to your job. Employers liability provides coverage for your company if a tort claim is presented for a job-related injury.

Auto: If necessary to cover both liability and physical damage for owned autos or trucks used in the business.

Umbrella: This is excess liability over and above your primary liability coverage’s. Limits are usually available from $1 to $10 million. Higher limits may be purchased at reasonable costs.

Other coverage’s to consider: Life, Accident and Health, Disability, Long Term Care, Retirement Plans, Dental Plans.

Your business may not possess all the following types of property, but you can use this list to make sure that you have considered all the property categories and any insurance coverage that may be warranted:

• Buildings and other structures (owned or leased)
• Furniture, equipment and supplies
• Inventory
• Money and securities
• Records of accounts receivable
• Improvements and betterments you made to the premises
• Machinery
• Boilers
• Data processing equipment and media (including computers)
• Valuable papers, books and documents
• Mobile property such as automobiles, trucks and construction equipment
• Satellite dishes
• Signs, fences and other outdoor property not attached to a building
• Leased equipment

To establish the amount of insurance you need on each, your insurance agent can help you review the types of property you own and their uses. Some of these items are covered in the basic policies. For others, coverage can be added by an endorsement, or rider. And some, like money and securities, may not be covered by a standard commercial policy and may require a second, separate policy.

The best thing to do is to take a complete inventory of all your business property, determine their value and decide if each is worth insuring. Then check to see that the items on the inventory list are included in the basic business property policy and covered for the correct amount. If not, ask you agent about the cost of purchasing additional coverage to meet your needs.

You also need to consider your business situation. Are you planning a major expansion? Does your inventory have a decidedly peak season (like a toy store in December)? Or does it fluctuate throughout the year (like a clothing store)? Is your liability limit high enough in light of the new job contract you just signed? Business policies are designed to be added to or subtracted from to meet your needs. Be sure to discuss changes to your business with your agent so that he or she can be sure your policy still provides adequate coverage.

Some Common additional coverage for business property include (this list is by no means all-inclusive):

Boiler and Machinery Insurance
Even if you do not own a boiler, you may need this coverage. The term “boiler and machinery insurance” is gradually being replaced with terms such as “equipment breakdown” or “mechanical breakdown” coverage. This insurance provides coverage against the sudden and accidental breakdown of boilers, machinery or equipment, including computer systems and telephones/communication systems. Coverage usually includes reimbursement for property damage, expediting expenses (ex. express transportation charges), and business interruption losses.

Builders Risk Coverage
Covers buildings in the course of construction. Depending on the policy, this coverage can be for either the building’s value at the time of loss or its full value at the time of completion.

Building Ordinance Coverage
Provides coverage when a community has a building ordinance stating that when a building is damaged to a specified extent (usually 50 percent), it must be completely demolished and rebuilt in accordance with current building codes rather than repaired. Special attention is required when establishing the amount of insurance.

Business Interruption Insurance
Covers the loss of earnings as a result of damage or loss of business property. Reimbursement for salaries, taxes, rents and other expenses plus net profits that would have been earned during the period of interruption can be included.

Commercial Crime Coverages
Covers money and securities, stock and fixtures against theft, burglary and robbery both on and off the insured premises and from both employees and outsiders.

Debris Removal Coverage
Covers the cost of removing debris after damage from fire or other covered peril that requires debris removal before reconstruction of the damaged building can being. This is not part of fire insurance coverage and must be added as an endorsement.

Fidelity Bonds
Covers business owners for losses due to dishonest acts by their employees.

Glass Coverage
Provides coverage for glass breakage such as store windows and plate glass on office fronts.

Inland Marine Insurance
Primarily covers property in transit such as from warehouse to warehouse or warehouse to retail store, as well as other people’s property left on your business premises, such as clothes left at a dry cleaning business or an employee’s personal effects left in the company locker room.

Insurance for Loss of Lease Income or Value
Covers the loss of income when rental property is damaged or destroyed and the loss of value when the owner of the rental property also used some of its space for business. If the tenant of the destroyed or damaged building is forced to rent space elsewhere at a higher cost, this is called loss of lease value.

Property insurance can be purchased on the basis of the property’s actual value, on its replacement cost or on an agreed amount. The differences between the three are:

Actual Cash Value
The replacement cost of the item minus depreciation. For example, a new desk may cost $500. If your 7-year-old desk gets damaged in a fire, it might have depreciated 50 percent. Therefore, you would be paid $250 for it.

Replacement Coverage
The cost of replacing an item without deducting for depreciation. So today’s cost for a desk of a size and construction similar to the 7-year-old one damaged by fire would determine the amount of compensation. If it costs $500 today, that would be the replacement coverage.

Agreed Amount
Art objects, antiques and other unique items are usually insured at an amount agreed upon when the policy is being written. An appraiser values the goods to be insured and the business owner and the insurer agree upon an amount that the insurer will pay if the goods are destroyed due to a covered peril.

Check your policy. If you prefer replacement coverage and do not already have it, this coverage can be added to your policy. Inflation-guard coverage, which automatically increases your insurance amount a certain percentage, protects against rising construction costs. Your agent can advise you of the costs involved.

Most business policies include a “coinsurance” clause stipulating that a percentage of the total value of your property must be insured in order to be fully reimbursed for a loss, even a partial one. (Most losses are partial). If you insure for less than that amount, your insurance company may impose a “coinsurance penalty” on your claim.

Here’s how coinsurance works:

Let’s say you have a building insured that you believe would cost $100,000 to replace and a coinsurance penalty in your policy of 80 percent. You insure the building for $80,000, thinking you have fulfilled the coinsurance clause. A fire loss causes $60,000 worth of damage, so you submit a claim. Your insurance company subsequently determines that the replacement cost of the building is actually $150,000. To determine how much to pay on the claim, the insurer divides the amount of insurance you purchased ($80,000) by the amount you should have purchased (80% of $150,000 or $120,000). The result (two-thirds, or $80,000) is the amount of your claim the insurer will pay.

Thus, even for a partial loss within the monetary limits of your policy, you will receive only two-thirds of the amount claimed. If the building had been insured for at least $120,000, the insurer would have reimbursed you for the full amount of the loss.

You should check with your agent to make sure you have adequate coverage. Adding an endorsement to the policy that automatically increases policy limits to keep pace with inflation is a good idea.

Remember that all insurance premiums are based on the risks involved. The insurance company evaluates the situation to determine the risks – or potential for losses – and bases its rates on the results. Therefore, deliberate steps you take to lower your risks not only can help safeguard your business but also may make you eligible for lower insurance rates. Consider these steps:

• Maintain adequate lighting throughout your business premises.
• Keep electrical wiring, stairways, carpeting, flooring, elevators, and escalators in good repair.
  • Install a sprinkler system, smoke and fire alarms, and adequate security devices.
• Keep only a small amount of cash in the cash register.
• Keep good records of inventory, accounts receivable, equipment purchases and the like. Consider keeping a second set of records off-site, such as with your accountant, insurance agent, at home or in a safe deposit box at your bank.
• Make sure your employees have good driving records.
• Make sure your employees know how to lift properly and use all necessary safety equipment, such as goggles, gloves, and respirators.
• Consider using the services of a risk manager. Such an outside consultant can advise you of any safety or environmental regulations you may have overlooked or not been aware of and talk to your employees about safety practices.
• You may also wish to raise your deductible where appropriate to lower your insurance premiums. How high to raise the deductible should be governed by how much you can afford to pay out of pocket. Be careful not to raise it so high that you cannot cover it should a loss occur.
• Finally, make sure your agent is familiar with your business and the risks inherent in it. He or she should be able to advise you on risk management techniques and their benefits to both you and the insurer.