Some Types of Insurance You Need to Protect Your Business

From the day an entrepreneur starts a business, he exposes himself to certain risks. Even before the first employee is hired, a business is at risk, making it important to have the right insurance in place. One lawsuit or catastrophic event could be enough to wipe out a small business before it even has a chance to get off the ground.

1. Professional liability insurance.

Professional liability insurance, also known as errors and omissions (E&O) insurance, covers a business against negligence claims due to harm that results from mistakes or failure to perform. There is no one-size-fits-all policy for professional liability insurance. Each industry has its own set of concerns that will be addressed in a customized policy written for a business.

 2. Property insurance.

Whether a business owns or leases its space, property insurance is a must. This insurance covers equipment, signage, inventory and furniture in the event of a fire, storm or theft. However, mass-destruction events like floods and earthquakes are generally not covered under standard property insurance policies. If your area is prone to these issues, check with your insurer to price a separate policy.

3. Workers’ compensation insurance.

Once the first employee has been hired, workers’ compensation insurance should be added to a business’s insurance policy. This will cover medical treatment, disability and death benefits in the event an employee is injured or dies as a result of his work with that business. Even if employees are performing seemingly low-risk work, slip-and-fall injuries or medical conditions such as carpal tunnel syndrome could result in a pricey claim.

4. Home-based businesses.

Many professionals begin their small businesses in their own homes. Unfortunately, homeowner’s policies don’t cover home-based businesses in the way commercial property insurance does. If you’re operating your business out of your home, ask your insurer for additional insurance to cover your equipment and inventory in the event of a problem.

5. Product liability insurance.

If your business manufactures products for sale on the general market, product liability insurance is a must. Even a business that takes every measure possible to make sure its products are safe can find itself named in a lawsuit due to damages caused by one of its products. Product liability insurance works to protect a business in such a case, with coverage available to be tailored specifically to a specific type of product.

6. Vehicle insurance.

If company vehicles will be used, those vehicles should be fully insured to protect businesses against liability if an accident should occur. At the very least, businesses should insure against third-party injury, but comprehensive insurance will cover that vehicle in an accident, as well. If employees are using their own cars for business, their own personal insurance will cover them in the event of an accident. One major exception to this is if they are delivering goods or services for a fee. This includes delivery personnel.

7. Business interruption insurance.

If a disaster or catastrophic event does occur, a business’s operations will likely be interrupted. During this time, your business will suffer from lost income due to your staff’s inability to work in the office, manufacture products or make sales calls. This type of insurance is especially applicable to companies that require a physical location to do business, such as retail stores. Business interruption insurance compensates a business for its lost income during these events.

By having the right insurance in place, a business can avoid a major financial loss due to a lawsuit or catastrophic event. Check with your insurer to find out what forms of insurance are advised for your type of business and put those plans in place as soon as possible

Know More About Business Interruption Insurance

The Chatham, N.J., resident, who operates three ecommerce websites selling sportswear, was reimbursed for $10,000 in storage and relocation costs after an early winter snowstorm in 2011 caused a week-long power failure and melting snow endangered $50,000 of inventory stored in her basement.

This fall, Superstorm Sandy brought a prolonged power failure that shut down Dorst’s customer-service lines, causing sales to evaporate. She’ll also see lower sales because of a month-long delay in the delivery of next season’s styles. Fortunately, her interruption policy will reimburse the profit Dorst lost because of those missed sales.

“That was real money last time, but nothing compared to what I’m going through now,” she says.

 Unlike Dorst, most business owners don’t have interruption insurance, says Richard McGrath, independent broker at McGrath Insurance in Sturbridge, Mass. Cost may be a factor in why entrepreneurs pass on such coverage: Policy prices range from $750 to $10,000 or more, depending on business size.

But businesses may want to reconsider interruption insurance given the rising number of natural disasters. The annual total has increased from 400 major incidents in a typical year to more than 600, according to a recent survey from global insurer Allianz.

Before getting interruption insurance, here are some issues to consider:

Common limitations
Most standard business insurance policies cover only loss or damage to tangible items — your equipment and inventory and your warehouse, office or store — and not lost profits if your business cannot operate.

To get business interruption coverage added to your business policy, you’ll need to document your current net income. If your net profits are substantial, beware of low per-incident limits — $30,000 per incident is common – because they might cap your coverage far below the amount you’d need, McGrath says.

Related: Picking up the Pieces: Sandy’s Impact on Small Businesses (Photos)

If your company is growing quickly, document many months of profits to demonstrate that income is accelerating. If you suffer an interruption, this will allow you to project that income would have continued to grow. Otherwise, the insurer may limit your coverage to the amount of the past year’s profits, says Bob Freitag, a public claims adjuster at AmeriClaims in Indian Trail, N.C.

Next, carefully note the types of interruptions you want to cover. Your interruption coverage will mirror what you covered in your main business policy, Freitag says. If you didn’t include flood coverage in your general policy, for instance, you won’t have interruption coverage for flooding, either.

Note that loss of utilities is often excluded from standard interruption policies, especially downed electric transmission lines — the very issue that has bedeviled East Coast business owners post-Sandy. If you want that covered, Freitag says, you will need to add a rider to your policy.

Calculating coverage
To figure out your ideal coverage amount, you should envision how your business would be affected by a catastrophe, McGrath says. To start, examine all the costs that would continue even if your business couldn’t operate, such as loan or lease payments and taxes. Also, note charges that might cease, such as utility service to a destroyed building.

If you would want to keep workers on the payroll while you rebuild your factory or store to avoid losing skilled labor, your insurance should reimburse you for their salaries.

Additional coverage
Even standard business interruption coverage doesn’t take care of every possible disaster cost. If you leave a destroyed warehouse and rent one that costs more, interruption insurance will cover only the old rate, McGrath says. Likewise, building replacement may be more expensive than expected due to new codes and modern materials costs. To cover these, you need an “extra expense” rider, Freitag says. It’s that type of provision that reimbursed etailer Dorst for the cost of moving her inventory in last year’s storm.

Your business is also at risk when related businesses are affected by disaster. For instance, an explosion at your website host’s server farm could take your site down or a key supplier may be unable to deliver if it’s wiped out in a hurricane. These events hurt your financial results even though your facility may be undamaged. “Contingent business” insurance covers your lost profits in these disaster scenarios, McGrath says.

Getting reimbursed
Insurers will generally exclude the first few days after a disaster from their calculations, so put aside what you’d need in cash to cover those costs, Freitag says. Then, furnish your insurer with extensive documentation of your lost profits. Consider saving your records electronically off-premises or storing printed copies elsewhere, so you’ll still be able to prove your losses even if your main facility is destroyed

Home Business Need Insurance

Driving to clients’ homes always made Brandi Greygor nervous. As the owner of Sassy Mama Boutique, Greygor often drove as much as $10,000 in women-and-kids’ clothing and accessories to home parties and exhibition halls. She would set up merchandise, which then sat overnight unattended before an event took place.

“That $10,000 of wholesale merchandise is $20,000 to $30,000 of income, if I were to lose that,” says Greygor, who is based in Union, Ky. Her 1-year-old home-based business was uninsured for more than nine months until April, when her worries about her risks led her to purchase insurance coverage.

 Sassy Mama’s story is a common one. Sixty percent of home-based businesses lack adequate business insurance, according to the Independent Insurance Agents & Brokers of America, based in Alexandria, Va.

Related: How to Create a Productive Home Office Space

One reason owners forgo insurance is confusion over what may be already covered by a homeowner’s or a renter’s policy. But most home-business owners have little or no coverage from their homeowner’s policy. What’s more, if you file a homeowner’s (or renter’s) claim for losses sustained by a previously undisclosed home-based business, your insurer may refuse to cover it or cancel your policy, says Ryan Hanley, an insurance agent at Murray Group Insurance Services in Albany, N.Y. At best, you might receive a small reimbursement.

“People do not realize that if the UPS guy comes to your door with a business package in his hand and slips and hurts himself, there is no coverage for that injury in their homeowner’s policy,” Hanley says.

If you’re doing business at home, you’re smart to have insurance. The amount of your sales doesn’t matter. The amount of loss you could face should something go wrong is what counts.

So how can an entrepreneur protect a home-based business? Start by insuring your business right away. You can choose from one or more of these three basic types of insurance, depending on your business’s complexity and type.

1. Rider to a homeowner’s or renter’s insurance policy
The most inexpensive home-based business insurance is an add-on or rider that expands a homeowner’s or renter’s policy to cover the company. The cost of such a rider is minimal — perhaps $100 a year — but it generally provides about $2,500 of additional coverage, says Loretta Worters, vice president of the Insurance Information Institute in New York City, an industry trade group and information clearinghouse.

This type of insurance may be appropriate for a one-person business without a lot of valuable equipment or many business-related visitors, and unlikely to suffer a major loss if unable to operate for a while as a result of fire or another disaster. Such coverage may work, for example, for an accountant who works at home preparing customers’ taxes and delivers the returns via email, Hanley says. But it could leave a home-based business owner on the hook for costs such as a large medical bill for that injured UPS man.

2. In-home business policy
An in-home policy covers a broader spectrum of contingencies, including loss of critical documents or theft of funds being taken to the bank for deposit. An in-home policy, issued by a home insurer or a specialty firm, usually is a plan against injury or theft covering as many as three employees, Worters says. Rates typically run from $250 to $500 and the plans can cover as much as $10,000 in losses.

Most serious home-based business owners may want to consider picking up at least an in-home policy, says Rebekah Marshall, multiproduct insurance manager at the National Federation of Independent Business. “This covers business equipment and liability [for injury],” she says. “That’s important if people are coming in and out.”

Related: When Every Office is the Home Office

If you’re interested in an in-home policy, you’ll need to find one that will cover your business type in your state. Each state sets its own rules about the insurance coverage that can be offered to home-based businesses. In general, given the low coverage amount, purchasers of in-home policies often operate low-revenue or part-time businesses.

3. Business owner’s policy
Entrepreneurs who need more than $10,000 of coverage should pay for a business owner’s policy. This comprehensive policy is what brick-and-mortar retailers, among other businesses, use, Marshall says.

Circumstances usually covered by this type of plan include damage to or loss of business equipment and other assets, liability for customer injuries, loss of critical records, malpractice or professional liability claims, and loss of income or a business interruption in the case of a power outage or a natural disaster. Such a policy might also protect you when driving a personal vehicle for business purposes.

This insurance protects against a higher amount of loss than a homeowner’s policy rider or an in-home business policy. Videographer Logan Hale, owner of 2-year-old Your Little Film in Los Angeles, paid about $500 for a $2 million business owner’s policy to cover his $25,000 of equipment against breakdown, theft or damage. His plan also covers loss or damage to home movies sent to him by customers, as well as injury or property damage inside a client’s home or public venues. He shopped around a bit before Los Angeles-based Farmers Insurance agent Rodney Pyle found a specialized policy for videographers, he says.

“As I started increasingly going into people’s homes to shoot, it really pushed me to say ‘2011 is about getting covered,’ ” he says. “Now I feel so much safer, knowing I’m not putting my family at risk for a possible lawsuit.”

Related: How To Create a Home Office on a Budget

As your company grows, it may require additional coverage not covered by a business owner’s policy, Marshall says, such as life insurance, workers’ compensation, and business-vehicle insurance. But for most small businesses, the business owner’s policy can provide a suitable basic safety net.

Business owner’s policy “is an investment in the business you should make if you’re serious about what you’re doing,” Marshall says.

Greygor is relieved that Sassy Mama is now covered by the business owner’s policy she purchased in April, especially the protections in case a customer is harmed by a product, she says. Like Hale’s, her policy has $2 million worth of coverage.

“I’m a mom,” she says, “and I wouldn’t ever want to be looking at another mom and saying I don’t have enough coverage for [her] injured child to be taken care of.”