Some Insurance Gambles That Put Your Business at Risk

Much like sunscreen, business insurance is one of those things you don’t realize how important it is until you’ve been burned: A lot of entrepreneurs don’t have it, and those who do, may not be fully covered.

While large corporations have staffers specifically trained to be sure the business is protected adequately, small business owners are often not aware of the risks their business faces.

 “Smaller businesses tend not to get the right amount of coverage,” says Loretta Worters, vice president of the Insurance Information Institute, an industry trade group that aims to educate the public about insurance. “They will get too little or not the right coverage.”

Here, three of the most common mistakes to avoid when deciding on business insurance.

1. You view insurance as one-size-fits-all. Think again. There are four basic types of insurance that all businesses need, according to Worters. Property insurance protects the building that your business is housed in and the inventory, raw materials and computers that you own. Liability insurance protects you against lawsuits. Business vehicle insurance covers any autos owned by the business. Finally, in every state except Texas, a business with employees must have workers compensation insurance should an employee be injured on the job.

In addition, every industry has its own specific risks and your business may require a specialized policy. “You need to get an agent that understands your line of business,” says Worters, noting that you should talk to an agent before just signing up with one. Ask a local business group or association for a recommendation.

2. You think you’re covered by another policy. “The biggest mistake [business owners] make is they assume they don’t need coverage,” says Ted Devine, CEO of Dallas-based Insureon, an online small-business insurance agency. He says business owners often falsely believe their company is covered by their client’s policy or they’re no longer at risk when a client leaves. Not true, according to Devine. A client can come back and sue you years after an event or transaction occurs, he warns.

And don’t think your homeowner’s policy will bail you out, either. Even if you have a home-based business, a homeowner’s policy won’t protect it should you get into any legal issues with employees or business litigation. Whether the homeowners’ policy will protect your business property in your home depends on the policy, says Devine.

3. You think you’re invincible. Worters says many businesses don’t even consider what is called either business income or business interruption insurance. If a natural disaster hits, for example, and your business closes, your revenue can be immediately shut off for an undetermined amount of time, and that can really threaten the life of your business.

Know More About Raise prices to increase profits

I know at first glance this sounds obvious, but it may be worth it for you to think about your prices. At least just for a moment.

How did you decide on your current pricing? Did you conduct market research to understand what prospects would pay? Or did you compare yourself to your competitors and base your price on that? Or was it a crapshoot, and random shot in the dark?

 

These are the ways most people do it, and they are all wrong. Because the price you set for your products and services is more important than you think.

The following few paragraphs are a bit number heavy, but stay with me because this will be really valuable for you to understand.

More Pricing Help
Find more articles on how much to charge for your products and services in our special section on pricing.

Let’s say you sell a high margin product – information products and software are two good examples. Your price is $60, and your costs are $10 – that means your gross margin (selling price – your costs) is $50 each time you sell one unit. Let’s say further that your overhead is $5,000 per month. If you sell 100 units you’ll break even, right?

Now you want to sell more, and decide you can take some business from a competitor by lowering your price – temporarily. You lower it to $40 – a 33% price cut, and not uncommon.

Your costs remain $10 and your overhead is still $5,000, only now your gross margin is $30 – 60% of what it was before. And how many units do you need to break even now? 166! That’s 66% more unit sales required to make up for the 33% price cut!

But what if you’re feeling very aggressive and you cut your price in half (also not unheard of) to $30. Now you have to sell 250 units – just to break even! That’s 2-1/2 times as many as before. How easy do you think that’s going to be?

Let’s use a different example – something that has real manufacturing costs. This time, your product sells for $100, and your cost of goods are $50 per unit, for a gross profit of $50. Same $5000 overhead, same number of units to break even. Now imagine you cut your price 20%, to $80, leaving you with $30 of gross margin. You need to sell 66% more units. Ouch!

What if you cut the price to $70. This 30% price cut means you have to sell 2-1/2 times more units – just to stay even.

Let’s go further…

Competition is really heating up and you think that matching them cut for cut is the way to go. The price for this amazing widget of yours is now a bargain basement $60.

(Shucks, that’s only 40% off your original price. Salespeople and business owners do this every day.)

How many units do you need to break even? 500.

Five hundred? That’s five times your original number.

Do you really think you can sell five times what you did before – at least without significantly raising your overhead and your variable cost of sale?

How many times have you done just this in response to competitive pressures?

How many times have you cut prices because you thought it would help you sell more?

What we’ve just done is a simplified version of what’s called margin analysis, and I hope it gives you a glimmer of what can happen when you mis-price.

For the most part, your price cuts don’t automatically enable you to sell 66% more than you did before, and generally – at least not in this universe – you don’t sell 250% more, and never, ever do you sell 500% more with this kind of price cutting.

But there is some good news – and it’s very good.

Let’s look at what happens when you raise your prices.

Remember your high-margin product. It sells for $60 and costs $10 to make.

Through good product positioning and excellent marketing you raise the price to $70. That’s only a 15% increase. Now you only have to sell 83 units to break even, and if you sell the same 100 units, your profits go from $0 to $1000. Nice increase…

And that “hard” product – the one with $50 of costs? Raise the price tag 20% to $120, your margins increase to $70, and now your breakeven drops 71, and you make $2000 if you sell the same number of them.

See how this works?

You can do this same analysis in a bit more sophisticated way, considering your marketing costs, sales or affiliate commissions, travel expenses if you have them, and so on. You can see the actual pricing effect varies quite a bit depending on these details.

If you have a high-leverage, pay-only-for-results affiliate model, a very high gross margin and almost no fixed overhead, you have a lot of price flexibility. You can cut the price 25% and only need to sell 15% more! That’s not too bad at all.

But only in that type of model. If you have a office, some staff, and a physical product – in other words, fixed overhead – lower prices can kill you – and you won’t even see it coming.

And higher prices?

They can make you rich.

By now you are starting to see the tragic effects of mis-pricing on the downside, and the marvelously enriching possibilities of raising your prices

Some Tests to Qualify for a Small Business Loan

Want to get a small business loan? Banks and other lenders are really only concerned about one thing; getting repaid. After all, that is how they still make the bulk of their revenue; making loans and getting repaid both interest and principal. Thus, to qualify for a business loan, you simply have to demonstrate that your business can service the loan request – meaning being able to make the loan payments for the life of the loan.

Most lenders will perform the following three analysis calculations to determine if your business has the cash flow to service the proposed new loan.

1) Spread The Financials:

Banks / lenders will require three years of past financial statements at a minimum.  The reason is to see if your business could have serviced the loan over the last three years.  If it passes this test, then your business should be able to service the loan for the next three years.

Thus, they use your past business performance to determine what your future performance should be.

To spread your financial, most lenders will do the following for each past period that your business provided financial statements:

  • Take your net income (that is your net profits after all operating costs, taxes and interest payments).
  • Add back any non-cash accounting items like depreciation (deprecation is not an ongoing cash expenses but an accounting anomaly to reduce taxable income for tax reporting purposes only).
  • Add back any one-time charges or expenses – expenses that are not expected to reoccur in the future.
  • Then subtract out the interest charges for the proposed loan – only the interest portion at this stage as interest payments are considered regular business expenses.
This results in the true net positive (hopefully positive) cash flow of the business – cash flow that will be used to pay the principal portion of the business loan.

Now, if your business’s cash flow at this point can cover the principal portion of the loan, you have almost passed this test.

Most lenders will not just want to see if your business’s cash flow meets the minimum principal portion of the proposed loan but would like it to cover 25% or even 50% more.  The reason is that should your business have a slow period and revenues decline by say 25% or 50%, your business’s cash flow would still be sufficient to make the loan payment.

Example:  Your business requests a $100,000 loan for three years with a monthly payment of $3,227 – broken down as interest of $449 and principal of $2,778. Therefore, your monthly cash flow should not only cover the $2,778 in principal but say 1.25 times more or $3,473.

Also, keep in mind that this cash flow figure should not only cover the proposed loan’s principal but the principal payments of all the business loans the company has.

Principal payments are not income statement items and are not accounted for based on normal operating income and expenses but are balance sheet items and are paid out of net income (after all operating expenses). Interest charges from loans are an operating expense and accounted for when the financials are spread. Financials could be spread monthly, quarterly or even annually – depending on the types of financial statements requested or the policies of the lending institution.

If you can pass this test via your past business performance, then it is highly expected that your business will do the same in the near future.

2) What If Scenarios:

Here, the lender will perform a series of “what if” scenarios on your financial statements.

For example, they may take your total revenue per period and reduce it by 10% or 20% – keeping all other items (your expenses) the same. Then, spread those numbers again to see if your business could still service the proposed loan, i.e., still have the cash flow to make the payments. Again, reassuring the bank or lender that your business would still be able to repay them should your business hit a slow period.

3) Debt-to-Equity Ratio:

Lastly, while your business may be able to service the proposed loan’s payments, banks also want to ensure that your business is not over leveraged – meaning that your business does not have too much debt in comparison to its equity.

Let’s say that the entire market declines or crashes and your revenues fall so low that you are forced to shut down the business.  In this situation, would you still be able to repay all your lenders – including this proposed loan? Thus, lenders look to a safety measure known as the debt-to-equity ratio.

Measuring your debt-to-equity is simply taking your Total Liabilities and dividing them by your company’s total equity. The higher this ratio, the more risk the business has as it is relying on too much outside debt financing. A ratio over 3 (meaning that the business has three times the debt as it does equity) is too much risk for most lenders to feel comfortable with. Most businesses will have a debt-to-equity ratio between 1.5 to 2 and are considered safe to their prospective lender.

Now, if your business does not pass all these tests with flying colors and you still need a small business loan to grow, then it is up to you (the business owner) to manage your company in such a way to bring your business in line with these tests.

It all starts with your understanding of your business and the measures it has to pass to qualify.

All About Insurance Tips

  • Premiums for fire, casualty and burglary insurance on business property are all deductible for tax purposes as trade or business expenses. If a business taxpayer has a self-insurance plan, however, all payments into the self-insurance reserve will not be tax-deductible for purposes; the actual losses incurred by the taxpayer would be the deductions.
  • Premiums for life-insurance are tax-deductible. But premiums paid on a policy covering the life of an officer, employee or other key person are not deductible if the business is a direct or indirect beneficiary under the policy. Premiums paid on a life insurance policy of which the business is a beneficiary are not deductible, since life-insurance proceeds would not have to be included in taxable income when received by the company.

  • Before speaking with an insurance representative, write down a clear statement of your expectations.
  • Do not withhold any important information from your insurance representative about your business and its exposure to loss. Treat the individual as a professional helper.
  • Get at least three competitive bids using brokers, direct agents and independent agents. Note the interest that the representative takes in loss prevention and suggestions for specialty coverage.
  • Avoid duplication and overlap in policies; you will be paying for insurance you do not need.
  • Ask your insurance firm if it’s an “admitted insurance company.” If so, it should have a solvency fund should a catastrophe put the insurance company in danger of going under. An unadmitted carrier has no such solvency fund.
  • The small businessperson should not consider any form of self-insurance. The pool of funds necessary to safely insure losses is extraordinarily large.
  • Get your insurance coverage reassessed on an annual basis. As your firm grows, so do your needs and potential liabilities. Underinsurance ranks as a major problem with expanding firms. Get an independent appraiser to value your property; if it has been more than five years since it was last appraised, chance are you’re in for a surprise.
  • Keep complete records of your insurance policies, premiums paid, itemized losses and loss recoveries. This information will help you get better coverage at lower costs in the future.

Insurance Losses

  • Virtually all policies require notification of an accident within 24, 48 or 72 hours of the incident. The claim itself does not necessarily have to filed at this time. Failure to report the loss may nullify your right to recovery.
  • There must be come proof of loss, though you will have a reasonable period to provide documentation if needed.
  • The insurer usually has three options when it comes to fulfilling the terms of a replacement policy: paying cash, repairing the insured item, or replacing the insured item with one of similar quality. Don’t hesitate to let the insurer know if you prefer one of these reimbursement methods.
  • Disputes regarding the amount of the settlement are put to arbitration. Thus an independent appraiser acts as judge in the conflict Don’t hesitate to use this system of resolving differences. If a compromise cannot be found, a lawsuit can be initiated.

Need Key Man Insurance

Q: What is key man insurance, and does my new business need it?

Key man insurance is simply life insurance on the key person in a business. In a small business, this is usually the owner, the founders or perhaps a key employee or two. These are the people who are crucial to a business–the ones whose absence would sink the company. You need key man insurance on those people!

 Here’s how key man insurance works: A company purchases a life insurance policy on the key employee, pays the premiums and is the beneficiary of the policy. If that person unexpectedly dies, the company receives the insurance payoff. The reason this coverage is important is because the death of a key person in a small company often causes the immediate death of that company. The purpose of key man insurance is to help the company survive the blow of losing the person who makes the business work. The company can use the insurance proceeds for expenses until it can find a replacement person, or, if necessary, pay off debts, distribute money to investors, pay severance to employees and close the business down in an orderly manner. In a tragic situation, key man insurance gives the company some options other than immediate bankruptcy.

If the company is just you and doesn’t have any employees or other people who depend on it, then key man insurance isn’t as necessary. You’ll notice that I didn’t mention your family–don’t confuse key man insurance with personal life insurance. If you have a spouse and/or children who depend on your income, then you should have personal life insurance for that purpose.

How do you determine who needs this insurance? Look at your business and think about who is irreplaceable in the short term. In many small businesses it is the founder who holds the company together–he may keep the books, manage the employees, handle the key customers and so on. If that person is gone, the business pretty much stops.

How much key man insurance do you need? That depends on your business, but in general you should get as much as you can afford. Shop around and get rates from several different agents; most life insurance agents will sell you a key man policy. Be sure to ask for term insurance–many agents will push whole or variable life, which have much higher premiums and commissions but are unnecessary for a key man policy. Ask for quotes on $100,000, $250,000, $500,000, $750,000 and $1 million and compare the costs of each. Then think of how much money your business would need to survive until it could replace the key person, come up to speed and get the business back on its feet. Buy a policy that fits into your budget and will address your short-term cash needs in case of tragedy.

Let me share an example from my own personal experience. My brother-in-law started a golf vacation business in the winter of 1997. Tommy worked many long hours for almost three years, and it looked like all his hard work was paying off. Then one night he was killed in a car wreck. He was 35 years old. As my wife and I tried to deal with the magnitude of that loss, we also had Tucker Golf’s employees, vendors and customers to think of. No one planned for this to happen. But it did happen, and we had to pick up the pieces. Tommy did not have key man insurance, and the company struggled for almost two years before it recently got back on solid footing. While key man insurance wouldn’t have brought Tommy back, it would have taken a major worry away from his grieving family and employees.

Most people, particularly when they’re young, don’t plan on dying suddenly. If you are working to start or grow a small business, you’ve got plenty on your mind, and chances are you haven’t thought much about key man insurance. But take it from my experience: By the time you need it, it is too late to do anything about it. Call an insurance agent today, figure out how much key man insurance your company needs and buy it!

Some Mistakes Business Owners Make Filing Insurance Claims

Now that Hurricane Irene is done pummeling the Eastern Seaboard, affected business owners will move on to the next phase: trying to figure out if insurance will cover their losses.

Here are the top seven mistakes business owners make in filing insurance claims:

 1. Not contacting your insurer immediately. Many people make the mistake of cleaning up damage before an insurance representative visits the business. This creates confusion about how bad things really were, and you may find that labor you did or paid for is disallowed if it preceded an insurer’s inspection. In a disaster situation, many insurers have a quick-response team that will come out to survey the situation.

2. Not documenting the damage. Often, repairs must begin immediately to prevent additional damage, or equipment must be moved to a new location. If so, be sure to photograph the original scene to document how it was before you started your cleanup effort. Also take photos of any repairs you make.

3. Not keeping damaged goods. If your business cleanup includes removal of items such as water-damaged merchandise, flooring or insulation, keep it all, even if it has to pile up in the parking lot. The damaged materials are all evidence of the impact of the disaster on your business.

4. Not appealing your insurer’s lowball estimate. Your insurer will give you a damage estimate after surveying your business. If you think it’s too low, you can appeal. Hire your own adjuster to do a second estimate. Usually, an impartial, third-party mediator will then be employed to make a final decision on the payment amount.

5. Not reading your policy. It’s a common myth that if you have insurance for a building, you must have coverage for flooding, earthquakes and all other possible calamities. But often, it’s not true. In earthquake-prone states, for instance, this coverage often must be obtained on a separate policy or rider, and flood insurance is only offered through the National Flood Insurance Program. Don’t waste time submitting claims to your private insurance policy if it won’t cover you for the disaster you’ve just suffered.

6. Counting on FEMA for quick help. If your business is in a federally declared disaster area, federal aid will be available. But you can ask survivors of Hurricane Katrina how maddeningly slow this aid moves. It might provide homeowners with temporary shelter and eventual money to rebuild. But for a business owner, your private insurance will be your best chance at receiving money fast enough to reopen before all your customers drift away.

7. Not preparing ahead of time. Obviously, the aftermath of a disaster goes more smoothly if you are ready to swing into action when trouble hits. Start with reviewing your policy to make sure you have adequate coverage. Then be prepared. Do you know where your insurance policy is kept? Is it handy, where you could grab it if you had to leave suddenly? Is an extra copy in a safe deposit box where it would be safe from flooding or fire? Do you have your insurance agent’s number programmed into your phone? It’ll prevent delays if you have your information handy

How to Protect Your Business with Credit Insurance

Managing your company’s cash flow is a tough task when you’re not sure your clients will pay what they owe. Rather than take a chance, consider credit insurance.

“Credit insurance has been around, but up until recently, it was really a very expensive proposition and really not affordable for small businesses,” says Michael Zeldes, a senior vice president of HUB International Northeast, a business insurance broker.

 These policies, also known as business credit insurance, trade insurance, bad debt insurance or accounts receivables insurance, may be a worthwhile investment, especially in this rocky economy.

How Credit Insurance Works
Credit insurance is appropriate for any business that extends credit to its clients.

Zeldes offers this example: Say a company has 50 customers and it sells widgets. Of those 50 customers, the widget-maker feels 20 of those companies are their most important customers because they buy the most merchandise.

The widget-maker can identify which of those companies they’re most concerned about, perhaps because of past late payments or non-payment, or simply because of the amount of extended credit. The underwriter for the credit insurance policy will investigate those specific clients and approve the ones the policy would cover.

One of the biggest benefits: The underwriters will continue to monitor the financial health of those companies over time. You’ll get regular reports from the insurance company about your clients, so if the client encounters financial difficulty, you’ll learn about it quickly.

It could really help you stay in business,” says Michelle Dunn, credit and debt collection expert and author of the Collecting Money book series.

The Cost
During a recession, you might be thinking that insurance costs are a luxury you can’t afford, but there’s no downside to applying.

“It’s sort of a no-brainer,” Zeldes says, because underwriters are very willing to evaluate the risks presented by your clients for free, and no one gets paid unless you buy a policy.

You can also control the cost of the policy by deciding how many clients you’d like to cover, and which insurer to use. Depending on the policy, you can choose how many days late a payment has to be before the policy kicks in. You can also select the percentage of the unpaid invoice the policy would pay.

Other Financial Safety Nets
If you extend credit for your clients but you’re not ready for credit insurance, the only other options is to do your own due diligence. Do what you can to check the credit worthiness of a company before you extend credit, said Dunn, but that can be a challenge.

“You can do your own risk management. Only do business with those you know will pay you,” Dunn says. “In a good economy, you might say that you could sell to anyone, but in a bad economy, who knows if even Wal-Mart is a good bet.”

Small Business Owners Can Win the Health Insurance Game

According to the 2012 U.S. Census, there are 28 million small businesses in the U.S., employing 52.6 million Americans — all of whom need health insurance. While small businesses with fewer than 50 employees are not required to provide health insurance coverage, many see it as an important tool to recruit and retain top talent.

SHOP’s shortcomings have been well documented, starting with the delay of initial enrollment by a year due to technical glitches, which still remain for many state exchanges. The requirement that employers offer a selection of options has also been postponed until at least 2016. Because of this delay, small businesses in 18 of the 32 states with SHOP exchanges are able to offer only one coverage option to employees.

On top of this, employers find the tax credit system — one of the more compelling reasons to use SHOP — difficult to navigate. Given these issues, it’s no surprise that a recent report by the Government Accountability Office acknowledged that SHOP will likely undershoot by a significant margin its 2015 target of two million signups.

It’s clear SHOP is not the solution for many small-business owners or their employees. After years of rate increases on group insurance and premiums that often cost more than rent, this isn’t just a benefits problem — it’s a business problem.

Because SHOP has been postponed, many small-business owners think their only choice is to stay with the current group insurance market. The ACA, however, offers another option that can provide their employees more personalized health coverage and can save employers significant money. More and more small-business owners are offering employees a one-time “raise” to buy their own health coverage in the individual market. A small increase in pay — combined with government subsidies, for those who qualify — can allow employees to pay even less than they would otherwise pay under group insurance.

Related: What the Self-Employed Need to Know About Obamacare

Going outside the traditional group market also provides employees with greater choice of coverage for their unique circumstances and regardless of prior health history, thanks to the ACA. The benefits are clear for small business owners, too: Allowing employees to purchase individual coverage helps moderate business expenses, making them more predictable and manageable.

To provide some context: The average group insurance premium is around $6,000 per year for a single person and $16,000 per year for a family. On the individual market, the average premium is $984 per year ($82 per month) after subsidies. It’s undeniable that individual health insurance often costs less than group coverage.

With individual subsidies widely available for families of four with annual household incomes of up to approximately $95,000 and the freedom for each employee to choose from thousands of plans to get the exact coverage they need, the appeal of transitioning to the individual market as a small-business owner is clear. WellPoint, a large health insurance carrier, reported insuring 300,000 fewer people in small-group health insurance plans in 2014. Instead, people opted for — you guessed it — individual plans.

Employer-based coverage will continue to be the largest source of health insurance for Americans, and the government correctly recognizes that small businesses can be a key provider of employee coverage if given the right tools. That being said, the SHOP program fails to meet the needs of many small-business owners, who will continue to explore their options on the individual market.

As a country we’re already investing in the ACA, which appears to be working on the individual level. Instead of investing in a program with little utility — SHOP — consider doubling down on the individual market. Small business owners should be aware of how it can help them secure the health of their employees and the financial prospects of their business

Some Type of Insurance You Need for Your New Business

One of the most common mistakes startup business owners make is failing to buy adequate insurance for their businesses. It’s an easy error to make: Money is tight, and with so many things on your mind, protecting yourself against the possibility of some faraway disaster just doesn’t seem that important, but it doesn’t take much to destroy everything you’ve worked so hard to build. Following is a closer look at the types of business insurance most entrepreneurs need.

The basic business insurance package consists of four fundamental coverages—workers’ compensation, general liability, auto and property/casualty—plus an added layer of protection over those, often called an umbrella policy. In addition to these basic needs, you should also consider purchasing business interruption coverage and life and disability insurance.

 Workers’ compensation, which covers medical and rehabilitation costs and lost wages for employees injured on the job, is required by law in all 50 states. Workers’ comp insurance consists of two components, with a third optional element. The first part covers medical bills and lost wages for the injured employee; the second encompasses the employer’s liability, which covers the business owner if the spouse or children of a worker who’s permanently disabled or killed decides to sue. The optional element of workers’ compensation insurance is employment practices liability, which insures against lawsuits arising from claims of sexual harassment, discrimination, and the like.

Generally, rates for workers’ comp insurance are set by the state, and you purchase insurance from a private insurer. The minimum amount you need is also governed by state law. When you buy workers’ comp, be sure to choose a company licensed to write insurance in your state and approved by the insurance department or commissioner.

Comprehensive general liability coverage insures a business against accidents and injury that might happen on its premises as well as exposures related to its products. For example, if a visiting salesperson slips on a banana peel while taking a tour of your office and breaks her ankle,.general liability covers her claim against you. Or let’s say your company is a window-sash manufacturer, with thousands of window sashes installed in people’s homes and businesses. If something goes wrong with them, general liability covers any claims related to the damage that results.

There’s one difficulty with general liability insurance: It tends to have a lot of exclusions. Make sure you understand exactly what your policy covers … and what it doesn’t. You may want to purchase additional liability policies to cover specific concerns. For example, many consultants purchase “errors and omissions liability,” which protects them in case they are sued for damages resulting from a mistake in their work.

If your business provides employees with company cars, or if you have a delivery van, you need to think about auto insurance. The good news here is that auto insurance offers more of an opportunity to save money than most other types of business insurance. The primary strategy is to increase your deductible; then your premiums will decrease accordingly but make sure you can afford to pay the deductibles should an accident happen.

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.

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 carefully review the policy’s exclusions. All policies cover loss by fire, but what about hailstorms or 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. 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.

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.

Additional 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 type of coverage, which can provide enough to meet your overhead and other expenses during the time your business is out of commission.

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. The life insurance policy should also 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 person” insurance. 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.

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.

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

Some Types of Insurance You Need for Your Import / Export Business

You’ll need insurance for many aspects of your import/export business, from employees to cargo. Read on to find out more.

Insuring your employees

Once you hire employees, you’ll need to think about caring for them. Workers’ compensation insurance laws vary among states; check with your insurance agent for details in your area. Workers’ comp covers you for any illness or injury your employees might incur on the job. If your employees work in your home office and get injured there, your homeowners’ insurance may refuse to pay on the grounds that it’s actually a workers’ comp case. Check with your insurance agent regarding what you need, then make an informed decision.

Export credit risk insurance

Thanks to the Export-Import Bank of the United States, you can purchase several types of export credit risk insurance designed specifically for the newbie exporter and small- to mid-sized enterprises. These policies protect you in the event that your foreign buyer decides not to pay you for either commercial or political reasons. The Ex-Im Bank (and the United States) hope policies such as these will encourage both you and your financial institution to take on higher-risk foreign markets.

Your menu options at Ex-Im are the following:

Small-business policy. This multibuyer policy requires that you insure all your export credit sales with Ex-Im; it’s designed to free you from the “first-loss” deductible of most commercial policies. To take advantage, you must have an export credit sales volume of less than $5 million in the past three years before application, your company must qualify as a small business under the Small Business Administration’s definition of the term and you must have been in business at least one year with a positive net worth. How do you find out if you qualify? Call the SBA’s Office of Size Standards at (800) 827-5722, or check its website.

Umbrella policy. This policy boasts the same coverage and eligibility as the small-business policy above, but it allows you as an export management company or export trading company to act as an adminis­trator or intermediary between Ex-Im and your clients.

Short-term single-buyer policy. This one, which covers a single or repetitive sale, is for the exporter who doesn’t want to insure everything with Ex-Im. A special reduced premium is offered to small businesses.

Cargo insurance

When it comes to cargo insurance, to mangle a well-known advertising maxim, “Don’t let your merchandise leave home without it.” The cost of the insurance usually runs about 1 percent of the insured value, although this varies with the type of goods and method of shipping.

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What do you get for your money? Peace of mind, for one thing, as with all insurance. And, in the event of a cargo misadventure, your insurance coverage should include enough to repay you for not only lost or damaged products but for your extra time and trouble and those lost profits. You’ll want to purchase all-risk insurance, which covers your cargo against everything except man’s inhumanity to man — war, strikes, riots and civil commotion — and inherent vice in the cargo. What is vice, you ask? It refers to any sort of plague or pestilence that might attack your cargo, such as boll weevils in those gorgeous cotton blankets or E. coli on your Texas steaks.

You might also want to consider general average insurance. This protects you in the event of someone else’s cargo loss. Say the ship carrying your containers runs afoul of stormy weather. The captain decides to jettison a portion of the cargo to save the rest, and they dump somebody else’s stuff into the briny deep. Fine, you say. Not quite. According to maritime law, even though your merchandise has made it to port safe and sound, you can’t take possession until you’ve paid for your share of the loss.

Let’s look at another scenario. Say the other party in your transaction has purchased insurance — for example, the exporter who’s shipping to you CIF (cost, insurance and freight) but you’ve got a funny feeling that their coverage isn’t too reliable. Not to worry. You can purchase a contingent policy, which is about half the price of regular insurance and will serve as backup insurance in the event of a catastrophe.

As a newbie trader, your best bet will be to purchase insurance through your freight forwarder, who has a blanket policy, or directly from the air carrier. As you grow, you may wish to purchase a blanket policy of your own, which will cover you for everything you ship over the course of a year.

Avoiding insurance claims

Out on the high seas, your cargo may be subjected to rough and stormy weather. On the docks, it can be equally buffeted about by tough longshoremen. What can you do to help ensure your cargo doesn’t become a marine insurance claim?

1. Pack with dock loading and unloading procedures in mind. Your cargo may be slung around (or skewered) by anything from a forklift to a sling or net, and then, if it survives that, left outdoors to rot. Often, cargo is “stored” on port decks or out on airplane cargo tarmacs, without any covering. If you’re unfamiliar with overseas port operations and don’t have the right packaging, you can lose cargo.

2. Pack to expect Mother Nature’s worst. Container loads can shift during heavy seas and storms. Someone else’s cargo can smash into yours — or vice versa. A sea voyage may be good for a human’s health, but it can be murder on merchandise. Think heat and humidity, salt air (which is incredibly corrosive), rain and sea spray. When any or all of this gets into your containers, you can end up with rust, blistering, mold, mildew and moisture damage.

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3. Pack to expect human nature’s worst. Some people just can’t resist somebody else’s goods. Theft can be a problem, especially when containers are left on the docks for a long time.

With all these potential disasters in mind, pack smart. Use adequate packaging materials; make sure your merchandise is cushioned against blows. Waterproof everything possible. Have package exteriors shrink-wrapped. Use waterproof lining on interiors. Coat exposed metal parts on machinery, for example, with grease or some other rust arrester. Use heavy strapping and seals. Discourage theft by eliminating trademarks or content descriptions on container exteriors