Insurance

Definition: Protection against loss for which you pay a certain sum periodically in exchange for a guarantee that you'll be compensated under stipulated conditions for any specified loss by fire, accident, death, etc

Let's face it: Starting and running any type of business has risks. Recognizing the risks in all areas of your business--management, marketing, contracts, personnel and the particular ramifications of your product or service on customers and the market--is the first step in effective risk management.

One of the smartest moves any business owner can make is having enough of the right kinds of insurance. Not only does this protect your business's assets from risks that could very well reduce them to nothing if a catastrophe struck, it also safeguards your personal assets, which are often on the line, from a liability point of view.

What kind of risks should you be concerned about? If you have employees, you're obligated to:

• Provide a safe place to work,
• Employ individuals reasonably competent to carry out
• Warn employees of danger,
• Furnish appropriate and safe tools, and
• Set up and enforce proper rules of employee conduct as they relate to safe working procedures.

You also owe a degree of safety and concern to your customers, clients, and the public--not only for their physical well-being when they're doing business with you but also to protect their property.

The basic business insurance package (not including health insurance) 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.

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Auto Insurance

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. Make sure, however, that you can afford to pay the deductibles should an accident happen. For additional savings, remove the collision and comprehensive coverage from older vehicles in your fleet.

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," says Mike Fox, an account executive with Wausau Insurance Companies. "I recommend carrying at least $1 million in liability coverage."

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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.)

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.

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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.

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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 person" 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.

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

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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.

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.

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