The worst thing you could ever do for your business is assume that nothing bad will happen. Brian Smith, insurance adviser for American Express OPEN, and Phil Holland, founder of MyOwnBusiness.org, say the best type of risk management for businesses is the right kind of business insurance.
Confused about what you need to look for when it comes to business insurance? This seven-point checklist will point you in the right direction.
1. Know what’s required.
Some factors are out of your hands when it comes to business insurance. For instance, contracts for office space require a certain amount or kind of insurance to lease the property. General liability is the most common type of mandated insurance. Landlords are required to carry property insurance.
If you run a home-based business, you’re not off the hook. Homeowner's insurance doesn’t usually cover lost business assets. Owners of home-based businesses may want to add riders to their homeowner's policy to protect themselves from risks, such as property damage.
However, because homeowner's insurance typically is meant to cover home-based businesses, that sort of policy may not provide the protection needed even with riders. As a result, it may be wise to buy supplemental policies such as general liability insurance.
2. Check state requirements.
In addition to fulfilling landlord requirements, you need to meet state regulations as well. Government requirements have a big effect on the type and amount of coverage you buy. Among the factors considered for government-mandated insurance are the number employees at a business, the location of the business and the zoning for the business.
Another type of government-mandated insurance you'll want to keep up with is workers' compensation. Each state has its own laws regarding workers' comp coverage.
3. Assess the business.
Regularly taking stock of your business' location, revenue and products will help you figure out your current coverage needs. If your business has gained inventory and has increased revenue, you'll most likely need to adjust your policy to reflect that; of course, that'll probably lead to higher premiums.
However, Smith says, "the landscape for business insurance in 2011 looks fantastic. The affordability is there because the market is soft right now."
4. Determine what could go wrong.
Although some small businesses can get away without having insurance, Smith doesn't recommend it.
“The need for insurance is just as great for a small company as it is for a big company,” he says. “A small company can’t tolerate a great loss.”
To properly protect your business, come up with a list of scenarios involving risks to your business, Smith recommends. “Have a discussion about what bad could potentially happen and then determine how you can protect yourself from that," he says.
For example, a home-based consultant most likely won’t need product liability insurance or auto insurance. However, a service professional -- such as a real estate agent or an architect -- may want to look into buying professional liability insurance to cover things such as "errors and omissions," which are mistakes that could harm someone else financially.
Errors-and-omissions insurance can take the financial sting out of legal action that a business may face over alleged blunders. The cost of this type of insurance ranges from a couple of hundred dollars a month to several thousand dollars a month.
Regardless of the type of business, Holland recommends investing in a life insurance policy if you have a business partner. The policy can be purchased through a buy-sell agreement. If one of the business partners dies unexpectedly, the dead person's business interests are transferred (bought or sold) according to terms of the agreement.
5. Read your policy.
“Reading your policy is the easiest thing that business owners can do to protect their business, but everybody doesn’t do that,” Smith says.
Knowing what’s not covered is just as important, if not more so, as knowing what is covered. Unfortunately, many people fail to pay attention to the exclusions cited in a policy, leaving them susceptible to liabilities.
6. Look for policy packages.
Rather than buying several policies, it may be more cost-effective to purchase a commercial package. Most insurance companies offer a "business owner policy" that bundles common types of insurance, such as property, liability, casualty and business interruption.
7. Shop around.
Once you've determined what types of insurance you need, it’s time to go shopping. Never approach just one insurance provider. “Compare companies and never get less than three quotes,” Smith says.
When doing your shopping, don’t forget about discounts. For instance, providing a drug-free work environment can earn a lower premium for your business.
“Always ask an agent to get creative when getting quotes,” Smith says. “Expect more to get more. A lot of times, if you don’t ask, they won’t tell you.”