By Reuben Dourte
Starting, operating, and growing your own business is more than a full-time job. It’s likely that this is the reason many business owners neglect to keep their insurance policies up to date, or even purchase the right coverages to begin with. Insurance can be a convenient, and cost-effective, way to transfer your risk of financial loss to another company; however, most people don’t enjoy discussing it because it isn’t a tangible product that you get to use after purchase.
Still, a properly written insurance policy can keep your business’ doors open when the unexpected happens. So, a basic overview of a few of the important aspects of business insurance can come in handy when you are evaluating how an insurance policy can help you mitigate your risk of financial loss.
1. Property Insurance
Your property loss exposures are pretty easily determined through building estimates and inventory limits. Property losses are measurable, so you can decide if you want to insure the property or if you can afford to assume the risk of loss yourself. If your business is heavily reliant on a brick and mortar location and you would find it difficult to self-fund the reconstruction of the damaged building after a loss, you probably need some property insurance.
If you have a loan on the building, the bank is almost certainly going to require evidence of insurance. A property insurance policy can provide you with coverage for events like fire, windstorm damage, lightning strikes and even the sudden collapse of the building. Not only can you select coverage for the building itself, but you can cover your equipment and inventory within the building as well.
Even small businesses can have hundreds of thousands or even millions of dollars of property value at one location. Having to replace all of that property out of pocket, in order to continue your business operations, would likely significantly change your cash flow and could potentially jeopardize contracts you may hold, and in turn affect the sustainability of your entire business model.
2. Business Income and Extra Expense
Business income insurance is considered a “property” coverage, but it is more abstract in that it does not deal with real property, but instead the loss of income because of damage to your business’ property. For example, a restauranteur may find herself unable to serve customers if her restaurant is severely damaged after a fire. She may spend significant time with the restaurant in an inoperable state. The owner may have an important team of employees, including a general manager, whom she can’t afford to lose during the time the restaurant is being reconstructed.
As such, she may elect to continue to pay her employees a wage during the time the business is being reconstructed so that they do not find other employment. Likewise, she may need to incur additional extra expenses in marketing to regain her clientele once the establishment is operational again. She may also experience an extended time frame where sales suffer because she has lost regular customers during her down time. Lastly, if the owner has a business loan and a mortgage, the bank may still need paid along with other expenses that may continue after loss time. All of these things add up to substantial monetary burdens and, without business income coverage, they become out of pocket expenses.
3. General Liability
General Liability, or GL, is probably the single most important insurance coverage to your business. Unlike the property coverages above, it is extremely hard to measure the maximum possible and maximum probable liability losses of a business. For this reason, it is important for most business owners to transfer as much of this risk to an insurance company as possible.
General liability insurance can provide you with premises liability for your place of business, as well as products and completed operations liability. When you are trying to determine the limit of liability insurance you should purchase, consider your company’s asset volume along with how hazardous your product or operations truly are. If you are manufacturing fireworks, it might be advisable to carry substantially higher general liability limits than if you run a small computer repair shop.
Likewise, if your company has millions and millions of dollars in assets, you need to protect those assets from the potential of both bona fide liability claims and malicious litigation. You may need to consider purchasing significantly higher limits of liability than does a small business run by a sole proprietor. The costs to defend yourself, or your business, in court can become incredibly taxing to your company, and those costs alone are a financial burden. Purchasing liability insurance allows you to receive payments for defense costs, even if the lawsuit brought against you is frivolous. The insurance company will pay to defend you, they will work to get false claims removed, and, in the event you are indeed found to be at fault, they will pay the damages up to the liability limit on the policy.
Insurance companies offer policies with plenty of extra coverages and, when you purchase a business insurance policy, it will almost certainly include more line items than these three types of coverage. However, these coverages provide protection from financial loss in some of the most common areas of loss to businesses and they should be on every business owner’s radar.
Ask an experienced agent about the specific coverages you will need to tailor a policy to your circumstances. Every business has unique needs and when it comes to insuring your business a customized approach is best. Starting with the fundamentals above will allow you to build the right policy with the right value.
Reuben Dourte is an account executive at Ruhl Insurance (@RuhlInsurance on Twitter) in Manheim, PA where he specializes in farm and agribusiness insurance risks. He received his Accredited Advisor in Insurance designation in 2015.
Disclaimer: Information and claims presented in this content are meant for informative, illustrative purposes and should not be considered legally binding.
