Most card sharks agree that insurance, in the world of Black-jack, is a sucker’s bet. However, gambling with an entire business—perhaps your life’s work or generations of others’ hard work—is a high stakes game that most savvy executives and business owners aren’t willing (or permitted) to play. After all, accidents happen. Buildings burn. Employees mess up. Technology falters. The litany of potential disasters can be mind boggling. The good news is that buying insurance means you have something to protect. The challenge is concocting just the right balance of adequate coverage and affordable premiums.
The Big Three
Property, liability and workers’ compensation are the primary types of coverage businesses generally use, but the only insurance mandated by Utah law is workers’ compensation, and even that has an exception or two.
Workers’ compensation insurance is required by Utah law for any business with W-2 employees. However, business owners and officers may choose to waive coverage for themselves.
“Technically, if they don’t have employees, for instance, if it’s a two-man plumber operation, they can choose to waive coverage,” says Shemwell. “I would never recommend it, but often they do because [workers’ compensation insurance] is expensive and maybe they’re trying to get started and it’s a chance they’re willing to take.”
Though a plumber, for example, may save approximately $2,000 per year by waiving workers’ compensation insurance, Shemwell explains that that individual may be giving up potential lost income coverage and potential medical coverage. “A lot of these guys assume that their health insurance is going to pick them up if they have a work-related injury and that’s not always the case,” he adds.
According to Tibbitts, fines for those who neglect their workers’ compensation insurance duties can be costly. “I’ve seen fines [issued by the labor commission] in excess of $10,000, so it can be pretty steep,” he says. Fines are typically based on the size of a business’ workforce and the length of time that business has gone without coverage.
As far as property and liability insurance, both Brad Tibbitts of Utah Insurance Department and Steve Shemwell of InfiniTeam Insurance, Inc. explain that, in practice, most businesses will need proof of property and liability insurance to operate. For example, a contractor will need liability insurance in order to build a new home and a financier will most likely require a property owner to have property insurance.
As the name would indicate, property insurance protects business owners from losses incurred by damage to or theft of property. Shemwell explains that there are three main components to consider with regards to insuring property. First, the insurance needs to cover the building or physical space occupied by the business. In some cases, even if the business owner does not own the building, one type of lease, known as a triple net lease, will require the tenant to buy building coverage.
Secondly, property insurance should cover business personal property (BPP), which is also known as contents coverage. BPP should include everything from inventory and machines to shelving and artwork.
“It’s coverage for the stuff that’s inside your building, attached or not attached,” explains Shemwell. Tenants aren’t necessarily covered by a landlord’s property insurance, other than the building. So, a coffee shop, for example, would need to insure everything from coffee supplies to shelving, to tables and cash registers, even if the owner is renting the space, says Shemwell. And within property insurance, “inland marine” coverage takes into account items that aren’t physically at the business’ location. For example, if an employee takes his or her laptop on a trip to meet with a client and it’s stolen in the airport, inland marine will cover that loss, explains Shemwell.
The third component of property insurance is the slightly less tangible business continuation or business interruption insurance. As Shemwell puts it, if an auto parts store has a fire, the business will lose profit starting the day after the fire. Business continuation may mean replacement of profit or covering extra expenses incurred as the owner and officers attempt to get a business back up and running after it is brought to a halt. He explains that every carrier writes business continuation policies a little differently.
Liability insurance comes to the rescue when a visitor trips over a wire. Or, perhaps, the widget you sell harmed a consumer. According to the National Association of Insurance Commissioners’ (NAIC) Website, liability insurance or commercial general liability, covers several situations for which you, the business owner, might be deemed responsible: bodily injury, damage to others’ property, personal injury and false advertising.
Shemwell explains that liability insurance is vital “to protect everything you’ve done to build your business.” He’s had clients with seven-figure claims in both auto liability and property loss.
Both Shemwell and Tibbitts suggest auto coverage as an important consideration for any business owner. Obviously, a business with a fleet of vehicles would need auto coverage, but in the case of a small business that sends an employee off to the bank on a work-related errand, auto liability could also become an issue.
Every industry and business has its own set of unique risks and values. Deciding what types of insurance to forego depends entirely on what you specifically have to protect.
The best way to sort through the intricacies of commercial insurance is to confer with a reputable agent. “The bottom line is that it’s best to sit down and talk with an agent. Spell out what your exposures are, what your business is and find out what you really need to insure,” explains Tibbitts.
“If an accountant makes a mistake with a decimal point, it could be a million- dollar mistake. If someone decided to sue him over that million-dollar mistake, it could cost him dearly. That’s where professional liability insurance comes into play,” explains Tibbitts. Those needs may change over time as your business grows and changes.
To ensure that you’re dealing with a reputable agent, Tibbitts suggests checking with the Utah Insurance Department to learn whether the agent is legitimate and licensed to operate in the state. Steve Baugh, executive director of the Utah Association of Independent Insurance Agents (also known as the “Big I”) recommends the “A.M. Best” guide or Website for researching a carrier’s rating. He suggests finding a carrier with a rating of A- or better. For small businesses, NAIC’s “Insure U” Website provides a handy rundown on the basics of commercial insurance. Direct writers, like State Farm Insurance or Farmers Insurance, may also serve as resources and potential business insurance providers, particularly for what Shemwell terms “Main Street” businesses.
Piecing together the various layers of coverage for a business’ unique needs can be complicated. For businesses that qualify, however, the Business Owners Policy (also known as “the BOP”) can be one-stop-shopping. It incorporates several types of property and liability coverage into one package.
According to Baugh, the BOP helped his association replace some stolen computers and incorporates “neat coverages that you’d otherwise have to buy separately.” His policy, for example includes host liquor liability coverage, which insures UAI if the company chooses to serve adult beverages at a reception. Qualification for the BOP varies per carrier.
Regardless of how the policy is packaged, there are always options for adding on specialized insurance, such as employment practices liability coverage and E-insurance (or internet business insurance).
Calling it a “hot button even here in good ol’ Utah,” Shemwell explains that employment practices liability generally comes into play when an employee (or potential employee) alleges discrimination, such as age or religious bias, in the hiring and firing process. This type of insurance covers defense costs and may also cover the financial penalties of losing a suit.
Given that more and more businesses rely on technology to keep sensitive information safe, E-insurance helps cover Web-based businesses threatened by hackers and computer viruses. If a company’s computer system is breached, notifying clients could be costly and identity fraud could complicate matters further. Though this type of insurance is still young, there are specialty carriers that focus on identity fraud coverage. As Shemwell explains, “Carriers are still trying to learn what the exposure is as claims come around.”
Pay attention to payments, even if you’ve hired someone else to make them.
“Make sure that all your payments are up to snuff,” says Tibbitts. If a payroll company has been hired to take care of taxes and workers’ compensation payments in addition to issuing checks, he advises double checking their work on a monthly basis. One business owner, he says, paid a hefty fine because her workers’ compensation payments had not been made for more than a year by the payroll company she’d hired.
Review your policy regularly. As Shemwell says, business owners are usually short of time; however, it’s important to ensure that insurance coverage keeps up with business growth. He advises reviewing insurance policies annually and making sure that limits are in line with what you have to protect in terms of property; double checking vehicle lists is also important. If a business is not insured to its full value and suffers a partial loss, the insurance company will pay according to a “did-over-should” ration, explains Shemwell. So, for example, if an office has insured itself up to $600,000 and the space is actually worth one million dollars, an owner might expect to receive full coverage for $100,000 worth of damages.
“You’re thinking, well, I’ve got a $600,000 limit- I’m under my limit. Wrong. The insurance company says we’re going to do a did-over-should ratio. You did insure for $600,000. You should have insured for one million dollars. So instead of 100 grand, you get 60.”
Make sure limits are adequate. If you’re a plumber working on a $1.5 million house, you need to be covered for $1.5 million, if you accidentally burn that house down, explains Shemwell. Additional liability coverage, for example, may require an umbrella policy (which is just excess liability coverage). “Buy as much as you can,” says Shemwell. “To change your deductible from $500 to $1,000, a $500 difference isn’t going to take you out of business, but if you hit the BMW full of attorneys, that potentially could take you out of business if you’ve only got a million dollar limit and you’re looking at a $2 million claim.”
Know and understand your policy. According to Tibbitts, Shemwell and Baugh, commercial insurance scams are few and far between. Tibbitts has seen some fraud involved with workers’ compensation (an agency listed itself as the insurer on a certificate and there was, in fact, no coverage). The best way to avoid the rare con artist or inexperienced agent is to verify the agent’s legitimacy and to shop around. After looking at a few different options, verify that the policy includes whatever coverage you’ve purchased through your agent.
As Shemwell says, “If you have a claim, you’re going to pull out this little thing called an insurance policy—and it’s an ugly read—but that’s the letter of the law, regardless of what anybody tells you.” After all, hedging those bets against unknown calamity is only worthwhile if that insurance policy is accurate.
Some businesses have inherent exposures that are unavoidable. As Shemwell says, while a dry cleaner may have 1,000 shirts and pants worth of liability, a contractor might need to cover liability for a $10 million-building. Everyone can help protect their businesses by doing the following:
1. Ensure that your agent is legitimate and licensed and that your carrier has a high rating.
2. Back-up your computer files and take them off-site to help ensure business continuation.
3. Check out OSHA’s (U.S. Department of Labor Occupational Safety & Health Administration) advice on safety requirements, www.osha.gov.
Resources for information on commercial insurance:
UAI (Utah Association of Independent Insurance Agents), www.uaiia.org.
NAIC (National Association of Insurance Commissioners), www.naic.org
Utah Insurance Department,
A.M. Best Company, www.ambest.com