Business owners have enough to worry about in terms of keeping their businesses financially stable and running smoothly. Control the things you can control and hedge the things you cannot. Your hedge in this case is business insurance. This week we’re going to dive into insurance policies you may need and what they do.
Small business insurance, also called commercial insurance, offers protection of a business’ property and income.
The most common is a company’s business owner policy (BOP). It typically includes three main coverages: business property coverage, general liability coverage, and business interruption coverage.
We’re going to start with those three coverages and then move into some more niche policies.
The property coverage policy protects the assets of a business. It insures the “things” your business owns. For example, a disaster strikes and the office you own is destroyed. Your property coverage policy will help replace, repair, or rebuild both the building and the things inside the building - furniture, fixtures, equipment, etc.
In a typical policy, you, the owner, will determine the limits of the coverage based on the estimated costs to replace or repair the assets that the policy covers. The higher that limit, the higher the cost of the policy. Keep in mind, just like any insurance policy, you are on the hook for the remainder of the bill if your losses exceed the coverage limits that you chose.
A note about compliance: some localities have insurance requirements. To avoid fines, make sure that you have, at very least, the coverages required. Work with an advisor or agent to meet those requirements if any exist.
General liability coverage protects you against accidents that may take place on your premises, or that your employees inflict on another person or their property. If a customer is injured or if an employee accidentally injures them or their property, and your business is found liable, your liability coverage may help pay for that customer’s medical expenses or property damages. Additionally, it can help cover the cost of your legal fees in the event you are taken to court.
Similar to your property coverage, general liability is also subject to coverage limits. If the injured party’s damages exceed your coverage limits, you may have to cover the rest out of your own pocket.
Also known as business income coverage, is a coverage that will replace lost income and additional expenses when your business experiences a covered peril. Tornadoes, fires, floods, other inclement weather, are typically considered under the covered peril category.
An example of how this coverage may work is unfortunately your office building burns down. You no longer have a location to conduct business. This coverage may cover the income you lost during the office’s vacancy. Also, it may cover the expenses of renting another office space temporarily. Like all insurance this coverage is subject to limitations. You will have a coverage limit and you may also be subject to a restoration period. If your business hasn’t returned to normal business operation within a certain period of time, your coverage may expire.
That is a general explanation of the three typical insurances that most businesses carry. Let’s move on to some of the more specific insurances that businesses may need to consider.
This is a type of insurance usually needed for partnerships or corporations with multiple owners. A cross purchase plan exists to ensure business continuity in the event of an owner’s death. How it works is each owner/partner purchases a life insurance policy on each of the other owners. Then, when an owner dies, the living owners use the proceeds of the life insurance payout to purchase the passed owner’s share in the business.
This type of insurance helps smooth over the transfer of ownership rights and protects against the deceased’s shares falling into the hands of someone that does not want them or should not have them.
Key-Man insurance, also known as Key-Person insurance, is a type of life insurance that a business takes out on one of their employees. Be it an executive, owner, partner, or essential employee, it insures against financial loss if that person passes away. In the prior example of the cross purchase plan, this time, the business itself is owner of the policy and very often the beneficiary. This means the company will pay the premiums on the policy.
There are a couple reasons for this policy and this one might be obvious - a business has an employee that is absolutely critical to its continued success or its operation in general. The policy will provide the company time to train and replace the key employee in the event of their passing by providing them financial protection to cover that lost time.
Another reason is that it can protect heirs from company debt if the owner dies and the business is passed down through inheritance. The proceeds will be paid out to service the debt prior to coming to the business.
The type of policy matters whether it’s term life or permanent life, talk with a financial advisor if you’re having any difficulty making this decision. There are certainly benefits to each.
A final note on this is that premiums paid for a key person are typically not tax deductible as a business expense. In the same vein, depending on the state that the policy is owned in, the death benefit may not be taxable as income.
I don’t think this requires a separate section, but before we move off the topic of the life insurance policies that a business or business owner may need, I want to touch on the fact that life insurance policies can often be used as collateral for securing a loan. Permanent life policies can be leveraged for a loan that may be used in the business. Similarly, when acquiring a business through debt, the lender may require a life insurance policy to guarantee a payout in the event the purchaser dies before paying off the acquisition’s debt.
We already covered the basic liability and property coverages, but let’s move on to some of the more specific coverages under that umbrella.
If your business requires you or your employees to drive vehicles for business reasons, it’s likely you’ll need commercial coverage. This insurance exists to protect the business from liability claims, the property in the vehicles, and vehicles themselves. The need for this coverage increases when the business owns the vehicles themselves, the vehicles are registered as commercial, or carry a commercial tag/license plate - in fact, it’s mandatory in most states.
The property in the vehicle can include things like tools, special equipment, cargo they may be transporting, etc.
Commercial auto helps insure against things that personal auto insurance does not. Mainly because personal policies typically don’t cover commercial uses of vehicles. While commercial auto will still have most, if not all, of the personal auto coverages that you may be familiar with (collision, comprehensive loss, bodily injury coverage, and property damage coverage), it is often required for businesses that do any of the following:
For larger commercial vehicles, you may need commercial truck insurance, but we’re not going to cover that in detail here. You should probably assume you need it if you’re entering into or are already in the freight business.
A final note: you are required by federal law if you move goods or people across state lines.
To put a bow on top of your commercial insurances, let’s discuss commercial umbrella insurance.
Most of our client’s have umbrella coverage to protect their net worths. Once your liability coverages are exhausted on more specific insurance policies, umbrella insurance sits on top of those liability limits to further protect you against cash outlays. Typical personal umbrella insurance coverage limits range from $1,000,000 to $5,000,000. Policies in excess of $5,000,000 are much more expensive and are more difficult to find, though they do exist.
The same thing is true for commercial umbrella insurance. Simply put, it helps increase your business’ liability coverage when a lawsuit exceeds the coverage limits of your core business insurances. The typical business umbrella insurance range is between $1,000,000 and $15,000,000.
A key thing to note is that commercial umbrella insurance, like personal umbrella insurance, does not cover property damage. If there’s significant damage done to a building you own in excess of property damage coverage, you are still on the hook for those remaining costs. However, if your business causes damage to someone else’s property, umbrella coverage may help cover those costs.
So who needs this?
Most often, businesses that have a lot of in person interaction with clients and customers should consider it. More interactions leads to increased risk of bodily injury. If you’re open to the public, this may even rise to the level of a priority for you.
If your employees use heavy equipment or anything that could be considered dangerous equipment, you’re likely going to want a commercial umbrella policy.
Working offsite on someone else’s property can also increase business liability risk. You certainly don’t want one of your employees to injure someone at their own residence or place of work, and you most certainly don’t want to pay out of pocket for the damages that would bring. Moreover, if your employees, during the course of their work, damage another person’s home or place of business, depending on how much damage they cause, your umbrella policy may step in to cover some of that damage, as well.
Keep in mind that a requirement for this type of policy is that your core insurance policies’ liability coverage must be maxed out prior to acquiring umbrella coverage.
Let’s move onto the coverage needed for professional practices: professional liability insurance.
Also known as errors and omissions insurance (E&O), this insurance exists to protect professionals against mistakes they may make during the course of their practice. Everyone is human, and unfortunately that comes with the ability to make errors, even if we’re as diligent as possible, it’s almost guaranteed that it will happen eventually. You can be sued if your mistake impacts someone financially. If you are found negligent in performing your services, you will be held liable for damages.
Let’s first determine which businesses are most likely in need of this insurance. If you find yourself in any of the following professions, you may be required to hold this insurance or you should definitely consider having it:
That list is not exhaustive, but if you find yourself adjacent to any of those fields or in the general category of professional, E&O is something you should definitely consider.
Borrowing an example I recently read, and I wish I could find the source, even a photographer could be sued and protected by the bride and groom of the wedding they were contracted to photograph. Let’s say that for whatever reason, the photographer misses the kiss at the ceremony. The couple could sue the photographer for failure to provide service. This is not meant to scare the photographers out there, it’s to drive home the point that this can be critical insurance to carry.
So what’s included in Professional Liability Insurance?
Errors and omissions: it helps cover you in the event you are found negligent in professional services you provided. This can help cover legal damages that you are sued for. Any example would be an accountant that makes a clerical error on behalf of a client. The client incurs a tax penalty resulting in thousands of dollars of additional liability - E&O helps cover you when the client sues you for those damages.
Financial harm: helps protect you against claims where your professional advice provided to a client caused them financial harm due to mistakes on your behalf.
Subpoena assistance: will help cover payment of attorney’s fees and expenses if you are required to testify or produce documents. This is only if you are not the named defendant in the case.
Personal injury: helps cover you against claims of personal injury resulting from professional services provided
Disciplinary proceedings: covers your defense in a claim brought by a regulatory board. If you’re being accused of professional misconduct, this insures against the legal fees required for defense. It does not assist in paying the penalties you incur if judgment is passed against you.
You likely won’t need all of those, and you will need to consider the coverage limits for each you’d like to include. Work with a financial advisor or insurance agent to find a policy that will best protect you.
We’re going to move onto information security
This insurance can cover a wide variety of risks that a business faces. It’s cliche to say, but the world is becoming even more dependent on digital infrastructure and that is all but assuredly going to continue.
There are two main cyber insurance policies: data breach insurance and cyber liability coverage. Cyber liability coverage is more often provided to larger businesses. Data breach insurance offers coverage against breaches of client information and can help your business respond to those events if they unfortunately take place.
These coverages can help provide coverage if your business’ computers are infected with a virus and that virus harvests private or sensitive data. It will also protect you in case your clients sue you after your business loses private identifiable information or personal health information.
Who needs this coverage?
Well, do you store, send, or receive personal information that is sensitive in nature?
Do you work in an industry that demands compliance with regulations surrounding customer information - think healthcare, finance, or education?
Think about what would happen to your business if a cyber attack took place.
If you are answered yes to either of the first two questions, you should strongly consider getting insurance to protect against these threats.
If you can picture a business altering calamity if you faced a cyber attack, then, again you should consider cyber insurance.
Why is cyber liability insurance recommended for large businesses rather than small businesses and what is the difference between it and data breach insurance?
Cyber liability insurance is a larger scope of cyber security insurance. A typical policy will offer the following coverages after a cyber attack:
Data breach insurance is more narrow in scope and covers only a few of the things listed above:
You can work with your insurer to add some of the additional coverages that a typical cyber liability insurance policy would have.
Let’s wrap up this post with a pair of insurances that affect your employees.
This policy is typically state required the minute a business hires its first employee. Even if your state does not require it by law, if you have employees working in person, it’s important to have protections in place to guard against employee lawsuits if a workplace related injury were to occur.
A slip and fall could cost you thousands and thousands of dollars if you are not insured. This is a critical coverage for any business that has employees working with tools and machinery or really any physical labor.
Your business may be responsible for medical treatment and replacement of income for time off required from a workplace related injury. Additionally, states levy harsh penalties for non-compliance.
What does it actually cover?
A typical policy will cover the following if an occupational injury were to occur that the business is liable for:
This is one insurance that an employer can not neglect. It is both federally and state mandated. The federal requirements are minimal, but the requirements per state can vary. Simply put, this insurance will cover an employee if they are laid off. Typically the federal unemployment insurance cost is relatively low compared to states. The rate is 6% of the first $7,000 of each employee’s wages.
We’re not going to get into an analysis on each state in this post. Your state should offer this information to you with a quick Google search. Be sure to read up on the requirements and the expected costs.
Keep in mind that most unemployed workers do not receive UI benefits. If a person leaves their job voluntarily, is self-employed, a gig worker, undocumented, or a student, they typically do not meet the eligibility requirement for UI benefits.
That brings us to the end of this week’s post. I hope you found something worthwhile in one of the more lengthy installments.
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Financial Advisor