Karen Willard - Buffalo
Stephen Clayton - Rochester
If you own your own business or are a partner in one, you’re probably already familiar with risk. After all, few things in life are riskier than launching and running your own small business. Part of the risk of any small business is the loss of critical tools and property or liability to others. Either of which can cause loss of income or even force you to close your doors.
Large companies employ full-time risk managers to keep their risk-taking to a minimum. But chances are that as a small-business operator, you are your company’s risk manager, along with its personnel director, office manager, and possibly the entire staff all rolled into one.
While juggling all the jobs that need to get done to make your firm a smooth-running and profitable operation, you may already be asking yourself, “Who has time to think about insurance?” You do! Keeping risks and losses to a minimum is a cornerstone of business success, especially for small businesses. Take a few minutes now to check your risk factors, find out your insurance needs and learn the many options available to you. And remember choosing the right agent is as important as choosing the right insurance.
Created by the Independent Insurance Agents of America, this guide does not represent the provisions of any particular policy, but it can serve as a starting point to a complete package of protection.
What types of property insurance should I consider buying?
The best thing to do is to take a complete inventory of all your business property, determine their value and decide if each is worth insuring. Then check to see that the items on the inventory list are included in the basic business property policy and covered for the correct amount. If not, ask your agent about the cost of purchasing additional coverage to meet your needs.
You also need to consider your business situation. Are you planning a major expansion?
Does your inventory have a decidedly peak season (like a toy store in December)? Or does it fluctuate throughout the year (like a clothing store)? Is your liability limit high enough in light of the new job contract you just signed? Business policies are designed to be added to or subtracted from to meet your needs. Be sure to discuss changes to your business with your agent so that he or she can be sure your policy still provides adequate coverage.
Some common additional coverages for business property include (although this list is by no means all-inclusive):
- Boiler and Machinery Insurance – Even if you do not own a boiler, you may need this coverage. The term “boiler and machinery insurance” is gradually being replaced with terms such as “equipment breakdown” or “mechanical breakdown” coverage. This insurance provides coverage against the sudden and accidental breakdown of boilers, machinery or equipment, including computer systems and telephones/communication systems. Coverage usually includes reimbursement for property damage, expediting expenses (e.g., express transportation charges), and business interruption losses.
- Builders Risk Coverage – Covers buildings in the course of construction. Depending on the policy, this coverage can be for either the building’s value at the time of loss or its full value at the time of completion.
- Building Ordinance Coverage – Provides coverage when a community has a building ordinance stating that when a building is damaged to a specified extent (usually 50 percent), it must be completely demolished and rebuilt in accordance with current building codes rather than repaired. Special attention is required when establishing the amount of insurance.
- Business Interruption Insurance – Covers the loss of earnings as a result of damage or loss of business property. Reimbursement for salaries, taxes, rents, and other expenses plus net profits that would have been earned during the period of interruption can be included.
- Commercial Crime Coverages – Covers money and securities, stock and fixtures against theft, burglary and robbery both on and off the insured premises and from both employees and outsiders.
- Debris Removal Coverage – Covers the cost of removing debris after damage from fire or other covered peril that requires debris removal before reconstruction of the damaged building can begin. This is not part of fire insurance coverage and must be added as an endorsement.
- Fidelity Bonds – Covers business owners for losses due to dishonest acts by their employees.
- Glass Coverage – Provides coverage for glass breakage such as store windows and plate glass on office fronts.
- Inland Marine Insurance – Primarily covers property in transit such as from warehouse to warehouse or warehouse to retail store, as well as other people’s property left on your business premises, such as clothes left at a dry cleaning business or an employee’s personal effects left in the company locker room.
Who decides how much my business property is worth?
Property insurance can be purchased on the basis of the property’s actual value, on its replacement cost, or on an agreed amount. The differences between the three are:
1. Actual Cash Value
The replacement cost of the item minus depreciation. For example, a new desk may cost $500. If your 7-year-old desk gets damaged in a fire, it might have depreciated 50 percent. Therefore, you would be paid $250 for it.
2. Replacement Coverage
The cost of replacing an item without deducting for depreciation. So today’s cost for a desk of a size and construction similar to the 7-year-old one damaged by fire would determine the amount of compensation. If it costs $500 today, that would be the replacement coverage.
3. Agreed Amount
Art objects, antiques and other unique items are usually insured at an amount agreed upon when the policy is being written. An appraiser values the goods to be insured and the business owner and the insurer agree upon an amount that the insurer will pay if the goods are destroyed due to a covered peril.
Check your policy. If you prefer replacement coverage and do not already have it, this coverage can be added to your policy. Inflation-guard coverage, which automatically increases your insurance amount a certain percentage, protects against rising construction costs. Your agent can advise you of the costs involved.
Insurance for Loss of Lease Income or Value
Covers the loss of income when rental property is damaged or destroyed and the loss of value when the owner of the rental property also used some of its space for business. If the tenant of the destroyed or damaged building is forced to rent space elsewhere at a higher cost, this is called loss of lease value.
What is coinsurance all about?
Most business policies include a “coinsurance” clause stipulating what percentage of the total value of your property must be insured in order to be fully reimbursed for a loss, even a partial one. (Most losses are partial.) If you insure for less than that amount, your insurance company may impose a “coinsurance penalty” on your claim.
Here’s how coinsurance works:
Let’s say you have a building insured that you believe would cost $100,000 to replace and a coinsurance penalty in your policy of 80 percent. You insure the building for $80,000, thinking you have fulfilled the coinsurance clause. A fire loss causes $60,000 worth of damage, so you submit a claim. Your insurance company subsequently determines that the replacement cost of the building is actually $150,000. To determine how much to pay on the claim, the insurer divides the amount of insurance you purchased ($80,000) by the amount you should have purchased (80% of $150,000 or $120,000). The result (two-thirds, or $40,000) is the amount of your claim the insurer will pay.
Thus, even for a partial loss within the monetary limits of your policy, you will receive only two-thirds of the amount claimed. If the building had been insured for at least $120,000, the insurer would have reimbursed you for the full amount of the loss.
You should check with your agent to make sure you have adequate coverage. Adding an endorsement to the policy that automatically increases policy limits to keep pace with inflation is a good idea.
Choosing an Agent
Agents are there to help you. At the most basic level, any agent should be able to answer all of your questions about insurance, provide you a thorough assessment of your insurance needs, and offer you a choice of insurance products to meet those needs. Also, any insurance agency should provide you with prompt, quality service in the case of a claim.
Just as important is the level of professional confidence and personal comfort you feel with the agent. Many people stick with the same insurance agent for decades, even generations. It helps to find an agent you can get to know and trust.
An important, but sometimes overlooked, factor to keep in mind is that there are two kinds of insurance agents: those who represent only one insurance company and those who represent more than one insurance company.
Agents offering through their agencies only the policies of one insurance company often are referred to as “captive agents,” because the company they represent does not allow them to offer their customers competitive alternatives.
By contrast, agents offering through their agencies the policies of more than one insurance company are called “independent agents,” because they can shop around for their customers for the best insurance values among a variety of competing companies.
A nationwide survey in 1994 showed that Americans prefer to work with independent insurance agents by a 2-to-1 margin over captive agents. You can be sure you are dealing with an independent agent when you see this symbol on the agent’s signs, letterhead and business card.