What insurance do I need for my business?
To answer this, let’s first think about what insurance is. It is part of risk management. The risks in business, as in life, are always present. They are managed by avoidance and by monetary coverage if they can’t be avoided. You can cover the money part of this management either by having money available to cover risk or by paying others to help you with money if you have a loss. This paying of others is what we usually call “insurance.” However, the concept of insurance also covers what some call “self-insurance.” This is when you do not buy an insurance policy from others, but cover any losses out of your own money.In non-business matters, we all self-insure to some extent. The deductible on your automobile insurance is self-insurance. You pay that first $500 or $1000 of loss. Your insurance policy pays the rest. Your hospitalization insurance has an element of self-insurance built into it, for you usually have to pay part of the medical bill. Your insurance only pays 80% or some other portion of it. To buy 100% medical coverage is very expensive – more expensive than most of us choose to pay.
What insurance you choose to buy for your business and what risks you decide to self-insure are business decisions you have to make. Usually these decisions are made on the basis of cost, probability, and severity. The cost of the insurance you buy is important because it is money out of your pocket that could be used for other business purposes. The probability of suffering a loss is important because some risks are highly probable and others are infrequent or not likely to occur. Finally, the severity of the loss if it does occur is important because some losses are so severe that they can wipe you out, such as a major fire or a legal judgment for a large amount of money.
In business, there are many types of risks. For most risks, outside insurance can be purchased. You can buy insurance against losses from fire, theft, natural disasters, loss of profits, lawsuits, mechanical failures, death, injury, hospitalization, and the list goes on. Which of these you decide to cover with insurance and which you choose to cover with self-insurance depends on an analysis of your business. Each type of coverage has a different cost. Some are cheap, such as liability insurance, and some are expensive, such as loss of profits.
An approach used by many small business owners is to assess the various risks in the business and then consult with an insurance broker on the costs of the various coverages. The owner can pick those coverages most appropriate for his business and can buy within the confines of his budget. Clearly,many small businesses can’t afford to buy much insurance.
As for what insurance your business MUST have, that also depends on the business. Unless some regulatory agency, lending bank, or landlord requires you to carry some form of insurance, you don’t have to have any. Many small businesses operate with little or no insurance coverage. They are essentially self-insured. If they have a loss, they either cover it out of their own funds, borrow what they need, or they fail as a business. It should be clear to you that there is no easy answer to this question.
How much will insurance cost?
The best way to determine this is to consult with a business insurance broker. Discuss your needs and obtain quotes for the various types of coverages you want. Remember, insurance rates are competitive. Not all insurance companies charge the same. It will pay you to shop.
Do I legally have to have any insurance?
Not unless you have a loan, lease agreement, property rental agreement, equipment time-purchase plan, or some other contract that specifies that you must carry insurance as part of the contract.Sometimes state or federal governmental agencies might require you to carry some form of insurance coverage, such as Workers’ Compensation Insurance.
Should I have a lot of insurance or as little as possible?
Since insurance is a business expense, you should have as little as possible given the risk probabilities and risk severity associated with your business. Questions to ask yourself are these:
- If this (risk of loss) happened, how would I handle it?
- How likely is it that I could suffer this loss?
- How bad a loss would it be?
- How much money do I have for insurance?
Experienced business owners in your line of activity and business advisors can sometimes help you decide.
Do I need liability insurance?
Most advisors will tell you to carry some liability insurance. It is relatively inexpensive and can protect you from a variety of risks. Nevertheless, many small businesses operate without it. Businesses that are likely to cause injury to others – or are likely to be sued by others usually carry this type of insurance.
What is self-insurance?
Self-insurance means you make some provision to cover losses from a risk. It does not mean that you simply go without insurance and make no provision to cover losses should they occur.Some self-insurance involves a fund or reserve of money for losses. Many small businesses will self-insure against medical costs of employees by paying into a company fund and using this fund to pay medical expenses.
Other forms of self-insurance provide for general business savings to cover losses.
If I operate my business from home, will my homeowners’ insurance cover me?
Probably not. Business operations are usually excluded from homeowners’ coverage and can actually negate some coverages. It is best to check with your insurance carrier to be sure.
What is Workers’ Compensation Insurance?
This is a type of insurance that comes into play when an employee is injured on the job or when performing official business duties. Usually, this insurance pays money to the injured party instead of you being sued for damages.In some jurisdiction, this type of insurance is required. Even if not required, it is usually considered a wise insurance purchase.
Should I have a general insurance agent?
Probably yes. A general insurance agent can be a valuable advisor to a small business. Risk management is an on-going concern to a business owner. Having a knowledgeable specialist available to answer questions and provide advice is a good idea.
How do I know I am not paying too much for my insurance?
By shopping and comparing prices. Insurance costs are not uniform. As with most other things you can buy, it is possible to get a bargain and it is possible to get ripped off.Because the terms of insurance policies are not identical, it is important to see that you are comparing apples with apples. A less expensive policy with different provisions may not be a bargain. A more expensive policy with more benefits may not be a rip-off. You must read the fine print.
This is where a trusted insurance agent is valuable. He or she can help you understand the language and provisions of insurance policies and help you protect yourself from overpayment.
Should I have a lawyer review any insurance contract?
You can if you want to bear the expense of a legal review. Sometimes this is smart and sometimes it is a waste of money. Often a review by your insurance agent is enough to help you understand. However you gain an understanding of your insurance contracts, you should know what they say and what you are buying.If you can’t interpret them by yourself, by all means get some help – legal or otherwise.
Should I buy “loss of profits” insurance?
You probably can’t afford it. It can be expensive and difficult to collect on. Like other categories of insurance, you can look into it and decide based on its cost, probability and severity. Most small businesses do not carry it.
Should I have high deductibles on my property insurance?
High deductibles lower your insurance premiums. In effect, you are assuming some of the risk of loss yourself. If you can afford to handle the loss represented by the deductible, and if the probability of occurrence is low, a high deductible is probably a good choice.Automobile collision insurance is a good example. A $500 deductible policy will cost more than one with $1000 or $1500 deductible. If you have few accidents and you can afford to handle the first $1000 or $1500 of loss, having a $500 deductible policy and paying the higher premiums year after year is usually a waste of money.