Business Insurance – What Type of Coverage and How Much?

Insurance may not be your favorite topic of conversation or expense to consider, and that’s likely due to lack of knowledge and understanding. Unless you are versed in policy and coverage lingo, it can be very confusing to understand what you actually need and how the numbers apply. But that’s no reason to bury your head in the sand.

When it comes to your business, even a home-based business, it’s imperative to manage your risk and protect yourself from financial loss.

Starting the Process of Securing Insurance
When faced with insurance decisions, your first inclination may be to start with a Google search. After some initial research online, you may become more confused, and you’ll often find it difficult or impossible to purchase your business insurance online.

It’s best to call your agent or broker to talk through what you have found, ask every question that you have, and work on getting accurate quotes that are tailored to your specific business needs.

“A savvy business owner will know enough to know that they don’t know anything about insurance,” says Lori Keohane, CIC, AVP/Small Business Practice Group Leader Commercial Insurance account executive, Engle Hambright & Davies, Inc.

Even when working with an agent or broker, people have three common questions regarding business insurance:

1. Do I really need limits that high?
2. Why is it so expensive?
3. Will this policy cover all of the things I do through my business?

“Every business has its own specific needs and exposures, and the business world is ever changing,” says Keohane. “The best recommendation I have is to partner with an experienced insurance agent or broker who has the ability or resources to understand not only one particular business segment’s needs, but the needs and exposures of other types of industries.”

Understanding What You Need
When you define your business, you use all kinds of factors to describe it: structure, size, type of business. Some of these descriptors contribute to your insurance needs, so it’s important to understand what matters.

Your business entity structure (sole proprietor, partnership, LLC, corporation) has little or nothing to do with your insurance needs, but your small or medium-sized business may also be home-based, so you need to consider all that applies.

Beyond those, the type of business/industry will drive more specific needs, which is where your agent or broker becomes critical.

Home-based Business
All home-based businesses need insurance. Liability and property coverage are recommended, and if you’re offering a professional service, professional liability (E&O – errors and omissions) is recommended, too.

A home-based business is a business that operates out of your home, with no other office or location. There are a wide variety of businesses that can be run out of the home or begin in the home and then grow to need a dedicated office space or retail store front.

“Typically, we see home-based businesses as those with minimal exposure or client base and limited outside-premise location exposure,” Keohane explains.

You can look at home-based businesses two ways:

1. A one-person shop where clients come to the home for service: hairstylist, massage therapist, seamstress, etc.
2. Only an office is needed because the business owner always goes out to visit clients at their location. This could be the consultant, bookkeeper, direct sales rep (e.g., May Kay, Thirty-One), painter, electrician, plumber, etc.

“Of course, there are home-based businesses, such as auto-body repair shops, cabinet makers, etc., that have a much bigger liability exposure and require proper zoning and permits,” Keohane advises.

Insurance for a home-based business may come from an extension of the resident homeowner’s coverage or from a standard business liability carrier. Not all homeowner carriers will offer coverage for home-based business.

It is important, if you are operating any type of business out of your home (whether a profit is generated or not), that you check with your homeowner’s carrier. Many will offer limited liability and property coverage, but most homeowners’ carriers will explicitly exclude any business-related exposure from the policy.

Small & Mid-sized Business
General liability, property, loss of income, workers’ compensation, employment practices, umbrella, and — now that we live in a digital world — cyber liability insurance are the basic starting-point coverages for insuring your business.

Typically, the annual sales and/or payroll will dictate whether a business is small or mid-sized, but the type of business will drive insurance needs. For example, an independent LuLaRoe consultant can make over $100,000 a year on her own, with no employees, and certainly needs insurance coverage, just the same as a three-person bookkeeping operation.

Types of Coverage
Below are some simple definitions of coverage and how it applies.

• General Liability – Protection for a business for losses resulting from personal injury, product or operational problems, and property damage as it pertains to their business operations.
• Property – Monetary coverage or replacement of business contents or buildings in the event of a covered loss. It is subject to the limits and deductibles within the policy. Typical losses include fire, water damage (not flood), theft, mechanical breakdown, etc.
• Business Income – Replacement of lost business income as a result of a covered loss that prevents you from operating your business.
• Workers’ Compensation – Coverage for lost wages and medical expense as a result of a workplace injury to an employee.
• Employment Practices – Protection for employers from claims that are made by the employee for: wrongful termination, sexual harassment, discrimination, invasion of privacy, false imprisonment, breach of contract, emotional distress, and wage and hour law violations.
• Cyber Liability – Also known as data breach or cyber risk insurance, this covers the costs incurred by your business in the event that your electronically stored data is compromised.

Coverage Amounts
Million-dollar general liability, umbrella, and cyber liability are industry-standard starting points.

Most insurance limit requirements are often dictated by a contract the insured is entering into — for example, with a client for work to be performed or a lease agreement with a landlord.

“Most of the time, when talking about liability, we start off with $1 million per occurrence limits,” Keohane advises. “The cost to write coverage with lower limits just doesn’t make sense, compared to the coverage you are losing.”

Once you know that you have appropriate coverage limits, you are getting the best price, and that your policy covers all of your specific business needs, you can rest easy in knowing that you are protected. An experienced and knowledgeable agent, who does all of this and takes time to understand your specific needs and answer questions, can always help you feel better about the insurance premiums you pay for the coverage you need. BW