Whether it's funding options, location selection and build out, merchant services, payroll processing, the list of critical decisions for the first year of business, and beyond is overwhelming. In the grand scheme of things, insurance often becomes an afterthought. As the fatigue sets in, insurance policies are rushed through, skimped, and thrown into place merely as a prerequisite for opening the doors and getting down to business.
Those who choose the entrepreneurial path do so for many reasons. But making money and retaining those earnings is the only way to keep the dream alive. It goes without question that we insure our most important assets like our homes, vehicles, families, and our ability to generate income. So why rush and skimp when insuring your new business venture when it could be your biggest investment to date next?
By nature, humans (and entrepreneurs to an even higher degree) are positive thinkers. We hate buying insurance because “it’ll never happen to me.” As someone who has worked with small business owners my entire life, I can tell you that it does happen. When it does happen, you will be grateful that you have the right policies in place to pay the losses so you can retain the profits you worked long and hard to build.
The following is a general list of insurance policies carried by most small business owners, descriptions of what they are meant to cover, and when they should be put in place. Every business model is different, so having a knowledgeable broker is key to making sure you are not under or even over insured.
Property Coverage – Meant to cover the building (if owned by you), any business personal property (i.e. equipment, inventory, furniture, etc.) and any leasehold improvements if you are a tenant (i.e. build out costs, permanent counters, cabinets, wall units, etc.).
Business Owners Policy – Business owners policy (BOP) in the insurance world is package policy that conveniently combine multiple lines of coverage under one policy. BOPs are not available for all business classes. Whenever they are available, they should be taken advantage of in order to achieve maximum savings. Depending on your business type and the available insurance carriers, BOPs can include some or all of the following, which can also be offered individually when necessary:
- General Liability – Covers you for potential property damage, bodily injury, and medical payments to others like customers and vendors making deliveries. The liability for the products you sell can also be covered.
- Business Interruption Coverage – An invaluable coverage if being unable to run your business from your primary location and will translate into significant lost revenue. If you experience a covered loss like a fire or extended power outage (i.e. Hurricane Sandy victims whose properties were untouched) and you are unable to run your business, you will be reimbursed for the loss of income during that period of time that your property is down or being repaired.
- Commercial Auto – Necessary if you have company vehicles used by yourself or your staff. Even if you do not have company owned vehicles, you should carry hired and non-owned auto coverage. These options protect you from the liability your employees might suffer while using their own personal vehicles for business purposes (i.e. sending an employee out on a quick errand).
- Workers Compensation – Meant to cover employees from work related injuries or sickness. Workers comp is highly regulated at the state level. Your broker will need to familiarize themselves with state laws regarding minimum coverage and whether or not owners can be excluded from coverage or not.
- Umbrella Insurance – Overriding excess insurance meant to protect you from a catastrophic loss that exceeds the limits of liability of the preceding BOP coverages.
When to Buy - Property and auto coverage should be carried as soon as you purchase a property or a commercial vehicle. General liability should be in place as you discontinue your builders risk policy or before you start taking deliveries and open up to the public for business. Workers comp should be in place as soon as you make a hire and prepare for your first payroll.
Errors & Omissions – Errors & Omissions (E&O) is designed to protect businesses that sell a service rather than a physical product (i.e. consultants, hair and nail salons, carpet cleaners, etc.). Just as a retailer can be sued for selling a faulty appliance that causes a financial loss to the customer, a service provider like a hair salon can be sued for the distress caused by dying a bride’s hair the wrong color the day before her wedding. These policies provide coverage for attorney’s fees as well as damages. Even if you are not at fault, you will still need to hire a lawyer to defend you to that end. In certain instances this coverage can be combined with a BOP policy.
When to Buy – E&O should be purchased before you engage with your first customer to ensure the services you are providing from day one going forward are covered by the policy.Employment Practices – Employment practices liability insurance (EPLI) covers your defense and settlement costs for suits related to hiring and firing practices, discrimination and sexual harassment claims. This often overlooked coverage is extremely important as statistics show that small business owners are more likely to experience an EPLI claim than a property or general liability claim. Furthermore, studies show that an EPLI claim, if experienced, would bankrupt half of uninsured small businesses with fewer than 100 employees. Fourty percent of all EPLI claims filed were against employers in that class. Many insurance carriers these days are offering EPLI coverage on their BOP policies. However, coverage is usually limited to $25,000 to $50,000, which is not nearly sufficient.
When to Buy – Since hiring practices and discrimination are major components of EPLI, the policy should be purchased before you begin to seek or interview any potential employees.
Employee Dishonesty – Although coverage against theft is built into property/BOP policies, theft by an employee is almost always excluded. This is where employee dishonesty insurance comes into play. If you stock high value inventory or employees have access to POS systems, you should consider purchasing this coverage. Ask your broker if it can be built into your BOP policy. It is common and the extra expense is minimal.
When to Buy – Generally purchased at the same time as a BOP or EPLI policy.
Cyber Liability – With a number of recent high profile hacks hitting the news, cyber liability insurance has become a real hot topic in the industry. Any business that collects personal private information like SSNs, DOBs, health information, or processes credit card payments is at risk of being hacked. Most states now have laws requiring businesses that experience a data breach to notify every single customer of the breach and offer them credit-monitoring services. With an average cost of $204 per customer, it’s easy to see why this coverage is garnering demand. Yet, the small business community continues to lag behind. Recent studies show that 55 percent of all businesses with revenues under $10 million have experienced a data breach and 72 percent of all data breaches occur in small- to mid-sized businesses due to their computer systems are generally easier to gain access. The loss of private data need not come from a traditional cyber-criminal. Many times it stems from a lost laptop, cell phone, or rogue employee. As a still developing coverage, cyber liability has a lot of differences in policies and pricing in the market right now. We are starting to see this coverage offered on BOP and E&O policies, generally sub limited to $100,000 or less. For companies whose revenues depend heavily on web sales, there are policies available that will protect your computer hardware from virus damage and loss of income if your website goes down due to a hack or virus.
When to Buy – Cyber liability coverage should be in place as soon as you begin to collect sensitive customer data, begin processing credit card payments, or launch your web retail presence.
Finding a good insurance broker to identify your potential risks and prioritize them for you will be key to your success as a small business owner. Part of running a business is putting people in the right positions to become successful. You have the vision and skills to make your business profitable. Therefore, your insurance broker should have the skills to protect those profits from a sudden loss that most times will be out of your control. If you form a relationship with a broker who can understand and support your needs today and protect your future, you’ll be in good hands.