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Understanding the Key Types of Insurance Your Small Business Needs
Posted by Sylvia Lagerquist, CPA
Protecting your business and yourself from risk is one of the least understood facets of small business ownership. And yet, when you establish a small business, the potential sources of risk multiply dramatically and they need to be managed and mitigated. The key is to understand the key areas of risk and purchase the appropriate kind of coverage for each priority.
An experienced small business insurance broker or consultant can guide you through this process. Here are ten of the key types of insurance your small business needs to consider and purchase to secure coverage for your future:
Professional Liability Insurance (E&O) – Also referred to as Errors & Omissions (E&O) insurance, professional liability coverage provides coverage against claims that anyone you contract with or service may bring against you over harm that may come as a result of mistakes or problems with performance. It should be noted that in most industries, professional liability insurance is tailored to the specific type of business. For example, an E&O policy for a law firm will be very different from that of a roofing contractor.
Commercial General Liability Insurance (CGL) – Whereas professional liability coverage is specific to the services or solutions you provide and how you provide them, general liability coverage protects your business from another individual’s or business’ claims of injury, property damage or medical costs associated with the actions of your company.
Business Property Insurance – In addition to covering strategic risk, your business also needs to protect its hard assets. This is true whether you own or lease your space, and even if you primarily work out of a home office or a coworking space. The goal of this coverage is to provide recourse in the event that your office equipment, inventory, files, furnishings, signage or equipment are damaged or destroyed, typically due to theft, fire or other incidents. Also, keep in mind that in many locations natural disaster coverage may be limited in situations such as floods or earthquakes and you may need to purchase either specialized coverage or an additional rider (essentially an addendum to the policy) that addresses this risk as well.
Workers’ Compensation Insurance – If you hire and manage employees, this coverage is mandatory and must be added to your company’s insurance portfolio. Worker’s compensation coverage provides for medical services, disability support and death benefits when an employee experiences an injury or fatality while on work-related activities (such as on the job site or while driving a company vehicle). Keep in mind also that OSHA workplace regulations cover even lower-risk issues such as ergonomics and office injuries, so your coverage should as well.
Employment Practices Insurance (EPLI) – Another must-have if you have other people on the payroll is employment practices liability insurance. This coverage, also known by the acronym EPLI, protects the company in the event of lawsuits or other claims being filed over a wide range of employment conflicts and issues such as discrimination, discipline, wrongful termination, employee benefit problems, sexual harassment and more. Check with your carrier as in some cases, EPLI may now be included in the business owner’s policy with some insurers.
Product Liability Insurance – If your business produces products of any kind, you need to separately acquire and secure product liability coverage to address any risks or claims that may arise associated with safety, product design, injury risk, product failure or the damage your product may cause to others or their property. Depending upon the type of product involved, coverage can be tailored as appropriate to address the most likely kinds of claims.
Company Vehicle Insurance – Make sure that before you let an employee drive the company car, that you have purchased and currently maintain coverage unique to company vehicle use, as regular car insurance policies do not generally cover business vehicles. This is essential both to protect the company in the event of an accident, but also to provide support to address the injuries which may be incurred by third parties in an incident.
Business Interruption Insurance – Not all companies carry this kind of coverage but in many instances, it can be invaluable to have business interruption coverage. If your business could be shut down for an extended period of time due to an initiating event (such as a labor action or a fire), then business interruption coverage should be on your list. For example, some years ago UPS employees went on strike for three weeks, during which many independent mail and package stores went out of business because, even though they were not parties to the labor dispute, the result was a massive decrease in shipping volume resulting in huge cash flow crises. Just keep in mind that business interruption coverage may be linked to company profitability, which means that in some cases, if on your taxes the business ‘loses money’, this tax position may hurt your ability to receive an appropriately sized payout should you need to activate your business interruption coverage.
Business Owner’s Policy (BOP) and Umbrella Policies – In some cases, an insurance company may assemble a combination package of coverages appropriate to your industry. A typical BOP policy will combine property insurance, business interruption insurance and business liability protector into one policy. Also, in some cases, an insurer may offer an additional add-on option called an umbrella policy which may extend or enhance the level to which liability coverage is covered by the insurance company. Note, however, that BOPs typically do not include professional liability, company vehicle insurance, worker’s compensation or health and disability insurance. Therefore, even if you have a BOP, you will need to secure separate insurance policies to cover professional services, vehicles and your employees.
Medical, Dental & Vision Insurance – When we think of small business insurance, most of us think immediately of health coverage since it has been so heavily debated for the last decade and small businesses often struggle mightily to find affordable coverage. Medical insurance is essential not only for your employees, but also for you. Look for carriers who provide a balanced network of options in a range of essential specialties so that you can attract and support employees of all ages and backgrounds effectively.
What each of these insurance categories has in common is a clear focus on mitigating risk. The purpose of insurance is to provide a backstop against the risk from unforeseen events, although the role of an insurance carrier is largely to help clients identify and reduce risks that could result in a claim. Sit down with your insurance broker today to review these policy types and to ensure that your business is receiving comprehensive support as you mitigate risk today.
Image Credit: GotCredit (Flickr @ Creative Commons)
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