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Cover Your Assets: An Insurance Primer for Small Businesses

Patrick Egan, BusinessNewsDaily Contributor

No person or business likes to spend money for protection from something that might not happen. But ignoring the insurance needs of your business can have deep repercussions — and possibly destroy your ability to earn a living.

But what insurance do you need? There’s no definitive answer to that, but it’s probably more than you think. Ron Reitz, president of Quality Claims Management, a national public adjustor firm that works on behalf of the insured to maximize claims, urges businesses to tell their insurance agent everything they can about your business. “The broker is your friend,” he said. “Make sure they’re part of the process and be honest with them.”

A business owner’s policy fits the general needs of many small businesses, but it may not cover everything. Here are some of the insurance policies your business should consider.

General liability insurance (aka commercial liability)

  • What it does: It protects a business against a wide array of lawsuits stemming from negligence. The policy usually covers the cost of defense, claims for bodily harm or property damage, personal injury and advertising damages (libel or slander).
  • Mandatory? A business won’t be able to rent space or secure a loan without general liability insurance.
  • Costs: Will rise with greater exposure to risk. A business with delivery staff buzzing around the streets will rate a higher premium than will a small publishing house.

Product liability insurance

  • What it does: Any company that makes, distributes, or sells a product has exposure to product liability, because almost any product can cause some type of personal or property damage. This insurance helps protect against negligence, breach of warranty, product defects and faulty instructions. It also helps cover the costs of recalls.
  • Mandatory? It is not mandatory, but it’s often included in a business owner’s policy. Alternatively, businesses that provide parts/supplies to large companies might be required to maintain the insurance as part of the contract.
  • Costs: A maker of chainsaws will likely have far higher premiums than a pillow manufacturer.

Property insurance

  • What it does: It protects a business against damage to its workspace, from a fire, leaks or any type of property damage event.
  • Mandatory? Yes. Again, landlords and mortgagors won’t let businesses occupy a space without it.
  • Costs: Location can have an impact on the cost. For example, businesses in low-lying areas close to bodies of water will incur greater costs.

Sprinkler leakage insurance

  • What it does: This insurance could fall under property coverage, but every business should ask the question. A sprinkler leakage policy may be especially important for businesses dealing with important documents. Recreating documents is extremely expensive. And, of course, sprinkler showers will ruin all electronic and computer equipment.
  • Mandatory? Not likely.
  • Costs: The higher the replacement costs of documents or equipment, the more expensive the premiums.

Professional liability insurance (aka ’errors and omissions’ or malpractice)

  • What it does: Almost all service providers should consider the possibility that clients, patients, or customers may litigate for perceived or real damages. The most common example of professional liability coverage is the malpractice insurance doctors carry, but architects, accountants, surveyors, realtors, lawyers, and insurance brokers commonly carry similar policies.
  • Mandatory? Not all professions require it, but many professional boards or associations require their members to carry this insurance.
  • Costs: The expense varies greatly depending on the profession and a particular state’s tort law history. A CPA won’t shoulder nearly the burden that an anesthesiologist does.

Umbrella insurance

  • What it is: Essentially, an umbrella policy serves as extra insurance beyond the dollar limits of a general policy.
  • Mandatory? No.
  • Costs: Relatively cheap, because claims large enough to reach umbrella limits are rare.

Worker’s compensation insurance

  • What it is: This insurance provides medical care and compensation when an employee gets hurt on the job. The employee usually accepts compensation in exchange for forfeiting the right to sue the employer.
  • Mandatory? Yes. States govern the worker’s compensation rules, so requirements will vary depending on where you do business.
  • Costs: State laws and programs have an impact its respective costs. Also important is the type of business — whether it’s more likely to have claims — as well as a company’s claim history. If a company makes frequent claims, its premiums will rise.

Internet business insurance

  • What it does: This insurance is vital for small- and medium-sized businesses that do business over the web, as it provides protection against security and privacy breaches. Businesses with less of an Internet presence might still consider a policy if they have multiple locations requiring e-mail and other digital transmissions.
  • Mandatory? No.
  • Costs: This type of insurance is still relatively new, and costs depend on the type of activity and the value of information being protected.

Crime and fidelity insurance

  • What it does: This policy protects employers from workplace theft and fraud.
  • Mandatory? Not necessarily, but customers of certain businesses — art storage, for example — might require it.
  • Costs: Businesses can mitigate costs by instituting strong policies and audit controls as well as running background checks on employees.

Business interruption expense insurance

  • What it does: If a business becomes disabled for any reason, a business interruption policy covers financial outlays and reimburses lost profits until the business as usual can resume operations.
  • Mandatory? No, but highly recommended.
  • Of Note: Businesses should make sure the policy includes extra expense coverage. This allows a business to rent an alternative location or lease equipment while waiting for the restoration of permanent resources.
  • What it does: If your business requires employees to spend a lot of time on the road — whether in their own cars or vehicles belonging to the company — this insurance will be important.
  • Mandatory? If the business owns vehicles, the insurance will be mandatory and will be identified as fleet insurance.
  • Costs: Auto insurance costs vary by state.

Home-based business insurance

A final word to the millions of businesses run out of private homes. All of the above insurance types may be vital to your business, depending on what you do. Don’t try to sidestep insurance simply because you operate out of the garage. Your homeowner’s insurance almost assuredly doesn’t cover you. And you may have more at stake, especially since losing a home to a work-related lawsuit might prove catastrophic.