Blog: New Business Tool Kit Chapter 9 – Insurance

April 5th, 2018

Business insurance, like many types of expenditures, is one of those items which business owners typically do not like to pay. You must remember that sufficient insurance can be as critical to the success of your business as a good product or service. Without proper insurance you could lose all the money, time and effort you put into your company. The types and amounts of coverage you purchase must be evaluated on a cost-benefit basis like any other commodity that you purchase.

Your insurance agent can help you review the amount of coverage you may wish to purchase for various purposes. Usually, you will want to insure against risks that could have significant detrimental impact on your business. This normally would include such items as fire, storm damage, theft, general and product liability. Depending on the nature and size of your business, it is often a good idea to self insure for all or a portion of certain losses. Self insurance can be accomplished by not buying coverage for incidental risks or increasing the deductions on policies that you do buy. Often, raising the deductible can have a very favorable impact on policy premiums. The administrative cost to the insurance company to process small claims is quite high. The rates typically go down substantially if they are relieved of this expense by insuring for losses in excess of a sizable deductible amount.  An insurance broker can provide you with comparative costs for various types of coverage with varying degrees of deductible amounts.

REQUIRED POLICIES

Very little insurance coverage is mandatory.  For most industries, workers’ compensation coverage is required by law. It covers injuries to employees while on the job. Premiums for this coverage are payable as a specific assessment against your business payroll, based upon industry-wide claim experience.

You must also be aware that the terms of your building, office lease, or mortgage may require you to carry certain kinds of insurance coverage in specified minimum amounts.  If you have leased equipment or have borrowed money from a bank or other lenders, there will usually be insurance requirements in the agreements relating to these transactions.  There are many other types of policies that you may wish to consider.  The specific coverage provided by each and their related costs can be explained in depth by a qualified insurance broker.

Some of the types of insurance coverage that you might consider for your business are listed below:

BUSINESS INTERRUPTION

This coverage, as the name implies, covers the loss of revenues your business would have generated if it were forced to shut down for reasons beyond your control.  While this is obviously valuable insurance, the policy premium must be carefully considered relative to the potential profits your business might lose during a short shutdown of operations.

EMPLOYEE FIDELITY BOND

This type of insurance typically covers the risk of loss from theft by employees.  If your business deals in large amounts of cash, negotiable securities, or similar types of assets, you may be well advised to consider this coverage.  Certain industries are required to carry this insurance by regulatory authorities.

UMBRELLA COVERAGE

This type of insurance covers losses above and beyond the limits of other policies that you carry.  Umbrella policies usually pertain to liability of various sorts, and are usually valuable if your business or you have a higher net worth, which requires protection in the event of a catastrophic loss.

ACCOUNTS RECEIVABLE COVERAGE

Also referred to as credit coverage, accounts receivable coverage reduces the risk of doing business, because it covers you against customer bankruptcy, refusal of delivery or other non-payment situations.

Insurance is like any other product you purchase.  Before purchasing it you should consult with more than one broker as to your needs for protection.  You should discuss insurance needs with acquaintances in the same or related business as yours.

Looking to start up a business? Our New Business Tool Kit provides the information you need to navigate through the business start-up phase.

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