Business Insurance: The Basics

When considering business insurance, business owners should start with the basics.

General Liability

General liability insures a business against accidents and injury on its premises and exposures related to its products/services. For example, a visiting salesperson slips in your office and breaks an ankle. General liability covers the claim against you.

However, let's say the business is a window manufacturer, with hundreds of its windows installed in homes and businesses. If something goes wrong with them—and this is the confusing part—that is not related to poor workmanship, general liability also covers the damage that results. Naturally, insurance companies don't want to pay for sloppy work. As a result, general liability tends to be rife with exclusions to the point that some companies wonder why they have it.

The key is determining how much coverage you need. A good way to determine what you need is to estimate what you stand to lose if there is a problem. Whether or not the business is incorporated is also a factor, as well as if your firm is being used as a subcontractor.

Property/Casualty

Most property insurance is written on an all-risk basis, as opposed to a named-peril basis. The latter offers coverages for specific perils spelled out in the policy. If your loss comes from a peril not named, then it isn't covered.

Business owners should get a breakdown of what the coverage offers. Then, go the extra step and carefully review the policy's exclusions. All policies cover loss by fire, but what about such crises as hailstorms and explosions? You may want to buy coverage for all these risks.

Perils not covered by a typical policy include: earthquakes and landslides, nuclear contamination, flooding and water-seepage, and maintenance-related losses, such as wear-and-tear and pollution.

Workers' Compensation

Workers' compensation is required by law in all states. Each state says that employers are liable for all injuries to workers, regardless of fault. In exchange for this blanket coverage, workers give up the right to sue their employers, except in cases of extreme negligence.

One way to reduce workers' compensation premiums is by reducing accidents. Even in office settings, injuries, such as carpal tunnel syndrome and slips and falls, can increase your premiums. After a certain premium level, employers may be rated on their claims history.

Automobile

A business auto policy covers property and liability risks that can come with the ownership or use of cars and trucks. The primary strategy for saving money with auto insurance is increasing the deductible.

Another helpful hint: If a small business owns a vehicle, its name should be on the policy. If the name written on the policy is different from the name that appears on the vehicle's title, the business owner will have problems collecting on a claim.

Liability associated with autos can be particularly complex for commercial vehicles. For example, the business could be found liable if an employee is driving on company business and has an accident, even if the employee owns the vehicle. The employer may also be liable if an employee drives a company-owned vehicle to and from home. If the employee uses the vehicle for personal reasons, the employer is usually not liable—however, some courts have found the company liable regardless.

Insurance Coverages Often Overlooked

Discrimination Liability.
To protect business owners, coverages are available for defense only or for both defense and indemnity for actual or alleged sexual harassment and wrongful termination. These coverages are excluded under the standard general liability contract and generally carry a deductible.

Directors' and Officers' Liability.
This is a very broad coverage and provides both defense and indemnity coverage for claims made against directors or officers for any alleged wrongful act in their respective capacities as directors and officers of the company.

Boiler, Machinery (including air conditioning) and MEA (miscellaneous electrical apparatus).
This coverage should be purchased as comprehensive, and consideration should be given as to whether or not to include coverage for the sudden and accidental breakdown of production equipment, as well as business-income protection. A classic example of a loss is the shorting out of a large electrical panel that is not only very expensive to replace, but could give rise to substantial loss of production.

Flood (including back-up of sewers).
This coverage is available through both the federal flood insurance program and directly through some standard carriers.

Earthquake.
An earthquake could be a potential catastrophe in the Metro St. Louis area. In many cases, the business insures its building, but overlooks insuring its contents and business interruption.

Off-Premises Power Failure.
This coverage can often be endorsed to the standard property insurance policy and, depending on the carrier, can include the failure of outside transmission lines. Generally, businesses in the food and beverage industry are aware of spoilage coverage, but this could also be an important consideration to some high-tech businesses.

Employee Dishonesty.
Some policies cover this, but most do not. When covered, the insurer will replace items or funds taken by employees.

Disability Buy-Out.
Owners need to consider the impact that a co-owner's disability can have on the business, as well as on their families.

Republished by permission of the St. Louis Small Business Monthly, The Source for Business Owners. July 2001