Business Insurance 101 

Common Business Insurance Policies

Running any Business is Risky.  Consider these policies to transfer your risks:

Business Owners Policy

Any small business should have a business owners policy.  This is equivalent to homeowners insurance. It's a basic coverage package, giving you a little coverage for the most common risks.  Salons, real estate offices, clothing stores, anything that belongs on Main Street USA needs one of these package policies.  General Liability and Property Insurance are included.  You can usually customize it to fit the needs of your specific business.  Every major insurance company offers a Business owners policy, so you should shop around.  Any savvy insurance agent can help.

Busy running your business and need a quote?

Workers Compensation

Workers Compensation insurance provides medical benefits and lost wages coverage to employees injured while on the job.  The policy is a social contract between the business owner and their employees.  The owner agrees to buy coverage and the employees are given the remedy for work related injuries via the insurance provider’s benefits.  This eliminates the employer risk and gives the employee piece of mind.

Consider this story:

Bob runs a little painting business out of his house.  He’s been operating Bobby’s Painting Service since 1987 and never had a claim. Then, one day his employee, Juan, decides to climb up on the roof of a house to take a peek at the eves they are painting that day.  Unfortunately, there was a heavy dew on the roof that morning and Juan slipped.  He tumbled 12 feet to the driveway below.  Juan sustained a cracked skull and a broken shoulder.  Needless to say, Juan will never be the same.  Luckily, Bob had Workers Compensation Insurance.  This covered Bob.  It pays an unlimited amount for Juan’s medical care. It also pays for his permanent disability and his temporary partial disability.  

Workers Comp is mandatory in most states as soon as you hire your first employee.  It's the law. 

He was on his way to a job on Highway 14 the other day and couldn’t stop in time. 

So instead of hitting the car in front of him, he swerves into oncoming traffic.  This was unfortunate because he then caused a head on collision.

The other driver survived, but did require a trip to the hospital.  Freddy’s insurance policy only carried $100,000 in liability limits.  

So when his policy was tapped out, the other driver still had $360,000 in unpaid medical bills.  

This is when Ken received a letter from the other driver’s attorney, demanding $360,000 due to Ken’s vicarious liability in the accident as Freddy’s employer.  

Ken was very happy to have non-owned auto coverage with $1,000,000 limits.  

Business owners should know that they are liable for the actions of their employees while driving their own vehicles for company business.

Commercial General Liability

A commercial general liability insurance policy gives coverage for bodily injury or property damage that your company is responsible for causing.  

Some businesses, such as small construction firms, only need liability protection.  So this policy would make sense.  

A word of warning when shopping for quotes, many General Liability insurance policies have a ton of exclusions.  

When you receive a quote, make sure all the exclusions are being presented to you.

Be smart!  Don’t just look at the price.  

Generally, these policies provide $1,000,000 “per occurrence” which is insurance language for “one event”.  

For some reasons, insurance companies like to use words like “occurrence”.  

I guess it's the lawyers who write the policies that chose the words.

Which reminds me of a joke...

What's the difference between a lawyer laying in the middle of the road and a snake laying in the middle of the road?

There are skid marks in front of the snake! 

Ha! 

Umbrella or Excess Liability

This is causing the Excess Liability marketplace to react. 

Underwriters are becoming more picky with the risks they will take and they are charging higher rates for those they do accept.  

They also tend to be hesitant to offer more than $5,000,000 in coverage.  

This requires most businesses to construct a “liability tower”; with multiple insurance companies take a piece of the action.  

The best thing to do is shop around and get a few quotes.  

The reason for this change in the Excess Liability market is a thing called “Social Inflation”...

What is Social Inflation and why does it matter?  

Social Inflation is why you need an umbrella or Excess Liability policy.  

It is the new trend in jury’s.  Think about it.  

When you get into a serious situation, where your company has caused someone to have life altering injuries, you will need more than $1,000,000.  

A claim that would have settled for $500,000 a few years ago, now tends to settle for much more because juries feel the injured person deserves more money.  

The saying goes, “Five Million is the new One Million”.  

By that, I mean you need higher liability limits that the standard General Liability policy provides.  

Think about it, the standard business owners liability limits have not changed in decades.  $1,000,000 per occurrence doesn’t cut it anymore.  

Excess Liability Insurance provides additional liability limits of insurance over one specific policy.   

Most umbrellas will extend coverage over the General Liability policy, the Business Auto, and the Employers Liability policy (aka Workers Compensation).

Commercial Umbrella policies can also have drop down clauses. 

These will cover losses not picked up by the policies beneath them due to exclusions.  

This is a “true umbrella” and may not be the lowest priced option.  It may also be the policy that will keep you in business.

Commercial Property Insurance

Commercial property insurance is coverage primarily for buildings, the contents of the buildings, equipment, and basically any tangible item a business could own. 

It also can extend coverage to the property of others, held in the custody of a business owner.  

The most important part of a Commercial Property Policy is the loss of business income coverage it can afford.

When shopping for property insurance, keep these rules:

Coverage Types:  Also Known As Settlements Types

When selecting insurance for your property, you have several options for the “cause of loss” form your policy will carry…

Co Insurance

A long time ago, insurance companies found out that most insurance claims aren’t total losses. 

For example, most of the time a building doesn’t burn to the ground.  

Before insurance companies figured this out, insurance buyers had already figured it out, which led to most insurance buyers not taking out as much coverage as would be necessary to cover the entire property for a total loss.  

They knew the building had a very small chance of being burned to the ground, so they saved premium and insured for less.  

Commercial Property Insurers on the other hand, depend on premiums that match the total risk they assume. 

So they came up with this little thing called Co-Insurance to force insurance buyers to buy adequate coverage limits. 

A simple example of Co-Insurance would be this story:

So he decides to insure it for $600,000 in rebuilding value.  

Jerry’s agent, Dane, tells Jerry that his insurance policy contains a co-insurance penalty if he fails to insure the structure to within 90% of its actual insurable value. 

The co-insurance penalty states:  if you don’t insure to 90% of actual replacement value, you will receive a pro-rated settlement to match the amount you are underinsured.

Later that year, Jerry’s building suffer a small fire. 

It is put out quickly and only a part of it is damaged.  

Total estimated loss for Jerry is $200,000.  

Jerry is very proud of himself for about a week because he knows the claim is covered and his insurance was done on the cheap.  

His excitement fades when his claims adjuster, Tom, tells him the settlement check will be for 60% of that amount:  $120,000.  

erry asks why?  

Tom explains that the co-insurance penalty requires Jerry to insure his building to within 90% of the actual replacement or insurable value. 

Failure by Jerry to meet this requirement would result in this prorated settlement.  

So Jerry gets to spend $80,000 of his own money to make up the difference for the repairs to his building.

How does it work?

You take the percentage that Jerry’s building is under insured by and apply it to the total amount of the claim.

For this example, take $200,000 and multiply by 60% because Jerry’s total insurable value is $1,000,000 and his actual insured value is only 600,000 .

Ordinance Of Law

An ordinance of law insurance policy will cover a common problem for building owners. 

Your building suffers a loss and the building code inspector will not approve the rebuild unless the entire structure is brought up to current code.  

Insurance is meant to restore a building to the way it was before a claim or loss. 

It is not usually meant to improve undamaged portions of the building.

Ordinance or Law coverage does just that.  

It pays to have the undamaged portion of a building brought up to code. The key is to carry enough coverage.  

The problem is knowing how far out of current code compliance your building is right now.  

Codes change from place to place.  Even neighboring towns can have different building codes.

Common code changes would be life safety upgrades to an older apartment complex. 

Or additional handicapped access for offices buildings.  

If you have a really old building, you will need a significant amount of ordinance or law coverage.  

It may be hard to secure enough coverage in the current insurance market.

Most underwriters know code compliance issues can be costly to handle, so they will not give the actual amount of coverage needed to bring the structure 100% up to code after a loss.

This leaves the property owner with the only option of paying to bring the property at least partially up to code before a claim occurs, or have enough money set aside to handle this uninsured part of any loss than might occur.

There are three main part of ordinance or law insurance.  You can click here to find out more.

Cause of Loss Forms

The “cause of loss” in the insurance biz refers to the way a claim is caused. 

There are three of these forms and its very important to the policy holder to take the best possible form.  

The three primary cause of loss forms are:

Basic form is the most limited of the three. 

Broad is a little better.  

The very best and the one you want is Special.  

Special form is the only one that includes coverage for theft.

Special form is also known as “all risk” or “open peril”.  

This is because it will pick up any claim as long as that type of claim is not specifically excluded from coverage.  

Why is this better than the other two?  

Basic and Broad form are “named peril” policies.

That means your loss has to be on the list of claim types in order to have the claim coverage.  

Having an “all risk” policy, that will cover anything not specifically excluded is way better.  

Would you rather have to prove your claim is covered or would you rather have a claims adjuster prove its not covered?  

The later is the way to go.

What are named perils? 

They include losses caused by: fire, lightning, explosion, smoke, windstorm, hail, riot, civil commotion, aircraft, vehicles, vandalism, sprinkler leakage, sinkhole collapse, and volcanic action.

Business Income Insurance

Did you know that most businesses who fail to reopen after a fire or other event covered by their insurance do so because they don’t carry enough Business Income coverage?  

You will still have bills to cover after an insurance claim shuts down the business and you are trying to get back up and running elsewhere.  

You will need the income stream to continue until you can get back on your feet.  

What if it takes 14 months to become operational again after a fire?

Where will the money come from to pay for relocation?  

How about your own income as a business owner?  

Where is that money coming from?

Extended Business Income

Extended business income coverage provides loss of income from sudden business stoppages due to fire, vandalism or a variety of other unexpected events. 

Once you reopen, it might take some time to re-establish your clientele. 

Extended Business Income will help bridge the financial gap between the time you reopen and the time your clients all rediscover you.  

180 or 365 days of Extended Business Income coverage is a minimum.  

Most policies normally offer 30 to 60 days of this coverage.  

Make sure to ask for more.

Earthquake and Surface Water Flooding Insurance

A standard business owners policy or property insurance policy is not going to provide coverage for any event that could impact a lot of people in the same area. 

Earthquakes and floods are prime examples.  

Earthquake Insurance and to a lesser extent surface water and flooding insurance are inexpensive policies and there's no reason for you to not add one. 

Insurance companies go out of business when there are a lot of large claims all at once.  

Look up Capital Insurance Group or Tower Insurance Group.  

They are two large insurance companies that went away in the last 10 years because they didn’t do a very good job of underwriting risks.  

Capital had too many properties insured for fire in northern and central California.  

Many of these were burned down all at the same time in towns like Paradise and Santa Rosa.  

Mobile Equipment, Tools, and anything that leaves your premises

If you have a business that provides a mobile service, such as a plumber, an electrician, or a locksmith, you need to insure your stuff in the vans and trucks.  

Specifically, plumbers drive around with a lot of expensive equipment in their vans. 

I’ve heard of vans with $30,000 or more in equipment driving around everyday.  

Plumbers equipment insurance is reasonable if you have a good claims history.

Items that move around a lot are more likely to be stolen or damaged. 

So the rate for insurance is going to be higher than the rate you pay on items stored at your building or location where you primarily do business.  

When you call an insurance agent, tell her you want “inland marine” coverage.

They will know what you are talking about. 

  Today, you need to insure your mobile equipment and tools like never before. 

Consider this article, which appeared in the LA Times last December: 

Last December the LA Times said vehicle break-ins are at a crisis level in the Golden State.  

If you are a contractor, looking for equipment insurance, click here the button below for a free quote. 

Professional Liability aka Errors and Omissions

Also known as Errors and Omissions, this policy covers the “wrongful acts” of someone in the course of performing their profession. 

Doctors, lawyers, engineers, architects, or even hair stylists all need a professional liability policy.

This policy is arranged so that you must carry continuous insurance coverage year over year in order to have any claims from previous policies covered. 

Oftentimes, lawsuits are filed months or even years after the event that caused them to be filed.  

This delay can lead to trouble for professionals who are not mindful of their insurance.  

Consider this:

Shaw Engineers were responsible for the construction of a weather monitoring tower on an island off the coast of North Carolina. 

This island was also home to a group of small plane enthusiasts.  One day, two years after the monitoring tower was constructed, a small plane hit it.

This caused the plane to crash, killing the pilot.  

The pilot’s family sued Shaw Engineering for negligence in failing to properly mark the tower.  

The professional liability insurance paid $1.8 million as their part in the settlement to the deceased pilot’s family.

One thing to keep in mind: professional liability insurance is on a  “claims made” policy form.

This means that claims must be made during the policy year in which you become aware of the situation causing the claim.  

Some policies include a 60 or 90 day period immediately following the expiration of coverage to make a claim.  

The point is:  make claims or put the professional liability insurance company on notice of any event that you feel could lead to a claim as soon as possible.

If you delay too long, you risk coverage being declined.  

When closing the business, it is wise to buy “tail coverage”. 

This extends the reporting period out for up to 36 months after the last policy expires.  

Tail coverage pricing varies, but typically reduces for longer tails being purchased.

Employment Practices Liability Insurance

Employment practices liability insurance also known as Human Resources Insurance by some of my clients, this policy protects business owners from allegations of things such as:  wrongful termination, harassment, discrimination, wrongful termination, wrongful discipline, defamation, slander, hostile work environment, wage and hour dispute… and the list goes on!

Employers in California, Nevada, New Mexico, Delaware, and Washington D.C. should all buy this policy today. 

Operating a business in these states almost guarantees you will have some trouble at some point with an employee or ex-employee claiming you did something wrong in your employment relationship with them.

I believe the best part of this policy is the defense costs being paid.  An attorney is going to charge $350 to $500 an hour to defend you and these claims take forever to finalize. 

If you have Employment Practices (EPLI) coverage, you’re in luck because the insurance company will pay your defense costs, minus your deductible, until the policy limit is reached.

As with Professional LIability, its very important to be accurate and disclose any prior incidents when applying for coverage, failure to do so could result in a declined claim.

Cyber Insurance

Cyber insurance is also knowns as Data Breach Liability Insurance.

Global Credit Card crime is a $7.5 billion dollar industry. 

The risks are being transferred by the big credit card companies down to the retailers responsible for collecting payment from customers.

This means you!

Data is your most important asset, but it is not covered by a standard Business Owners Insurance policy. 

Computer systems can be held hostage and a demand note can be sent for ransom.  

This is called ransomware attacks.  

This is also not covered by a standard business owners policy.  

Ransomware attacks happen all the time.  

Going without insurance leaves your business vulnerable.  

Social Engineering is also on the rise.

This is the term given to a hacking event that is done by very sophisticated cyber criminals.  

Consider this example

In 2016, a diamond importer received their normal invoice for $650,000 from their supplier in Israel. 

The invoice came as always, via email, from what looked to be the same email address as always.  

The only difference was the sender asked that the payment be made to a new bank account.  

The accounting office at the import company paid the invoice to the new account via wire transfer, as normal.  

Days later, they realized their error, when the real invoice arrived from the real supplier.  

They had been hacked!  

Luckily for the importer, the insurance agent had put Social Engineering coverage on their Cyber policy and the loss was completely covered by insurance.  

Had that coverage been absent, they probably would have gone out of business.

This example is extreme, but I use it to make a point on the value of cyber insurance coverage. 

Cyber insurance policies have many coverage parts, the list can include:

Network Security LIability:  this pays for your legal defense and settlement from lawsuits that are brought because your company sent a computer virus to hundreds of your customers via email (which would come as quite a shock).

Incident response costs:  pays for a technically trained cyber incident manager for advice on how to stop a claim event.

Legal and Regulatory Costs:  pays a data breach attorney to handle the various state, federal, and private regulations.

IT and Forensic Costs:  payment for specialist computer forensic experts to determine how to stop a cyber attack on your system.

Crisis Communication Costs:  payment to a public relations firm to reduce damage to your brand and public image.  Hopefully stopping customers from leaving you!

Third Party Privacy Breach Management Costs:  Pays the additional costs associated with privacy regulation compliance, includes credit monitoring services and identity restoration services.

Post Breach Remediation:  Payment to comply with HIPPA standard security risk assessment costs 

Funds Transfer Fraud:  also known as social engineering, from the story above.

Theft of Personal Funds:  You want your money insured, right?

Extortion:   Your computer system can be held hostage.  It’s a very popular crime.  You could be next!

Corporate Identity Theft:  Nobody every thinks their corporation’s identity could be used by a  3rd party impersonating your business online.

So these are just a few of the coverage options with Cyber Liability.  These policies are fairly priced right now, but with a few more claims, this line of coverage will probably become more expensive over the next few years.

Directors and Officers Liability

Have investors or shareholders in your business?  On a Non-Profit Board?  Then you need this coverage.

Directors and Officers (D&O) Insurance protects the personal assets of leadership.  Lawsuits can be brought by other parties, claiming they suffered some kind of financial loss because you did a bad job running the company or the non-profit.

Can you imagine losing your personal money due to your actions on a non-profit board?  It can happen.  This is why I refuse to serve on a non-profit board until I know that they carry at least a $1,000,000 Directors and Officers policy.

Generally, these policies should be handled by insurance professionals with a good understanding of the policy forms necessary.  There are three parts to a Directors and Officers policy:  Side A, Side B, and Side C.

Side A:  If your company or non-profit is unable to pay for your defense costs and indemnity.  The policy pays.

Side B:  Pays back the company or the non profit if it paid out to defend or indemnify board members or directors.

Side C:  pays to protect the business entity or non-profit entity itself.  Also called the “corporate coverage”.  It pays to protect the company as a named defendant in the suit.

International or Global Travel Insurance

The globalization of our economy is causing more businesses to travel internationally. 

Sending employees abroad creates risks not picked up by your standard business insurance, which has a “coverage territory” of the United States and Canada.  

The International or Global Travel Insurance policy provides a few unique coverage options:

General Liability:  provides bodily injury and property damage coverage for employees in foreign nations.

Contingent Business Auto Insurance;  supplemental to local insurance you buy “in country” will provide an additional layer of coverage should the local insurance fail to respond to a claim.

Foreign Workers Comp:  should an employee sustain a work related injury while traveling abroad, this policy responds.  Your domestic workers comp would decline the claim because the employee is out of the United States.

Accidental Death and Dismemberment:  if an employee dies while on business travel or loses a body part, the insurance will pay for their body to come home or the additional expense associated with getting an employee home who is injured severely.  

Kidnap and Ransom:  If your employee is held hostage, the policy will provide specialists to help with the negotiation for release and the ransom money needed to free them.

Executive Support Services:  Includes emergency evacuation assistance should the country become hostile to Americans or suffer a catastrophe while your staff is visiting.  The employees will have a person in the country they can contact to help them evacuate.

Pandemic Insurance

In the years following COVID 19, the Pandemic Insurance policy may become desirable as a risk transfer for larger corporations. 

These policies will be available to larger businesses, able to handle the outlay of $200,000 or more in premium for insurance.  

The policies have staggered payment limits.  

With money becoming available when the World Health Organization first declares a pandemic in the “insured territory”. 

Then will release money as the death count grows in your pre determined insured territory.  

Not fun to think about!

Best Practices Of Shopping For Business Insurance

The insurance market is always changing.  It is a good business practice to shop your insurance every three years.  When preparing to shop, take these steps:

1. Get your printed claims history for the past 4 years.  The insurance jargon phrase is “loss runs”.  Every underwriter will want to see your claims history.  Even if you have zero claims.  

2. Know your business financials.  What is your revenue forecast for the next year?  What was your revenue last year? What is your payroll?  Outsource anything?

3. Contracts:  underwriters are interested in how you protect your business contractually.  If you have good risk transfer wording in the contract, leverage that to get lower rates.

4. Assign markets:  if you are working with more than one agent.  Give them each their own insurance companies to represent.  Most insurance agencies represent the same insurance companies.  Controlling the access will guarantee you get the best deal.  You have each agent prepare a Broker of Record letter for their assigned companies, which you will sign, then let them go to war for your business.

5. Start Early:  if you want the best offers, you need to start 100 to 120 days before your current policy expires.  Don’t go to market 30 days before your current policy expires and think you are getting the best offers.

6. Don’t give up your pricing.  Some agents may as “where they need to be” on price to win your business.  You tell them:  ‘as low as you can go”.  They ask this question because their underwriter is asking them the same question.  Let them figure it out on their own.

7. Full Disclosure: Make sure the proposals outline the policy coverage and its limitations.  Coverage limitations are called “exclusions”.

8. Fill out your own applications.  Don’t let your agent fill out the application for you.  That is how things get missed.

Good luck, happy shopping, give me a call if you need help.

Agent Dan