Thinking ahead: The Ins and Outs of Business Insurance

Business insurance exists for one reason: to protect your business from essentially two categories of threat – those arising from people in our litigious society where anyone who owns a business can be considered a deep pocket target, and where damage caused by your business’s product or advice is actionable; and to protect against Mother Nature and all her occasionally devastating glory.

“It’s a product that enables a business owner or organization or policyholder to transfer financial consequences to the insurer in exchange for consideration known as a premium,” said Elena Ahrens, deputy chief of property and casualty, Nevada Division of Insurance. “This is a form of protecting company financial interests.”

Whether you’re starting up or have been in business for 30 years, you don’t want to put everything you’ve worked hard for at risk by not insuring your business. But you also don’t want all your profits going out the door in the shape of a policy larger than what you need.

Some forms of business insurance are required by law. Even one part-time employee creates the requirement by state law to have workers’ compensation insurance in place. In some instances, employers are required to cover independent contractors with workers’ comp, so it’s best to get the facts from an expert when starting up even if starting with just basic coverage.

The other legally required insurance is auto if the business owns any vehicles in the company name. Otherwise, the types of business insurance you choose and the amount of coverage is up to you.

When you’re trying to decide what type you need and how much of it, some of the considerations to take into account include:

  • Have you invested in equipment your business needs to operate?
  • Do you own the facility out of which your business operates?
  • Do you rent and if so, do you have renter’s insurance?
  • Do you work out of your home? If so, is there a rider on your homeowner’s insurance? Without one, your business replacement costs may not be met, or may only be met to a predetermined limit.
  • Do you produce a product that’s consumed by the public (liability insurance)?
  • Do you need professional insurance (malpractice) or insurance for directors and officers?

Types of Business Insurance

The type of insurance a business needs and the amount needed varies from industry to industry.

Real property covers the facility out of which the business works.

Liability insurance covers your product if it’s consumed by the public and you have the potential of being sued. Liability insurance also acts as professional or malpractice insurance in case something you’ve advised or performed in your business is deemed to have caused damage, and covers bodily injury damages.

Directors and officers insurance covers instances where businesses such as banks that have a board of directors that serves on a volunteer basis make decisions that somehow cause financial loss. Those directors and officers can be sued individually and collectively and this insurance policy covers them both ways.

Business interruption insurance (or business income insurance) covers expenses if you’re unable to work because your business has been destroyed.

“Business interruption protects a person and their business,” said Jeric Leavitt, co-owner, Leavitt Group. “If their building burned down and they have to relocate, the insurance company is actually going to help them relocate and pay extra expenses incurred as a result of having to relocate and the insurer is also going to pay business and ongoing expenses.”

For example, if the business has taxes owed or payroll expenses for key employees they don’t want to lose during the interim period, the policy will cover those expenses. Such coverage isn’t automatic – it’s an extra expense that’s highly recommended, said Matt Cook, commercial lines account executive, Cragin & Pike Insurance. “You want that business income coverage to last long enough to cover the full time the business may be down. Typically we recommend a company have at least a 12 month business income limit during suspension of operations.”

According to Greg Pike, chief sales officer, HUB International Insurance, commercial real estate lenders are starting to require business interruption protection to extend 18 to 24 months. “I haven’t had anyone explain why it’s happening, but I would tell you it is a tightening of the regulatory community on the banking industry where they’re trying to protect their downside greater than what they used to,” said Pike.

So what’s the most important type of business insurance and does that vary by industry? “It definitely varies by industry,” Ahrens said. “There are two general types for business owners. First is the business owners policy that combines property and liability insurance and is designed for small and medium sized businesses that are generally low risk. The second is a commercial package policy that combines property and liability and is designed for larger companies with specific risk – for a little higher risk companies, like a restaurant, contractor or bank. And both of these can be customized to fit the business’s specific needs.”

Another consideration when choosing business insurance is whether to choose replacement cost or current value. Choosing current value means if your equipment has depreciated, the policy will only pay the amount the equipment would be worth now. So if the business loses a computer from 2000 that’s now only worth $50, $50 is all the business will get. Replacement value – cash value, in insurance lingo, according to Dave Kulikowski, executive sales manager, Altus Insurance Group – means the computer will be replaced with the cost of a 2012 computer.

New trends in Business Insurance

Two forms of insurance are becoming more prevalent in our economically challenged but technologically advanced business environment.

The first is employment practices liability insurance (EPLI), which covers wrongful termination, sexual harassment and racial discrimination. The coverage provides protection for employers when employees, whether or not let go for all the right reasons, want to file a claim or allege wrongful termination. At a minimum it provides defense coverage to protect the employer for allegations like those listed above. According to Cook, Southern Nevada is seeing more of these claims.

Another form of business insurance becoming more prevalent is data breach liability, or cyber liability, which protects businesses when data entrusted to them is lost, stolen, hacked or otherwise compromised, especially if the compromised information is used to open checking accounts and credit cards, and costs are run up.

“The policy covers claims that arise out of the business’s negligence in controlling other people’s private information,” said Kulikowski. “Identity theft is growing. There are more people on the internet and more sophisticated people using personal information in illegal ways.”

One more trend: commercial property insurance policies may require a property to be occupied at least 33 percent at the time of a loss. According to Pike, if the property isn’t occupied to the required percentage, various commercial coverages like vandalism and malicious mischief can be removed, and primary coverages like fire can be reduced.

So What Do You Need?

When determining the type of business insurance needed and the amount of the policy, Ahrens suggests business owners first conduct their own risk analysis so they’re familiar with every aspect of their own company’s needs.

“Every business has different needs according to the type of business they are,” said Ahrens. “To conduct a risk analysis a business owner first needs to identify the type of business assets they have. After that, a business owner can project or anticipate potential risk associated with those assets. In this instance, with an understanding of risk and decision on how to insure.”

According to Leavitt, at the first meeting with a new client he tries to get a feel for what the business is doing. “The more that we can understand what they do, the better we can present their needs to various underwriters, because what we’re going to do is gather information from them and go to a lot of different carriers or insurers and talk to underwriters and say this is what the business is doing and what their concerns are, so the more we can understand their operations, the more we can sell them to an insurer.”

Captive Insurance

If it sounds like business insurance involves paying premiums to recover from something you hope never happens, it is. That’s the nature of insurance and it’s not the only game in town. If it sounds like banking your own funds against tomorrow might suit you, read on. Captive insurance might be right for your business.

Captive insurance started offshore in jurisdictions like the Cayman Islands and Bermuda and made it to the U.S. with the 1981 Product Liability Risk Retention Act and the Liability Risk Retention Act of 1986. Basically the legislation allows large employers and manufacturers to create their own insurance company to provide coverage that’s very hard or impossible to get through the traditional coverage market, according to Michael Lynch, deputy commissioner of captive insurance, Nevada Division of Insurance. It started making a fairly large splash in Nevada between 1999 and 2001 when it was virtually impossible for some doctors to get professional, or malpractice, insurance.

Since then it’s evolved into a product that’s more competitive, using a positive selection criteria. For businesses that are good risks and have good risk management policies, choosing captive insurance rather than coverage from a traditional insurer allows businesses to either manage their policy themselves or create a company that manages it for the business. Most captive programs manage only their own risk, and all are monitored by the commissioner of insurance for solvency, the same as any insurance company.

“What [the business owner] can do is establish a captive insurance program, write the policy and then use his own money to fund it and preserve for claims and then he can go buy reinsurance on the reinsurance market, which is a big, big, big market, and typically his whole cost is going to be 75 percent of that whole policy,” said Lynch. And if the business remains a good risk and in good shape, it’s possible to write off expenses associated with the captive insurance company. Further, if the manager continues to make a profit and takes that money out in the form of dividends, leaving a reserve for the insurance coverage, the captive insurance program functions like a savings account.

There’s another upside to captive insurance – it’s good for Nevada. In terms of economic development, a large business that carries millions of dollars in workers’ comp could have a self-funded captive program and utilize deductible reimbursement in excess aggregate, saving maybe a couple hundred thousand dollars off that million dollar premium, Lynch said. The savings may allow the business to continue to expand in Nevada. For more information on captive insurance, http://doi.nv.gov/captive.aspx.

Keeping It Real

When choosing an insurer, it’s a good idea to stop by the Nevada Division of Insurance website or call to confirm the agent and agency you’re considering doing business with has a license to do business in Nevada. Insurance is a complex business and it’s easy to get blind sided by someone with fraudulent insurance. It’s one thing to hope you’ll never have to file a claim. It’s another to file the claim and find out there’s nothing behind the policy.

It’s also a good idea to include your insurance agent in your professional team, in contact with your CPA and your attorney. They’re all interrelated, and they all look at your business in a slightly different way. Also, many insurance agencies offer free seminars for clients to help them understand the ins and outs of business insurance and how to be compliant.