05/ 29/ 2008
by Charles R. McConnell
Under normal business conditions, operating day-to-day and week-to-week and trying to keep up with demands coming from various directions, it's not surprising that insurance coverage is usually the last thing on most owners' and managers' minds. A business operator might go for months without giving a thought to this "invisible necessity" called insurance. Yet a crucial need for insurance coverage is never more than a single incident away, and although the probability of a major calamity may be extremely small, it is nevertheless present.
Skimping on insurance can be an extremely risky practice, as can assuming that the coverage purchased several years ago remains adequate. Coverage should be re-evaluated annually to ensure that the business has the right kinds of coverage and an adequate amount. Unfortunately, the question of whether a particular business carries enough insurance of the proper kinds doesn't occur to some proprietors until the unanticipated occurs and they discover the coverage they depended on wasn't nearly enough. As one owner noted after a gas explosion and fire originating beneath an adjoining business completely destroyed his business, "Sure, I have some insurance, but you never think it's going to be so drastic that absolutely everything's lost."
Several types of coverage are required by most businesses. Primary coverage includes: general liability; fire, and depending on where the business is located, perhaps coverage for floods or other natural disasters; business interruption coverage; and appropriate vehicle insurance. There are also legally required necessities such as Worker's Compensation and, in some states, short-term disability coverage.
The decision to buy or upgrade insurance coverage is usually not a pressing issue when compared with all that occupies the time and attention of those responsible for running a business. But with no insurance, insufficient insurance or the wrong kinds of coverage, a business is completely at the mercy of fire, flood, tornado, or other natural disaster. There is also the possibility of robbery or burglary and the steadily increasing risk of lawsuits. There are numerous ways a business can be irreparably crippled or wiped out for lack of sufficient insurance coverage.
Beyond the basics, secondary, and sometimes optional, insurance includes:
- Robbery coverage, which is often fairly pricey, but necessary to a business in which significant amounts of cash and valuables are handled;
- Burglary coverage, which also may be fairly expensive and could necessitate meeting costly security requirements;
- Fidelity bonding for employees responsible for handling company funds;
- Life insurance or key-person insurance, which can be especially important in partnerships and corporations.
Many smaller companies are not appropriately insured for certain disastrous occurrences or the coverage they have, which proprietors may believe to be adequate, doesn't cover some forms of damage. For example, in the weeks following the devastation wrought by hurricanes Katrina and Rita many policy holders who were flooded out discovered they were covered for just about everything except flooding. And after the 9/11 attacks in New York City, some independent businesses located near the World Trade Center would have failed if not for business interruption insurance.
If your business is in a geographic region in which it could be damaged or destroyed by natural disasters such as hurricanes, floods, tornados or earthquakes, it's essential to determine what special coverage may be needed for these risks and to acquire adequate protection. The amount of insurance is always important; it's invariably recommended to insure for replacement value to avoid being hurt by the effects of inflation and depreciation.
Most smaller businesses can benefit from the services of an insurance advisor to help build the needed coverage around the kind of business one operates. This advisor should be someone who specializes in businesses insurance and can help a company keep updated coverage as the business expands and the environment changes. This isn't the time to deal with a relative or friend who sells insurance, unless this individual is one of the aforementioned specialists. Information about basic forms of insurance can be obtained from several sources including the National Association of Insurance Commissioners (NAIC) at www.insureuonline.org/smallbusiness, as well as the Insurance Information Institute at www.iii.org/individuals/business.
How do you determine how much or what kind of insurance to buy? And insurance advisor can be a great place to start, as can the Small Business Administration. It's all too easy for one who isn't thoroughly knowledgeable of insurance needs to become over-insured in some areas and under-insured in others and not be made aware of such shortcomings until disaster strikes.
