The tragic events of Sept. 11 affected hundreds of companies in New York City, but they especially affected small businesses. One method of protection from financial disaster, according to the Wisconsin Institute of CPAs, is business insurance. No matter what size business you own, adequate business insurance is essential to managing risk and minimizing the impact of catastrophic events.
Small businesses have a wide variety of insurance options. Those include standard policies covering fire, theft, vandalism, and liability, as well as specialized types of coverage. Working with a knowledgeable professional, such as a CPA, is the best way to design an insurance plan that provides adequate and affordable protection. Following is an overview of several common types of small business insurance.
Property – As the name suggests, property insurance covers both real and personal business property. Real property insurance typically covers loss of, or damage to, a building’s structure by fire, lightning, wind, vandalism, and certain other casualties. Personal property insurance provides similar coverage for equipment, office furniture, supplies, inventory, and work materials. Be aware that your company’s computers and phone systems may require separate coverage.
Liability -General liability insurance protects your business in the event it is sued for injury to a person or damage to a person’s property for which you are legally responsible. Product liability insurance protects your company if someone is injured as a result of using your product or service. Liability insurance not only pays for damages but also the legal fees and other costs associated with your defense. Bear in mind that these costs can be substantial, regardless of whether or not the lawsuit has merit.
Business interruption – When you’re forced to close your business for a period of time as a result of disaster-related damage, business interruption insurance compensates for the profits you would have earned, based on your financial records, had the disaster not occurred. It also pays for operating expenses such as payroll, taxes, and other expenses that continue even though business activities have halted temporarily.
Business owner – Many insurance companies bundle several types of coverage such as property, liability, and business interruption insurance into what is commonly called a business owners policy (BOP). A BOP, which is often the most economical way to protect your business against a broad range of risks, is typically available for lower risk small businesses.
Workers’ compensation – Workers’ compensation insurance, which covers employees in case of work-related accidents or injuries on the job, is mandated by law. It protects your business from liability for the injured worker’s medical bills, attorney fees, lost wages, and lawsuit awards.
Key person – The loss of a key person can be a major blow to a small business that, by its very nature, relies on the talents and abilities of a few people. Key person coverage can help compensate a business for financial losses due to the death or long-term disability of a key person. These policies also may provide the surviving owner(s) or partner(s) with funds to buy the deceased or disabled person’s share in the business from his or her spouse or children.
Purchasing the right insurance coverage for the right price requires a significant amount of time and effort. Because policies are often long, complicated, and confusing, you may need help understanding the contract’s terms. The Wisconsin Institute of CPAs recommends that you work with your CPA to gain an independent assessment of the policy. With respect to costs, keep in mind that companies that offer “too-good-to-be-true” premiums often can do so because they provide less extensive coverage or make it difficult to collect on claims.
One way to minimize your insurance premiums is to opt for higher deductibles. Higher deductibles mean you pay more for insured losses, but they can significantly reduce your premiums. Essentially, you will need to determine just how much risk you are willing to take. Finally, before signing a policy, check on the company’s rating with A.M. Best (www.ambest.com).
The insurance needs of a small business change frequently. Whichever type and amount of insurance you purchase, CPAs recommend that you review your coverage at least once a year and adjust it as necessary to ensure adequate protection.
The above information was provided by the Wisconsin Institute of CPAs, based in Brookfield, www.wicpa.org.
July 5, 2002 Small Business Times, Milwaukee
