Business Insurance

Owning a business comes with a number of risks.  Business insurance protects you by minimizing unexpected events such as an injured employee, natural disaster or lawsuit. Business insurance is typically not required by law with the exception of workers’ compensation insurance. However it is a good idea to purchase insurance to protect your property and inventory.

The following information describes some typical policies a business owner may want to consider, but is not considered to be all inclusive for every business type in Illinois. Policy terms and conditions vary and it is important to work closely with your insurance provider so that the insurance choices you make minimize any risks and losses that may occur in your business.

Professional Liability Insurance/Errors & Omissions Coverage
If your business provides advice rather than a product, you probably have professional liability exposure. Examples of some industries that have this exposure include medical, legal, accounting, real estate, computer software development, and engineering firms. General liability does not provide professional liability coverage. A separate policy is required, although some miscellaneous industries such as pharmacy and optometry are provided coverage under the standard general liability policy. Professional liability policies are usually written on a “claims made” form rather than an “occurrence form” as are most general liability policies. NOTE: A commercial umbrella policy does not provide excess limits over a professional liability policy.

Commercial Umbrella
An umbrella policy provides excess limits over any underlying policies that are scheduled on the umbrella policy declarations page. An umbrella policy differs from an excess liability policy in that the umbrella overlays all of your underlying policies. An excess liability policy is designed to provide higher limits for only a specifically identified policy.

General Liability
Your business needs coverage to protect itself from bodily injury and property damage claims. There are two parts to general liability: premises and operations coverage and products and completed operations coverage. Premises claims occur on your premises (for example, a person slips and falls in your store), while an operations claim refers to an accident that occurs during the course of your work (for example, your salesman knocks an expensive vase off a customer’s desk while he is attempting to set up a product demonstration).

Product liability claims refer to alleged injuries that occur because your product is inherently unsafe (silicon breast implants are an example). Complete operations claims refer to accidents that occur after you have completed your work. For example, an electrician makes an error in wiring a panel. A month later, an overload occurs because of the error causing a fire. Engineering design and build firms will often find that product liability and completed operations are excluded under their general liability policy as it is sometimes difficult to distinguish between a completed operations claim and a professional liability claim.

Workers’ Compensation
This policy provides coverage for on-the-job injuries to your employees. Your business is protected against other litigation related to the injury with this coverage in force. Workers’ compensation is rated similarly to general liability in that each class of employees is identified by a unique code that should correspond with your general liability codes. Each code has a specific rate per $100 of payroll and is subject to audit at expiration.

Property
Your commercial property includes among other things: buildings, office equipment, manufacturing equipment, inventory, and work in progress. Always try to get the broadest coverage possible. Many carriers no longer use “all risk” terminology as property policies have a number of exclusions such as flood and earthquake.

Quite a number of carriers are now offering endorsements that offer a broad range of additional coverage. Be sure to request selling price coverage for your finished goods in inventory. In a loss, these goods would then be covered at their sales price as opposed to the manufacturing cost.

Property insurance only covers property on your premises. If an employee is taking equipment off site or if you are storing inventory at a job site, these items must be covered on a separate policy.

Business Automobile Policy
Vehicles titled in a company name must be covered under a business auto policy.  Commercial autos are rated on the basis of their use and range of operation.

If you have employees who use their personal vehicles for your business you may want to consider Hired and Non-owned liability coverage. This policy offers protection to your firm in the event an employee is involved in an accident while driving his or her vehicle on company time. For example, a salesperson could be involved in an accident that could ultimately lead to a suit against your business.

Be sure to check if you are using your personal vehicle on business that it is covered.  Many policies exclude covering personal vehicles on business use.

Business Income Policy
This coverage acts like a disability income policy for your business. The three most common forms of this coverage are 1) loss of rents, 2) business interruption, and 3) extra expense. Loss of rents coverage replaces the lost rental income from your damaged or destroyed property. For example, if three buildings in the apartment complex you own burn, this policy would replace your loss of rental income while the structures are being reconstructed. Business interruption replaces lost income if you are unable to produce goods for sale as your site is being reconstructed.

An extended period of indemnity can be obtained to help replace income after operations have resumed as it may be difficult to immediately return to pre-accident revenue levels. Extra expense coverage provides cash to enable a firm to reestablish its operations in a more rapid fashion. For example, if you have a service business that does not require large amounts of fixed equipment to operate, with some extra money you could rent temporary space, computer equipment, and a telephone system. In a short amount of time, your firm can be up and running.

Bonding

What is a bond?
A bond guarantees the fulfillment of a legal obligation. It’s a three-party agreement or promise where a third party (surety company) guarantees to a second party (obligee or owner) the payment or successful performance of the first party (principal). A bond is not an insurance policy calculated to cover losses. Rather, a bond is an extension of credit with the assumption that there will be no loss. The bond premium paid to the surety covers only the underwriting expenses of the surety company. When losses occur, they have a significant impact on the surety company’s financial results.

Types of Bonds
Bonds cover numerous aspects of operating a business. Typical bonds are surety and fidelity.

Benefits of Surety Bonds
Surety bonds are a risk transfer mechanism. The risk of doing business with the principal is shifted from the company doing the work (obligee) to the surety company. Federal, state and local governments often require surety bonds to guarantee that business owners and individuals will comply with various laws protecting public funds. For example, license bonds protect the public from business misconduct. Contract bonds protect taxpayers by guaranteeing that projects are completed properly, on time and without liens.

Types of Surety Bonds
Different surety needs are met by different classes of surety bonds:

• Contract Bonds guarantee that an entity awarded a contract will meet its obligations under that contract.
• License & Permit Bonds guarantee that individuals granted a license or permit to operate a business or to exercise a privilege will meet the obligations under that license or permit.
• Miscellaneous Bonds guarantee a variety of non-classifiable obligations. These include utility, lost securities, workers compensation premium payments, and sales tax payments.

Types of Fidelity Bonds
Companies are vulnerable to a wide variety of commercial crimes, including employee theft or dishonesty; forgery; loss of money, securities and other property on premises; computer fraud; disappearance or destruction of property; robbery and burglary. Different security needs are met by different classes of fidelity bonds:

• Pension Trust (ERISA) Bonds are designed to protect the investors and the money in these funds.
• Blanket & Schedule Bonds provide protection against employee theft. These bonds cover the loss of money, merchandise or other property owned by the insured when such a loss is due to employee dishonesty.
• Janitorial Services bonds are specifically designed to provide protection for customers since they have access to customers’ assets, equipment, supplies and personal belongings.

Underwriting Process
A surety company must determine the probability of a loss should the principal be unable to complete their obligations under the bond. Since a bond is an extension of credit, the surety company must analyze the principal’s financial standing and business aptitude to determine if the principal has the financial strength and business knowledge to support the bonded obligation. This is called the underwriting process. Surety company underwriters evaluate risks in ways similar to banks evaluating loan applications. Underwriters consider business and personal financial statements, credit reports, credit references and other factors.

Collateral
A surety company may request collateral to reduce the risk of the bond. Forms of collateral include cashiers checks, certificates of deposit or irrevocable letters of credit. In addition, collateral reduces the risk a surety company assumes when issuing a bond. After all obligations of the bond have been met, collateral is returned to the principal and the obligee releases the surety company from their obligation under the bond.

Choosing a surety
Surety companies handle a wide range of surety products, and sell different products at many different rates. When selecting a surety company, make sure the company is listed with the U.S. Department of the Treasury. The Treasury Department lists all surety companies that are qualified to write bonds for federal contracts. To be acceptable, the company must qualify financially under the regulations of the U.S. Department of the Treasury.

Check on the rating of the company. An acceptable surety company is rated “excellent” or better by the A.M. Best Company, an insurance rating service. You can get a copy of its annual Best Rating Report from the surety company.

Frequently Asked Business Insurance Questions

I’m just getting my business started. Do I need insurance right away?
Yes, because the chance that you could suffer a loss begins with the first day of business. You can’t get help after the fact. If you suffer a loss and have no insurance or have improper or insufficient coverage, there is very little, if anything, your insurance agent can do to help you.

I don’t have any major business assets. Why do I need insurance?
Every business has some property. And, when you think about it, your business is your property. Just like your home and your car, your business needs to be protected from loss, damage and liability. In addition, your business is your source of income, so you need protection from the potential loss of that income.

Is insurance coverage different for different businesses?
Many small businesses are now insured under package policies that cover the major property and liability exposures as well as loss of income. A common package policy used by many small businesses is called the Business Owner’s Policy (BOP).

Generally, these package policies provide the small-business owner more complete coverage at a lower price than separate policies for each type of insurance needed. Your agent can help you decide which policy or policies are right for your business. Additional coverage for property, liability or perils or conditions otherwise excluded (e.g., flood protection) can be purchased as endorsements to a standard policy or as a separate, second policy called a difference-in-conditions (DIC) policy.

Because businesses vary, it is impossible to have a standard policy to cover all contingencies. Also, some businesses, regardless of their size, do not fit the profile of a standard business owner’s policy. Your insurance agent can advise you of the best policy (or policies) to protect you and your business.

What types of property do I need to insure?
Your business may not possess all the following types of property, but you can use this list to make sure that you have considered all the property categories and any insurance coverage that may be warranted:

• Furniture, equipment and supplies
• Inventory
• Money and securities
• Records of accounts receivable
• Improvements you made to the premises
• Machinery
• Boilers
• Data processing equipment
• Valuable papers, books and documents
• Mobile property such as automobiles, trucks and construction equipment
• Satellite dishes
• Signs, fences, and other outdoor property not attached to a building
• Intangible property (good will, trademarks, etc.)
• Leased equipment

What types of property insurance should I consider buying?
The best thing to do is to take a complete inventory of all your business property, determine their value and decide if each is worth insuring. Then check to see that the items on the inventory list are included in the basic business property policy and covered for the correct amount. If not, ask your agent about the cost of purchasing additional coverage to meet your needs.

I work out of my home. Will my homeowners insurance cover my business?
Yes, but on a very limited basis. Loss of business property is usually reimbursed up to $2,500 in the house and up to $250 for business property damaged or lost away from the premises. Even if your business is a sideline such as a craft studio, these limits may be too low to cover all the equipment and materials you have accumulated. It’s also important to know that no business liability coverage is included in a standard homeowner’s policy. Your insurance agent can help you ascertain what, if any, additional coverage you need. This additional coverage may be added to your homeowner’s policy or found in a separate commercial policy.

Can I do anything to lower my insurance premiums?
Remember that all insurance premiums are based on the risks involved. The insurance company evaluates the situation to determine the risks – or potential for losses – and bases its rates on the results. Therefore, deliberate steps you take to lower your risks not only can help safeguard your business but also may make you eligible for lower insurance rates. Consider these steps:

• Maintain adequate lighting throughout your business premises.
• Keep electrical wiring, stairways, carpeting, flooring, elevators, and escalators in good repair.
• Install a sprinkler system, smoke and fire alarms, and adequate security devices.
• Keep only a small amount of cash in the cash register.
• Keep good records of inventory, accounts receivable, equipment purchases, etc. Consider keeping a second set of records off-site, such as with your accountant, insurance agent or at home.
• Make sure your employees have good driving records.
• Make sure your employees know how to lift properly and use all necessary safety equipment, such as goggles, gloves, and respirators.
• Consider using the services of a risk manager. Such an outside consultant can advise you of any safety or environmental regulations and talk to your employees about safety practices.
• You may also wish to raise your deductible where appropriate to lower your insurance premiums. How high to raise the deductible should be governed by how much you can afford to pay out of pocket. Be careful not to raise it so high that you cannot cover it should a loss occur.
• Finally, make sure your agent is familiar with your business and the risks inherent in it. He or she should be able to advise you on risk management techniques and their benefits to both you and the insurer.

What should I look for in an agent?

Agents are there to help you. At the most basic level, any agent should be able to answer all of your questions about insurance, provide you a thorough assessment of your insurance needs, and offer you a choice of insurance products to meet those needs. Also, any insurance agency should provide you with prompt, quality service in the case of a claim.

Have additional questions about starting your business?  Contact the Illinois Small Business Development Center (SBDC) at Southern Illinois University for a confidential business consultation at no charge to you. Call (618) 536-2424 to set up an appointment.