You are so excited, your first business! Then comes that word that (can) put a damper on all the fun – insurance.
As a business owner you do need to carry insurance. But what kind?
At the very least you will have to have some sort of Commercial General Liability policy, and if you employ workers you will also have to have Workers Compensation insurance.
Read the Small Print
As a business owner you are, no doubt, incredibly busy so the idea of reading through the 40+ pages of an insurance policy can sound like drudgery. But get yourself a cup of coffee and hunker down, because you need to understand your policy.
You need to understand what your policy covers – generally it covers premises (the ‘location’ where you conduct your business and all its attached fixtures), products (all the ‘stuff’ that you sell or use in your business), and completed operations (the completed ‘work’ that is sold to your customers). And more importantly, you need to understand what it doesn’t cover, its exclusions. If either is unclear or you find it confusing in any way, pick up the phone and call your agent. And do ask lots of questions. If, for instance, you own a retail store but your policy does not cover theft you need to understand why this is, and/or the limits of the coverage before you sign on the dotted line. Your policy may cover the instance of your backroom being burgled to the tune of $1000 but will not cover the $30 of tchotchke the pesky neighborhood kids swiped – or vice versa. If you know what is excluded then you may be able to purchase additional coverage for that particular risk if you believe it is worth the premium.
Know the Dollars
Your premium – the amount you pay that buys you the insurance coverage. This is largely determined by the type of business you engage in. If you work with toxic or incendiary chemicals, for instance, you are likely going to pay more for insurance than if you own a shoe store. The premium is also based on the limits of your coverage – generally the higher the limit the more costly the insurance.
You have likely heard the term deductible, and you probably know that this is the dollar amount you yourself will have to pay out of pocket before your insurance coverage kicks in. And you should be aware of how that might impact you if your business does suffer a loss. Sit down with a calculator, and hopefully your agent, and do a quick calculation. Maybe your premium comes out to just $100 a month, but the deductible is $1000 for premises damage, say if someone crashes into your store front. Well, if $1000 feels daunting given the income and expense of your business, maybe it’s worth an extra few dollars a month to get a much lower premium.
Know What is a Need
Know what insurance you must have. If you lease a space for your business your landlord will require you to carry insurance that covers the premises you are leasing. If you own a building your loan carrier will require that you carry insurance to cover the entire building and surrounding property you own. If you carry inventory you may not be required to carry insurance on that inventory – so you will make that determination whether it is worth the premium or you are willing to take the loss. If, however, you have vendors that give you terms, part of their requirement might be that you carry product insurance. Maybe you are in an industry that requires you to hold a license to engage in that business. It very well may be that you are required to carry insurance to hold that license. Know the particular circumstances of your business before you choose a policy.
If you are a sole proprietor, say you open and close your shoe store all by yourself six days a week like clockwork and don’t employ anyone, you can forego Workers Compensation insurance. But the minute you hire the first employee you must carry a Workers Compensation policy (in the state of California this is true, check your state rules to be sure). A Workers Compensation policy covers your employees for illness and/or injury incurred on the job or as a result of their employ with you. You, however, are not covered if you are the owner, even if you give yourself a paycheck.
Pick Up the Phone
We are so used to doing so much online these days. But in reality, unless you are very familiar with insurance policies already, you need to have an agent. And not just any agent. Your brother-in-law who sold you car insurance may not be well versed in commercial. You need an agent who specializes in the type of insurance you need. Also, make sure any agent you contact (and you should contact several for quotes) works with a company that provides insurance for your particular business. It will often be the first question they ask you when you call, “What kind of business do you own?” And not every agent will be able to access every insurance company’s offerings. This is why you need to shop agents. So, while you may like the insurance commercials with the funny animals, don’t contact three agents from different offices that work with the same carrier – they will have the same policies to choose from.
You can and should ask your agent many questions, but it is ultimately your decision what coverage you choose, what limits, and what deductibles you can live with. The more you understand the more comfortable you can be with this particular cost of doing business.
If you would like to do even more research you might start with the California Department of Insurance (or check your own state’s insurance commissioner). They have many online resources and downloadable brochures on all types of insurance.