Business Insurance Basics [You Must know]

 

Most businesses need to purchase at least the following 4 types of insurance 

1. Property Insurance 
2. Liability Insurance
3. Commercial Vehicle Insurance 
4. Workers Compensation Insurance

• Property Insurance

Property  insurance compensates a  business if the  property used  in the  business is  lost or  damaged  as the  result of  various  types of  common perils,  such as  fire or theft. Property  insurance covers  not  just a  building or  structure  but  also the contents,  including  office furnishings, inventory,  raw materials, machinery,  computers and  other  items  vital to a  business’s operations. Depending  on the  type of policy,  property  insurance  may  include  coverage for  equipment break- down,  removal of  debris after  a fire or  other  destructive event,  some  types of water  damage and  other losses.

• Business Interruption Insurance

Also  known as  business  income  insurance,  business interruption  insurance is a  type of  property  insurance. A  business whose  property has sustained  a direct  physical loss  such as  fire  damage or a  damaged roof  due to a tree falling on it in a windstorm and has  to close down  completely  while the premises are being repaired  may lose out to competitors. A  quick resumption of  business after a  disaster is essential. That is why  business interruption  insurance is so important.

There are typically three types of business interruption insurance. A business can purchase any one or combination of these.

• Business Income Coverage

Compensates for  lost  income if a  company has to vacate its premises  due to  disaster- related  damage  that is  covered  under the  property  insurance  policy. Business  income  insurance covers the  profits the  company  would have earned,  based on  financial records, had the  disaster  not occurred. The  policy  also covers  operating expenses,  such as electricity, that  continue  even though  business  activities have come to a  temporary halt.

• Extra Income Coverage

Reimburses the  company for  a reasonable  sum of money that it spends, over and above  normal  operating expenses, to  avoid having  to shut down  during the  restoration period.

 

• Contingent Business Interruption Insurance

 Protects a  business owner’s  earnings following  physical loss or  damage to the  property of the insured’s  suppliers or customers,  as opposed to its  own  property. Damage  due to floods, earthquakes and acts of terrorism are  generally  not  covered  by  standard  business  property  insurance  but  can be  purchased  through  various markets.

 

• Protection Against Flood Damage

 

Property  insurance  policies  usually exclude  coverage for flood damage. Businesses  should  find out from their  local  government  office or  commercial  bank  whether their  business is  located in a flood  zone and  whether their  location has been flooded  in the past. Flood  insurance is  available  through the federal  government’s National Flood Insurance Program (www.FloodSmart.gov),  which is serviced  by  private carriers, and from  a few  specialty insurers.

 

• Protection Against Earthquake Damage

Coverage for earthquake  damage is excluded in  most  property  insurance policies,  including  business  owners  package policies. Businesses in an earthquake-  prone  area will  need a  special earthquake  insurance  policy or  commercial  property earthquake endorsement.

 

• Protection Against Terrorist Attack Losses

Under the Terrorism Risk Insurance Act of 2002 and its extensions,  only  businesses that  purchase  optional terrorism  coverage are  covered for losses  arising from terrorist acts. The exception is  workers compensation, which covers work-  related  injuries and deaths  including  those  due to acts of terrorism.

 

• Liability Insurance

 

Any  enterprise  can be sued. Customers  may  claim that the  business  caused them  harm  as the  result of, for example, a  defective product, an  error in a  service or  disregard for  another person’s property. Or a claimant  may allege that the  business created a  hazardous environment. Liability  insurance  pays damages for which the  business is  found liable,  up to the  policy limits,  as well as attorneys’  fees and  other  legal defence expenses. It  also  pays the  medical  bills of any  people injured by, or  on the premises of, the  business.

A Commercial General Liability (CGL) insurance policy is the first line of defence against many common claims. CGL policies cover claims in four basic categories of business liability:

• Bodily injury
• Property damage
• Personal injury (including slander or libel)
• Advertising injury ( damage from slander or  false advertising) In addition to  covering claims  listed above, CGL  policies  also  cover the  cost  of defending or settling claims. General  liability  insurance  policies  always  state the  maximum  amount that the insurer  will pay  during the  policy period.

 

There are two major forms of liability insurance policies a business can select: occurrence and claims made. Both types of policies have their advantages.

 

• Occurrence Policy

 

 An  occurrence  policy covers a  business for  harm to others  caused by incidents that  occurred  while a  policy is in force,  no matter  when the  claim is filed. For example,  a person  might sue a  business in 2010 for an  injury stemming from a fall in 1999. The  policy that  was in  place  when the incident  occurred (i.e. 1999) will apply,  even if the  company now has a  policy in  place with  higher limits. Occurrence  coverage  may not be  available in  some states or for  some industries or professions.

 

• Claims Made Policy

 

A claims made  policy covers the  business  based  on the  policy  that is in  force  when the  claim is made,  regardless of  when the incident  occurred. In the above example,  the limits  in the  policy in  effect in 2010  would apply. Businesses with claims made  policies  can purchase optional “tail  coverage.” Tail  coverage  enables a  business to  report claims after the  policy has ended for alleged  injuries that  occurred  while the  policy  was in  effect.

 

• Commercial Vehicle Insurance

 

A  commercial  auto  policy  provides  coverage for  vehicles  that are used  primarily in  connection with  commercial  establishments or  business activities. The  insurance  pays any  costs to  third  parties  resulting from  bodily  injury or  property  damage for which the  business is legally  liable  up to the  policy limits. While the  major coverages are the same,  commercial  auto  policies differs from a  personal  auto  policy in  a number of technical respects. They  may have  higher limits and/or provisions that  cover rented and  other non-owned  vehicles,  including employees’  cars  driven for  company  business. Several insurers  offer  business  auto  policies geared to  owners of small  businesses or  specific  types of  businesses.

 

• Workers Compensation Insurance

 

Employers have a  legal  responsibility to their  employees to make the  workplace safe. However,  despite precautions,  accidents can occur. To  protect employers from  lawsuits  resulting from  workplace  accidents and to  provide  medical care and  compensation for  lost  income to  employees  hurt in  workplace  accidents, in  almost  every  state  businesses are required  by  law  to buy  workers  compensation  insurance. Workers  compensation  insurance covers  workers injured  on the job,  whether  they are  hurt  on the  workplace premises or elsewhere, or in  auto  accidents  while on  business. It  also covers  work- related illnesses. Workers com pensation  provides  payments to injured  workers,  without regard to who  was at fault  in the accident, for time  lost from  work and for  medical and rehabilitation  services. It  also  provides  death  benefits to surviving spouses and dependents. Each  state has  different  laws governing  the amount and  duration of  lost  income Benefits,  the provision of  medical and rehabilitation  services  and how the sys- Tem is administered. For example, in  most states there are  regulations that  cover Whether the  worker or  employer can  choose the  doctor who treats the  injuries And how disputes  about  benefits are resolved. Workers  compensation  insurance  must be  bought as a separate policy. In- home  business and  business  owners  policies (BOPs) are  sold as  package  policies  but do  not  include  coverage for  workers’  injuries.

 

Other Types of Business Coverages

 

The first  four coverages  discussed  below are  different  types of  liability  insurance Policies  available to businesses. The  fifth is a  form of  life  insurance. There are Also  specialized  liability  policies geared to  specific  types of businesses.

 

1.      Errors and Omissions Insurance/Professional Liability

Some  businesses  involve  services  such as giving advice, making recommendations, designing things,  providing  physical care or representing the  needs of Others,  which can  lead to being sued  by customers,  clients or  patients claiming That the business’ failure to  perform a  job  properly has injured them. Errors and Omissions or  professional  liability  insurance covers  these situations. The  policy Will pay any judgment for which the insured is legally liable,  up to the  policy Limit. It  also  provides  legal defence costs,  even when  there has been no wrong- Doing.

 

2.      Employment Practices Liability Insurance

 

Employment practices  liability  insurance covers,  up to the  policy limits, dam- Ages for which an  employer is legally  liable  such as violating an employee’s civil Or  other  legal rights. In addition to paying a judgment for which the insured is Liable, it  also  provides  legal defence costs, which  can be  substantial  even when There has been no wrongdoing.

 

3.      Directors and Officers Liability Insurance

 

Directors and  officers  liability  insurance protects  directors and  officers of corpoRations or non- profit  organizations if  there is a lawsuit claiming they  managed The  business or  organization  without  proper regard for the rights of others. The Policy  will pay any judgment for which the insured is legally liable,  up to the Policy limit. It  also  provides for  legal defence costs, even  where  there has been No wrongdoing.

 

4.      Umbrella or Excess Policies

 

As the  name implies, an umbrella  liability  policy  provides  coverage over and Above a  business’s  other  liability coverages. It is designed to  protect  against Unusually  high losses,  providing  protection  when the  policy limits of  one of the Underlying  policies  have been used up. For  a typical  business, an umbrella  policy  would  provide  protection  beyond Its  general  liability and  auto  liability  policies. If a  company has employment practices  liability insurance,  directors and Officers  liability, or  other  types of  liability insurance, the umbrella  could  provide Protection  beyond  those  policy limits as well. Cost  depends on  the nature of the Business, its size, the  type of  risks the  business faces and the  ways the  business Implements  risk reduction.

 

5.      Key Person Life Insurance

 

The  loss of a key  person  can be  a major blow to a small  business if that  person Is the  founder of the  business or is  the key  contact for  customers and  suppliers And the  management of the  business. Loss of  the key  person  may also make the Running of the  business  less  efficient and  result in a  loss of capital. Losses  caused By the  death of a key  employee are insurable. Such  policies compensate the Business  against  significant losses that  result from that  person’s  death or disability. The  amount and  cost of  insurance  needed for  a particular  business  depends On the  situation and the age,  health and  role of  the key  employee. Key  employee  life  insurance  pays a  death  benefit to the  company  when  the key  employee Dies. The  policy is  normally owned  by the  company, which  pays the  premiums And is the beneficiary. The monies from key  person  insurance  can be used to Buy  back  shares in a  company from the  estate of the deceased, pay a head  hunting  firm to  find a  suitable  replacement and  cover  costs or  expenses  while the Business adjusts to the loss. Package Policies Commercial insurers  sell coverages  separately and/or  offer  policies that  combine Protection from  most  major  property and  liability  risks  in one package. Package Policies are created for  types of  businesses that  generally face the  same  kind and Degree of risk.