The basic purpose of business insurance is to pay losses due to unfortuitous events that could financially impair your company’s future or even put you out of business.
Insurance is only one part of a complete risk management strategy. You should eliminate or reduce your risk through maintenance, and proper training as well as safety programs.
Business Insurance can be grouped into a number of categories, including:
- Building and Content (Glass)
- Business Interruption (Time Element)
- Inland Marine
- Boiler and Machinery (Mechanical Breakdown)
- Workers’ Compensation
- General Liability
- Professional Liability
- Crime (Bonds)
- Employment Practices Liability
- Excess Liability (Umbrella)
There are over twenty-two million firms in the United States paying out over $13 trillion in payroll to their employees. Businesses are quite different from one another and their business insurance needs vary greatly. Forty years ago I was involved in the underwriting process as an insurance company employee for the Mayo Clinic account. As you can imagine, they were hugely concerned about the malpractice (professional liability) exposure. They also had many millions of dollars in buildings and content to be covered. One of their big exposures was the pressure vessels (autoclaves) used to sterilize instruments used in the operating room. Most of the losses we incurred on their account came in the workers’ compensation area, with many back injuries resulting from improper lifting. (That was resolved largely through increased employee training.)
Schools are also large businesses. They have a need for Corporal Punishment Liability coverage, and like most businesses, have a distinct data problem both from protection against physical loss and probable liability should you have a data breach. Their band could need a Musical Instrument Floater to cover physical damage and theft. Schools are often heated by large boilers that need coverage for possible explosion.
Even a roadside stand run by a farmer to sell produce needs insurance. They have a Products Liability exposure for whatever they sell. Often such an operation is excluded from their farmowner’s policy and needs a separate policy. Should a farmer run a corn maze during the Halloween season they will need General Liability for trip and fall accidents.
An auto garage, like other businesses who hold customer goods in their care, custody, and control will need Garagekeeper’s Legal Liability for their bailee exposure to cover the cars they don’t own.
A greenhouse might consider the Glass coverage to be their most essential insurance.
An over the road trucker might consider Auto Liability to be the most important coverage, or in the case of those who haul very valuable cargo, it might be their Inland Marine – Motor Truck Cargo.
Underwriters use several different exposure units to measure liability risk. The most popular three are payroll, receipts, and area (square footage).
Building and Content (Glass)
For many business their largest investment might be what they spend on their building and its contents. Most fire insurance contracts cover:
- Volcanic action
- Sprinkler leakage
- Sinkhole collapse
- Riot or civil commotion
- Windstorm or hail
- Aircraft or vehicles
- Glass breakage
- Falling objects on the building exterior
- Weight of snow, ice, or sleet
- Water damage caused by accidental discharge or leakage
Most fire insurance policies exclude:
- Mysterious disappearance
- Artificially generated electrical currents
- Wear, tear, marring, or scratching
- Insects or vermin
- Dampness or dryness of the atmosphere
- Rust or corrosion
- Rain, snow, or sleet to property in the open
- Sewer Backup
- Explosion of steam boilers and steam pipes
I’ve been involved in many large fire losses during my forty-three years in the business. Forty years ago I was a Special Agent for the largest fire insurer in the United States. I placed us on a large recreational vehicle dealer. From a fire underwriting standpoint it appeared to be in a good risk. The financial condition of the business was excellent so there was a minimal moral hazard. The building was only five years old with excellent housekeeping. All the hazards appeared to be minimalized included a properly installed Underwriter’s Laboratory approved parts cleaner. The building was what we called light fire resistive, in that it was mainly made of steel walls and truss. It was located just outside a town with a good fire department.
Much to my surprise the building burned to the ground costing my company over $2 million.
The building had lost power overnight; and when the owner came in he found frozen water pipes. He tried to solve the problem using a welder. The welder was using electrical current. The procedure backed up the resistance in the buildings electrical grid creating enough heat to touch off a fire.
The fire could have been contained to minimal damage had the responding fire department put a hose on it. Unfortunately, when the fire department realized the fire was outside the city limits they did what they could to protect the buildings next door which were in the city limits.
The fire department from the township had also responded, but when they realized the business had not paid their fire dues, they allowed the building to burn.
One of the biggest concerns for building and content coverage is establishing a proper valuation to determine the amount of coverage to put on the policy.
Buildings have several valid values. The market value is what a willing buyer will pay that a willing seller will accept. This value is normally set by comparable sales.
Replacement Cost is the amount it would take to replace the building in like and kind. This is the kind of coverage most insureds and most mortgage companies want.
Actual Cash Value is Replacement Cost less depreciation.
Often building owners will express a Utility Value. For example; the building owner bought a 2,000 square foot brick building for a very good price ($80,000) that he’s using strictly for storage. The Replacement Cost of the Building might be $125 per square foot ($250,000). The owner knows he would replace the building with a pole barn at about $30 per square foot . . . $60,000. The Utility Value is $60,000. Depending on the requirements of the mortgagee, the underwriter might agree to a no coinsurance policy at $60,000, if that is what the insured wants. You need to be aware that a coinsurance penalty can be quite expensive if you’re not carrying the right amount of insurance at the time of a partial loss.
Business Interruption Insurance (Time Element)
Many people seem to think of business interruption insurance as almost an afterthought. In my experience, this coverage is as essential to staying in business after a large loss as any other. Business Interruption covers the Actual Loss Sustained from one of the insured perils (see above list for normal coverage). Expenses go on, even if your doors are closed. For example, you could lose valuable employees that you’ve spent years training because you don’t have the income to keep meeting payroll after a large fire. In some instances a fire will require a complete rebuild, which could take over a year.
In other instances you have the kind of business that can be opened again immediately in another location, but that will require additional expense, such as money for rent for space or leasing of office equipment.
Your business has a “loss of rents” exposure whether you have tenants or not in that your property has rental value even if you’re the sole tenant.
Inland Marine Insurance
Inland Marine is coverage that grew out of Ocean Marine Insurance. It provide protection for loss due to physical damage to mobile equipment and equipment used in transportation and communication. It is also used for expensive and unique items such as a Jeweler’s Block, which covers the inventory of a jewelry store.
Inland Marine Floaters are used to provide coverage for everything from gigantic equipment used in mines to TV towers to piccolos.
Coverage is generally written on an all-risk basis and applies worldwide.
Boiler and Machinery (Mechanical Breakdown)
As a trainee in the 70’s I worked with the boiler inspectors. Some of the boilers I looked at were huge, like those at Federal Cartridge, which were large enough to walk in. The boilers were generally either firetube or watertube, depending on what was passed through which cavity to heat the water. Boiler insurance protects for direct and indirect loss sustained due to a boiler incident. The insurance policy includes an annual boiler inspection.
Workers’ Compensation Insurance
Workers Compensation is a system to streamline the processing of workers’ grievances for injuries sustained on the job. The State of Minnesota explains the coverage on their website.
“Workers’ compensation is a no-fault system designed to provide benefits to employees injured as a result of their employment activities and to limit the liability of employers. Because it is a no-fault system, the employee does not need to prove negligence on the part of the employer to establish liability. It also means the employer cannot use negligence on the part of the employee as a defense to a claim.
A work-related injury can be any condition that is caused, aggravated or accelerated by the employment activities. This includes traumatic injuries, gradual injuries or occupational diseases. The employee needs to show only that the employment activities were a substantial contributing factor to the disability and/or need for medical care.”
Workers’ Compensation Fraud
Because of the large scale of the workers’ compensation system, and since it involves workers, employers, attorneys, doctors, and others, this leaves open the opportunity for fraud. While business owners should make sure that their commercial insurance affords coverage for workers’ compensation claims by employees who become ill or injured on the job, they should also be aware of the possibility of workers’ compensation fraud. An independent insurance agent, familiar with the workers’ compensation system, can assist business owners in understanding and averting the potential for fraud when it comes to workers’ compensation insurance.
General Liability Insurance
General liability provides insurance needed to cover liability for bodily injuries or property damage sustained by the public. It covers accidents occurring as a result of business operations including the ownership, maintenance, or use of the specified premises and any operations necessary or incidental to those premises.
Coverage is also afforded for some kinds of written agreements.
The policy includes the cost of a legal defense for covered claims. This can prove to be extremely important. In the mid-eighties I created what has become one of the largest self-insurance pools for political subdivisions in the nation. It was my experience running that organization that the insurance company for political subdivisions can expect to spend one dollar on defense cost for every dollar of actual award paid out.
Coverage generally includes Personal Injury Liability
There are various types of daycare classifications, including In-Home Daycare, Family Daycare, Group Daycare, Adult Daycare, Drop-In Centers, and 24/7 Centers. Although the requirements and insurance vary between types, there are several common areas of concern.
Skilled Nursing / Facility
Skilled nursing and skilled nursing facilities have a unique set of risks that require special coverage.
Personal Injury Liability
- false arrest, detention, or imprisonment or malicious prosecution;
- libel, slander, or defamation of character; and
- wrongful entry or eviction or other invasion of the right of private occupancy.
Completed Operations Liability
Coverage applies after the operations have been completed or abandoned and the occurrence happens away from the premises of the insured.
Product Liability Insurance
All firms that have a product that the public uses, should have products liability insurance. Coverage provides protection for bodily injury and property damage claims arising out of the insured’s products or reliance upon a representation. The bodily injury or property damage must occur away from the premises of the named insured and after physical possession of the product has been relinquished. The policy can be endorsed for restaurants and similar exposures for on premise coverage.
Professional Liability – Errors and Omissions Insurance
Coverage provides coverage for negligence in the performance of services where a reasonable standard of care is expected. This is includes improper performance and failure to perform.
Crime (Bond Insurance)
In addition to various performance and indemnity bonds Crime coverage can include:
- Computer Fraud
- Money and securities theft, disappearance, or destruction
- Employee dishonesty
- Safe burglary
Business Auto Insurance
The basic parts of a commercial auto policy include:
- Bodily injury liability
- Property damage liability
- U.M. (Uninsured Motorist)
- U.I.M. (Underinsured Motorist)
- P.I.P. (In Applicable No-Fault States)
- Comprehensive (Other Than Collision Physical Damage)
- Medical payments
Employment Practices Liability – Employers Insurance
Coverage for defense costs and liability related to various employment-related claims, including:
Excess Liability (Umbrella)
It is doubtful that a true umbrella is available for most businesses. Most of what comes under that general name are “following form” excess policies that provide policy limits in excess of what is provided in the primary policies. The coverage usually mirrors what is provided in the primary policies.
Social welfare for unemployed workers. Not really insurance.
Director’s and Officer’s Insurance
(Errors and Omissions Liability Insurance for management) Provides protections for the directors and officers of a company if they’re sued in conjunction with their performance of their duties for the company.
Liquor Liability Insurance
Provides coverage for liquor related liability losses. Often called dram shop coverage, this coverage responds to suits which hold a supplier of alcohol responsible for a person who later becomes involved in an accident or mishap. This applies to those who serve, manufacturer, or supply liquor.
Restaurant & Bar Liability Insurance
Restaurant and bar insurance can be quite complicated. With employees, patrons, and the presence of alcohol, the potential liabilities are numerous, and the infrastructure required to run a successful establishment means there is significant potential for property damage to be costly.
Small Business Insurance
A small business cannot afford to operate without insurance, but a small business cannot long stay in business if it purchases every form of insurance applicable to its operation. Small businesses need to purchase essential insurance in adequate limits, but should avoid maintenance-type coverage.
Medical Malpractice Insurance
Malpractice Insurance is normally Professional Liability Insurance for people in the medical field.
Lawyers Professional Liability
Legal Professional Liability Insurance is Malpractice Insurance for people in the legal field.
Builder’s Risk Insurance
Builder’s Risk Insurance is coverage for direct damage to buildings while they are under construction. It normally will include some form of theft coverage for supplies.
Indemnity insurance covers the obligation to pay for any loss or damage that has been or might be incurred by your company.
This is usually a prize for some sort of contest such as a hole-in-one contest.
Indemnity Insurance in some states is considered to be gambling . . . and NOT insurance.
Provides liability coverage for general contractors, sub-contractors, and contractors.
Event Insurance provides premise liability for a specific event such as a concert or wedding. It might include cancellation insurance, such as rain insurance.
Coverage for physical damage to laptop computers.
Water Damage Insurance
Water damage is normally covered if not excluded by the policy. Most policies exclude floods.
Social Service Organization Insurance
Specialized coverage for those organizations who improve our communities. Includes general liability and professional liability.
Specialized coverage for those organizations who are non-profits. Includes general liability and professional liability.
A guarantee by the Federal Deposit Insurance Corporation (FDIC). It covers deposits in a member bank. Created in 1989, the FDIC insures bank deposits of national and state banks that are members of the Federal Reserve System. Bank Insurance protects individuals against commercial bank insolvency currently (2013) to a limit of at least $250,000 per bank.
Also known as Flight Cancellation or Trip Interruption Insurance. Protects travelers from unexpected delays and inconveniences.
Designed to cover travelers worldwide. Can include medical coverage, trip interruption, cancellation and emergency travel services.
Protection for property, damage or other liabilities. Includes vehicle insurance, liability insurance, crime, inland marine, and bonds. Does not include auto insurance, health insurance, long-term care insurance or life insurance.