Business Insurance Basics

Business insurance coverage protects businesses from losses due to events that may occur during the normal course of business. There are many types of insurance for businesses including coverage for property damage, legal liability and employee-related risks. Companies evaluate their insurance needs based on potential risks, which can vary depending on the type of environment in which the company operates.

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

1. 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 breakdown, 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 businessowners package policies. Businesses in an earthquakeprone 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 workrelated injuries and deaths including those due to acts of terrorism. 

2. 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 defense 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 defense 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. 

3. 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. 

4. 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 compensation 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 system 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 businessowners 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 defense costs, even when there has been no wrongdoing. 

2. Employment Practices Liability 

Insurance Employment practices liability insurance covers, up to the policy limits, damages 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 defense 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 nonprofit 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 defense 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 coverage 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. 

1. Packages for Small Businesses 

Smaller companies often purchase a package policy known as the Business owners Policy, or BOP. A BOP is recommended for most small businesses (usually 100 employees or less), as it is often the most affordable way to obtain broad coverage. BOPs are “off the shelf” policies combining many of the basic coverage needed by a typical small business into a standard package at a premium that is generally less than would be required to purchase these coverage separately. Combining both property and liability insurance, a BOP will cover a business in the event of property damage, suspended operations, lawsuits resulting from bodily injury or property damage to others, etc. BOPs do not cover professional liability, auto insurance, workers compensation or health and disability insurance. Small businesses will need separate insurance policies to cover professional services, vehicles and employees. 

2. Commercial Multiple Peril Policies 

Larger companies might purchase a commercial package policy or customize their policies to meet the special risks they face. Commercial multiple peril policies, often purchased by corporations, bundle property, boiler and machinery, crime and general liability coverage together. Larger firms employee a risk manager to help determine the company’s exposure to certain risks. 

3. In-Home Business Policies 

There are several insurance options designed to address the special needs of home businesses. 

• Homeowners Policy Endorsement: Homeowners may be able to add a simple endorsement or rider to their existing homeowners policy to increase coverage. 

• In-Home Business Policy: An in-home business policy provides more comprehensive coverage for business equipment and liability than a homeowners policy endorsement. Many insurance companies offer insurance policies specifically tailored to small business. 

• Businessowners Policy (BOP): The home business might be eligible for The Businessowners Policy (BOP), see above. The key to whether a business owner is eligible for a BOP is the size of the premises, the limits of liability required, the type of commercial operation it is and the extent of its off-premises servicing and processing activities. A BOP, like an in-home business policy, covers business property and equipment, loss of income, extra expense and liability; however, the BOP provides these coverages on a much broader scale.