"A pet shop chumpanzee, usually friendly with strangers, suddenly bites a little girl on the cheek. Her doctor says she'll be scarred for life. The little girl's parents sue the pet shop for damages totaling $500,000.
A small TV repair shop is gutted by a fire caused by faulty wiring. The owner's entire inventory, as well as twelve TV's in for repair, are destroyed.
A family is visiting a photography studio for a portrait, when five- year old Mark uses the men's room. He playfully turns on the water faucet, and leaves it on. Before the flowing water is discovered, it has seeped through an opening in the floor, damaging several very expensive paintings in the art studio directly below."
American Institute of Small Business
Most small businesses are just an accident away from financial ruin. What would happen to you if your business suffered a fire? flood? theft? vandalism? Let's face it, most insurance is expensive; but what small business can be without it? If you believe that you cannot afford insurance, you need to ask yourself whether you are ready to start a business.
Why Do You Need Business Insurance?
*Most home and personal auto policies do not cover business damages.
*You may be sued because of personal injury to others on your business property.
*You may suffer losses from a dishonest employee.
*Your business building and equipment may suffer damage and need repair or replacement.
Types of Insurance
Property and Liability: Most Insurance Companies offer insurance packages covering many property and liability risks, however, these packages are not all inclusive. Most insurance companies list those risks not covered and offer "endorsements" that you can add for an additional premium. These endorsements allow you to secure insurance specific to your business needs.
Some considerations when choosing a property and liability insurance policy are: replacement cost or actual value, business interruption insurance, product liability, professional liability and credit insurance.
Replacement Cost: covers the cost of new goods to replace those lost.
Actual Value: covers the estimated value of goods lost based on the depreciated value.
Business Interruption Insurance: covers lost income if the business is closed temporarily due to a disaster.
Product Liability: covers loss due to a product defect or design flaw that results in injury or property loss.
Professional Liability: protects people in fields such as law, accounting, insurance and sales who provide consulting services.
Credit Insurance: protects businesses from high losses on accounts receivables.
Life and Health: Securing life and health insurance is a critical element to insuring the success of your business and family. If you suddenly die or become disabled in an accident, can the business continue without you? Can your family survive without your income? Most likely the answers to these questions are no, therefore, you need life and health insurance. Most insurance companies offer term and whole life insurance as well as credit life insurance.
Whole Life Insurance: offers clients continuous coverage for a flat premium despite changing age or health status. The premium is based on your age and health status when you initiate the policy. Whole life insurance is expensive but offers an accumulating cash value that you can borrow against and sometimes withdrawal while you are still alive.
Term Life Insurance: provides coverage for a specified time. Premium rates can increase over time based on age and health changes. However, term insurance is often less expensive than whole insurance. Unlike whole insurance, term insurance expires. If one's health has deteriorated when the insurance expires, one may find it difficult to establish additional life insurance protection.
Credit Life Insurance: pays off designated debts at the time of death. This insurance is particularly useful if the business has borrowed heavily to start or continue the business' operation.
Health Insurance: can provide protection against basic and major medical expenses as well as disability coverage. If you suffer a stroke and are unable to work for months, how will you survive? How will your business survive? If your business demands that you employ personnel, you will want to offer them health insurance benefits as well. This is a critical element to an employee's compensation package.
Insurance Tips for Small Business Owners
*Before starting a business, seek advice from insurance companies specializing in business insurance.
*Shop around for an agent and company that offer the best coverage for a reasonable cost. Equally important to price is making sure you get the policy provisions you need with an insurance company that has a good reputation.
*Insurance should cover potentially large losses such as those losses that would threaten the financial security of your business. Insurance is not intended to protect against trivial losses such as a loss involving a $50.00 piece of equipment.
*Estimate your insurance costs in your business plan.
Conclusion
Insurance is a very complicated topic that many never really understand. However, the insurance basics presented to you above will enable you to make sound insurance decisions with the help of a trustworthy agent.
References:
Folleck, Max, How to Set Up Your Own Small Business, The American Institute of Small Business, Volume II, 1989.
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