When you think of business insurance, what are your first thoughts? The building, your office equipment and computers, or accident liability? Every business has different risks and needs, of course, but even if these items were completely covered, what if the business had to shut down for a day, a week, or a month? What if your clients did, too? Whether because of a fire, a flood, a tornado or other disasters, you may not be as prepared as you think.
If you live in an area prone to natural disasters (the Gulf Coast, for example), you and your clients hopefully already have a disaster readiness plan. If not, there are some good tips and templates available from the Small Business Administration. But being prepared and being able to handle the short and long-term financial stresses that these emergencies can cause are two different things.
Types of Business Insurance
Traditional damage insurance for a small business is similar to a home owners’ insurance policy, covering a building and/or its furnishings and objects in case of certain events such as theft, flood, fire or other specific events. In areas more prone to hurricanes, flooding or earthquakes, however, traditional insurance policies may not include those events without substantial premium increases.
Likewise, some businesses require more expensive equipment and computers to operate, while others may have to maintain large inventories. A used auto dealership, for example, may have hundreds of thousands of dollars’ worth of vehicles on the lot when a storm strikes or vandals strike, causing significant financial damages. And while a manufacturer may have large capital items, a plumber, on the other hand, may have little inventory or other physical items of value in their shop.
During the insurance underwriting process, the risk of damage is calculated along with potential recovery costs, which then determines the premium and deductibles. The critical aspect to consider is that this form of insurance covers the tools and materials that a business needs to conduct its business. Property insurance is not often required by state or government agencies, but may be required by lenders, investors or customers. If a business owns vehicles, it will also need insurance coverage for those vehicles.
In addition to covering potential damage to business property and machinery, many businesses need coverage for issues such as liability for injuries to other people and their property, and even punitive damages. Much like liability insurance for automobiles, most states require businesses, or at least some types of businesses, to have insurance or self-insurance bonds based on their business activity. Lenders may require coverage, as well. (While injuries to employees also need to be considered by the business, those instances are covered under state workers’ compensation laws, and generally not under private business insurance coverages, which is the focus of this article. Likewise, this article does not cover health insurance options businesses may offer.)
The requirements and costs are generally associated with the potential risks: A modern car wash facility, for example, has many moving parts that can seriously injure customer or damage their car, or a worker may be accused of theft; A mechanic’s premises may also be dangerous to customers if precautions aren’t in place; And, while an architect’s office may pose less likelihood of catastrophic injury to a person, negligence in their computations could still cause deficiencies in buildings.
Professional Liability Insurance
Well-known as malpractice insurance, many professionals are required by their states to maintain certain thresholds of insurance coverage in the event they are held liable for damages that arise from their professional conduct. This includes doctors, lawyers, architects and CPAs, among others. For some professions, it is known as Errors and Omissions insurance. This form of coverage is also often required of larger customers and government entities conducting business with the professional firm.
Business Continuity Insurance
This generally covers the loss of revenue during reconstruction of physical damage to a business. If the business can replace any lost property or machinery, or overcome an injury liability claim, can it still make up for the lost revenue or the loss in customer faith that it incurred during their downtime? This is where business continuity insurance (sometimes called business interruption, or business income insurance), can play a vital role in protecting the business, it's investors, it's employees and it's clients. Business continuity insurance is primarily focused on the following:
For e-commerce businesses, the cost of a few hours or days of downtime is more easily measurable, and quite serious. Likewise, it’s easy to comprehend the severity of downtime to a business that caters to a peak season of holiday travelers. But how about the cost to consultants and firms with steady client bases, who might lose the ability to meet with those clients during the most critical time. Think about a tax-focused accounting firm that suffer fire damage in late February or early March. That could cost nearly an entire tax season.
Business continuity insurance helps ensure that the most critical business functions are able to continue as soon as possible. For ecommerce businesses, that may mean moving servers or establishing a temporary support and admin location. For brick and mortar businesses, this can often include the direct costs and support needed to immediately open a temporary business location nearby the damaged one, and getting hardware and other business supplies in place as soon as the next day, and often for as long as needed, or when the traditional business insurance comes through. Business continuity coverage can also provide temporary staffing if necessary. Keeping in touch with clients is imperative, particularly client trust is part of the service the business provides.
Business continuity insurance can also help cover the loss of income that a business might incur as the result of a disaster. This can help businesses that had to completely close down because of damage to the business itself or loss of income during rebuilding. While their property insurance would cover physical damage, a prolonged loss or significant decrease in income could still doom many small businesses.
Business continuation or interruption insurance is not required by federal, state or local governments, but can be added to many traditional business property insurance policies as an added measure of security.
Business continuity insurance is not likely to cover losses due to the Covid-19 pandemic, because it is focused mostly on downtime caused by physical damage to a business. However, policies may include clauses for mandatory closures by government authorities (shutdowns), as well as disruptions to supply chains, both of which could be applied during the pandemic.
Double Check Your Insurance
Assess Business Risk
Determine the risks you know you face, and do some research to understand additional potential risks. A good place to start is the NFIB’s checklist. The costs of the insurance premiums and deductibles will vary based on the coverage needs.
Make Insurers Compete
After assessing your risks and needs, and doing a little research, you are more prepared to discuss potential coverage options with business insurance providers.
Just like home and auto, business insurance coverage can often be bundled at a discount. These Business Owner’s Policies often include property, liability, auto coverage, and even business continuity.
Regularly Review Your Coverage
Whether a business has grown or evolved in a different direction over the course of a few years, its risks and responsibilities may have changed. Your insurance agent should offer a periodic review of your policies and coverage amounts, but don’t assume this is just a chance for them to upsell you: It may well be beneficial, especially if it helps ensure the financial strength of the business.