It pays to buy adequate business insurance, no matter what type of business structure you choose.
While business insurance is not generally required, it's a good idea to purchase enough insurance to cover your company's assets. Even if you form a corporation or an LLC. which shields your personal assets from business liabilities, you still risk losing your business if disaster strikes. Insurance can greatly reduce this risk. The two most common and generally useful types of business insurance policies are property insurance and liability insurance.
As the name implies, property insurance covers your business for damage or loss to your business property. A good property insurance policy should cover:
- property fixtures, such as lighting systems or carpeting
- equipment and machinery
- office furniture
- computers and accessories (monitors, CD-ROM drives, modems, printers)
- inventory and supplies, and
- personal property that's kept at the business site.
In addition to establishing what property is covered under a property insurance policy, you'll need to understand which types of losses are covered. Most commercial property insurance policies provide either "basic," "broad" or "special" form coverage, with special form policies offering the broadest coverage and basic the narrowest.
A basic form policy commonly covers fire, explosions, storms, smoke, riots, vandalism and sprinkler leaks. A broad form policy typically adds damage from broken windows and other structural glass, falling objects and water damage to the list of covered items. (Note that theft isn't typically covered under either a basic or broad form policy, a fact that surprises many business owners.)
Special form coverage offers the widest range of protection, as it typically covers all risks (including theft), unless specifically excluded from the policy. While premiums for special form policies are more expensive, it may be worth the expense if your business faces multiple or unusual risks. Before purchasing any insurance policy, read it carefully to determine what types of damage are covered.
Also, make sure you understand the coverage limits on various policies, any deductibles or co-payments required, and how the insurance company pays claims. "Guaranteed replacement cost" insurance will reimburse you what it costs you to replace the property, not merely its current (depreciated) value. If your computer equipment is destroyed, for instance, this type of coverage will pay you as much as you'll need to replace it -- at today's cost.
Comply with Your Lease or Homeowner's Policy
If you rent your business space, your lease may require that you obtain a specific amount or type of property coverage. Be sure to check your lease for any insurance requirements before you purchase a policy.
If you have a home-based business, you may need to adjust your homeowner's policy. Check to see whether your homeowner's insurance is limited or voided entirely if you run a business from home. If so, upgrade your insurance policy to include business use of the home and business-related claims.
Liability coverage protects your business against situations like the notorious slip-and-fall accident: someone injures himself on your premises and sues you. A general liability policy (versus a product liability or vehicle liability policy)
covers damages that your business is ordered to pay to an individual (customer, supplier, business associate) who is injured on your property.
A related, though technically different, type of insurance is product liability insurance, which protects you from lawsuits by customers who claim to be hurt by a product you provided. If your business offers a product to the public, you might consider this type of insurance. It can be expensive, but much less so than a multi-million dollar award to a victorious plaintiff.
Finally, auto liability insurance covers damage that you or an employee cause in a business-related accident. Auto liability coverage is not included in general liability policies, and is legally required for drivers in all but four states (Mississippi, New Hampshire, Tennessee and Wisconsin). Even if this type of insurance is not required in your state, it's foolish not to protect yourself against the potentially devastating risk of an auto accident. Make sure you insure any vehicles used in your business, including employees' personal cars that are used for business purposes.
Insurance Doesn't Cover Business Debts
Liability insurance will never insulate you from regular business debts. If you think there's a chance that your business will fall into serious debt, an LLC or corporation is probably the best business structure for you.
Finding and Buying Insurance
Insurance brokers who gather information from different insurance companies can help you decipher policies and determine the best deal for you. Be sure to find a reputable broker, however, since they receive commissions from insurance companies. You need to be sure you have an agent that is looking out for your needs at least as much as his or her own.
Make sure your broker understands the nuances of your specific business activities and the risks that are, or may be, involved. Preferably, use a broker who specializes in policies for your type of business.
You may be surprised to learn that specially tailored policies exist for your type of business. For instance, a "producer's package policy" for filmmakers covers several risks unique to the film business, such as the costs of a production -- often in the tens or hundreds of thousands of dollars -- in case your negatives are destroyed. An insurance broker who knows your type of business will be able to direct you to these specialized policies, while a run-of-the-mill broker may not.
You'll probably encounter insurance companies that offer package deals, which can be cheaper than buying several individual policies separately. As long as all your needs are met, these package deals can be a good way to go. As always, be sure you understand the extent of coverage in each area rather than relying on any promises that a particular package covers "all your business needs."
Insurance Requirements for Employers
If you are an employer, you will be subject to a number of additional insurance requirements -- you must typically pay for workers' compensation insurance, unemployment insurance and state disability insurance. These insurance programs are specifically for employers and are largely regulated at the state level. To find out more, contact your state employment department.