Understanding Business Insurances

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In the general context of business planning, and also in the specific contexts of business continuity planning and succession planning, one of the topics that we at the Kansas SBDC frequently discuss with clients is the importance of having necessary and appropriate insurances.  Often, we recommend business owners confer with several members of their BAIL team about insurances. (BAIL is the acronym for Banker, Accountant, Insurance agent and Lawyer; but a BAIL team is a business’s group of  key advisors  which often will extend beyond these four individuals. It may include, e.g., a marketing consultant, a manufacturing consultant, and/or a freight forwarder – and, of course, in the case of our clients, their SBDC Business Advisors!)

Though not exhaustive, below is a lengthy list of types of insurances that small business owners might discuss with members of their BAIL team. Important topics to discuss include exposure to legal liability, exposure to financial risks, business opportunities, business continuity, risk mitigation and recovery, support services, mandatory areas of coverage, recommended areas of coverage, duplication of coverages, unnecessary coverages, recommended amounts of coverages, costs of coverages and how to contain them, deductibles, terms and limitations of coverages and exclusions. It is important for business owners to ask questions, to read and understand their policies, to have access to the document(s), and to keep them up to date.

Business Interruption Insurance (or Contingent Business Insurance) gives the business owner a defined amount of income for a certain period of time if the business is closed due to a catastrophe such fire.

Commercial Automobile Insurance on vehicles owned by or used for the business can include liability, medical, and comprehensive insurances and might also include industry specific coverages, e.g., for construction or for mobile-food- businesses.

Commercial Property Insurance  typically covers buildings and contents (e.g., equipment, inventory, furnishings, documents) and exterior fixtures (e.g., signage, lighting, fencing)  in the case of storms, fire, burst pipes, explosions, theft and vandalism. It is worth understanding the limitations of commercial property insurance. For example, inventory is typically covered only when it is on the insured property (or within so many feet of the property) and not when it is in transit. It should also be noted that home-based businesses may not be covered under their home-owners insurance policy and may additionally require commercial coverage for the business.

Cyber Liability Insurance (or Cyber Risk Insurance) is becoming more important with the devastating effects that cyber attacks can have on small businesses. This type of insurance can cover things such as business losses, the costs of investigations and notifications, and liability.  (Related reading …)

Defalcation, Embezzlement, and Fraud Insurances, Employee Bonds, and Fidelity Bond Insurance are types coverages against employee theft (internally or externally) and criminal or inappropriate behavior.  (Related reading on … defalcation, embezzlement, employee bonds.)

Directors and Officers Liability Insurance (also called D&O Insurance) is available for the Board of Directors/Officers of for-profit as well non-profit businesses to reimburse expenses related to their legal defense against accusations of poor financial management and possibly wrongful acts. (Related reading …)

Employee Non-Owned Auto Insurance. Auto insurance is vehicle specific. This gives a business coverage if one of its employees gets into an accident while driving a personal vehicle for business.

Export Credit Insurance insures exporters who extend credit to foreign buyers against non-payment by those buyers due to commercial or political risk. (Related reading …)

Flood and Earthquake Insurance While property insurance covers structures, inventory and signage in case of events such as break-ins, fires, and storms, losses from wide-spread events such as floods and earthquakes are generally excluded and require separate policies.

Fiduciary Liability Insurance is liability insurance for fiduciaries of employee benefit plans. (Related reading …)

General Liability Insurance offers coverage of expenses related to injuries of non-employees on a business’s property, damages caused by the business to another’s property, and some claims related to intellectual property in advertising. (Related reading …) There are many things that are not covered by general liability insurance and so it is important to understand what other insurances one might need.

Health Insurance can help keep employees, including the owner, healthy and factor in to employee retention. In addition, by offering, or at least making Disability Insurance and Life Insurance availablebusiness owners can show that they care about the financial well-being of their employees and employees’ families.

Inland Marine Insurance (sometimes called Floater Policies) covers inventory or equipment while it is in transit – typically over land – or while it is being held by a bailee or being warehoused at another location. It can also cover moveable property (e.g, artworks, jewelry, computers), moveable equipment (e.g,  photography, medical or construction equipment), and items involved in communications (e.g., radio towers) and transportation (e.g., piers). This insurance generally offers coverage against theft and damages due to collisions, but may also offer coverage for damages due to delays. (Related reading …)

Key Person Insurance (also called Key Employee Insurance) is life or trauma insurance on any individual (e.g., the business owner) without whom the business would struggle to survive in the short-term. This insurance can be a component of the succession and continuity planning of a business. (Related reading …)

Ocean Marine Insurance covers goods while in transit over international or domestic waters by ship or plane. It also offers coverage for businesses such as marinas, marine construction, marine transportation, marine research, commercial fishing and, in some cases, water-related tourism.

Patent Infringement Insurance can cover the costs of a business’s defending itself against deliberate or accidental patent infringement.

Product Liability Insurance for businesses such as manufacturers, distributors, retailers and contractors insures against claims made for liability due to design, manufacturing or marketing and labeling defects in products. (Related reading …)

Professional Liability Insurance (also known as Errors & Omissions Insurance) offers coverage against a customer who claims losses due to dissatisfaction with the business’s work. This type of insurance is industry-relative.

Speciality Insurances are available for a wide range of specific industries and professions such as agriculture, equine-based businesses, aviation and unmanned aerial vehicles, healthcare, food-services, etc.

• Trade Credit Insurance is available for domestic and international transactions. It can be used, e.g., when a seller wants to extend credit to a buyer in order to allow the buyer time to raise cash to pay for the purchase. It insures against non-payment and is available on a per-transaction basis or over all sales. Export credit insurance, above, is a type of trade credit insurance. (Related reading …)

Workers Compensation Insurance This provides insurance provides coverage to cover costs of medical treatments, disability claims and death benefits in case an employee is injured or killed while working. (Related reading for businesses in Kansas …)

Some of these insurances are quite common and generally recommended (e.g., general liability). Others are not as common as perhaps they should be (e.g., business interruption insurance); and yet others are important only in specific circumstances (e.g., export credit insurance). Before making decisions about what insurance to get or not to get, it is important for business owners to educate themselves, confer with trusted advisors, consider what they have to protect, understand the ways in which insurances can help with risk mitigation and business recovery, investigate whether carrying certain insurance coverages might allow them to expand their business, understand what insurances won’t cover and their limitations, and evaluate how insurances fit into their general business plan, business continuity plan and/or succession plan.

 

Laurie Pieper, Ph.D.

Business Advisor

Washburn University SBDC

America’s SBDC Kansas

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