New businesses start every year, and many of them fail within the first five years. While business insurance can’t protect your sales numbers if you’re struggling to create market share, it can protect it from all types of common accidents, losses, and lawsuits that affect businesses everyday.
The world of business insurance can seem intimidating at first, which is why it can be very beneficial to turn to the experts, independent insurance agents. Your agent can talk to you about your business and recommend the proper type of business insurance.
How Does Business Insurance Work?
Business insurance, aka commercial insurance, is a multi-layered insurance program that can cover a business for many types of sudden and accidental losses and lawsuits. Business insurance covers an extremely large variety of industries and businesses, and hence is more of an “a la carte” type of insurance, where you can select which types of policies you need.
In general, there are two broad types of business insurance:
- Business owners policy: Also called a BOP, this type of small business policy functions more like a homeowners policy, where you’ll receive a bunch of coverage types under one policy. It can include liability, property protection, and a host of other coverage options all in one place. A BOP is mainly designed for small businesses in certain industries, but it's normally a comprehensive and competitively priced policy.
- Commercial package policy. If your business doesn’t qualify for a BOP, then you’ll need to go the a la carte route. This is where you’ll fit multiple types of insurance policies under one commercial package policy, which is the glue that holds all of your various policies together. Under a CPP, you’ll find various insurance options, such as commercial general liability, commercial property, and commercial auto insurance.
There are seemingly an endless number of business insurance options, which is why it can be difficult to know whether your business is properly covered or not. This makes the business insurance buying process critically important to protecting your business.
How to Buy Business Insurance
Business insurance can be confusing and complicated, which means it's ideally suited for independent insurance agents to help you navigate it’s complex world.
There are some large, national insurance companies that might offer some types of business insurance online, but unless you’re also an insurance agent by night, it can be very difficult to correctly buy business insurance on your own. Online guides can only do so much to secure you the proper coverage, and most insurance companies that offer business insurance only sell it through independent insurance agents anyway.
Having the expert advice of an independent insurance agent can be critical in helping your business succeed.
1. Before you start a business
If you’re just starting out on the path of entrepreneurship, insurance should be one of your first items to tackle, along with securing the help of an attorney and accountant. It might be tempting to hold off on buying business insurance until your business is making enough money to afford it, but this can be problematic.
If your business suffers any type of loss, including being sued for a faulty product or service you sold, one loss or lawsuit could immediately put your business into financial ruin. Therefore, when you’re planning your start-up costs before you actually begin selling anything, you should include insurance costs in your budget.
The problem that you’ll likely run into, however, is that you won’t have any prior business insurance.
Insurance companies like to see a history of continuous business insurance, and some are hesitant to offer an insurance policy to a business that’s just starting out or has never carried insurance before.
Luckily, there are insurance companies out there that will insure start-ups or businesses that have never had insurance, so speak with an independent insurance agent to find out what your options are.
2. Decide which types of business insurance you need
An independent insurance agent can help you decide which types of business insurance you need. If you’re a very small business, you might be eligible for a business owners policy, or BOP. A BOP combines many different insurance coverages into one policy, similar to a homeowners policy.
For example, small retail stores generally are eligible for BOPs, where they’ll receive coverage for the building they own or rent, their business contents, liability for their business, and a host of other automatic coverages.
If there’s any type of auto exposure, meaning if you’re using a vehicle for any part of your job, then that is always going to be a separate policy under a commercial auto policy.
For everyone else, the first policy you’ll need is a general liability policy. True to its name, it provides broad, though not all-encompassing, liability coverage for your business. Just about every business out there needs at least a general liability policy, because it can protect your business from legal and defense costs and settlement charges if your business is held liable for somebody else’s injuries.
Among the many types of business insurance options include:
- Commercial property insurance: This covers physical damage to your building and business contents, which could include stock. It can also include damage to your customers personal items as well.
- Commercial general liability insurance: The backbone of any commercial or business insurance program, commercial general liability gives you legal and defense costs if your business is sued.
- Commercial auto insurance: If your business owns any vehicles, you'll definitely need commercial auto insurance. But even if you use your personal vehicle for business purposes, you probably need a commercial auto component because your business would likely be named in a lawsuit if you caused an accident.
- Workers’ compensation: This insurance covers your employees if they get hurt at work. It can also include owners as well. Workers' comp includes both medical expenses and lost wages, and also protects your business from being sued by injured employees.
- Bonds: Similar to insurance yet technically different, a bond is basically financial insurance to the hiring client. A bonded contractor or company is demonstrating that they can and will pay the full amount of the contract to the client if the project goes south. It's a way for the client to know it can trust the contractor or company with a large job.
There are many others as well, including commercial crime coverage, cyber insurance, and commercial umbrella insurance.
3. Compare insurance companies
To get business insurance quotes, you’ll need to give your independent insurance agent some information about your business. Some of the information you’ll need to include is:
- Name: You’ll want to include your legal business name and a DBA, if you have one.
- Address: Provide both the physical location(s) of your business and its mailing address.
- Entity type: This is where you’ll give your business entity, such as a sole proprietorship or LLC.
- Property information: Your agent may be able to pull up some information on your building, but you’ll also want to inform them of any updates, unique features, and how much coverage you want on the building and your contents, such as equipment and inventory.
- Prior insurance information: Include the name of your prior insurance company and relevant coverage information. If you don’t have prior insurance, you can give your related work experience in the industry.
- Loss runs: This is your loss history, and your current insurance company can give you this. It helps the new insurance company choose what rates you’ll have. Few or no prior losses will give you the best rates.
- Payroll numbers: You’ll likely want a workers' compensation policy as well to cover workplace injuries. Your rates will depend on your prior losses, the industry you’re in, how many employees you have, and what your payroll is. Before you can get a renewal offer, your insurance company will look at what your payroll was in the prior year. If your payroll was less than what you were charged for, you’ll receive some money back, but if it was more, you’ll owe the difference.
- Sales numbers: Your general liability rates are partly determined by what your sales figures are. You’ll also receive a general liability audit at the end of each policy year, where you’ll owe or receive the difference between what you paid and what you owe or are due to receive, based on what your actual sales numbers were.
You can also speak with your independent insurance agent about the various business insurance discounts that are available to you.
4. Find the best option for your business
Your independent insurance agent will likely give you a couple of options to choose from and will explain the differences between your different proposals. The cheapest business insurance isn’t always the best option. You’ll want to take into consideration a company’s claims service and rate stability, so you hopefully won’t see a big spike in premium in the coming years.
You’ll also want to factor in all of the different coverage options included in your proposal. Businesses across the country face some type of losses or lawsuits nearly everyday, so you want to make sure that you’re protecting your business with the proper insurance coverage.
5. Finalize your new business insurance policy
Once you decide on which company and policy you want, you’ll need to pick an effective date and a payment plan. If you have prior insurance, you could select your new policy to start once your old one expires, although you don’t have to do this.
If you start your new policy before your old one expires, you’ll need to cancel your old policy and you’ll receive a refund check for the remaining policy period that you’ve already paid for.
Your payment options will be similar to other types of insurance policies, where you can choose to pay monthly automatically out of your checking account, quarterly, semi-annually, or annually.
Finally, you’ll need to sign the application and all other paperwork. Oftentimes, insurance companies will want you to fill out and sign a supplemental questionnaire that pertains to your industry. This helps give the company a better picture of your business operations.
6. Cancel any old business insurance policies
If you do have a prior insurance policy, you’ll need to cancel it with the same effective date as when your new policy starts. Typically you can do this about 30 days in advance, so you don’t have to wait until the exact day to start the new one and cancel the old one.
For example, if you have a January 1st effective date, you can start your new policy and cancel your old one anytime in December. Just make sure you’re starting the new policy and cancelling the old one with an effective date of January 1st.
Once you cancel your old insurance policy, you’ll still be subject to a sales and payroll audit from the old company. This is simply the insurance company’s way of settling up and making sure everything is squared away.
It’s based on the notion that you should pay for what your business actually did, not on a projection. If your payroll and sales were higher than projected when the policy started, you’ll likely owe the company more money. But if your projections were on the higher end, you should be due for a refund.
What to Watch Out for When Buying Business Insurance
The biggest thing to watch out for with business insurance is not having all of the proper coverage in place. Business insurance is made up of many types of policies that cover your business for a specific type of risk. If you don’t have the right policies in place, you won’t have any coverage if you have a claim.
While nobody likes to pay bills, your business insurance bill is just as important as any other operating expense you have. For example, just because you operate a small retail store on Main Street in the middle of America, doesn’t mean your business is exempt from cybercrimes or data breaches. It’s best to buy the proper business insurance now, because if you do have a claim, you’ll be able to turn to your insurance and keep running your business.
The Benefits of an Independent Insurance Agent
Business insurance can be complicated and there are many moving parts and types of policies. Independent insurance agents know the ins and outs of business and commercial insurance. They’ll be able to explain, for example, when your general liability policy stops covering you and is picked up by your commercial auto policy.
Your agent will advise you on how best to protect your business. And if you do have a claim, you’ll have somebody who you know and trust to help you navigate the claim and get your business back up and running as quickly as possible.
TrustedChoice.com Article | Reviewed by Paul Martin
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