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Fall 2000 Cover Your Assets: Q&A on Insuring Your Business

Insurance is probably one of the most misunderstood and unappreciated elements of small-business management. Many owners see business insurance as a necessary evil, and some try to carry as little coverage as possible. But while insurance may seem like little more than an expensive cost of doing business, good coverage can protect specialty retailers from financial wipe-out due to misfortune like theft or fire.

Many retailers don’t have business insurance, or have too little, because they don’t understand it. Others have had bad experiences with insurance agents. But that shouldn’t keep them, or you, from pursuing the benefits that various kinds of coverage can provide.

If you have ever purchased business insurance, you know it’s not always simple. But it doesn’t have to be overly complicated, either. To help you gain a bird’s-eye view of the kinds of insurance available, what they cover and why they can be important, here are answers to questions most small-business owners ask.

1. What business insurance do I need?

You need business insurance to cover business-related assets you or the bank owns. This includes inventory, fixtures, computers, equipment and supplies, as well as real estate and leasehold improvements, if applicable.

2. Where do I get business insurance?

You’ll buy business insurance from an insurance agent who represents one or more business insurance companies. It’s extremely important that you find a reputable agent who sells for reputable companies. Talk to several agents, because different agents and companies offer different policies. Then be sure you’re comparing the proverbial apples to apples when you analyze those different policies. (One good way is to make a simple chart or spreadsheet on a legal pad and fill in the details of each policy you’re considering.)

Don’t just take the cheapest rate you find. Instead, take time to read the fine print and ask questions before you make a decision. The extra effort can mean the best coverage for your retail business at the best price.

3. How do I find a good agent and/or insurance company?

The best way is to ask other people who they use or would suggest. Your accountant, lawyer, banker—even your competitors—all know an agent or two, and will probably be more than willing to recommend them.

Finding the right company can be more difficult. Thousands of US companies sell business insurance. Some are highly reputable; others are not well established, or worse. In general, agents either sell coverage for one large insurance company, or represent many insurers. Finding an agent you trust will help you select a strong company. Ask these basic questions about the companies he or she represents:

  • How long has the insurer been in business?
  • How is it rated by the top independent insurance rating firms (such as Best, Moody’s, Standard & Poor)?
  • Does the insurer have adequate reserves (i.e., enough money) to pay claims?
  • Does the insurer pay claims promptly?
  • Can you add “endorsements” (specific modifications to the insurance policy) later? If yes, ask the agent for examples and costs.
  • Does the insurer have experience insuring retailers? Small businesses?
  • Who are some of the insurer’s clients?
  • If the agent were in your position, would he or she buy business insurance from this insurer?

4. How much insurance do I need?

Most insurance companies in most states offer basic coverage for the contents of your business against hazards like fire, wind, theft, vandalism and other “events.” (Since specialty retailers almost always lease space, they don’t need coverage for the building itself.) But you do need certain kinds of insurance and at certain levels. Mall leases usually specify the minimum coverage required (and mall management will require that they and the developer are named in the policy). Check with your leasing office for details.

But minimums aren’t always enough. You want to make sure you are adequately insured if a covered event occurs. Most of the value of your business is tied up in your inventory, which is what “contents” insurance covers. Buy coverage that equals or is close to the replacement value of your assets. Over-insuring—buying coverage that’s higher than their value—is wasted money, because the insurance company won’t pay out more than the value of what you lost. You can always increase the level of coverage as the value of your assets increases.

5. What about deductibles?

The deductible is what the insurance company requires you to pay out of your own pocket before they pay your claim. (It’s the same concept as in car and medical insurance.) If you suffer a “covered loss,” the insurance company pays the amount of the loss that exceeds your deductible level, up to your maximum coverage.

You set the deductible level when you buy the coverage. You can usually choose a deductible in an amount like $500, $1,000, $2,500 or more. The higher your deductible, the lower your premium, because you take on more of the financial burden to replace and rebuild. Your agent can help you determine a good deductible level in your situation. And you can increase it later if you wish.

6. Do I need liability insurance?

In a word, yes. It protects you if someone claims to have been injured at your cart or shop due to your negligence or that of your employees. And with liability coverage, your legal representation is free if the insurance company decides to defend a claim.

A basic business policy generally includes some level of liability coverage. Gary Baldwin, an agent formerly with State Farm Insurance, says standard liability coverage is $300,000. Most malls require more, however. “Million-dollar umbrella coverage” is common even for small retailers, and Baldwin says it’s a good idea to add to your liability coverage. “That can be increased substantially for a small sum of money.”

Does geographic location impact rates? According to Edward Shahinian at SIS, Inc. in Arizona, there are no regional differences in liability insurance rates. What determines the cost are the size of the unit and the amount of coverage. On average, he says, the cost of $1,000,000 coverage for carts is about $55 a month; for kiosks and temporary in-lines, about $75 a month. He estimates that the yearly rate for carts is $265, and $365 for kiosks and in-lines. And Shahinian says you can save on insurance costs by paying the full year’s coverage cost up front.

7. What about flood insurance?

Many specialty retailers find out the hard way how important flood insurance can be, if their center is in a flood zone. No geographic area is immune, and the damage can be catastrophic: floods caused by Hurricane Floyd in 1999 caused total property damage of more than $10 billion in North Carolina alone.

Flood insurance can be relatively inexpensive (the rate generally runs about 65¢ per $1,000 of coverage), but only 20 percent of business owners in flood zones purchase it. Bob Meers, of the insurance agency Ellis, Rhodes, Meers & Co. (St. Charles, MO), says not having this coverage is a mistake. “You are definitely better off in bad times with flood insurance,” says Meers, who works primarily with small business owners. Agencies like his sell flood insurance policies, but the coverage is actually underwritten by the federal government. To find out if you’re in a flood zone, you can call your county government’s Stormwater Management office.

8. What other types of business insurance should I consider?

According to Baldwin, one type of insurance that’s often overlooked is “business interruption coverage,” also known as “business income” or “BI” coverage. It provides valuable working capital for your business in case of a loss of facilities due to events like a tornado or fire.

Baldwin says many policies include a standard clause for business interruption of up to 12 months. So if there were a fire, for example, you would be reimbursed for the value of the contents (and property, if any) that your business owned and lost, and for income you will have lost during the 12 months after the fire. Lost-income benefits are typically based on your average revenues for the 12 months before the fire. Without BI coverage, you would have no way to recoup that income during your recovery period.

Workers’ Compensation is another type of insurance Baldwin considers essential. It protects your employees if they’re injured on the job. Most states require businesses with as few as two employees to carry workers’ comp. In many cases, workers’ comp and employee liability coverage are combined into one policy.

9. Can I save money on insurance costs?

Yes. Baldwin says the best way to save money is to ask about a comprehensive Business Owner’s Policy (BOP). With a BOP, all of the types of business insurance mentioned so far are bundled into one policy. “About 90 percent of all small retail [businesses] could be covered under a BOP policy,” he says. “You’ll save a lot of money with a BOP rather than buying the different coverages separately.” A specialty retailer with approximately $100,000 in inventory and/or leasehold improvements (excluding real estate) can expect to pay between $700 and $800 a year for a BOP, he says. Of course, rates will vary according to a number of factors. Getting quotes from different agents is another good way to save. “With a small retailer, [the cost of] coverage shouldn’t vary [among agents] by more than $50 a year for the premium,” says Baldwin. “But you still should obtain different bids every two or three years to make sure you’re not paying higher than market rates.”

10. What potential problems should I be aware of?

Baldwin says the biggest mistake small-business owners make is to “under-insure” —buying inadequate levels of coverage. If that happens, you’ll have to make up the difference to rebuild and replenish out of your own pocket. “Make sure you’re covered for the full value of your assets,” says Baldwin. “You are basically taking [a] self-insurance risk if you aren’t, and it’s not worth the potential downside.”

Other potential pitfalls lie in the fine print. According to Baldwin, here are some of the fine-print issues you need to cover:

  • As mentioned, make sure the policy covers replacement cost.
    Replacement-cost coverage enables you to replace damaged assets with the same items at today’s prices, rather than used (or cheap) ones that match the depreciated market value of the originals.
  • Pick a deductible level you can live with.
    Make sure you can afford to pay the deductible amount if you need to make a claim. Setting a high deductible level might save premium dollars, but you would be taking on “self-insurance” risk—paying for a large portion of your loss out of your own pocket—with a high deductible. For example, if your covered loss is $2,500 and your deductible is $2,000, you would receive only $500 from the insurance company.
  • Check the claims payment record of the insurance company: how long do they take to pay claims?
    The policy should show this information, but the best way to find out is to ask business owners who have filed claims.
  • Ask questions.
    Before you buy, make sure you fully understand what the policy covers and what it doesn’t.

It isn’t possible to insure against all potential events that might interrupt or damage your business. But you can significantly improve your ability to survive the financial set-back a fire, theft or accident can cause… and pick yourself up, dust your shelves off, and open for business as usual.

J. Tol Broome, Jr.

J. Tol Broome Jr. is a freelance writer based in Greensboro, N.C. He can be reached by e-mail at .

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