Which Insurance Do You Need?
There is no question that the subject of insurance can be a confusing one: there are different types, different deductibles, different caps, different premiums…and the most confusing of all, different endorsements. In California, there are also different legal requirements about the type of insurance a business is required to carry: only Workers’ Compensation Insurance and Commercial Auto Insurance (for company-owned vehicles) are legally required by the state. If you are a professional services business (such as a medical practice, an architecture firm, a legal firm, etc.), the professional organization that certified you to practice may also require you to hold a specific form of commercial liability insurance to stay in business.
Beyond those legal or statutory requirements, unless your business has huge cash reserves and can self-insure (unlikely!), several additional types of commercial insurance are vital to protect your business from unforeseen losses. The right business insurance and a good amount of cash in reserve help your business become less vulnerable and more likely to survive a major loss.
Two Key Types of Insurance for Small Businesses
- Commercial Property Insurance insures against damage to the physical space(s) your business occupies, and the inventory and equipment within it, i.e. the physical assets of the business.
One important factor to consider is the value of insurance: does it cover the cash value of the assets (i.e. the value minus depreciation) or the replacement value? The former will likely be of less value than the latter. Though this could mean cheaper coverage costs up front, in the event of an actual loss you, as the claimant, could end up with a lot less money than you were expecting (and potentially not be able to fully rebuild or replace like-for-like lost assets).
- Commercial General Liability Insurance, in simple terms, protects your business against any losses resulting from being sued by a third party. This could include lawsuits brought for personal injury, physical damage, or contract-related disputes. Keep in mind that you may also be required to maintain a minimum dollar amount of coverage by your clients, vendors or professional organization.
Business Interruption Insurance
California’s relatively high incidence of natural disasters makes Business Interruption Insurance a common topic in the State. This type of insurance provides coverage when a business is forced to close due to circumstances beyond its control, such as a fire. Certain types of business interruption insurance can also protect against disruptions to your supply chain (e.g. key vendors).
With just a little research, you are likely to see that these policies can get expensive quickly. Fortunately, for small businesses, the different types of insurance can often be bundled into a single comprehensive business owner’s package, which can be more cost-effective than buying them separately.
Do you have enough insurance coverage?
In assessing your business insurance coverage, you should perform the following steps to ensure you are adequately covered:
- Educate Yourself – familiarize yourself with the different types of business coverage that exist. Ask other business owners in your industry what insurance coverage they have for reference.
- Analyze Your Business – assess your business so that you can describe your operations to others. Prepare a written description of your business, explaining what it does and how it operates. What are the risks to your business? What are the assets? Create a flowchart that describes each step of your operations.
- Choose an Agent or Broker you Like and Trust – ensure this person is a licensed professional with a good knowledge of insurance coverages and the insurance market. The more your agent knows about your business, the better he or she will be able to meet your insurance needs.
- Review Your Insurance Coverages Regularly – check and update your policies regularly. Your business will grow and change over time and your insurance policies need to reflect those changes. You may need to buy additional coverages or increase or reduce your limits. Meet with your agent or broker once a year, before your policies renew, to assess your coverages.
With the right experts to guide you, business insurance doesn’t have to be confusing. While the annual policy costs may seem high at first, the cost of not having insurance when you need it is a risk that no small business owner can afford to take.
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