Insurance in Small Business

There are many different types of insurance policies available for small businesses.  Typical insurance policies for small businesses include the Texas Business Owner’s Policy, or TBOP, auto insurance, and worker’s compensation. These policies are not inclusive, and several things are not included in some policies.  Pricing and coverage are also an important component of insurance policies. As a small business owner, there are vital things one should know about insurance policies including how one can be dropped from their insurance company and the steps in filing a claim.

 

Texas Business Owner’s Policy [1]

The Texas Business Owner’s Policy (TBOP) is an owner’s policy strictly for businesses in Texas. The basic policy includes property and general liability insurance.  Property insurance covers damage to or loss of the policyholder’s property. The insurance company will pay for direct physical loss of or damage to covered property including the building and your business personal property.

Building property includes:

  • Completed additions
  • Fixtures
  • Permanently installed machinery and equipment
  • Personal property owned by you that is used to maintain or service the building or structure such as fire extinguishing equipment, outdoor furniture, and certain appliances

 

Business personal property includes:

  • Furniture and fixtures
  • Machinery and equipment
  • “Stock”
  • All other personal property owned by you and used in your business
  • Labor, materials or services furnished or arranged by you on personal property of others
  • Improvements and betterments of building
  • Leased personal property for which you have a contractual responsibility to ensure

 

General liability protects businesses from being liable from bodily injury (sickness, disease, or death), personal injury, and advertising injury. Advertising injury includes false advertising.

A TBOP is not required to do business, but most companies are not going to do business with you if you do not have insurance. Having a Commercial Certificate of Insurance[2] is key when planning on doing business with others. A prime example of this is construction subcontractors. A company would not feel safe hiring a construction crew if they did not have insurance.

There are several advantages and disadvantages to a business owner’s policy that are listed below.

Advantages

  • Replacement cost
  • Automatic seasonal increases
  • Unlimited loss of income and extra expense
  • Slot rated

 

Disadvantages

  • Inflexible- limited class eligibility
  • Older buildings are ineligible
  • Size limitations

 

Additional Policies Available

Property and general liability are the two types of insurance covered under every TBOP.  Auto insurance and worker’s compensation are two additional types of coverage that are commonly added to a TBOP.

 

Commercial Auto[3]

When the sole purpose of a vehicle is for your business, then a commercial auto policy is required for insurance purposes. When deciding whether or not you need a commercial policy, if the vehicle is registered as owned by the business, then it is required to have a commercial auto policy.  You also need a commercial policy if other employees beside the owner are driving the vehicle for business related purposes. If a business owner is still unsure if they need this policy, they can contact their insurance agent who can tell them what is required.  A commercial auto policy covers damage to a vehicle and replacement cost, the medical expenses of injured persons, and legal costs related to the incident.

A commercial auto policy varies from a personal auto policy in that it covers only listed persons employed by the business, while a personal auto policy covers anyone whom you allow to drive your car. If a driver is not specifically listed as an employee on the insurance policy they will not be covered under commercial auto insurance. It is extremely important to update your policy frequently, especially as new employees are hired, to add them to the list of covered drivers.  Since an insurance company will only list persons who have a good driving record, it is recommended that an employer contact their insurance agent before hiring someone who will be driving a company vehicle to ensure that their driving record is clean and meets the qualifications to be insured.

 

Workers Compensation[4]

The role of worker’s compensation is to compensate an employee for a work-related injury or accident and an occupational disease. The question becomes did the accident or illness occur in the course of employment.  The definition of an accident includes continuous or repeated exposure to the same conditions resulting in bodily injury.  For a disease to be considered occupational, the risk must be greater in this occupation and must be a direct result of a particular occupation. An example of an occupational disease would be black lung which comes from working in a mine. Worker’s compensation varies by state and is actually not required in the state of Texas.

The primary goal of worker’s compensation is to get an employee back to work as soon as possible, even if it needs to be on a limited basis. If this is not possible, the law is meant to cover medical expenses for the disabled. In the late 1800s, many states enacted laws passed laws that employers must fulfill certain duties to employees. The five duties include:

  • a reasonably safe place to work
  • reasonably safe tools and equipment
  • reasonable fit and competent fellow workers
  • reasonably enforceable safety rules
  • reasonable warning of any hidden workplace dangers

 

What’s Not Included[5]

The TBOP covers all causes of loss except for those specifically excluded in the policy. There are a variety of different things that are not covered under a traditional TBOP.  These include accounts, bills, currency, deeds, or other evidences of debt, money, notes or securities. Animals are not covered unless you are in the business or boarding someone else’s animals, or if you own animals for the sole purpose of stock and they are located inside your building. Automobiles that are held for sale are not part of the policy except in the case of a car dealership.

Bridges, roadways, walks, patios, or other paved surfaces related to your small business are not included in the coverage policy. Any contraband or property that is involved in the course of illegal transportation or trade is obviously not covered under a legitimate insurance policy. Also not included are foundations of buildings, machinery or boilers if they are below the lowest basement floor or under the surface of the ground. The land that a building is on is not covered, as well as any water or lawn located on the property.  While all of these are excluded under a basic TBOP, a business can purchase additional coverage depending on their needs and type of business.

 

Pricing 1

For a small business, the price per term, or annual premium, for a TBOP policy will vary greatly depending on the type of business and the coverage purchased.   The annual premium for a small business such as a restaurant in College Station will typically be between $1,000 to $2,000 per year.  Unlike personal auto insurance, a small business’ premium is not affected by the number of claims made.  Rather, the insurance company determines the price of a policy by assessing the level of risk associated with providing coverage to the business.  In other words, they predict the number and cost of incidents they expect to have to pay for.  In addition to risk, the price of a policy is also based on factors such as a business’ amount of sales, revenues, or payroll.  For a new business without existing financial data, the policy price is based on projected levels of sales, revenues or payroll.  The insurance company will audit the new business at the end of the first year, and determine whether an adjustment to the premium is necessary.  Based on the results of the audit, the small business will either be refunded part of the original premium, or required to pay an additional amount.  A small business can choose how they will pay.  A premium can be paid annually, bi-annually, monthly, or on another payment plan depending on the insurance company.

 

Coverage 1

The level of coverage purchased varies greatly due to the varying needs of different small businesses.  A TBOP policy will have two coverage numbers:  a per occurrence amount, and an aggregate dollar amount.  Per occurrence is the dollar amount for which a business is covered for each individual claim they make.  The aggregate number represents the maximum amount the insurance company will pay for the total amount of claims during the year.  The aggregate is usually double the per occurrence amount.  A typical level of coverage for a small business is a $1 million / $2 million split.  This means insurance will pay for up to $1 million per occurrence and $2 million total for the year.  So, if a business has two claims of $1 million each, that is all they can file for the entire year.  Any amount over the per occurrence or aggregate amount must be paid for out of pocket by the small business.

 

Commercial versus Personal

In general, a commercial policy is more complex and can have higher coverage amount than a personal policy.  Insuring a business exposes the insurance company to differing types and greater amounts of risk; because of this, commercial policies are more expensive.[6] Commercial insurance includes such policies as property, liability commercial auto and workers’ compensation. Personal insurance includes auto, homeowners, flood and earthquake, as well as others.  An umbrella policy can be purchased in either the personal or commercial area.[7] In either commercial or personal, coverage of individual items under the umbrella policy must be maxed out before the additional umbrella coverage can be purchased.[8]

As previously mentioned, the rate of your commercial insurance is largely determined by the history of your business.  Aspects that are taken into consideration are overall periods of financial loss, poor financials, stability of your operation, and longevity.  The number of times a claim is filed does not affect a commercial rate.  The initial rate of one’s personal insurance is weighted based on the credit of the individual purchasing, and can increase when claims are filed.  Unfavorable conditions will result in a higher premium; it is all about the risk the insurance company takes on by providing coverage an individual or business.

A small business owner may not always need to purchase a commercial auto policy; in some instances a personal auto policy may be more appropriate.  In deciding whether to purchase commercial or personal auto insurance, a small business owner needs to first determine how the vehicle(s) will be used.  If the vehicle will be used for personal reasons and for business errands such as taking deposits to the bank, and the small business owner or his family will be the only ones driving the vehicle, it may be the best choice to maintain a personal policy and simply list the vehicle as a business use asset.  If the vehicle will be used for entirely business purpose and there will be multiple employees driving it, a commercial policy would be the best choice.

How You Can Be Dropped By Your Insurance Company[9]

At the end of every year, the insurance company will review the business’s owner’s policy to see if they will continue insuring the company or decide to drop them. There are two main factors that will contribute to a business being dropped by its insurance company. These factors are loss runs and risk. If the yearly loss of a business is more than the insurance company’s premium, the insurance agency will not agree to renew the policy. It is not profitable for the insurance company to keep insuring a business that is not profitable and may likely cause the insurance company to also lose money.  The risky nature of a business is the second factor involved. An example of this would be in the tow truck business.  This particular type of business has an extreme amount of liability as it is constantly dealing with expensive trucks used for towing, as well as the liability of the cars that it is towing.  In this case, the risk involved for the insurance company is extremely high, and they are not very likely to want to insure someone who will likely cost them large amount of money.

Filing a Claim 1

An insurance claim is an application for the benefits provided by your insurance company that must be filed before your insurance will disperse any money.  The insurance company can approve or disallow your claim depending on their assessment of the incident.  There are two types of claims:  regular and catastrophe.  A regular claim is one that is filed by a single business under a “normal” claim situation.  A catastrophe claim is one filed due to an incident caused by a natural disaster or Act of God, which affects a large group of people at once.

The steps in filing a regular claim are as follows:

  1. Call to Your Insurance Agent.  The small business owner should call their insurance agent and report the occurrence immediately.
  2. Assignment of Claim Number.  Your agent or representative at the insurance company will collect the details on the incident and assign the case a claim number.
  3. Investigation of Coverage. The claim is assigned to an investigation team of the insurance company who will determine whether or not and to what extent the incident is covered under the owner’s policy.
  4. Assignment of Adjuster.  An insurance adjuster is assigned to the claim.  The adjuster will actually visit the site to physically assess the damage and associated liability.  They may ask questions and/or request additional information.
  5. Approval or Denial of Claim.  After their physical assessment, the adjuster will approve or decline the claim.  The adjustor will also determine who is responsible for paying the claim.
  6. Payment. Once the claim is approved by the adjustor, the insurance company will send the small business a check.

The time to complete the regular claims process varies.  With the full cooperation of all parties, payment can be received within just a few days.  However, if parties are in disagreement, or if there are other complications, the claims process can take years.

In the event of a natural disaster or catastrophe, the claims process will be different.  The insurance company may send a large group of adjusters directly to the affected area prior to any contact with their clients.  Adjusters may go door to door to investigate the damage and assign claim numbers.  However, if you are able, you still need to contact your insurance company after a catastrophe to report the damage.

Top 5 Things to Know About Insurance

When asked what the top things to know about insurance, Jessica Lavender, an independent insurance agent who deals with small businesses, listed these five things.

1.     Make sure you are covered. Look through your policies and know what is, and isn’t, covered.  The coverage and exclusions in your insurance policies can differ significantly from those of your friends. The best advice is to understand your policies before you have a claim.  Ask your local insurance agent or company representative to explain anything you don’t understand.

2.     Pick a financially stable company. If your insurance company goes out of business, you are out of luck. You have 30 days to move your insurance to another company before you are lost.

3.     Have a policy that best fits your business’ needs.  Make sure you have everything you need and aren’t paying for things you don’t.

4.     You get what you pay for.  A cheaper premium usually translates to less coverage.

5.     Have a good agent. They help you with practically every aspect of insurance, including the claims process and writing a policy specific for you and your business.

Conclusion

Insurance is a very complex topic and it is important for small businesses to be aware of its insurance policy and coverage.  Fortunately, insurance agents are knowledgeable and are willing to help a small business owner with any questions he or she may have. Insurance may seem overwhelming, but help is available to those who are willing to ask for it.


Bibliography

  1. Lavender, Jessica.  Personal INTERVIEW.  27 March 2009.
  2. McManus, Todd.  Personal INTERVIEW.  1 April 2009.
  3. Worker’s Compensation Facts & Figures.  Journalist’s Resource Center for Worker’s Compensationhttp://journalists.workerscompensation.com/general_information.php

 

  1. Geico Insurance.  “Knowing When you Need Commercial Auto Insurance.” 2009. http://www.business.com/guides/knowing-when-you-need-commercial-vehicle-insurance-29078/

[1] Jessica Lavender, Agent with Farmer’s Insurance, College Station.

[2] See Appendix A for example of this form.

[5] Jessica Lavender, Agent with Farmer’s Insurance, College Station.

[6] Todd McManus, Agent with Farmer’s Insurance, College Station.

[7] Todd McManus, Agent with Farmer’s Insurance, College Station.

[8] Todd McManus, Agent with Farmer’s Insurance, College Station.

[9] Jessica Lavender, Agent with Farmer’s Insurance, College Station.


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