Take Coverage

Entrepreneur, Sept, 1999 by Robert McGarvey

Insurance is a waste of money, you say? You may not need it all, but you sure need something.

Buying insurance is no joy - it costs too much and the money could be put to better use building your business. Or so you think. Except, that is, when you have a loss, and insurance keeps your business humming.

If you have insurance in the first place. The surprising fact is, many entrepreneurs don't even carry the basics. A recent Entrepreneur subscriber survey indicated that only 55 percent of you believe you have "adequate" insurance for property damage, fire, theft or liability - the essentials.

That statistic comes as no surprise to insurance experts. "[Entrepreneurs] are much more interested in building wealth than in protecting against loss," says Beverly Brooks, partner of Dallas insurance agency Brooks Bittner. "It's often terribly difficult to get entrepreneurs to focus on risk."

Think you're too busy to think about insurance? We'll put it bluntly: If you're not adequately insured, you risk losing your business. Can you afford to fight a sexual harassment lawsuit when even a case without merit can cost you upwards of $50,000? Do you realize that if you send an employee out to pick up a pizza for the crew and he or she gets in an auto accident, your business is likely to get sued even if the vehicle isn't company-owned? "That happens frequently," affirms Cathy Jones, president of Integrated Risk Solutions, a risk-management and insurance consulting firm in Dallas.

Coverage against those risks would cost just a few pennies a day, but most entrepreneurs have scant coverage, haven't updated their insurance since they first opened their doors years ago, and don't know the new types of coverage designed to protect their businesses.

But updating your insurance policies won't necessarily break your budget. When you add it up, purchasing adequate coverage should cost a typical office firm 1 percent or less of its gross revenues, estimates Jeff Olmstead, a product manager specializing in small business with The Hartford Financial Service Group Inc., an insurance company in Hartford, Connecticut. What's more, small businesses now have many new insurance products to choose from - and more insurers are competing for the market. Add to that the new efficiencies resulting from more widespread automation and you've got falling prices. The upshot: It's a good time to go shopping for small-business coverage.

This month's "Quick Guide" will clue you in to new types of insurance and help you determine whether the coverage you have is adequate.

JUST THE BASICS

There are a few types of insurance every business needs. You probably bought policies that covered those areas when you first opened your doors - but have you kept up with your business's changing needs? Let's take a look:

* BUSINESS PROPERTY COVERAGE. This insures your office equipment, inventory, the building you own and tenant improvements you've made to space you rent against a range of perils, from fire to windstorms and some water damage - roof leaks are usually covered; floods aren't.

How much coverage do you need? The simple answer: What would it cost to get your business afloat again in the event a fire burned everything you own to cinders? "Determine how much your property is worth. That's how much coverage you need," says Madelyn Flannagan, director of research and information for The Independent Insurance Agents of America.

Take note: This isn't a static number. You'll want to continually update your limits. Many business owners neglect doing this," says Flannagan.

* LIABILITY. This is what covers lawsuits from accidents that cause bodily injury (a delivery person slips on your steps), mishaps that cause damage to property (you sell a defective lubricant that burns out a customer's car engine), and a grab-bag of miscellaneous claims (like libel, slander and false advertising). "Don't buy less than $1 million in liability coverage," recommends Flannagan.

BEYOND THE BASICS

Buy liability and property protection, and that's a start. But there are many more kinds of coverage you need, some of which are even required, either by law or by insurers. Below, we've assembled a sampling of policies. You probably don't need them all. But we'll bet you need more than you have.

* DISASTERS. Many natural disasters - earthquakes and floods, for instance - aren't covered under standard property insurance policies. Coverage is available, sometimes from government agencies, sometimes from private insurers, and costs vary wildly. Earthquake insurance in California is pricey; in Texas, it's very cheap. If disaster insurance is inexpensive for your area, that's probably because insurers know it will rarely be needed. "[But] business owners ought to think hard about buying it," says Jones. "I had one client whose business was in a 500-year flood plain [meaning the best scientific guess is that it would flood only once every 500 years], and he got flooded out last year." Ask your agent how much disaster insurance would cost you. If it's expensive, that's all the more reason to buy it - the proof you need it is that insurers label your area "high risk."