How Much Of A Good Thing?

Entrepreneur, Sept, 2000 by Pamela Rohland

We admit it: Discussing business insurance is about as exciting as, say, cleaning out the basement. Perhaps you're thinking of turning a few pages and skipping this article altogether.

But wait--you might want to reconsider. Because if you're operating your business with the wrong insurance, not enough insurance or--heaven forbid--no insurance at all, then you might as well be bungee jumping off a cliff without a cord. Insurance may one day be the only thing that prevents you from having your life's work destroyed in a few disastrous moments.

To help you, we asked leading industry experts for their do-or-die suggestions on how you can build (or maybe just strengthen) this strongest safety net for your growing business.

After you figure out the types of insurance your business needs, assess whether your current policy is right for you. Too little insurance leaves your business vulnerable, while too much leaves you cash-poor from paying high premiums.

Industry experts advise that you consider these factors:

* Actual value: When purchasing property insurance, know the true value of your property (what it would cost to replace it). Insure your most vital property for its full replacement value. Because that costs a lot, however, consider insuring only the property you absolutely need to continue running your business.

* Lenders' stipulations: If you have a loan on property, the lender usually requires you to maintain insurance. If you don't, the lender may foreclose on the property or purchase insurance itself and charge you an exorbitant price for it.

* Absolute minimums: When you're our shopping for liability insurance, check with your current agent to learn whether there are minimum insurance limits set by law. These are usually small, however, and you shouldn't expect them to cover you adequately in the event of a serious accident.

Sole proprietorships usually need more liability insurance because the owners run the risk of losing personal as well as business assets. Businesses that are incorporated, however, require less liability insurance. Put simply, if a corporation is sued, only its assets can be seized.

* Employees: Are your employees experienced professionals or high school kids? Are they accident-prone? If bad things seem to happen to you or your staff, buy more insurance rather than less.

Pamela Rohland writes about issues of entrepreneurship for a variety of regional and national business publications.

You Can Do It Yourself

Well, maybe. Self-insurance was a trend of a decade ago that didn't travel well into the new millennium. Commercial insurance is now competitively priced, and many companies that were self-insuring gave it up.

Still, some businesses--usually large corporations with plenty of cash--prefer to self-insure. According to Tepp, a company can do it one of three ways by:

* Agreeing to a large deductible, then using cash or credit to fund it.

* Self-insuring up to a certain amount (such as $250,000) then purchasing so-called excess insurance, which kicks in when losses above that amount occur.

* Joining with a group of businesses operating in a similar industry or region to establish your own insurance fund. Members pay premiums, plus a fee to join.

"Alone, these businesses wouldn't be large enough to self-insure, but together they are," says Robert P. Hartwig, vice president and chief economist for the Insurance Information Institute in New York City. "This way, you all have a stake in each other's businesses, and one bad claim won't wipe out a business. The problem is, if the companies in your group have a bad year, you'll be asked to pay more. If there are 100 companies in your group and 10 have fires and are burned to the ground, the premiums could cost much more than anyone expected."

Pamela Rohland writes about issues of entrepreneurship for a variety of regional and national business publications.

Back To Basics

Kathy Posner, 46, unknowingly spent five years with a gap in coverage--but lucky for her, she was afforded the opportunity to make changes before disaster stuck. As founder of [Comm.sup.2] Inc., a Chicago communications consulting firm, she learned the hard way how essential it is for entrepreneurs to have the right types of insurance for their businesses. "When I started my company in 1990, I had a partner who took care of most of the business aspects," she says. "When I bought him out in 1995, I discovered that we had never had workers' compensation insurance. Companies are required by law to have workers' comp, and if anyone had ever gotten injured, I would have lost my business and all my assets!"

To evaluate the extent of your current coverage, check out the Business Insurance Oracle Web site (www.insuranceoracle.com Developed by Jerry Glenn, CEO of Western Sentry Insurance Brokers in Thousand Oaks, California, the site provides a good starting point for entrepreneurs via a basic insurance checklist. Glenn's biggest piece of advice: Avoid buying policies a la carte, like you would Chinese food. Instead, purchase them as a package deal and you'll receive a lower price. You'll also have only one party to hold responsible in the event of screw-ups.