Frequently Asked Questions

Risk analysis is a process by which you consider all possible risks and determine which are the most significant for your particular business. It may make sense to mitigate some risks by purchasing insurance. Other risks can be eliminated without purchasing insurance. After considering how likely various losses are to occur, how expensive they are to mitigate and how much money you have to spend, you decide the optimum strategy for dealing with the various risks.

The size of the company, type of industry, type of organizational structure, capitalization, geographical area, management team, degree of experience and expertise in the targeted business, capitalization, competitive environment and many other factors can have a bearing on the risk environment for the company. The business owners should address such issues in their business and strategic analyses of the company’s situation. A few of the potential operational risks are as follows:

1. Risk of Property Damage

2. Risk of Inventory Loss or Damage (through spoilage, etc.)

3.Risk of Loss from Employee Theft

4. Risk from Various Liabilities (including injuries to customers or to others)

5.Risk from Errors and Omissions Liabilities

6.Business interruption Risks

Other risks involve the business’s employees and may call for optional or mandatory insurance coverage:

1. Worker’s compensation

2. Unemployment

3. Employee benefits

Some additional risks relate to the owners and their ability to continue the business in the event of serious losses

1. Risk of death of an owner or key employee

2. Risk of disability of an owner or key employee.

The primary ways of dealing with risk include:

1. Find ways to avoid risks such as eliminating potentially hazardous products or procedures

2. Reduce the frequency or severity of risks that cannot be eliminated

3. Transfer the risk to an insurance company (or perhaps to another party by means of legal agreements that your business will be “held harmless”).

A review should be done periodically. Once a year might be appropriate for many businesses. Many insurance premiums come due or up for reevaluation annually. That would be a good time to consider any changes in your risk analysis. You should also consider a review whenever you business:

1. gets larger or smaller

2. changes its nature as when it diversifies into new businesses or markets or products

3. relocates

4. anytime your business evolves in any way that could change your risk profile.

The type of organization can have a bearing on the degree to which you are personally liable for obligations of the business.

Unincorporated Businesses:

Unincorporated businesses are by far the most common type of business.

The three basic forms of unincorporated business enterprises are

1. Proprietorships (easiest to form and terminate). This is the most common form of business enterprise. Most proprietorships are small. The proprietor faces the greatest risk exposure of any business owner since the business and personal assets of the proprietor are legally indistinguishable – as are business and personal debts. Business misfortune can cause personal financial distress.

2. Partnerships. State laws lay out the legal principles that govern these. Allows for additional input of expertise or capital or time. General partners of businesses also have essentially unlimited exposure.

3. Limited-liability companies. These are the fastest growing form of company. They allow limited liability, flexibility of partnership taxation, and are attractive to people who desire to be limited partners (with limited liability) and supply investment capital, but not become involved in the active management of the company. A variation of this is the registered limited liability partnership which operates as a normal general partnership and offers liability protection for all partners.

Incorporated Businesses:

The corporation is another form of business organization. A corporation exists as a legal entity separate and apart from its owners. It is created under the laws of the various states. Advantages of the corporate form include limited liability, continuity of life, and various tax advantages. Corporations range from small scale to very large. Very large corporations usually have a department that manages the various aspects of risk planning and business and insurance planning. Corporations are taxed as separate taxpayers with rates different from those applicable to individuals. These tax considerations affect some aspects of insurance planning for corporations.

Corporations can be one of two general types (C corporation – the ordinary type, or S Corporation – which has a different type of taxation)

A closely held corporation has a small number of shareholders, no public market for the corporate stock and the ownership and management overlap. Many small closely held corporations are functionally not greatly different from small unincorporated businesses in such matters as how they operate, make decisions and raise capital. Despite the difference in liability exposure, some lenders have been known to require managements of small corporations to pledge personal assets to secure business loans.

The term “Business Insurance” refers to a wide variety of insurance coverages that can reduce or mitigate or compensate for exposure to risk for the business or its employees. It also includes coverages mandated by law such as unemployment insurance, workers’ compensation social security, and (in some states) state disability.

In today’s business world, your computer data constitutes a key asset – perhaps more valuable than many of your tangible items such as buildings or vehicles. So safeguarding data and data processing assets are crucial success factors.

Many data related risks can be greatly reduced by non-insurance steps. For example a carefully designed program of backing up data frequently and dispersing data processing and records in widely separated locations can avoid many of disruptions caused by natural disasters (hurricanes, tornadoes, floods, earthquakes, etc.) or by area-wide disruptions of communication or electric power and even terrorist attacks. If such events do occur, the redundancy and dispersion should make it possible to recover your operations quickly in most situations.

Archived data should also be maintained in secure locations. If you do not have the capability of securing such records, you might want to consider using the services of outside companies that store your valuable records in secure, carefully controlled, remote locations such as special warehouses or underground mines.

And security of customers’ private information is increasingly important to give customers the confidence to use your products and/or services. So you need to consider what information security risks you have and how to eliminate them.

These are areas where you might find preventive actions to be preferable to insurance and remediation.

The risk assessment process is the basis for determining what insurance you need. Many insurance companies provide a wide variety of business property and casualty coverages. These can be underwritten individually and tailored to your specific business.

The cost is dependent on the specifics of your business situation. You can probably reduce the cost by shopping around. There are many companies providing business coverages and competing for your business.

Many small to medium size businesses may be able to save money by considering packaged coverage instead of purchasing a lot of individual policies for the different risks.

Property and casualty insurance provides a tool for reducing the individual business’s risk by spreading the risks faced by many businesses. Many business owners contribute their premiums to the insurance company that provides the policy, but not all of the insured businesses experience losses so the insurance company is able to use some of the premium dollars to compensate those who actually sustain losses. In effect, the relatively small amount of money contributed by the many companies that are insured is used to reduce the losses suffered by the companies that actually have losses.

The insurance company has to pay for the cost of the coverages provided to the insured businesses. The predictability of these costs will vary based on the type of coverage. Some losses are immediately apparent (e.g. fires) while others take years to become final (e.g. court judgments for liability coverages). Various expenses, such as getting customers and administrative costs of running the business must also be paid. Investment returns on premium dollars not yet spent add to the available funds to pay these expenses. Insurance companies judge all these and other factors including competitive forces, the legal environment, the investment returns likely to be earned for some years in the future. Then they set rates that make for a profitable operation, subject to regulation by the insurance departments.

Some types of package coverages such as business owner’s policies are underwritten by class of policies rather than as individual companies. If your business fits in a certain classification the whole group of businesses in that class is underwritten together so that rates are set for all of them rather than considering each individual company. This leads to more efficient underwriting and helps to keep the rates low if your business meets the requirements to be accepted in one of the classifications. It also means that such policies have less flexibility than you would have if you purchased individual policies for each type of coverage.

As with other potentially risky aspects of life, insurance can help by taking risks faced by many policy owners and pooling them so as to compensate the ones who sustain substantial losses. Pooling of risks works because what is unpredictable for an individual business is much more predictable for a large group of businesses. If your building burns down or is burglarized, the money the insurance company collects from its policy holders plus what it earns from its investments is used to offset your losses. People who do not suffer losses but have paid their premiums have the assurance that if they suffer insured.

Yes. For example, you cannot insure against many business eventualities such as loss of business to competitors or rising prices of supplies.

Once you have analyzed the risks, you need to consider the cost of the various coverages and what your most significant exposures to risk are. Then you should consider your available insurance budget and decide which risks you should insure against.

Buying insurance is one way to deal with risk. However, some risks can be countered with measures such as:

1. Installation of better locks or security devices or by moving to a location less susceptible to crime or flooding etc.

2. Loss of merchandise can be reduced by security devices on the items to be sold.

3.Liability losses resulting from customers slipping and falling can be reduced by clearing away snow or water on walkways, using signs to warn of large steps or redesigning products to reduce the possibility of injury to customers.

A knowledgeable insurance representative may also be able to suggest additional steps to reduce exposure to risks.

Many factors influence the cost of business insurance, but some important ones include the type of business, the location, the size (both physically and in terms of volume of business). Competition for the business is also a factor. If there are many companies wishing to provide insurance for your type of business, you will be in a better position to shop around for a good price.

Some types of businesses including restaurants (except fast food), financial companies, some types of medical offices and others may be considered high risk for some types of insurance and so may have higher than average cost for those types of insurance. Also, they may not be eligible for lower cost packages of business insurance.

A history of large or frequent claims can also increase the cost.

A business owner’s policy (BOP) is the best choice for many small to medium size businesses if they can qualify and if the limitations and types of coverages fit their needs. Some specific additional policies may be purchased to supplement the BOP coverages if needed.

You have had your personal coverage with the same company for many years. Will it help you to get a better price on your business insurance? Usually, it will only be a “tie breaker.” When you are comparing prices you may get a slight break on price if everything else is about even. But don’t expect a lot of points for loyalty to your insurer.

Property damage includes a number of direct risks as well as some indirect ones. Direct damage would include fire or flooding damage to the building where you do business while indirect damage would include being out of business temporarily because of damage caused by a fire or flood. Whether you lease or rent or own the building where you conduct your business, you will probably need some type of property insurance.

You need to be certain that any property insurance coverage is adequate. Decide whether to base the coverage on replacement value, actual value (replacement less any depreciation), or some other amount you stipulate and deem sufficient.

Many forms of business insurance (other than property coverage, life insurance or disability insurance) fall under the general category of Casualty Insurance. This includes such risks as workers’ compensation, automobile coverage (for business vehicles) and liability coverages. Since there are various types of potential liability for a business (involving actions of employees, product defects, etc.), it is important to consider all the liability exposures and make sure that you have adequate insurance against any that may be significant for your business. Your insurance advisor or insurance company should be able to advise you whether individual liability policies or a package of liability coverages will be needed.

Some industries have an especially high risk of losses to various types of crime. These can include such acts as burglary, armed robbery and theft by customers or employees. It is reported that some retail organizations employ under cover shoppers to check on the practices of employees as one of the tools to try to try to minimize employee theft. Many stores also employ a variety of security personnel, alarms, tags and other devices intended to thwart theft.

Despite some highly publicized cases of accusations of misdeeds against officers and directors of major companies, for many small businesses it may not be necessary to have Directors and Officers DNO coverage. Each business needs to assess the need for DNO in its particular situation. For many companies the answer may be no, however.

Basic liability coverages such as provided in business owners’ policies may be adequate in many cases, But if you are in a business or profession where there is an especially high risk of lawsuits (some branches of medicine for example) you may need extra protection.

It depends on your situation. If your business is new you may want to wait until you have been in business a while and have achieved a degree of success. Once you have achieved that you may need to consider providing some benefits in order to attract and retain excellent workers. The size and composition of your work force will probably be a factor to consider. If you have mostly part time or workers or workers who have other coverage (such as through a spouse), it might not be as important to provide benefits. They might consider the pay or vacation to be more important.

A business can be crippled by the death of a partner, because the partnership is effectively ended by the death and needs to be reconstituted with the remaining partners and any new participants. But the interests of the deceased partner need to be bought out, just at a time when the business may be badly damaged by the loss of a critical member of the team and funds may not be available to pay for the deceased’s ownership interests.

A buy/sell agreement is a legal document that binds business partners to buy out the interest of a deceased partner at terms that are predetermined so as to allow the business to continue to be run by the remaining partners. The agreement is funded by life insurance policies on each of the partners with proceeds to be paid to the business for disposition according to the terms of the agreement. It is important that the agreement be carefully drafted by attorneys experienced in how to meet the exact requirements of the organization in question.

Similar arrangements may protect against long term disabilities that can sideline one of the main players in the business. A disability policy can provide needed funds in the event of such an incident and buy out interests of someone who will not be able to return to the business for a long period of time.

Disability income protection can also contribute to paying overhead expenses when an owner is incapacitated.

The basic problem is that the business may have to be liquidated shortly after the owner’s death if there is no plan for business continuation. The problems are somewhat different for incorporated or unincorporated businesses, but both are likely to need a buy-sell agreement. Life insurance is commonly used as a way to fund such agreements.

A properly prepared buy-sell agreement will require the estate of the deceased owner to sell the business and the purchaser to buy it for a prearranged price. This guarantees a market for the business, liquidity for taxes and administrative costs and improves the probability of the business being able to continue and carry on normal functions such as borrowing money.

The death of a shareholder of a closely held corporation does not terminate the corporate, but it may have serious consequences concerning the continuation of the business, the disposition of the deceased shareholder’s stock (including the possibility of unwanted heirs or outsiders acquiring the stock and becoming involved in the business).

Again, the solution is a properly designed and executed buy-sell agreement. The agreement should reflect the goals of the people making the agreement clearly and in great detail. Some agreements require the other shareholders to purchase the stock of the deceased shareholder at the time of death. Another type of agreement has the corporation buying and “redeeming” (holding as treasury shares) the shares of the deceased shareholder.

A shareholder may wish to receive cash for his or her stock in a closely held corporation in order to retire or for other reasons. Also, an extended period of disability could trigger an agreement to redeem the stock of the affected stockholder. Plans for contingencies such as this can be established with funding coming from disability insurance or life insurance policies.

Many business owners have no intention of disposing of their business as long as they are alive. But some others become ill, or wish to retire, or decide for some other reason that they wish to withdraw their assets through some sort of disposition of the business. Several disposition methods are possible including outright sale, installment sale, exchange of stock or assets, liquidation. These could have complicated business and tax consequences that need careful analysis with the appropriate professional advisors.

Since execution of a buy sell agreement or other possible transactions require an estimation of the value of the business. It is essential that a valid method for determining an accurate value be available. The agreement may have been draw up long before the time that the value needs to be determined. An accurate method that can be used when needed is essential. The calculation techniques aim at determining the “fair market value” of the business. The two primary techniques focus on the earning power or the assets of the business. Adjustments and judgements can also come into play as well as IRS advisory rulings relating to the valuation techniques.

Planning for business owners generally impinges as well on personal financial issues. For most business owners, the business constitutes a significant part of the owner’s personal assets. Furthermore, personal financial problems can jeopardize the healthy continuance of the business through creating difficulties in raising capital, getting loans, etc. The analysis and planning issues often involve concepts that relate to business organization, laws, taxes, compensation for the owners and employees and insurance planning.

Since few business owners are likely to have competence in entrepreneurial skills as well as the wide variety of specialized disciplines required, it is almost inevitable that some resort to advisors will be required unless the company has grown to the point of having many employees and departments staffed by the professional specialists that handle these many areas.

Suppose you are trying to meet an important deadline for a key customer when a disastrous, unforeseen event takes place putting your ability to complete the job in jeopardy. An example would be when the indispensable person who heads up the project becomes ill or is hospitalized.

Much publicized events such as this have happened in the entertainment industry when a hurricane destroys a set for a movie or a film or stage star becomes sick or dies suddenly. It is obvious that the unexpected can have severe financial consequences. Some businesses use business interruption insurance to offset this.

Most businesses with employees will need to purchase worker’s compensation coverage. While details vary from state to state, there are generally requirements mandated by state law and the coverage is purchased through an insurance broker.

The person or vendor who provides your payroll services will make the proper payments to the state and federal unemployment organizations as part of the payroll services function.

A business owner’s policy (BOP) has been compared to a homeowner’s policy for business. BOPs were first developed in the 1970s and have become a very popular form of insurance for small to medium sized businesses. BOPs combine some of the basic coverages needed by a typical small business into a standard package at a premium that is generally less than would be required to purchase these coverages separately. Business owners also like the simplified nature of the package as opposed to buying a collection of small policies. The efficiency also appeals to insurance companies and allows them to offer a lower premium for the package.

A similar packaged product is also available for farmers.

Most of the coverages that are needed by small and medium sized businesses, with the exception of auto and worker’s compensation, are generally included. This not only simplifies the process of buying the basic insurance coverages, but often gives a lower premium for businesses that qualify for a BOP. Business owner’s policies basically consist of property coverage, liability coverage and some additional types of coverage that most businesses require. Optional coverages can also be added to meet specific needs of the business.

Typically a BOP policy includes:

1. Property insurance (covering buildings, equipment and inventory).

2. Business interruption insurance (covering losses that cause you to shut operations or reduce production for a time). Business interruption insurance can provide money to offset lost profits or to pay continuing expenses (typically for up to a year for insured losses).

3. Casualty or liability protection (covering harm done by the employees or products to other people or their property).

4. Crime insurance (covering loss of money or securities resulting from burglaries or robberies or destruction) as well as losses from employee theft or embezzlement.

5. Liability insurance covering lawsuits arising from accidents (as when someone trips and falls on your business’s property) or when you sell a product that damages the customer’s property or you are accused of offenses such as slander, copyright or invasion of privacy.

6.Vehicle coverage for rented or borrowed vehicles.

A number of other coverages such as flood insurance or earthquake insurance or owned vehicle coverage and specialized liabilities are generally not included in POBs. Some of these may be available separately for extra premiums.

One of the distinguishing features of BOPs is that most automatically include business income and extra expense coverage (subject to some limitations).

There are as many Insurance Carriers as variables when deciding what Workers Compensation policy is best for you and your business. That said The Harford has compiled a great site to answer many of these questions and concerns.