Real Small Business

Frequently asked questions about small business insurance.

Does my small business need insurance?

Yes. Not having insurance - or not having the right kind of coverage - can put your business at risk. Without adequate insurance, a fire, theft, employee accident, or lawsuit could destroy your business and might even consume your personal assets.

In fact, your business may be legally required to have certain kinds of insurance. For example, if you have employees, your state may mandate that you carry workers' compensation coverage, or you may have to prove you have specific types of coverage in order to get a state or local business license. In addition, people such as landlords or suppliers may require you to have coverage as part of a contract.

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What can I do if I can't afford business insurance?

According to the Insurance Information Institute, about 40 percent of small business owners have no insurance at all because they claim they are cash constrained. The uninsured may be buying into a common misconception - that small business insurance is expensive. The truth is that not having insurance can cost a lot more than annual premiums - you can end up losing your livelihood to a disaster.

Packaged insurance solutions - such as business owner's policies (BOPs) - give you coverage for basic property and casualty risks at a reasonable cost. If the cost of this kind of coverage is still beyond your means, you might want to look into other methods of reducing the expense. For example, a higher deductible will usually lower your premiums. You may find yourself paying higher out-of-pocket costs should you need to make a claim, but you will be protected when disaster strikes.

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What kind of deductibles should I carry?

For many business insurance policies, the minimum deductible available is $250 per occurrence. Higher deductibles will reduce the cost of your insurance by lowering your premiums. When evaluating higher deductibles, it is a good idea to carefully consider your circumstances. Ask your insurance provider for quotes for various deductibles, and analyze them carefully before making a decision. Most liability policies do not have deductibles, although some do for property damage.

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What can I do to keep my insurance costs under control?

The surest way to control your insurance costs is to use what insurance professionals refer to as "risk management." Using risk management methods, you determine the probability of your business facing a loss, and consider whether or not it needs coverage for that loss. This is a process that large companies use, and one that small businesses can practice to ensure they don't over or under-buy insurance.

Risk management is basically a four-step process:

    1. Identify sources of potential losses.

    Examples would include casualty and theft losses, fraud and embezzlement, injury claims, etc.

    2. Evaluate the financial risk posed by each exposure.

    How frequently might the event occur? How severe would its impact be?

    3. Determine how to treat the risk.

    Can it be eliminated or controlled? Can you transfer the risk to your insurance company?

    4. Monitor the results of your analysis.

    You may need to review steps 1-3 annually.

By using risk management to avoid or reduce losses, you can lower the number of insurance claims your business may make. This, in turn, lowers your coverage rates, which are based on your claim history. You may also find that your out-of-pocket expenses for uninsured claims are lower.

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How often should I review my business insurance policies?

A small business' insurance needs change frequently. You don't want to find yourself suddenly underinsured, nor do you want to pay more for insurance than necessary. Take stock of your policies and premiums at least annually, and, if possible, twice a year, to ensure they still meet your needs. Also, re-evaluate your coverage whenever your circumstances change.

Don't feel as though you have to stick with your current provider. One way to save money is to shop around to see what rates and services are being offered by competitors. Ask for bids from at least three providers to find the most cost-effective policy.

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Do I need liability insurance if my business is incorporated?

While certain business structures such as incorporation are designed to protect owners' personal assets in cases of liability, they do not exempt companies from insurance needs. In fact, incorporation typically does not protect you personally from professional malpractice and other liabilities. Although incorporation makes your company a separate legal entity, an attorney could find ways to strip away your corporate shield and make you personally liable in the event of a lawsuit. Not only would your business be at risk by not having insurance, but your life savings could also be devastated.

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Do I need workers' compensation coverage?

In general, you need to carry workers' compensation insurance if your company has employees.

Without coverage, you may be sued by an injured worker for medical and disability costs, plus damages. Workers' comp requirements vary from state to state. Each state has its own workers' comp laws, as well as its own administrative and legal structure for handling claims and disputes. Contact your state's insurance commissioner's office to find out what the requirements are where you are located.

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