ComplianceLegalSeptember 20, 2020

How to select business insurance

As you start a business, be sure to protect your new venture and the time and money you’ve invested in it. By simply incorporating a business or forming a limited liability company (LLC), you help protect your personal assets from business debts and liabilities. But purchasing the correct type and amount of business insurance is another key layer of protection. This article helps you understand the different types of business insurance policies available.

What are the policy types?

There are different types of business insurance that provide different types of coverage. There’s coverage against damages to your business’s location (office, factory, etc.), vehicles, and equipment and inventory. There’s business insurance to protect against losses resulting from crimes, such as theft or even employee fraud. There are many types of business liability insurance, protecting your company in the event of a lawsuit. There is also business insurance to provide coverage for extended leaves of absence due to illness.

What are the general categories?

Business insurance can be divided into four broad categories:

  • Business property insurance. Reimburses any insured party who has suffered a financial loss because property (land, buildings, personal property, etc.) has been damaged or destroyed.
  • Business liability insurance. Delivers protection to pay for bodily injury or property damages when the insured is legally responsible.
  • Business automobile insurance. Provides protection against damages caused by the vehicles used for business purposes. Similar to personal auto insurance, comprehensive coverage provides compensation for vehicle damages resulting from fire or theft; collision covers losses due to an accident; and liability coverage protects you if you are sued for an accident involving a company vehicle.
  • Business umbrella insurance. Extends coverage for losses above the limit of another policy or policies. An umbrella policy may also extend coverage for losses not normally covered in the other policy.

Outside of these four primary categories, other types of business insurance coverage include: workers compensation insurance, business interruption insurance, group health insurance, group life insurance and disability insurance.

Choosing the right limits and deductibles

Once you select the right type of coverage for your business, you’ll also need to choose the appropriate limits and deductibles to suit your needs. These factors can greatly influence the premiums you pay:

  • Get the best coverage at the best price. Obtain and compare multiple quotes from reputable carriers and independent insurance agents. You can get quotes online or in person. If you are a member of an industry organization, check to see if they have a recommended insurance provider. It’s also often beneficial to talk to other business owners to see who provides their insurance and whether they’re satisfied.
  • Compare the details. Policies from different carriers may have the same name, but not the same coverage. Be very clear on what is and is not covered in each policy.
  • Considerations for home-based businesses. Owners of small home-based businesses can often add a rider to their homeowner’s policy instead of needing a separate business insurance policy. Discuss your particular situation with an insurance agent to determine what is best for you.

Understanding common elements and exclusions

Before deciding the type of coverage for your business, be sure you know what various policies will cover. Here are some common elements and exclusions:

  • Endorsements. Specialized coverage types are more restricted in scope and cover situations excluded in a comprehensive general liability insurance policy. Sometimes you can pay an additional premium for an "endorsement"—an amendment to a comprehensive that will cover a standard exclusion. When liability relates to a unique risk (e.g., professional services by an accountant), a specialized policy will be required (e.g., an errors and omissions or E&O policy), in addition to a comprehensive general liability insurance policy.
  • Coverage of occurrences. A comprehensive policy covers liability for any "occurrence" during the period—that is, the policy will cover liability for personal injuries or property damage that the insured caused to another party while the policy was in effect. A lapse in insurance coverage opens a window of vulnerability.
  • Expected or intended damages. Damages that were subjectively "expected or intended" by the insured are excluded from coverage. Courts have ruled that to deny a claim, it is not sufficient for the insurance company to prove that a "reasonable person" would have expected the outcome. Rather, the insurance company must prove what the insured party was actually thinking at the time, which is a tall order to meet.
  • Intellectual property, advertising, etc. Coverage for personal injuries to other persons—as a result of libel; slander; defamation; invasion of privacy; copyright, patent, trade name and trademark infringement; and unfair business practices—traditionally has been included in a comprehensive policy. Recently, however, insurance companies have added exclusions from coverage for copyright, patent, trade name and trademark infringement. They are also narrowly defining "advertising," to limit or deny coverage. Be sure to examine any proposed comprehensive general liability policy for this type of coverage.
  • Data as property. Coverage for damages to another person's property only may apply if the property is "tangible," or the damage "physical." It’s up for debate as to whether computer data is "tangible," or capable of "physical" harm. So if you provide computer hardware, software, or programming services, make sure you know what your policy covers.
  • Property insurance distinguished. A single policy may provide for comprehensive general liability coverage (for damages caused to other persons in the form of personal injuries and property loss) and separate coverage for damage to property owned by the insured. Remember that comprehensive general liability coverage alone does not offer protection for damage to property owned by the insured. Property insurance must be included in the policy for the insured's property to be covered.
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