The last thing a business owner/entrepreneur wants to do is spend a lot of time with an insurance agent. When I came into this business as an agent, I learned quickly that an entrepreneur has a short attention span when it comes to worrying about risks to his property or life.

However, an understanding of business insurance and risk management is an essential element in any business plan.

The principle behind insurance is the idea of transferring risk of catastrophic loss to a larger pool of risk takers . . . for a price or premium. Insurance is not for the frequent but small loss; rather, it is for the infrequent but expensive insurance loss that could put the viability of the enterprise at risk.

Small businesses have special needs that should be addressed in a risk management program.
The insurance industry recognizes this and offers a number of insurance plans designed just for the small business.

The most common plan is a packaged policy that combines protection from all major property and liability risks in one package. This plan is commonly called a business owner’s policy (BOP). Packages are created for businesses that generally face the same kind and degree of risk.

A BOP might include property insurance for buildings and their contents along with business interruption insurance, which covers the loss of income resulting from a fire or other catastrophe that disrupts the operation of the business. Liability protection, which covers a company’s legal responsibility for the harm it may cause to others, is also an important element.

A BOP does not generally cover professional liability, auto insurance, workers’ compensation or health and disability insurance. These coverages must be obtained in separate policies.

The property insurance portion of the package is designed to make you whole again in the event you sustain a loss to any business property, be it a truck, store fixtures, inventory, raw materials, work in progress, etc. An “all risks” plan covers all risks of loss except for those specifically excluded. A “named peril” policy covers only perils named and excludes all other originations of loss. The business owner is better off with the former than the latter, although the latter may cost less.

Business interruption insurance will pay claims resulting from loss of income and payroll because of an insured property loss. The operative word is “income,” and it is up to the business owner to substantiate the net income lost, not the gross income or sales. This insurance will not cover income and payroll loss emanating from a disaster not covered by property insurance. The most commonly excluded perils are losses due to floods, earthquakes and acts of terrorism. Most insurers will also provide insurance to protect from these losses; however, it will be part of a separate policy for an additional cost.

When considering the amount of property coverage, policies will stipulate reimbursement for loss in terms of “actual cash value” or “replacement cost.” The former is typically less expensive because the coverage will apply to the depreciated value of the property. Replacement cost is generally higher than the depreciated actual cash value; therefore, a policy stating replacement cost coverage will cost more.

Premiums are set by an industry organization called the Insurance Services Office (ISO) that provides insurers with basic premiums, incorporating a number of factors to determine risk. Each company may elect to modify these rates for competitive reasons, based on the presence or absence of protective safety measures or claims history.

Business owners who develop a good relationship with a competent business insurance agent can work with the agent’s guidance to reduce risks and keep premiums down by working to eliminate hazards and risks.