“A few years ago there was a fire on North Temple and 700 West in Salt Lake City,” recalls Mike Brown, manager of ATP Insurance Group. “A high-end wood working company, which was leasing the building there, went up in flames. The building went with it. Unfortunately, it was an old building and the landlord hadn’t insured it for replacement value. There wasn’t enough money to rebuild, so the tenant moved out and the landlord was left with no building and not enough money to build another one.”
This is just one recent example of a business failure due to poor insurance planning and a perfect reason why experts emphasize that careful insurance planning can lessen the risks and cushion the losses that businesses face. In today’s litigation-prone world, it is vital to buy the right kinds and the right amount of insurance from the right insurance agent. The plethora of options available lessen the risk in the intrinsically risky job of running a business.
General Liability v. Professional Liability
“General liability insurance is a must to protect the company in case it is negligent,” says Kelly Warren, small business department manager at Salt Lake-based insurance firm The Buckner Group. “One million dollars per occurrence is a starting place, with perhaps an umbrella policy for more.” In addition, professional liability insurance is routinely obtained by lawyers, engineers and architects, but it can be written to cover almost any service requiring specialized training, Warren says. “We’re increasingly asked to provide professional liability insurance for computer consultants, and it could be written for other service providers, from printers to barbers.”
General liability insurance protects the assets of a business when it is sued for something the business did (or didn’t do) to cause bodily injury, property damage or advertising injury (damage from slander or false advertising). With general liability coverage, however, the insurer pays only general damages, not punitive damages, because those are considered to be a punishment for intentional acts. One very important part of the coverage is that the insurer pays for defense costs, or attorneys fees in fighting the case. Sometimes the attorneys fees are greater than the claim that is ultimately paid.
In contrast, professional liability insurance deals specifically with errors and omissions of professional judgment.
General and professional liability insurance policies state the maximum amount that the insurer will pay during the policy period. Usually, a policy also lists the maximum amount the insurer will pay per occurrence. For example, if a company has maximum insurance of $2 million total, but $1 million per occurrence, and it is successfully sued for $1.5 million for one event, the insurer would only pay $1 million. The company would be responsible for the other $500,000.
Personal Property Insurance
Virtually all companies need business personal property insurance to cover potential loss of equipment and furnishings. If a company owns a building, it needs property insurance as well. “Some companies, such as parking lots, packing and shipping companies and dry cleaners, take care of other people’s property,” Warren notes. “They need special insurance to cover damage to property owned by others.” Business auto insurance is also necessary for company cars and trucks.
Workers Compensation Insurance
Any business with employees is required by law to carry workers compensation insurance. “A business owner can opt out of coverage for himself,” Warren notes, “but there’s a big fine if the company doesn’t cover other employees.” Whereas a state fund used to provide workers compensation insurance, it is now sold by various private insurers.
An Agent Who Cares
Regardless of the type of insurance you need, the most important aspect of the search is finding a agent you trust, someone who will honestly protect the intricacies of you business.
Chris Cappaert owns Blue Iguana, a Mexican restaurant in downtown Salt Lake. “I have always gotten my insurance coverage through an agent I know personally and whom I can trust,” Cappaert says. “I have my agent’s cell phone number and can contact him immediately if there’s a problem.”
Cappaert’s agent provides her with quotes from several insurance companies so she can compare price and coverage. “I sometimes change insurance companies because, after a year or two, the rates go through the roof.” Cappaert notes that restaurants have special insurance needs. “Liability insurance is important because we have so many people coming through our restaurant that there are occasionally slip and fall issues.”
Business interruption insurance is is also important at Blue Iguana, she says.
“I’m in the basement of an older building, so we’re always concerned about the building being shut down for repairs. Losing the income from one Friday and Saturday night could hurt our bottom line for the whole month,” Cappaert says.
Barbara Howard, accounting manager for Advanced Modular Manufacturing, which constructs commercial modular buildings, recalls only one insurance claim made by her company since 1981, for which she cred-its careful business practices.
Still, the company also carefully maintains its insurance coverage. “We live in a sue-happy world, and, in the construction industry, a tool can always fall off a scaffold and hit someone on the head,” Howard says.
General liability and vehicle liability insurance, as well as workers compensation insurance, are the most important types of coverage for Advanced Modular’s construction business. Howard says she most values accessibility and efficiency in insurance agents. “If I have a problem, I want to talk with someone quickly and have that person fix it. I want to know that if there’s follow-up, they’ll do it, and I won’t be trying to take care of the same problem three weeks later.”
Because insurance can be a complex part of doing business, experts say having the right agent on your side can help ease some of the pain and frustration. The following are a few of the common errors seen among commercial insurance policies.
Common Insurance Mistakes
Failure to State Proper Value
“Sometimes people put the value of their assets too high for insurance purposes and sometimes they put it too low,” Brown says. “When they estimate the value of their sales or the value of their equipment for a lender, businesses may give a grandiose figure, far above the real value. If they use those same figures in estimating how much insurance they’ll need, they’ll pay more than they should. On the other hand, if businesses underestimate the value of a building or other important asset, a loss could put them out of business. It’s best to be accurate, but estimating high is less dangerous than estimating low.”
Brown points out that umbrella policies give good value for companies that want to make sure they have ample coverage. Umbrella policies provide additional insurance, above the standard amount. For instance, a company with $1 million in liability insurance could buy an “umbrella policy” to secure an additional $1 million in insurance. The umbrella policy will cost much less than the standard policy since, statistically, many more claims are paid out for less than $1 million than for more than $1 million. “These days, you could be sued for looking the wrong direction,” Brown says. “Businesses need plenty of liability insurance.”
Failure to Understand the Dangers of Co-Insurance
“Many businesses don’t know about co-insurance penalties,” says Warren. “If you insure a building or other asset for only partial value, the insurer will reduce the sum paid on your claim by the proportion which the amount of insurance you purchased bears to the asset’s real value.” Assume that a business insured its building for $1 million and it was really worth $2 million. If the building was 50 percent destroyed, the insurer would reduce the payment to $500,000 rather than $1 million, even though the business had $1 million in coverage.
Failure to Buy Ordinance and Law Coverage
Assume you own a building built in 1990, Brown suggests. You insure it for $1 million, which would be the cost to rebuild it as it was originally built. Also assume, though, that the local building code has been changed since 1990, and the cost to rebuild the building to the current code is $1.25 million. If you don’t have “ordinance and law coverage,” your insurer will only pay $1 million. Brown points out that new legal requirements imposed by revised building codes or new laws, such as the Americans with Disabilities Act, can wreak havoc with building costs.
“I remember a restaurant that had only one bathroom,” Brown says. “It burned down. The building code had changed and now required both men’s and women’s bathrooms. The restaurant didn’t get enough insurance money to put in both bathrooms, it couldn’t rebuild the building, and it went out of business.”
Failure to Report Changes in Operations
“Some businesses change what they do,” Warren says. “For instance, a landscaper may begin doing general contracting. If the business doesn’t let its insurer know that, losses relating to the general contracting part of the business may not be covered.”
Failure to Report New Assets
When businesses buy a new car or truck, owners sometimes assume that the dealer will call the insurance company to report that the vehicle has been purchased and must be added to the policy. “That may not happen,” Warren says. “Sometimes there’s a bad accident and we get called to pay an insurance claim on it, only to find that the vehicle has never been added to the client’s insurance policy.”
Even shrimp boats need insurance. One challenge of being an insurance agent is fulfilling unusual insurance requests. The agents at The Buckner Company and ATP Insurance Group have fielded policies for the following uncommon companies:
• Cloud seeder and crop dusting operations
• Animal pathology lab
• Shrimp boat and fish spotting businesses
• Race horses
• Gang and troubled youth intervention center
• Film production at Lake Powell, including movie cameras transported on rental boats
• Loss and damage coverage for camera mounted on the bottom of a helicopter for a TV chase scene
• Liability policies for river running guides and scuba diver instructors
• Kayak rentals
• Ocean cargo coverage to cover water purification system en route to Australia
• Business coverage for importer of Potty-Time (a bracelet that sings tunes to kids at various times to remind them to go to the bathroom)