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Covered: A small business owner's guide to insurance

Monday, April 18, 2011

Source: Missouri Dept. of Insurance, Financial Institutions and Professional Regulation; and the National Association of Insurance Commissioners

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Commercial Auto Insurance

All motorized vehicles, whether used for personal or business purposes, need auto insurance. Automobile liability insurance -- required by most states -- covers medical expenses for injured persons and damages to the property of other individuals as a result of a motor vehicle accident caused by the insured's negligence.

Personal and commercial auto insurance policies are the same in the essentials, with a few distinctions, like high liability limits and provisions that cover rented and other non-owned vehicles, including employees' cars driven for company business.

Personal or Commercial?

Factors to help determine which policy works for you

* Who owns or leases the vehicle -- you individually or the business as an entity?

* Who drives the vehicle -- you or your employees?

* How is vehicle is principally used -- for example, transporting people, delivering packages or carrying hazardous materials?

Discuss these matters with a licensed insurance agent knowledgeable about commercial auto insurance. You might also want to consider the purchase of collision and comprehensive (other than collision) coverage to protect yourself against damage to your vehicle.

More tips on commercial auto insurance

* If your business owns or leases a vehicle, make sure its name is listed on the policy as the principal insured.

* If you are relying on either a personal auto insurance or personal umbrella liability policy to provide you with protection for your company's use of vehicles, look closely at the provisions, as business-related liability may be excluded.

* If your employees operate a company car, make sure they have good driving records and are trained properly.

* Consider increasing insurance on your business vehicle to cover permanently attached items, such as a generator or storage unit.

Premium costs

Eight factors that may affect your premium costs

1. Premiums are linked to the type of vehicle driven. So if you're buying or leasing a new car or truck, check the insurance rates before you make your final choice.

2. Safety devices can help reduce your premiums. If you're buying or leasing a new vehicle, consider getting one with anti-lock brakes, side air bags, automatic seat belts and daytime running lights.

3. Anti-theft devices, such as an alarm system and global positioning system -- so that your vehicle can be located if stolen -- can help reduce your premiums.

4. Where you park your vehicle can impact premiums. If you have access to an indoor garage or locked parking lot -- places that decrease the likelihood of theft -- you may qualify for lower premiums.

5. The geographic region in which your business operates affects your premiums. For example, areas prone to extreme weather -- hail, wind storms, hurricanes -- higher traffic patterns or higher risk of theft may have higher insurance rates.

6. The number of claims you have previously filed can affect your insurance costs.

7. The coverage limits you choose affect the premium -- the higher the coverage amount, the higher your premium. If you're using your vehicle to conduct business, you may want to consider a higher liability limit so that coverage protects both your business and personal assets if you are sued due to an accident.

8. The cost of your insurance is directly linked to your policy's deductible amount. The deductible is the amount of money that you agree to pay as part of a claim, before your insurer pays the remaining amount toward that claim. For example, if your vehicle incurred $1,000 of damage in an accident and your deductible was $250, you would pay the first $250 and your insurer would pay the remaining $750. The higher the deductible, the lower the premium.

Property Insurance

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Property insurance protects small business owners from losses due to damage to physical space or equipment and as a result of theft. For insurance purposes, a business' property includes the physical building in which it resides, as well as its other assets. All of the following, owned or leased, can be considered business property:

* The actual building

* Inventory

* Furniture, equipment and supplies

* Machinery

* Computers and other data processing equipment

* Valuable papers, books and documents

* Artwork and antiques

* Television sets, VCRs, DVD players, satellite dishes

* Signs, fences and outdoor property not attached to a building

* Nontangible items such as trademarks and copyrights

Basic, broad and special

The three types of property insurance plans include:

* Basic form, which includes losses resulting from a fire, lightning, windstorm, hail and explosion, plus the cost of removing property to protect it from further damage.

nBroad form, which includes basic plus extended coverage for other types of perils, such as a roof collapse (e.g. caused by snow or ice), riot and civil commotion, etc.

* Special form, which includes basic and broad, and covers all direct physical losses except conditions specifically excluded as listed in the policy.

Cash value vs. replacement cost

Actual cash value insurance reimburses you for the value of lost, damaged or stolen goods after depreciation is taken into consideration. Replacement cost insurance reimburses you the amount it would take to replace, rebuild or repair damages with materials of similar kind and quality, without deducting for depreciation.

Other options

Business interruption/continuation insurance

This type of insurance covers lost earnings due to a circumstance covered by one of the property insurance plans you purchased, such as a fire or theft that shuts down your business for an extended period of time. Business interruption/continuation insurance covers expenses associated with running a business, such as payroll and utility bills, based on the company's financial records. The coverage can be added to a property insurance policy or purchased as part of a package insurance product.

More tips on property insurance

* It's important to have your property value assessed before, and periodically thereafter, any type of property insurance coverage is purchased. Be sure to keep copies of receipts for equipment, furniture and other valuable items in the event your premises are destroyed. Keep physical photos of your property in another location as well as digital pictures stored on your computer or with a Web service.

* High-value specialty items, like antiques and artwork, should also be assessed by a reputable appraiser before you buy property insurance. These types of items are usually covered for an agreed-upon amount before a policy is written. It is important to specifically tell your agent about these specialty items so that the correct coverage is provided.

* If you lease your building or offices, do not rely on your landlord to provide coverage for your business property. The building will typically provide insurance only for the basic structure and common areas. Read your lease carefully -- there may be other requirements or penalties in the fine print. Check to see what is and is not covered so that you are fully protected if something happens to your property and equipment or if someone decides to sue you for damages caused by you or one of your employees.

* A property insurance policy generally includes a statement specifying the limit of liability. Be sure you understand how it works. The limit of liability is defined as the maximum amount an insurer will pay for a covered loss. Typically, the insurer will bear responsibility up to a certain limit, as stated in the policy, with the policyholder liable for amounts above that limit.

* Costs for business interruption coverage are tied to the type of small business you operate. For example, less business interruption coverage would be needed following a fire at a travel agency versus an art gallery, assuming that it would take more time for an art gallery to recover from a fire.

* Even if you purchase business interruption coverage, make sure you have sufficient funds to tide you over the first few days. This type of coverage typically doesn't kick in for a specified time period after a disrupting incident occurs. The time period will be listed in your policy.

Liability Insurance

If someone falls while visiting your business premises, or a customer is hurt by a product your business sells, you can be held responsible. That's the risk that liability insurance covers.

In a 2004 survey released by the National Federation of Independent Business, 30 percent of small business owners ranked the cost and availability of liability insurance as the second most important insurance concern they faced. (Health insurance ranked first, while workers' compensation ranked third.) Concerns about liability insurance are significantly increasing. In a 2000 survey, only 11 percent of small business owners cited cost and availability of liability insurance as a critical issue.

Liability insurance, also called commercial general liability, covers four categories of events for which you could be held responsible: bodily injury; damage to others' property; personal injury, including slander and libel; and false or misleading advertising. CGL coverage pays for the injured party's medical expenses. It excludes your employees, who are covered by workers' compensation. Bear in mind that even trespassers can sue you if they fall and get hurt on your business premises.

Damages covered

There are three types of legal damages people may sue you for that are typically covered by a CGL policy:

* Compensatory damages: financial losses suffered by the injured party and future losses they may suffer resulting from an injury they claim in the lawsuit.

* General damages: non-monetary losses suffered by the injured party, such as "pain and suffering" or "mental anguish."

* Punitive damages: additional penalties and charges the defendant must pay.

What liability doesn't cover

Standard liability insurance does not protect a business against:

* Claims from sexual harassment, wrongful termination of employees, failure to employ or promote, or race and gender lawsuits. These and other employee-related claims are covered by employment practices liability coverage. The cost of employment practices liability coverage depends on a business' number of employees, whether there is a history of the company having been sued in the past, and other business risk factors. The policy also pays for legal costs associated with a company's defense of a lawsuit related to employment practices.

* Claims related to operating an automobile or truck. If you own vehicles for your business, whether for deliveries or client consultations, you will need separate commercial automobile coverage to protect you and your employees against liability claims resulting from car accidents.

* Professional liability insurance -- or errors and omissions insurance -- is coverage for wrongful practices by professional service providers (e.g. health care providers, lawyers and consultants). This type of insurance covers faulty service (errors) or failure to provide a service altogether (omission). Malpractice insurance is a specific type of professional liability policy that protects physicians and other licensed professionals from liability associated with bodily injury, medical expenses and property damage, as well as the cost of defending lawsuits related to such claims.

* Claims related to workers' compensation insurance. Workers' compensation insurance protects a business owner from claims by employees who suffer a work-related injury or illness. In all states, most companies are required to carry workers' compensation insurance for their employees. According to the Small Business Administration, business owners, independent contractors, domestic employees in private homes, farm workers and unpaid volunteers are usually exempt from workers' compensation eligibility.

Other types of liability insurance

* An umbrella liability policy provides extra protection above a standard policy. Umbrella policy coverage limits are typically within the $1 million to $5 million range and are appropriate for business owners who have large assets or may be especially vulnerable to lawsuits.

* Crime insurance protects businesses from theft and malicious damage, such as employee embezzlement.

* "E-insurance" or Internet business insurance covers Web-based businesses for damages caused by computer hackers and viruses.

Business owner's policy: A package solution

Many small business owners purchase a business package policy called a "BOP" -- a business owner's policy. A BOP typically includes property insurance, business interruption/continuation insurance and liability insurance. Often it is a less costly option for small businesses than buying a set of individual policies. Many insurers customize BOPs for specific types of businesses. However, a BOP does not cover professional liability (liability claims arising from wrongful practice by professionals), auto insurance, workers' compensation, health or disability insurance -- all of which need to be purchased separately.

Not all businesses qualify for a BOP. For example, a factory or jewelry store would probably not qualify for a BOP. Those businesses -- because of their unique risks -- usually require more customized coverage than what's included in a standard BOP.

A home-based business or a company with only a few employees may start out with a BOP and then expand its coverage as it grows.

Small business -- group health insurance

The cost of health insurance for employees -- by far the single most expensive benefit offered by employers -- is one of the greatest challenges many small businesses face today. As business owners know, health insurance is a powerful tool for hiring and keeping the best workers.

Business owners are not required to offer health insurance to their employees.

Small group health insurance provided by insurers is regulated by the state of Missouri. Federal law also mandates that an insurer cannot deny coverage to a small business due to the health conditions of its employees or their dependents (although insurers can consider this when setting rates). In addition, self-insured health plans (where an employer insures itself) are regulated by the federal ERISA (Employees Retirement Income Security Act of 1974) law. It is rare for a small company to self-insure its health insurance.

Four types of health insurance

Small businesses commonly offer several different types of health insurance. Major medical plans typically cover a comprehensive array of health care needs, including doctor visits, prescription drugs and hospital care. These benefits can be delivered through several different types of plans:

* Managed care plans -- These plans offer a network of preferred health care providers. While those covered by the plan don't have to use these providers, they get better benefits if they stay in the network. A managed care plan might be labeled HMO, PPO or POS. A 2006 survey of U.S. small businesses with health insurance showed that more than 90 percent had a managed care plan.

* Hospital / surgical plans -- These plans are not "comprehensive" or "major medical" coverage, meaning they generally only cover hospitalization and surgery. They don't cover prescription drug costs, doctor's office visits and other services.

* Self-insured arrangements -- Your agent may suggest one of these arrangements for your business. By self-insuring, you collect premiums on a regular basis and use these funds to pay health-related claims filed by your employees. Be advised that the DIFP reviews these arrangements on a case-by-case basis and may determine that some such arrangements violate state law.

* Limited mandate plans -- These plans do not offer some coverage that comprehensive plans are required by state law to offer, such as mammograms and colorectal screenings. This may result in a lower-cost plan. Missouri law allows small businesses to choose limited mandate plans if they currently have no coverage or if they cannot afford to maintain their current plan because of the price.

By the numbers: Average cost of health insurance


The average Missouri premium for small group health insurance was $365 per month ($4,385 per year) per employee and $790 per month ($9,476 annually) for family coverage, according to 2006 data from the federal government.


* For PPO plans, individual deductibles averaged $849 with annual out-of-pocket limits of $2,700 and co-payments of $21 for in-network physician visits.

* HSA plans had an average deductible of approximately $2,220 and average annual out-of-pocket limits of approximately $2,800.

The deductible data comes from a 2006 survey by America's Health Insurance Plans, the association of health insurance companies. AHIP surveyed 21 of its member insurers that offer coverage to more than 650,000 small groups (defined as firms with 2-50 employees) that employ 4 million workers and their 3.2 million dependents. For more information, visit www.ahip.org or www.statehealthfacts.org.

Shopping for health insurance

Before purchasing, interview several licensed insurance agents who specialize in serving the health insurance needs of small businesses. It's also a good idea to survey your employees to find out what kind of coverage is particularly important to them.

* Shop around: compare the costs of equivalent coverage from several insurers to be sure you're getting the best deal.

* Ask about premium cost increases over the past five years.

* Talk to other small business owners to find out about their experiences with different kinds of health plans and insurers.

* Ask lots of questions before you decide on a health plan. If you fail to get the answers you need from one agent or insurer, contact others.

* Small business group health plans are not standardized, and benefits may vary greatly from one plan to another. In Missouri, group health insurance must cover childhood immunizations, mammograms, Pap smears, prostate and colorectal screening.

* Understand the factors that affect your premium costs. Missouri law allows insurers to calculate premium rates based on age, sex, industry, geographic location, family composition and overall health of the group.

Controlling costs

Some cost factors are clearly outside of your control. Other cost factors can be managed, such as:

* The type of health plan you select. For example, HMOs are typically less expensive than PPOs; both are less expensive than indemnity plans.

* Take advantage of the tax benefits available to your company.

* Businesses can generally deduct the premiums they pay to health plans for their employees. Discuss this with your accountant.

* The specific benefits you select. For example, choosing higher deductibles, co-payments and maximum out-of-pocket limits can lower monthly premiums. On the other hand, choosing lower lifetime medical limits can lower premiums.

* The costs you transfer to your employees. Most small businesses ask their employees to bear a portion of the cost of their health insurance premiums. While this doesn't affect the premium charged by the insurer, it does affect the amount the employer pays.

Other suggestions: Know your rights

Small group health plans are typically required to treat all of your eligible employees (generally full- or part-time employees who work at least 30 hours a week) equally and may not discriminate against those who are ill or become ill. Small employer plans can exclude coverage for pre-existing conditions for up to 12 months after an employee's enrollment date. Explore joining a trade association for small businesses in your industry operating in your state. By joining a trade association, you may be able to join a larger group, which may offer a more affordable plan than you could purchase on your own.

Missouri allows small and large businesses to pool together to purchase health insurance for their employees, but the plans must be underwritten and rated as a single employer, uphold a uniform health plan design, guarantee issuance to all members and comply with all other federal and state insurance requirements.

Consider individual health insurance

Many insurance companies offer individual health insurance policies. You should compare several policies with comparable benefits to see which you prefer. You may be able to get more affordable individual health coverage through a trade association or small business organization in your state.

Do your homework

Do some other research on the insurer and agent. Cost is not the only important factor.

Check to verify that both your agent and the insurance company are licensed in Missouri. You can do this online or by calling the Missouri Insurance Consumer Hotline at 1-800-726-7390. (Some agents work for one insurance company, while others are independent and can sell policies from several different companies.) Look into the complaint history of the insurer you're considering. You can find that out by calling the Missouri Insurance Consumer Hotline at 1-800-726-7390.

Red flags to watch for

Beware of "alternative" types of health insurance -- or outright fakes.

1. Medical discount plans are not insurance. These plans claim to offer discounts for members who use certain doctors, pharmacies and hospitals. Verify these claims with those providers before buying.

2. Bogus health plans: You may see ads on late-night TV, in spam or in junk faxes offering "unbeatable" low prices on group health coverage. Many of these are unlicensed, illegal operations. As with most products, if a deal sounds too good to be true, it probably is.

Group Life Insurance

Some small business owners offer group life insurance to employees. Group life insurance can be part of an employee benefit plan that is paid for by the employer or a voluntary offering, whereby the employee pays for the coverage.

For policies paid by a business owner, the benefit can often be equivalent to a full year's salary, an amount that may not be sufficient for most people. These types of policies can be viewed as an added benefit or "supplemental" to other life coverage an employee may already have.

If an employee wants additional coverage on top of what an employer is willing to purchase, for double or triple times his/her salary as an example, he or she may have to pay for it individually instead. Purchasing additional coverage outside of what is offered through the group policy will likely require that the employee undergo a medical exam to determine the level of insurability based on his or her health. However, a voluntary life insurance policy can provide significantly more coverage, depending on the amount of money an employee wants to spend individually for that type of policy.

Group life insurance policies tend to be less expensive than those purchased individually based on the fact that many group policies are only effective while an employee within the group is employed at that particular company. Most group life insurance is sold on a term basis. Term life insurance pays a death benefit if the policyholder passes away within a specified time period.

In general, term life insurance is much less expensive than permanent life. In fact, term life premiums have decreased markedly during the past decade due to the fact that Americans are living longer on average.

How rates are calculated

To figure out a group rate, the insurance company will usually consider the following factors about a business:

* Number of employees within the group

* Average age of employees

* Ratio of female to male (based on the statistic that women tend to live longer than men)

* Number of smokers

* Risk-factors associated with the business

Based on the business risk, for example, a marketing firm would probably have a lower group rate than a roofing company for equivalent coverage.

Generally, group life insurance policies are "guaranteed issue," meaning that employees don't need to undergo a medical examination to be eligible. An employee who has a serious medical condition may still be a part of the group, as long as he or she is still an active worker. However, a employees out on disability leave are not eligible for group life insurance until they return to work, unless they went on leave after the policy had been issued.

Tips for choosing group life insurance

* If you decide to offer group life insurance to employees, shop around for the best rates and packages through several insurance companies/agents first. You may want to purchase all of your group packages (health, disability, etc.) through one company/agent after you have assessed all your options in order to make it easier to track policies and make payments.

* Review your group plans regularly as your business grows. Examine how your group life insurance needs and premiums may change as a result of added employees or new capabilities your company offers.

* If you're going to provide workers with voluntary group life insurance, check whether the policy you're offering allows them to carry the plan over to a new company should they decide to change jobs. Also see if there are additional stipulations in the policy that can make it more flexible for the employee, such as a waiver of premiums when a worker is on disability leave and may not have the funds to pay for the policy during that time.

Key person life insurance

Within a small company, there are typically some "key people" who are critical to the success of the business. These individuals may be limited to the business' founders or partners, or defined more broadly to include other employees responsible for running a critical aspect of the business, such as the senior marketing or sales manager, chief engineer or software developer in the case of a technology company.

The death of any of these key people would likely cause serious impact on the business' bottom line. Therefore, many small firms choose to purchase key person life insurance policies on these very important employees. As the policy owner, the company is the beneficiary and receives the proceeds when the insured key employee dies. The payout can help the company by providing:

* Cash to weather the loss and continue operations until a new employee can be hired and trained to carry out the functions of the deceased.

* The funding to buy out the key person's heirs, if ownership rights of the business are involved.

In some cases, a small business seeking a loan from a bank or trying to raise capital from outside investors may be required by the lender or investor to carry life insurance for its partners. The bank may even require that the small business provide a collateral assignment agreement that gives the bank first rights to the policy proceeds to cover outstanding loans due in the event of one of the owner's deaths.

Types of Key Person Policies

Like individual life insurance policies, key person life insurance policies may be purchased as term life or permanent life policies.

* Term life insurance covers the insured for a term of one or more years. It pays a death benefit only if the insured dies within that term. Term insurance generally offers the best value for your premium dollar. However, it does not build up cash value. It may not be renewable at the end of the term or may cost considerably more to continue.

* Permanent life insurance, which goes by several names, such as whole life, universal life and variable life, typically includes both a death benefit and cash value. Because of the cash value element, premiums tend to be higher than for term life insurance.

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