Cutting Business Insurance Costs May Prove Expensive

Entrepreneur’s Notebook

by BRIAN KABATECK

Is your business covered if disaster strikes? Imagine an earthquake, flood or fire damaging your business. Would it survive? The answer often depends on the type of insurance you carry.

When shopping for the best insurance coverage, it is important to remember that no two policies are exactly alike. Often, a better rate means less coverage. Most large insurance companies use standardized insurance forms, but every company offers a variety of coverage, from top-of-the-line products to economy packages.

There are literally hundreds of insurance policies available to the small-business owner. Whether seeking insurance for a start-up or looking to find better or less expensive coverage for your current business, begin by speaking with an insurance agent who will take the time to explain what a policy does and does not cover, and how it differs from the policy you currently have or others you are considering. Enlist the services of an insurance agent with access to multiple carriers who can give you enough choices so that you can intelligently purchase a policy best suited for your needs.

Unfortunately, insurance agents, unlike other professionals, cannot be held accountable for failing to convey less attractive aspects of the products they sell. For example, if a lawyer fails to advise a client of the adverse consequences of an action the client is taking, the client can later sue the lawyer for malpractice for not disclosing the dangers of the action.

With insurance agents, the standards of conduct are not as high. The policyholder must specifically ask the agent “Would I be covered to the same extent as I am now covered under my current policy?” or “What is the downside to this policy?” Only then, if the agent does not properly advise the client of possible deficiencies in coverage, can the agent be held liable. If you contact an agent and merely say “I want to get a better rate than what I’m paying now,” and the agent provides a lower quote but with substantially less coverage than the client intended, the agent cannot be held liable.

Types of policies

There are two types of business insurance policies. An “all risk” policy provides coverage for every risk except for what is specifically excluded in the policy. A “named peril” policy covers losses only from the “perils” listed in the policy. For small businesses, the all-risk policy is usually preferable because California law puts the burden to prove an exclusion on the insurer. With a named peril policy, the burden of proof is on the insured to show that a peril was initially covered in the policy.

While reviewing a policy, take a careful look at the endorsement page (sometimes called the declaration page). It is the one page of your policy that pertains specifically to your business. Much like selecting options when buying a new car, it is here where the policy options, i.e., the individual coverages and endorsements, are listed.

The endorsements for your specific business typically will be listed by number. Make sure the endorsements match the numbers listed elsewhere in the policy. Some insurance policies will not cover business contents, only the structure, and most do not cover the cost to research, replace or restore information stored in valuable papers and records.

While your insurance policy may cover the physical damage caused by a disaster, it may not cover the revenue lost while the business is being repaired. How can you continue to pay your employees, your lease, utilities and vendors until your business reopens? One way is through “business interruption” coverage, which requires the insurance company to pay salaries, rent, and anticipated business profits while the business is being restored.

However, if your new business or start up has little or no profits, anticipated profits are speculative, and therefore insurers may be unwilling to grant the full business interruption coverage. At a minimum, the insurance carrier should be willing to pay employee salaries while the business is unable to operate.

Home-based business owners may mistakenly believe their homeowners policy covers their business. A homeowners policy may contain a “business pursuit” exclusion or “professionals services” exclusion. These exclusions specifically say that the policy does not cover business activities in the home.

Market value

Typically, insurance policies pay actual cash value up to the stated limit of the policy. This is the market value at the moment of the loss usually nowhere near the replacement cost. Most insurance companies will no longer write “replacement cost” policies. The billions of dollars paid to insureds with these policies after the Northridge earthquake essentially did away with the practice. Policyholders can, however, purchase 150 to 200 percent replacement policies, which sets higher payout limits.

Insurance policies generally do not cover director or partner liability. Thus, if a shareholder or partner sues your business, you probably would not be covered by your policy. Therefore, if you offer professional services (i.e., you are an attorney, doctor, accountant), you will probably need separate liability coverage in order to protect yourself. Similarly, if you are a manufacturer, consider including a products liability endorsement.

Finally, while your business may have the right policy, if you did not follow the required safeguards (forgetting to turn on a burglar or fire alarm, storing hazardous waste improperly), your insurance company will probably balk at paying for any damages incurred as a result.

Brian S. Kabateck is a partner in the Los Angeles law firm of Quisenberry & Kabateck LLP. E-mail: [email protected].

Entrepreneur’s Notebook is a regular column contributed by EC2, The Annenberg Incubator Project, a center for multimedia and electronic communications at the University of Southern California. Contact James Klein at (213) 743-1759 with feedback and topic suggestions.