Business Insurance Basics: What You Need to Know
Having a business is a great way to make money, provide useful goods and services to your community, express your creativity, and create jobs. However, despite all the opportunities, there are also quite a few risks involved with running a business. To manage these risks, businesses use a number of strategies.
What Is Business Insurance?
Business insurance is essentially a risk management tool, designed to reduce the business owner’s financial risk. Generally, the business owner (policyholder) signs a contract with an insurance company that agrees to protect the business owner’s financial interests in a variety of circumstances. The business owner pays a monthly premium based on circumstances like their business credit, level of coverage, and prior claims history.
The most common types of business insurance are business income insurance (BII), liability insurance, and property insurance. BII helps a business keep paying its employees and bills following the effects of a disaster or accident covered by the policy. Liability insurance protects a business if another party sues it for causing injuries. Property insurance covers loss of or damage to a property that the business uses.
A business owner would be required to pay out of pocket to cover lawsuits, replace property, or pay for repairs if a disaster were to occur and they did not have insurance. This could create crucial cash flow situations for the business if there isn’t enough profit or sufficient cash reserves. If the business can’t afford to pay the required amounts, it could shut down. Having comprehensive business insurance can prevent catastrophic business losses.
Similar to homeowner’s insurance, business owners who own a brick-and-mortar location will need business insurance that protects their property in the event of vandalism, fire, or a natural disaster. If you own the building outright, you might want to check with an insurance agent who can recommend the appropriate level of coverage based on the type of business you run and the approximate value of its assets like equipment and inventory. If, on the other hand, you are leasing a business location, the landlord may have specific business insurance requirements.
Choosing an Insurance Provider
When it comes to choosing an insurance company, a business must consider the following major factors:
· The company’s financial strength. Since insurance claims are paid out of the insurance company’s funds, which have been collected in the form of policy premiums, it’s important to choose an insurer with enough funds to cover potential claims. An insurance company can fail if it doesn’t have enough money to pay for multiple claims resulting from a large disaster, for example. A contract of insurance is a promise to pay; therefore, a business should make certain the issuer is able to fulfill its promise.
· Pricing. Different insurance companies may charge different rates for the same level of coverage. It’s prudent for the business to work with an insurance broker or shop around to compare quotes. No insurer will have the lowest rate at all times and quite a few things can affect the premium price. Always be sure to read the fine print, so you understand the precise level of coverage. Choosing the policy with the lowest premium may end up costing you more in the long run, if the coverage is minimal.
· Customer service reputation. Good customer service may sound like a “nice-to-have” benefit, but it can be critical when it’s time to submit a claim or make changes to a policy. As a business owner, you want an insurer with responsive customer service representatives who will be available 24/7 to guide you. The insurer’s claims process should also be as simple to understand as possible.
How to Shop for Business Insurance
There are many ways to purchase business insurance, including through direct agents, independent agents, and brokers. It’s important to understand the functions of each so you can decide the best option for your business.
Insurance agents represent insurers — they can either be employed or contracted by an insurance company. “Captive” agents only offer insurance from one company; independent agents represent more than one insurer. In contrast, insurance brokers are independent entities that represent a business instead of the insurer. Brokers can help a business by comparing policies and prices from competing insurers.
Independent agents and brokers are compensated by the insurance company through commission for every policy they sell. They also receive a commission every time a business renews its policy. Agents who are employees of an insurance company receive a salary and may have other bonuses associated with performance and policy sales.
Normally, the cost of an identical insurance policy from an insurer will be the same, whether the business purchases it via an agent or broker, or directly from the company. Nevertheless, in a few cases, the broker will charge the business a fee that should be acknowledged beforehand.
Final Word on Business Insurance
Understanding the need for business insurance and the basic types available is the crucial first step in putting together a strategy to manage risk for your business. The next step is to learn more about the different types of business insurance available, including what is legally mandated in your area. Then, you’ll need to assess your own needs and determine the level of coverage you’ll require. A broker or agent can help with this process, as well as help you compare specific policies.
