Beyond the Basics [Mercer Business (NJ)]

If you're a business owner, you likely have some sort of insurance coverage to protect your business, but did you know there's an array of new insurance products that can protect your business above and beyond the basic types of coverage?

Most everyday perils are typically included in your standard business insurance policy. Here we're talking about general liability, worker's compensation, business interruption, and fire and theft. As many business owners know or should know this coverage isn't necessarily an option.

"Usually some organization is forcing most businesses to purchase insurance," says Jeff Perlman with Borden Perlman, a Lawrenceville-based insurance company. "It might be a bank, a landlord, a State government, or State statutes."

Anyway you look at it, insurance is something a business should think about well before opening their doors for business since it has the potential to be a significant line item in their expense budget. "When creating a pro forma financial statement talk to an insurance broker in advance and have some realistic expectations," suggests Perlman. "As far as the information they're going to need, a qualified insurance broker can lead you through that by asking 20 questions."

If it's a start up business be prepared to speak about your experience and why your business will succeed.

"Many underwriters are skeptical of startups because most businesses fail in the first couple of years," says Perlman. "Underwriters don't want to do business with a company that's going to fail and want to make sure the owner has the requisite experience, knowledge, and financial ability to sustain the business."

It's a given that most traditional businesses will have some sort of insurance in place, not so much for a small business, particularly one in the home.

"We've found home-based businesses often overlook the need for business insurance," states Perlman. "Their expectation is that their homeowner's insurance will respond. However, homeowner policies exclude business pursuits."

Unless it's a small business in the name of the individual homeowner and they're doing less than $5,000 a year in sales.

"That's something many homeowner policies would cover," adds Perlman. "You're a sole proprietor, the business is in your name, and sales are very low. Typically the cut off is $5,000 a year."

But what if you have $50,000 in sales and store your inventory in your home?

"Homeowners insurance is not set up for that, and then you have to buy special business insurance," notes Perlman. "Same thing if you are incorporated or have an LLC, then your homeowners insurance won't cover that either."

Avoidance is not the tact to take when it comes to insurance no matter how big or small the business.

Risks Without Insurance

"There are several risks of not purchasing insurance," says Perlman. "You're not going to win certain contracts that require you to have insurance, or a governing authority (State or Municipality) may require it and if you don't secure the coverage your business may be in jeopardy along with the risk of a lawsuit against you or some kind of damage to your inventory, or injury to your employees. Without insurance you are personally responsible for the claims."

Another consideration is defense costs. "Even if it's a frivolous lawsuit it could take a lot of time and if you don't have insurance you're going to pay an attorney personally," cautions Perlman.

Beyond the basic insurance needs new insurance products related to the Internet and data are providing businesses with added protection. These policies address issues that typically aren't covered in traditional insurance policies, including identity theft, data security, Internet breaches, workplace violence, and image restoration.

"The insurance products that have evolved over the last 5-10 years protect against many of these issues that weren't necessarily issues years ago," explains Perlman.

If you haven't thought about those issues, you're not alone.

"Most [small and mid-size] businesses are aware of the exposure, but aren't buying insurance for it," says Perlman who places the typical Mercer Business reader in that category. "They are unaware of the huge cost involved if they do have a claim."

Organizations more likely to invest in coverage for these issues are larger institutions such as healthcare, colleges, and banks, and IT consulting companies, for example.

Privacy Liability

Meanwhile, Perlman is starting to see more interest in coverage for identify theft and data privacy. "It's basically privacy liability and there's two parts to that," he explains. "One is any claims resulting from an organization's failure to protect sensitive or corporate information and second is the cost to notify and provide credit monitoring services."

Typically both types of coverage are rolled up into one insurance policy. For businesses conducting financial transactions over the Internet there's cyber security coverage although the specific terminology for this coverage will differ from insurance provider to insurance provider.

Some insurance companies also include copyright and trademark infringement coverage.

Another area of coverage and of particular interest to nonprofit organizations is related to workplace violence counseling and reimbursement along with costs associated with protecting an organization after a threat. Crisis management coverage is another new policy of interest to non-profits as well as for profits. All of these policies can be matched to a particular business, but it's not coverage that's required.

"Nobody is saying you have to have data security and privacy insurance," emphasizes Perlman.

The costs of these new policies are coming down and although it's difficult to ballpark, Perlman generalizes by saying that a small business without a lot of exposure might pay in the $1,500 range as the minimum premium for data privacy coverage. He estimates that five years ago the minimum premium for that coverage was closer to $10,000.

"Companies that don't have a huge exposure are more reluctant to consider this insurance," he says. "We think it's important to understand what insurance coverage they have and what they don't have, and it's our job to make them aware of everything available in the marketplace."

Employment Practice Liability

Gerald Balermo, an agent with Sentry Insurance, has been in the insurance business for more than 30 years. One area where he's seen a lot of traction over the past 10 years is employment practice liability. "That covers discrimination, wrongful termination, negligent hiring, harassment, and verbal and physical abuse in the workplace."

He also recommends identify recovery coverage and data compromise coverage in case company credit cards are compromised as well as the personal data of customers in that business's care.

While stories about identify theft and data security tend to get a lot of press coverage, Balermo agrees with Perlman that coverage for these losses is not something that the average business client inquires about.

"It's something It's bring up, they usually don't ask," says Balermo.

Businesses most interested in this coverage, he says, are those with large numbers of employees who have greater exposure - usually firms with 10 or more employees although there's an exception to every generalization and companies with even fewer employees can find this coverage useful.

To help clients better understand their risks Balermo often cites examples of employment practice claims. "In 10 years I've had several and insure companies that have claims [against them]. The best way to explain [the risks] to the business owner is to explain their exposure."

He's found the cost of this coverage has come down quite a bit and is often based on the number of employees and whether or not the company has had prior claims. Asked about common mistakes businesses make when purchasing insurance, Balermo says, "Most people shop for price. That's not the best way to protect your assets.

Price not Always the Best Determinant

Jack Blair with Nottingham Insurance takes a traditional viewpoint regarding the importance of making sure your business is insured. "You really need to look at what your exposures are, do a proper job of analyzing them, and determine what a prudent person would do to address that."

Additional coverage beyond the basics is considered a luxury by some businesses. "There's a lot of pressure on small business to focus on the price because funds might be tight," says Blair. "Many times people don't look at the worst-case scenarios; they're optimists and think that everything is going to be fine. If nothing bad happens, those price conscious decisions are good. It's only when bad things happen that you understand the value."

Some coverage is better than none in Blair's mind and he acknowledges that sometimes there's a need for businesses to minimize some of their coverage because of the cost. But it's something he says should be revisited periodically.

"When small businesses are growing it's important to continually meet and review their policy to make sure the coverage has in place is still adequate. What may have been adequate five years ago when it was a startup may be different today."

Blair also acknowledges the impact of new technology, the Internet, and data security.

"If you're doing business over the Internet and taking people's personal information you may need cyber-liability coverage even though no one requires you have to have that," says Blair.

He recommends evaluating your exposure and how much of your budget can be allotted to that coverage. Blair has seen studies that show only one in four companies are investing in cyber-liability insurance.

"It's still new and there are probably six or seven coverage variations within the policy that you can pick and choose from depending on how much exposure you have," says Blair. "A lot is driven by whether you are an Internet-based business and the privacy requirements in your industry."

Employment Practice Liability

He compares this to where employment practice liability was 10 years ago. "We see a lot more people taking employment practice liability, which provides coverage for harassment and discrimination," explains Blair. "When that first came out it was more expensive than it is today because fewer companies were providing it and people were apprehensive and didn't see a need for it. As you saw some of the cases play out in the papers it raised people's awareness and there were a lot more players and carriers writing it. That ultimately drove the price down."

Whether it's required or optional, a smart way to ensure your businesses long-term viability is by investing in insurance, and it's particularly prudent to investigate the new insurance products coming to market as your company and the way it does business evolves with the times.

"The last thing you want is to have an uncovered claim," concludes Blair. "At the end of the day you don't want to be sitting there with minimal limits or without coverage you were required to have."