If a truck crashed into your building in Rhode Island tomorrow, would your business be able to withstand it? What if your electrical system failed and caused a fire? What if a customer tripped on your carpet and broke an arm?
Chances are, if you have a lease or bank loan, you carry at least some insurance to protect your company – and even if a third party doesn’t require it, most businesses consider basic property and liability insurance to be essential.
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But what about insurance against theft or other crimes committed by employees? Or coverage for company use of personal vehicles? Or business interruption insurance?
Most large companies have risk managers – in-house or on contract – who assess their exposures and recommend preventive strategies and insurance options to protect them.
Small businesses, however, often lack that kind of expertise, insurance and risk management experts say, and because of the wide range of potential coverages and the perceived costs, they may forgo insurance that could really protect them in a calamity.
How do you determine what, precisely, you should insure against?
Jim Mastors, CEO of Mastors & Servant, a large insurance agency in East Greenwich, said he frames it very simply for his clients: “What is it that could happen that you can’t afford to happen?”
“When people think about it that way, they behave differently,” Mastors said. They may decide, for example, they can’t afford any calamity that will cost them more than $100,000. “That narrows down the list, and the probability of it happening becomes less important.”
If something is fairly likely to happen, but the damage would be minimal, it’s probably not worth insuring against. On the other hand, if an event’s likelihood is small, but that event would be catastrophic – as Hurricane Katrina was for the Gulf Coast – it should take priority.
Many small businesses take chances “they can’t afford to take,” Mastors said. Because if the unlikely does happen, “and it puts you out of business, then you lose.” And the bigger and more valuable a business becomes, he said, the more there is to protect.
There are other considerations, too.
Bob Quigley, senior vice president for commercial lines at The Preston Agency in West Warwick, said many businesses neglect to get “key man” coverage – to ensure they’ll be able to replace an owner or manager who is essential to operating the company, if he dies or is incapacitated.
“A lot of times the spouse – who may be the only survivor – is not equipped or doesn’t have the knowledge to actually step in and operate the business,” Quigley said. “If you create a key-man concept with life insurance, it gives money to the business to go out and hire a replacement CEO so the business can continue to operate.”
Such a policy also benefits the owner’s family, he said: they will have a working business to keep or to sell, rather than just assets to liquidate “fire sale”-style.
Another error many small business owners make is excluding themselves from their companies’ workers’ compensation coverage, Quigley said. That could leave them with big medical bills and no disability coverage if they are injured.
In fact, if a business owner is crucial to the company, he or she should have round-the-clock disability coverage, Quigley said. “If you’re a small business and you’re disabled, where are you going to get an income?” he said. “Can the business survive your not working? Can the business hire someone and still support you? Probably not.”
A good life insurance policy doesn’t cost a lot of money, Quigley noted. Premiums will depend on the age and health of the person, but “unless you’ve got one foot in the grave and another on the proverbial banana peel, we’re not talking over $2,000 a year.” Disability coverage will cost less than $1,000 a year, he said.
Quigley said businesses should consider employee dishonesty coverage, which can cost less than $500 for a comprehensive $100,000 policy. “Nobody thinks their employees steal from them,” he said. “They do it every day of the week.”
William K. Austin agreed. He’s a veteran risk manager and a principal at Austin & Stanovich Risk Managers in Providence. “Small companies tend to think, ‘We know all of our people. Nobody’s going to steal from us,’ ” he said.
The recent case of Angela M. Buckborough – a bookkeeper convicted of embezzling $9 million from J&J Materials, a Rehoboth construction company – should remind businesses of the damage a dishonest employee can do, Austin said.
Businesses tend to underestimate their exposure to such thefts, he said, so they get inadequate coverage or none at all. Insurance isn’t enough, he added – they should also have strong accounting controls, such as requiring multiple signatures on checks.
Company owners may also find it pays to get business interruption insurance – which even larger businesses tend to overlook, Austin said. “When something happens, whether it be a fire, a wind storm, a flood … businesses tend to underestimate the time it will take to get back online.” Even if your property is fully restored, he noted, if the bills have piled up and you’ve had no revenue to cover them, “you may be so far in the hole that you’re out of business.”
Business interruption insurance is not very expensive, Austin said – premiums are a percentage of your property insurance rate. And package policies known as “business owner policies,” designed for small businesses, typically include the coverage at little or no additional charge, Austin said.
Then there’s liability coverage. Some have it by default: medical practices, pharmacies, insurance agencies (for them, so-called “errors and omissions” coverage is required by law). But David White, who oversees commercial lines at Butler & Messier Insurance in Pawtucket, said many businesses neglect to get errors-and-omissions coverage. Quigley and Austin also mentioned it.
Last, but not least, there’s liability insurance covering employer practices and benefits. Some companies have been successfully sued by their workers under the federal Employee Retirement Income Security Act (ERISA), Austin noted, for mismanaging pension plans or for offering too-limited investment choices, such as forcing workers to invest in company stock.
