Bulletin #3011, Home-Based Business Fact Sheet: How to Insure Your Business

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Adapted for Maine from Iowa by Jim McConnon, Extension Business and Economics Specialist

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If you’re starting a small business, one of the important things to decide is what type and amount of insurance you need. Insurance is needed to protect business and personal assets against losses due to claims filed against the business, or due to property damage by people or natural perils.

This fact sheet will help you understand insurance types, state laws, insurance options and steps to set up an insurance program. It does not replace the need for help from an insurance agent or broker. He or she can help create an insurance plan that will meet your needs. This can add to your business’ success by reducing uncertainties.

If operating out of your home, check to see what coverage your homeowner policy provides. Most home policies will not provide coverage for a new business without a product and premise liability rider. For example, the fabric and supplies used in a home sewing business would probably not be covered by a homeowner’s insurance policy. Any tools used or stored in the home for business use would likely also need a rider for coverage.

Types of insurance

Property insurance protects the owner of the property (or the mortgage) against loss caused by the destruction of a part or all of the property by fire, windstorm, explosion, hail, smoke, and other perils. Fire insurance is generally considered a must. “Other perils” coverage can be added for a small extra cost. Property insurance can cover real property (buildings) and personal property (machines, furniture, finished goods, etc.).

Liability insurance protects the business from financial loss due to any claims of bodily injury or property damage in connection with business operations. Many liability policies, in addition to bodily injuries, now cover personal injuries (libel, slander, etc.).

Crime coverage covers losses due to robbery, burglary, employee dishonesty (see fidelity bonds) or vandalism.

Automobile insurance may cover both physical damage and liability coverage for company-owned vehicles or vehicles used for business purposes.

“Key person” insurance covers the business if any partners or key people to the operation become disabled or die. Some people refer to this type of insurance as “business life and disability insurance.”

Product liability insurance protects the business from claims against defective merchandise. Coverage applies to the products once they leave the manufacturer and covers the manufacturer in case the product user sues for bodily injury or property damage. Services, too, are a marketable commodity that can cause damage, so they may be subject to product liability.

Business interruption insurance covers for loss of earnings during a temporary halt in business caused by a major disaster, such as fire or theft.

Workers’ compensation insurance, mandatory in Maine, covers treatment of injuries and loss of pay related to employee accidents or illnesses on the job.

Fidelity bonds, placed on employees with access to cash receipts or other company funds, cover for loss from embezzlement.

Employee health and life insurance provides workers and dependents with financial benefits in case of illness or death. If a staff is too small to qualify for group benefit policies, an owner can take out individual policies for each. Employers usually have to set aside benefit funds for workers who belong to labor unions.

Your insurance agent

Seek help and open dialog with an insurance agent from a well-known insurance carrier. Trade associations often offer special rates and policies to their members. An agent or broker who specializes in business insurance can help you plan your business insurance program.

Insurance regulation

The Bureau of Insurance regulates all insurance business in Maine. Each insurance company must register and comply with the insurance department’s rules and regulations. The department grants a license to an agent to sell specific types of coverage. Agents contract with a company or companies to sell those lines of insurance for which they are licensed. Every agent selling insurance in Maine must show proof of licensing for each type of insurance they sell.

There is a rating bureau that sets rates on every business building in Maine. These rates differ by location, type of structure, local fire department, class rating, type of business or businesses and other factors. Based on the classifications, insurance companies receive spot checks to see if they are in line with rates and regulations. Because of the classification and spot checks, policy premiums tend not to vary a lot. To get the best rate and service, shop around before deciding which plan (or plans) to purchase.

Alternatives to commercial insurance

Self-insurance means that your business will assume risks directly. This means your business does not buy insurance, but saves that cost and pays losses from its own funds. If you self-insure, you set aside funds to cover your losses should they occur. If the company sign blows down, you have the money set aside to fix it.

Many small businesses cannot cover major losses with self-insurance. Self-insurance works only if the risks are small. Then the business can afford a loss without serious damage. A business may assume limited risk by raising the deductible amounts on selected policies which, in turn, lowers the premium.

Transfer of risk, another alternative to commercial insurance, is also not practical for many small businesses. Some examples of transfer of risk are leasing automobiles (with the lessor holding the insurance) or purchasing services and/or subcontracting rather than hiring people. In some cases, transfer of risk may be more costly than buying insurance.

Loss prevention and careful steps to reduce the risk of loss can lower insurance premiums in most cases. A loss-prevention program is important whether you have a commercial insurance agent or are self-insured. Installing a sprinkler system, adding burglar alarms or adding stair handrails are examples of things to include in a loss-prevention program.

Copies of business records, including up-to-date assets and inventory records along with accounts, should be kept somewhere away from the place of business. Some examples of safe places are with your business accountant, a safety deposit box or on a computer disk.

Organizing your insurance program

1. Recognize the risk. The first step toward good protection is to know the risks you and your business face. Some businesses will need coverages not noted here. For example, you might buy glass insurance to cover plate glass windows, glass signs, doors, showcases and countertops.

2. Decide what perils to insure against and how much loss you might suffer from each.
For example, if you have customers coming into your home, you might want to obtain additional liability insurance.

3. Cover your largest loss exposure first. The largest loss of exposure for service-orientated home businesses is a personal liability.

4. Use as high a deductible as you can afford. Often full coverage is not economical because of the high cost of covering the “first dollar” loss.

5. Avoid duplication in insurance. Get one agent to handle your insurance so you avoid duplication.

6. Buy in as large a unit as possible. Many “package policies” work well for small businesses and provide really good protection.

7. Plan for adequate care and protection of business and insurance records. Purchase of a fire-proof lock box for your records is often money well spent.

8. Review your insurance program periodically (annually or when a major business change occurs) to make sure you have enough coverage and the premium is as low as possible. Evaluate your loss-prevention program, too.

9. Keep complete records of your insurance policies, premiums paid, losses and loss recoveries. This information will help you get better coverage at a lower cost in the future.

Review this list before shopping for business insurance. A good insurance agent will provide protection for the business based on what risks you can assume and the amount you can pay.

The Home-Based Business Fact Sheet Series

This is one of a series of publications designed for the person entering or considering a new business operation. See the University of Maine Cooperative Extension Online Publications Catalog for the complete Home-Based Business fact sheet series.

Information in this publication is provided purely for educational purposes. No responsibility is assumed for any problems associated with the use of products or services mentioned. No endorsement of products or companies is intended, nor is criticism of unnamed products or companies implied.

© 2001, 2008

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