Proper Insurance Coverage - A Sound Business Decision

by Royce Belcher, CPA

As a business owner, you are constantly faced with risk and uncertainty. With the proper insurance coverage you can reduce risk, protect employees, equipment and yourself from a variety of financial disasters. The amounts and types of coverage required depend on your particular situation. Key factors to consider in accessing your insurance needs include the types of products or services you sell, your location, the level of inventory, the type of equipment and whether you have employees.

Employees Health - An Asset Worth Insuring

In reviewing insurance needs for employers, employee health insurance coverage is one that requires careful planning and consideration. Health insurance coverage contributes to the well being of your workforce and allows you as an employer to recruit and retain quality employees. As an employer, you have the ability to select from a variety of health care plan options. The traditional health coverage provided to employees, private insurance plans, usually results in higher premiums as employees have access to any facility and provider they choose.

With the changing face of the American workforce, employers have turned to more affordable plans for providing employees with needed coverage. Common selections for group health insurance include health maintenance organizations and preferred provider organizations. These selections provide a more affordable alternative to employers with a limited reduction in benefits. In selecting the appropriate health care package for your situation, take the time necessary to analyze your employees and consider their needs carefully.

Property Liability - Maintaining Control in a Time of Crisis

Property insurance protects your building and its contents. The cost of coverage depends on the value, location and type of property covered as well as the perils insured against. Most certified public accountants suggest purchasing replacement cost insurance. This type of coverage will replace your property at current prices, regardless of the amount originally paid. Although replacement insurance will cost more, you will be protected from inflation. In determining the amount of coverage your business requires you should consider the value of inventory, equipment, furniture and fixtures. Losses due to earthquakes and floods are excluded from most property policies. Therefore, a separate policy called a Difference in Condition must be purchased if owners want to insure against these hazards.

Additional considerations should be made related to leased equipment. In most circumstances, the lessor requires adequate coverage to be maintained on the equipment to protect their interest. Other factors to address include requirements imposed by banks and other lenders related to the financing of equipment, inventory and other assets of the business. In the event of a loss, property insurance could provide the funds necessary to rebuild your business. Without adequate coverage, your business may be unable to meet obligations owed to its vendors and other creditors in the event of property losses.

Business Interruption - Meeting Obligations Without Operations

If a fire, flood or other unforeseen event discontinues your operations, business interruption insurance can assist you in meeting the ongoing costs of business while your company is unable to operate. Although your company is incapable of manufacturing its products or delivering its services, your business will continue to incur expenses. Expenses typically covered under the policy include payroll, rent and other normal operating expenses. Some policies even provide your business with reimbursement for lost profits while you are unable to operate. As most policies cover specific expenses, it is critical the policy be structured to meet your individual needs. Many business owners are unaware that insurance coverage may be obtained to reduce risks associated with expenses and lost profits. Although this is coverage you hope you will never need, in the event of a crisis business interruption insurance may preserve your business financially until you are able to resume normal operations.

Liability Coverage - Protecting Your Business From Damages

In today's environment, a business owner can be sued by virtually anyone their business comes into contact with - employees, customers, delivery workers and vendors. All of these groups have the ability to hold your business liable for damages caused by your company or employees. Liability claims can result from falls, auto accidents, defective products or a variety of other causes. Liability insurance can protect your business from financial destruction, which may occur as a result of claims. Typically, policies state a dollar limit per occurrence and an aggregate dollar limit for the policy year. Policy premiums vary among insurance companies and are based on a variety of factors, the most common factor being revenue. Some general liability policies cover employment practices and some do not.  If the general liability policy being considered excludes coverage for employment practices (e.g., wrongful termination suits), then the business should consider purchasing a separate employment practices liability insurance policy in addition to the basic general liability insurance policy.

If your company is involved in the manufacture, design or selling of certain products, you will also need product liability insurance. In determining an adequate amount of product liability coverage to maintain, consideration should be given to the nature of the products and the potential for harm or injury resulting from their use. Keep in mind product liability claims may not be filed immediately. In some instances, manufacturers have been held responsible for defective products as many as 20 years after they were made or sold.

Worker's Compensation - Compensating Injured Employees

Worker's compensation insurance provides loss of income, injury and medical benefits to your employees injured while performing their jobs. Generally, costs of coverage vary depending on the industry and classification of job duties. Job duties resulting in traditionally higher accident risks will translate into higher employer premiums. Costs are also directly affected by the employer's loss history; therefore, it's wise for an employer to take as many precautions as possible to prevent employee injuries. Requirements of coverage vary from state to state and the owner is responsible for insuring compliance with their state laws. Many industries and trade associations have formed self-insurance funds that pool premiums of participating employers to obtain better coverage rates for their members.

Disability Insurance ? Meeting Obligations Without Income

Many business owners fail to consider the need to obtain disability insurance protection for themselves until in a time of crisis when they are unable to meet the continuing costs of doing business and providing for their family. Disability insurance is based on individual earnings and provides benefits in the event of temporary or permanent disability. When the coverage is properly structured, benefits provided under the policy may be income tax free. These benefits may be used to meet current obligations of the business or used for personal living expenses. The amount of coverage, perils covered, length of coverage and exclusion period varies by policy.

Life Insurance - Protecting Your Family

In operating a business, owners usually are required to borrow funds, sign leases and make other financial obligations which their business or family may be ultimately responsible for in the event of death. Operating loans for the purpose of acquiring property, equipment and inventory may be substantial, and funds necessary to liquidate the debt may not be readily available in the event of unforeseen circumstances. It is important to understand the financial impact your business pursuits can have on your family and their ability to continue in their current lifestyle if you are gone. In reviewing insurance needs, determine if adequate coverage exists to pay off the company debt and still provide the needed financial support for your family.

Conclusion

Adequate insurance coverage is a requirement to operate a successful company in today's business environment. After initially accessing your needs and purchasing appropriate insurance coverage, the policies should be reviewed periodically to insure the coverage is still adequate and is the business' best solution. As a trusted adviser, your certified public accountant is in a position to offer cost effective suggestions, to enhance your insurance program.

About the Author

Royce A. Belcher, CPA, is an individual practitioner in Lebanon, Tenn.

See our FAQ page here.