One of the first challenges to a new company is the decision to buy insurance coverage. For many people insurance terms are like a foreign language to be avoided at all costs. However, keep in mind that a single calamity or the death of a key executive without insurance has been the demise of many small businesses.
As a business owner you should know the rudimentary insurance terms and procedures before you start the process of purchasing the policies you need. Business insurance falls into several categories: life, property and liability insurance.
* Life insurance: Commonly known as "key man" insurance, a life insurance policy is purchased for the most important executive (s) in a business. A bank may require him or her to get such coverage when a business loan is extended to the firm. The beneficiary is the company, but the benefits can be transferred by agreement to the bank to pay back a loan should the key executive die. Alternatively, the insurance payout can be used to pay the salary of a new executive who steps in after the key person has died.
* Property insurance: Fire insurance may be written for coverage against windstorms, hail and other natural calamities. It may also protect from damage caused by riots, civil disobedience and explosions. Marine insurance is frequently called ocean marine coverage which is deceptive. It may cover losses related to goods transported via the ocean, seas, lakes, rivers and harbors. Policies are available to cover automobiles, boilers, machinery and glass. Burglary, theft or robbery policies protect against the impact of these actions by non-employees.
* Liability: There are several types of liability coverage, also known as casualty insurance. Fidelity coverage addresses employee dishonesty, while a forgery bond protects a business from forged signatures on such items as checks or contracts by employees or non-employees. General liability policies protect a firm from losses that may result from injuries to people hurt on the premises. Accidents of any nature may produce legal actions against the business.
Workers' compensation is liability coverage required by the State of Maryland. It provides benefits to employees who may be injured on the job. This includes expenses related to an employee's lost wages and incurred medical costs.
Professional liability coverage, also known as malpractice insurance, is purchased by a number of professionals such as physicians, attorneys, business advisers and engineers. This is protection from possible claims by clients of negligence or gross errors on the part of the professionals.
Types of companies: Insurance companies are either stock companies owned by shareholders or mutual companies owned by the insured policyholders. No stock exists in a mutual company, so if you are insured by a mutual firm, you may receive policyholder dividends. Usually these payments are not large.
All insurance companies must reserve money to pay current and anticipated claims. The state's Insurance Division reviews the operations of any insurance company that conducts business in Maryland to confirm that the company's financial strength will satisfy its liabilities.
Buying the policy: A business may buy insurance from a direct or an indirect insurance agent. A direct agent is an employee of the insurance company and sells only one "brand" of insurance, such as Nationwide or State Farm. An independent agent works for an insurance agency and can sell insurance from one of a number of insurance companies. The advantage of the independent agent is that the agent can quickly contrast and compare a number of policies from different companies to see which one fits your situation at the best price. The risk is that the independent agent could steer you toward an insurance
company which might not offer the best policy for you, but will give the agent a free trip to Hawaii when a certain sales level is achieved.
Should you select the insurance company which offers the lowest price? Not necessarily. An inexpensive policy could be issued by an insurance company that has an extremely high potential for excessive losses. This could be caused by its acceptance of relatively risky new customers in order to increase the insurance company's premium revenues. When the claims start rolling in from these policies, the insurance company quickly increases the premiums for all of the policyholders or simply does not renew the high-risk policies. Even a business with no claims could have its policy canceled, and it can be quite an ordeal to get new insurance in a hurry at a reasonable price.
In the purchase process, you may recognize the insurer as one that is a reputable firm, however, when in doubt ask questions of the agent.
The bottom line: In times of recession, insurance is sometimes ignored. Be sure to have adequate coverage so your firm will not become another negative statistic.
Patrick Rossello, president of the Business Consulting Group in Towson, is a member of a number of local advisory boards including Baltimore's Technology Development Center. Send questions or suggested topics to him c/o Money At Work, The Evening Sun, 501 N. Calvert St., Baltimore, Md. 21278.