Insurers often combine a number of insurance coverages
into a package that is sold as a single contract.
The most common policy for small businesses is the
Business Owners Policy (BOP).
The BOP combines coverage for all major property
and liability insurance risks as well as many additional
coverages into one package policy suitable for most
small businesses. The term "BOP" specifically refers to insurance policy language
developed (and revised as needed) by experts at ISO. ISO provides sample insurance
policy language, research and a variety of other products to insurance companies.
The BOP includes business income insurance, sometimes called business interruption
insurance. This compensates a business owner for income lost following a disaster.
Disasters typically disrupt operations and may force a business to vacate its
premises. Business income insurance also covers the extra expense that may
be incurred if a business must operate out of a temporary location.
To cover specific risks associated with a business, a variety of additional
coverages may be added to the basic BOP. For example, if a business has an
outdoor sign, the BOP doesn't cover it unless coverage is specifically added
for an additional premium. If a business relies on electronic commerce, the
owner can add coverage for lost income and extra expenses in the event the
ability of the business to conduct e-commerce is slowed down or stopped due
to a computer virus or hacker.
Only small- to medium-sized businesses that meet certain criteria are eligible
for a BOP. Factors insurers consider include the size of the premises, the
required limits of liability, the type of business and the extent of offsite
activity. Premiums for BOP policies are based on those factors plus business
location, financial stability, building construction, security features and
fire hazards.
Major Coverages
Most small businesses need to purchase at least
the following four types of insurance.
1. Property Insurance
Property insurance compensates a business if the
property used in the business is lost or damaged
as the result of various types of common perils,
such as fire or theft. Property insurance covers
not just a building or structure but also what insurers
refer to as personal property, meaning office furnishings,
inventory, raw materials, machinery, computers and
other items vital to a business's operations. Depending
on the type of policy, property insurance may include
coverage for equipment breakdown, removal of debris
after a fire or other destructive event, some types
of water damage and other losses. It may also provide
operating funds during a period when the business
is trying to get back on track after a catastrophic
loss.
2. Liability Insurance
Any enterprise can be sued. Customers may claim that
the business caused them harm as the result of, for
example, a defective product, an error in a service
or disregard for another person's property. Or a claimant
may allege that the business created a hazardous environment.
Liability insurance pays damages for which the business
is found liable, up to the policy limits, as well as
attorneys' fees and other legal defense expenses. It
also pays the medical bills of any people injured by,
or on the premises of, the business.
3. Business Auto Insurance
A business auto policy provides coverage for autos
owned by a business. The insurance pays any costs
to third parties resulting from bodily injury or
property damage for which the business is legally
liable, up to the policy limits.
4. Workers Compensation Insurance
In all states but Texas an employer must have workers
compensation insurance when there are more than a
certain number of employees, varying from three to
five, depending on the state. Workers comp insurance,
as this coverage is generally called, pays for medical
care and replaces a portion of lost wages for an
employee who is injured in the course of employment,
regardless of who was at fault for the injury. When
a worker dies as a result of injuries sustained while
working, the insurance provides compensation to the
employee's family. An extremely small business, such
as one operated by one or two people out of a home,
may not need workers compensation insurance. But
it often needs more property and liability insurance
than is provided in a typical homeowners policy.
Other Types of Business Coverages
1. Errors and Omissions Insurance/Professional
Liability
Some businesses involve services such as giving
advice, making recommendations, designing things,
providing physical care or representing the needs
of others, which can lead to being sued by customers,
clients or patients claiming that the business's
failure to perform a job properly has injured them.
Errors and omissions or professional liability insurance
covers these situations. The policy will pay any
judgment for which the insured is legally liable,
up to the policy limit. It also provides legal defense
costs, even when there has been no wrong-doing.
2. Employment Practices Liability Insurance
Employment practices liability insurance covers
(up to the policy limits) damages for which an employer
is legally liable such as violating an employee's
civil or other legal rights. In addition to paying
a judgment for which the insured is liable, it also
provides legal defense costs, which can be substantial
even when there has been no wrong-doing.
3. Directors and Officers Liability Insurance
Directors and officers liability insurance protects
directors and officers of corporations or not-for-profit
organizations if there is a lawsuit claiming they
managed the business or organization without proper
regard for the rights of others. The policy will
pay any judgment for which the insured is legally
liable, up to the policy limit. It also provides
for legal defense costs, even where there has been
no wrong-doing.
4. Key Employee Insurance
Life or disability income insurance can compensate
a business when certain key employees die or become
disabled. These coverages cushion some of the adverse
financial impact that results from losing a key employee's
participation.
5. Umbrella Policies
As the name implies, an umbrella liability policy
provides coverage over and above a business's other
liability coverages. It is designed to protect against
unusually high losses. It provides protection when
the policy limits of one of the underlying policies
have been used up. For a typical business, the umbrella
policy would provide protection beyond the general
liability and auto liability policies. If a company
has employment practices liability insurance, directors
and officers liability, or other types of liability
insurance, the umbrella could provide protection
beyond those policy limits as well.
