Insurance Advice For Small Businesses

A big fire like the one at Lifetime Fence Supply four years ago would have been fatal to some businesses. The fairgrounds-area company, which sells fencing products to contractors and the public, lost its building, computers, records, a bunch of equipment and even more inventory to the blaze.

“It was tough. We were able to survive,” said Vernon Ackerman, who owns Lifetime Fence with brother Brad. They had to cover roughly $250,000 of the losses themselves. “I would say an average small business with a fire like we had would probably go out of business,” he said.

The Ackermans survived largely because they are a well-established business with a foundation of understanding suppliers and solid customers, Vernon Ackerman said.

What the painful lesson taught them is that they had been greatly underinsured, particularly in the replacement value of their charred inventory.
That’s a common story, said David Young, an advisor and insurance expert with the Washington State University Small Business Development Center in Seattle.

“Uninsured losses usually put people out of business, on a large claim,” Young said. “I’ve not run into one yet that has too much coverage.

“That just doesn’t happen,” agreed Bruce Davidson, owner of Davidson & Associates Insurance Agency in Vancouver.

To make matters worse for Lifetime Fence, Ackerman said they felt representatives of their former insurance company “dragged their feet,” taking more than a year to settle the claim.

“It put a pretty sour taste in our mouth,” he said. As a result, the brothers gathered references and took their business to Davidson, who helped them re-evaluate their coverage needs.

“When you have a loss like we had, now (the concept of another) loss becomes very real,” Ackerman said. But if fire did strike twice, he added, “We would be in a better position than we were.”

Review coverage

Davidson said it’s critical for business owners to review coverage with their insurance advisors regularly. Typically, a 10-year-old policy simply won’t cover a catastrophic loss such as a fire because the total value of the business and its various assets, and particularly the current cost to purchase replacements, usually increases dramatically in that much time.

“It’s hard to fathom how much, if you’ve acquired (assets) over time, it would cost to replace that stuff,” Davidson said.

Even more crucial than maintaining enough coverage for property loss is making sure a business is adequately covered against liability claims, said Davidson and Rich Biggs, an owner of Biggs Insurance, Clark County’s largest independent agency. Liability protection of $1 million, once considered safe, could easily fall short in the face of today’s liability rulings, according to insurance experts.

If, for example, someone is injured due to your product, or while on your premises, “You just don’t know the dollar figures behind the potential loss,” Biggs said.

“Don’t scrimp on liability insurance,” Davidson said.

So, is there perhaps a place to scrimp?

Young often advises business clients to be prepared to carry some risk on their property. For example, if you own a fleet of vehicles, it likely will pay off to keep higher deductibles ($1,000, for example) and expect out-of-pocket expense for smaller damages. “Over the long run, you will save money,” Young said. (Of course, carry adequate liability coverage for fleets as well as private vehicles employees or contractors use to conduct your business. Any vehicle driven for business purposes represents one of the greatest exposures to liability claims for many companies, experts advise.)

“Ultimately, a small business owner wants to protect his asset,” and therefore focus risk management on the kinds of losses that can jeopardize the company, said Michele Lacey, training coordinator and lead customer service representative at Biggs, as well as president of Insurance Professionals of Southwest Washington.

Most policies are fairly simple for a typical retailer, because the claims histories for those types of businesses are low, Biggs said. A fairly comprehensive policy on a downtown flower shop, for example, might run $500 a year or so. “Those policies are really built like a homeowner’s policy,” with broad coverage for general liability and property, he said.

Trickier categories

Where it gets trickier is for business categories such as the construction industry. Generally, contractors are more likely to face larger and more frequent insurance claims. As a result, fewer companies offer such policies, and their rates are higher to reflect the risk, Biggs and Davidson said. Additionally, legislative changes to liability law, often designed to protect consumers, can quickly raise the risk for insurance companies and further drive up costs, Davidson added.

Most small business owners can do a better job of maintaining their records. Current documentation showing business assets will speed and possibly increase claim payouts. “It’s a challenge to stay on top of it,” Davidson acknowledged.

While records are critical, if Davidson could offer just one piece of advice for small business owners, it would be this: “I believe that they should look at their insurance agent like other professional advisors, and to stop treating insurance as a commodity.”

Along those same lines, Biggs and Lacey suggested that new business owners get their insurance professional involved at the same time they are scouting locations, arranging financing and similar considerations. Doing so will help not only get the best coverage, which can take time, but also may help evaluate the insurance costs and ramifications of other startup decisions. “It should not be viewed as a last-minute detail,” Biggs said.

Additional insurance wisdom Following is a selection of other coverage options culled from interviews with Davidson, Biggs, Lacey and Young. ● Pay attention to what’s in your policy, and what isn’t. Are there certain exclusions you didn’t expect. Or, are you covered for improvements you made to a leased building? ● Income loss. Policies can be written to compensate not only loss of assets but also an accompanying loss of income. ● Business life insurance. Have a plan that spells out who will buy or sell the business should a partner die. This coverage can be used to compensate the deceased partner’s heirs for their share. ● Technological breakdown? Depend on Internet access or your Web site to conduct business? You can insure yourself against a cyberspace crash. ● Identification theft. You can insure your business, business owners and employees against this increasingly common crime. ● Work from home? Most homeowner policies won’t cover more than $5,000 in losses of business equipment in the home. If you work there, and especially if your work requires technology, equipment or other assets, you may need additional coverage. ● Subcontractor coverage. Are you subbing out part of a job? Demand that the subcontractor has coverage that would shield your company from liability for a claim stemming from their work. ● Traveling property? Do you bring a laptop computer or construction tools to jobs away from your business base? You may need additional coverage to protect those assets when they leave your premises. ● Serve on a nonprofit board? Sounds cruel, but your volunteer work could expose you to lawsuits sometimes aimed at individual decision-makers on a board. A personal umbrella policy can shield you. ● Small fish next to big pond? Does your business rely on foot traffic generated by a larger neighbor? You can buy coverage that would compensate you for business lost due to a sudden closure of the big store.

Resources
- Washington Small Business Development Centers: www.wsbdc.org. A wealth of information about doing business in the state. For insurance information, start with “Risk Management” under the Resources tab.
- Small Business Administration: www.sba.gov. Another goldmine. Under the Tools tab, try the “Library and Resources” section. Among the Management and Planning Series publications listed there, MP-28 discusses many of the considerations for managing risk with business insurance.
- Washington State Department of Labor and Industries: www.lni.wa.gov. Information about workers’ compensation and other topics, including applications for coverage.
- Washington State Office of the Insurance Commissioner: www.insurance.wa.gov. Although aimed at protecting and educating consumers, discussion of some of the topics could be useful to businesses. For example, click on “health insurance” under the Types of Insurance tab and start with the FAQs.