Financial

Being underinsured

may be disastrous

for small businesses when calamity strikes

by Richard A. Hale

By successfully launching your own business, you proved that risk-taking can pay off. But the risk associated with not having the appropriate insurance for your business is one you would be wise to avoid. An uninsured calamity can shut you down permanently, or at least wreak havoc on your assets.

The law requires little in the way of insurance for small businesses. However, landlords, suppliers and other entities with whom you work will likely require you to carry some coverage. Even so, the Insurance Information Institute in New York City estimates that about 50 percent of small-business owners are either not insured or are grossly underinsured.

If you are one of these owners, you'll want to read on to learn more about some of the insurance available to small business owners.

Standard business owner's policy. This provides coverage for property (fire, wind, theft, etc.), liability (injury to someone in your business or by your product) and business interruption.

Business owner's policies are designed for small service and manufacturing businesses. Standard business owner's policies do not cover professionals such as consultants, lawyers or accountants because of their high professional liability. The components of each policy are different, so be sure that yours contains all the components that your business requires.

Product liability insurance. This protects you in case one of your products harms a user. It is used by businesses such as toy makers, candy manufacturers, caterers, food sellers and garment makers. Most business owner's policies include product liability coverage, but if you do not have this coverage through a business policy, and your product runs the risk of inflicting harm on those who use it, you may want to buy product liability separately.

Professional liability insurance. This protects you financially in case of a claim against you for negligence or wrongful acts. It is the service equivalent of product liability and includes coverage for malpractice, errors and omissions. Even if you are not required to have it by state law, it is wise to carry coverage if your service could inadvertently harm another person. Some professionals who have this type of insurance are computer technicians, accountants, hairdressers, lawyers and consultants.

When you shop for this kind of insurance, be sure to ask about deductibles and about coverage that is reduced by the cost of legal fees. Some policies are being written with exclusions and limits on coverage of legal fees and court costs.

Car insurance. This can usually be included on your personal auto policy if you infrequently have customers in your car. But, if you have cars, vans or trucks used primarily for business, you will most likely need a separate business-auto policy. If other people will be driving your vehicles for the business, make sure you put their names on the policy, too.

Workers' compensation insurance. This insurance covers employees in case of work-related illness or accident. In Missouri, workers' comp coverage is required for all businesses with five or more employees, and for all construction-industry businesses with one or more employees (an owner of a construction business who works for himself or herself is not considered an employee for this purpose). Farm workers employed by noncorporate farms are typically exempt from the workers' compensation insurance requirement.

Disability insurance. This insures up to 60 percent of your gross income in case you cannot work due to illness or injury. The benefits from this policy are paid to you while you are disabled.

Business overhead protection. This is much like a personal disability insurance policy except that the benefit payments go to the business instead of to you personally. This coverage is intended to pay ongoing expenses like rent and utilities if the owner can't be actively involved because of a short- or intermediate-term disability.

Key person insurance. This insurance protects the business in case of the death of the owner or other key employee. For example, the death of a sales manager could result in the loss of important customers who had a solid relationship with that person.

This coverage pays a death benefit to the business so it can withstand the loss and pay the costs of finding a replacement.

As you explore the myriad of options for insuring your business, consider checking with your county or city clerk, or your state insurance office to see what kinds of insurance are recommended for your business. You'll probably find, however, that you'll save time and frustration by seeking the advice of an insurance professional who is familiar with your business and your needs. The most important thing is to act now if your business is uninsured.

(Richard A. Hale, CFP, is a financial advisor with American Express Financial Advisors Inc.)

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An uninsured calamity can shut you down permanently, or at least wreak havoc

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