BUSINESS INSURANCE
For The Small Business Owner¹

          The City of Sacramento does not have a business insurance program in place, but provides the following as an informational tool for the small business owner interested in learning more on the subject.

General -

            Business insurance is a complex subject, as diverse as business itself.  Selecting an agent or broker experienced in business exposures and the commercial insurance market is extremely important.  Interview several agents and ask for referrals.  When shopping for coverages, get several quotes or proposals and have these in writing.

             Contractual agreements that enable your business to operate, such as leases, merchandising, and finance contracts, may obligate you to insure beyond your immediate concern.  Review them, if possible, with your agent.

             As you shop for your insurance you will see special terms and concepts unique to business insurance.  Ask your agent to explain anything you are not familiar with.  Be sure you understand how your insurance premium will be calculated.  It may be floor area or, more frequently, payroll or sales income.  In any case, your cooperation for access to your books, records, and/or premises is expected.

             Policy periods are generally annual.  Payment is due when coverage starts or as agreed upon.  Premium financing is usually available, but be aware of the interest rate you will be paying, as well as the authority given to the financing organization and how any disruption in your payment will affect your coverage.

Workers’ Compensation Insurance -

              An employee who has suffered an injury or illness resulting from employment is entitled to worker’s compensation benefits provided at the employer’s expense.  California Labor Code Section 3700 requires that every employer in California either buy workers’ compensation insurance from a licensed insurance company, or obtain a certificate of self insurance from the California Department of Industrial Relations.  Failure of an employer to secure payment of compensation may result in imposition of both civil and criminal penalties!  Because of the elaborate requirements and considerations with this insurance, it is recommended that business owners refer to Worker’s Compensation brochures available from the Department of Insurance and the Department of Industrial Relations.

Commercial Auto -

             Commercial auto insurance largely parallels private auto insurance.  Still, familiarity is recommended.  Whenever you transport a client or move property by a motor vehicle, you should have an understanding of how your commercial auto insurance will work.  Also, how will “non-owned” autos, newly acquired vehicles, or changes in drivers effect your coverage.

Property Insurance -

              Business insurance may cover property of all types that you own or that is in your “care, custody, and control”.  It may be buildings, improvements, equipment, inventory, goods in transit, earnings, etc.  Your contractual obligations may also require you to protect other people’s property as well.

Coverages -            

            Property coverage is addressed from two sides of the same idea.  “Named Perils” names each peril to be insured against; such as fire, explosion, aircraft damage, windstorm, etc.  Other perils may be added along the way.  “All Risks” starts from the other side, assuming all perils are covered except those named in the “Exclusions” of the policy.  Obviously, the exclusions are an important part of the All Risk policy.  Perils often excluded are: theft, flood, and earthquake.  Since the All Risk policy affords better protection, it is more expensive to purchase than the Named Perils policy.  The difference between Named Perils and All Risk is a typical example of the kind of thinking and interpretation you must apply to understanding how your insurance policy will cover your business.  Remember, your agent is there to help you in understanding your coverages.

             Insurance of property is based on its value, however that may be derived.  There are “co-insurance” penalties for failing to insure to value. These penalties will be applied to any loss adjustment.  Determination of value is also important for calculating the premium and compensating for a loss.  Some terms often used are: “actual cash value” meaning market or depreciated value, “replacement cost”, “selling price” for unsold inventory, and the many coverages of “business interruption”.

Claims -

             Because of deductibles, dollar limits you agree to absorb in the event of a loss, and other ways of sharing the burden of coverage, you should know how the insurer will handle a claim.  Large deductibles, although they afford a reduction in premium, can have a critical effect on your cash flow if you are operating on or have access to very little capital.  Also, you cannot rely on insurance to always or completely cover your losses.  A frequency of claims will have a definite and sometimes harsh effect on the insurer’s willingness to continue to insure your business.  Although business-owners generally purchase replacement cost coverage, insurers often limit their initial compensation payment for loss to actual cash value until such time as the owner has replaced the items lost.  The policy, itself, will define the time-frame to start the process of replacing items, generally six months.  This method of handling claims is prevalent and you should be prepared to make up whatever difference between the value of your loss and what the company legitimately pays.  Obviously the best preparation includes taking necessary measure to minimize or eliminate losses in those areas where you have control.

California Fair Plan -

             If you can’t find business property insurance in your area, consider the California Fair Plan.  Although it is not available everywhere in the state, most agents can help you in applying in qualified areas.  The California Fair Plan can be reached at 800-252-0089.

Liability Insurance -

            Good business practice dictates that you take adequate measure to protect other people and/or their property against any damage your company and/or its property may cause.  This is the coverage afforded by business liability insurance.  It may be required by government statute or by the threat of litigation.

Coverages -

             Major types of business liability insurance you should be familiar with are: premises/operations, lessor’s risk, contractual, products/completed operations, personal injury, non-owned auto, and professional liability.  Discuss these thoroughly with your agent to determine appropriateness and limits for adequate protection.

Limits -

             Limits of liability are the maximum amount of the money the policy will pay on a single loss.  They are generally set somewhere in relation to your assets, as your interest in compensating others diminishes once that compensation has exceeded your resources.  Limits may be expressed as a single figure in a “combined single limit” or “split limits” which specify one amount for bodily injury and another for property damage.

Claims -

              Knowing whether claims are paid on a “per-occurrence” or a “claims made” basis can mean the difference between a covered claim and no coverage.  Ask your agent to explain these terms and find out how claims will be handled for your particular policies.

Premiums -

              Different exposures generate premium in different ways.  Offices where no customers visit are one kind of exposure; factories with blast furnaces are another.  Some factors that determine premium are: square footage, payroll, sales, expenses for independent contractors, number of employees, etc.  You should know how your premium is derived. You should also be aware of how much you are committing to deposit premiums and what effect audits and changes in your business activities will have on your premium.  Where possible, get complete explanations of premium terms and coverages in writing.

Non-Admitted Insurers -

             If you are unable to obtain insurance from an admitted (licensed in California) insurer, you may find yourself considering purchase of “non-admitted” (not licensed in California) insurance.  Be aware that non-admitted insurance companies are not subject to the financial solvency regulation and enforcement which applies to California admitted companies, nor are they covered by the California Insurance Guarantee Association in case of insolvency.  Contact the Department of Insurance at 1-800-927-4357 for more details.  

Small Business and Commercial Insurance -

             Operating a business is difficult enough without having to be concerned about suffering significant financial loss, or worse, due to unforeseen events occurring.  Insurance is to protect against loss of your investment and financial impairment to your business.  Some of the most commonly asked questions regarding commercial insurance are discussed below:

Q.  How do I go about obtaining business insurance?

A.  The first step in obtaining proper business insurance is to find and contact a reliable insurance agent or broker.  Business contacts can often refer you to someone that they have had good experience with.  When looking through the yellow pages, look for specialization in commercial insurance, and membership in one of the professional agents’ or brokers’ associations.  When dealing with the agent initially, they should do their own analysis or survey of your exposures, and then ask to review any present coverages.  To do otherwise could perpetuate any errors, gaps, or overlaps that may exist in your present program.

Q.  What kind of insurance do I need?

A.  There are six broad areas of exposure:

            1.            Property
            2.            Time Element
            3.            Crime
            4.            Automobile
            5.            Liability
            6.            Workers’ Compensation

              Not every business will have exposures in every area, which is why an analysis must be done.  The State requires Workers’ Compensation insurance if there are any employees.  Various governmental agencies may require certain types of insurance.  For example, the Contractors State License Board requires bonds for contractors, and the Public Utilities Commission requires Commercial Automobile insurance.  Most other insurance is a business decision on your part.  However, contracts you may enter into, such as leases, loans, etc., may contain insurance requirements you have to comply with, and of which you should be aware.

Q.  Can any exposures be reduced or eliminated?

A.  Exposures can be reduced but not eliminated.  You can order an inspection by a Loss Control Engineer to uncover hazardous conditions.  Recommendation from this report can benefit you by helping to identify and reduce risks, (and thereby reduce premiums), making your business more attractive to insurers.

Q.  What are some of the specific exposures and how are they covered?

A.  Following is a table of common exposures and appropriate coverages:            

PROPERTY
Exposure	Coverage
Buildings (owned)	Commercial Building policy, Fire & Extended Coverage minimum.
Building (leased)
a. Lessee required to provide insurance	Same as owned building.
b. Lessee not required to provide insurance	Same as owned building.
Building under construction	Builders Risk policy.
Contents of building	Business Personal Property policy (includes furniture, fixtures, equipment, and stock). Fire & Extended Coverage minimum.
Tools & equipment (used away from the premises)	Contractor’s Equipment floater.
Stock	Usually insured as part of Business Personal Property. If values fluctuate considerably during the year, a reporting form may be appropriate.
Property of others in possession for storage, service, or repair	May be covered under Business Personal Property or Special Types of coverage.
Damage to boiler, air conditioners, air compressor, etc.	Boiler & Machinery coverage.
Loss or damage to stock while being transported in an owned motor vehicle	Motor Truck Cargo coverage.
Loss or damage to property shipped via:
a. Common carrier	Transportation coverage.
b. Mail	Mail coverage.
c. Common carrier, overseas	Cargo policy.
Loss due to faulty discharge of water from automatic sprinkler system	Usually covered by Commercial Building and Business Personal Property coverage.
TIME ELEMENT
Exposure	Coverage
Loss of profits due to insured loss	Business Income (Interruption) coverage.
Expenses necessary to continue business operations after insured loss	Extra Expense coverage as part of Business Income coverage.
Loss of rents due to building(s) not being habitable due to insured loss	Generally included in Business Income coverage.
CRIME
Exposure	Coverage
Loss of money due to robbery or burglary, on or off premises	Robbery & Safe Burglary coverage - Money & Securities.
COMMERCIAL AUTO
Exposure	Coverage
Liability & physical damage exposures	All such exposures can be dealt with by a comprehensive Commercial Auto policy, a Truckers coverage policy, or Motor Carriers policy.
LIABILITY
Exposure	Coverage
Business operations and premises	Comprehensive General Liability policy.
Products manufactured, distributed, or sold	Comprehensive General Liability policy or Products, Completed Operations policy.
Work performed by you under contract, such as construction	Comprehensive General Liability policy or Products, Comprehensive Operations policy.
Premises owned but not occupied by owner	Comprehensive General Liability policy.
Liability for the contractors or sub-contractors	Comprehensive General Liability policy or Owners & Contractors Protective Liability.
Losses in excess of policy limits or need high limits of liability	Umbrella Liability policy.

Q.  In Commercial Insurance, are there policies that provide or combine the various kinds of coverages like a Homeowners policy does with personal insurance?

A.  Yes, there are various “package” policies available.  Programs such as the Business Owners Policy (BOP), Special Multi-Peril (SMP), and insurance company designed packages are constantly being marketed.  Many insurers design packages to meet specialized needs, such as auto garages, auto dealers, jewelers, furriers, barbers and beauty salons, and apartment buildings.  Competent commercial agents and brokers are prepared to offer these programs.

Q.  Can I obtain Earthquake insurance for a business?

A.  Insurance companies are not required to offer earthquake insurance on commercial property.  The availability is therefore determined by the market place and individual company underwriting decisions.  Here, again, the agent can do the searching for you.

Q.  How much does business insurance cost?

A.  Your cost will be unique to your exposure; that is, it will be similar risks insured by the same company, but since this is a competitive market, different companies will have different premiums.  You should know the basis for the premiums.  Property insurance premiums are based on a rate per $100 coverage.  Factors that go into making the rate are construction of building, occupancy and use, public protection, neighboring exposures, and internal protection, such as sprinklers, etc.

            The premium basis for liability insurance depends on the type of business.  Stores and manufacturing are based on gross sales.  Contracting and service businesses are based on payroll.  Apartments are based on the number of units, hotels, on gross sales, and office space and property owned and leased to others are based on square footage area.

            Anything based on sales or payroll is auditable and can result in additional or return premium.  Companies have minimum and deposit premium requirements, which can and do vary, and should be considered when shopping.       

Q.  How can I find out about insurance companies that are presented to me?

A.  First, ask the agent for the background on the company.  Then call the Department of Insurance Hotline to find out their status in California, how long in the state, etc.  You may then want to go to the library and obtain detailed financial information and ratings by reviewing rating service reports published by A. M. Best, Standard & Poors, Moodys, or other rating services.

Q.  After I agree to purchase insurance, complete the application, and pay money, how do I know I have insurance?

A.  You should be given a “binder” signed by the agent, showing you as the insured, effective date of coverage, the insurance company, location and description of property insured, amounts of coverage, limits of liability, and other pertinent information.  A binder may be valid for up to 90 days pending issuance of the policy.

Q.  Can an insurance company cancel my insurance?

A.  A company has a 60 day underwriting period during which they review the application and other information submitted, possibly have an inspection done, and verify the rating and premium calculation.  The company may cancel your insurance within that 60 day period.  They must give you at least 10 days notice of cancellation.  After 60 days the reasons a policy may be canceled are very limited.  The reason and 30 days notice must be given, except for non-payment of premium or fraud, when 10 days notice is required.

Q.  When I receive my policy(s), how can I be sure they contain what I agreed to?

A.  Ask your agent to deliver the policy(s) in person, review then with you and answer any questions you might have.

Q.  How would I know if the insurance company is non-renewing my insurance?

A.  The insurance company must give at least 60 days, but not more than 120 days notice of non-renewal, and the reasons.

Questions or complaints -

            If you have questions or a complaint against an agent or insurance company, you may contact the Department of Insurance Consumer Services or by telephone, at 800-927-4357.

           ¹ From the California Department of Insurance brochure, “Business Insurance For The Small Business Owner,” Form 514.