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January 16, 2013

What kind of insurance is right - and wrong - for your small business?

By Stephanie Taylor Christensen, InsWeb.com

Owning a small business is risky, and the insurance you need to cover the risks for yourself, your customers and your employees can be pricey.

Here is a list of four types of small business insurance you should have, and three types you don’t necessarily need.

Essential coverage

1. Business owner policy (BOP)

Although you can buy them separately, BOP conveniently packages a commercial general liability and commercial property policy into one product.

The commercial liability part of the policy protects you from mishaps like a customer hurting himself at your business and from claims about defective products.small business insurance

The policy’s commercial property portion protects the structure of your business and covers losses related to your business’ belongings. BOP also includes business interruption insurance, which provides money keep your business running if your business is damaged or must relocate after an insured disaster.

Matthew Avellino, CEO of New York-based insurer AC Risk Management Inc., calls BOP “the insurance product that every business owner needs.”

Although it’s designed to address the primary insurance needs of a small business, BOP is not all-encompassing. For example, while water damage to your business caused by backed-up drain probably would be covered, you’ll need a separate policy to cover flooding caused by a natural disaster.

Barry O'Donovan, owner of New Jersey’s The Kilkenny House Pub, learned that lesson when his establishment suffered $300,000 worth of flood damage during Hurricane Irene in 2011.

“The biggest mistake I made was not checking my insurance policy with my representative thoroughly. He said, ‘We can save you this and save you on that,’ but he never brought up needing flood insurance,” O’Donovan says.

What you’ll pay: Avellino says commercial policy rates are based on a business’ sales, costs, payroll and location. The more successful your business, the more you’re likely to pay for insurance.

2. Workers’ compensation and disability insurance

This coverage protects workers who suffer on-the-job injuries (workers’ compensation) or who can’t work because of some sort of disability. Whether you’re required to carry this coverage depends on the laws in your state.

Gene Fairbrother, the lead small business consultant for the nonprofit National Association for the Self-Employed (NASE), says that regardless of state laws, “clients may require you to carry the coverage in order to qualify for a contract.”

What you’ll pay: Rates are based on payroll, type and number of employees, and job duties. The riskier the jobs, the higher your premiums will be.

3. Hired or non-owned auto insurance

Susan Combs, president of Combs & Co., a health and property insurance brokerage in New York, says that this type of insurance protects your company if an employee is driving his car or a rented one while conducting business for you. Pizza restaurants that use delivery drivers commonly buy this type of insurance.

What you’ll pay: Expect to pay anywhere from $500 to $1,000 to add this coverage, Combs says.

4. Umbrella insurance

This policy covers insurance claims that exceed the limits of a standard liability policy. So if you have liability coverage worth $400,000 and a customer breaks his leg and sues you for $600,000, this policy could cover the gap.

What you’ll pay: Rates vary based on what it is that you cover, but Combs says a small business owner generally will pay about $400 to $600 a year for $1 million worth of liability coverage. Keep in mind that you don’t need to have $1 million in business assets to need $1 million in coverage; if you you’re on the losing side of a lawsuit, the winner can go after business assets as well as your personal savings, your property and even your future income.

Nice to have, but not critical

1. Long-term disability insurance

Florida attorney Shane Fischer says that because the odds are much greater that you’ll become disabled on the job than to die on the job, it makes more sense for a business owner to carry disability insurance rather than life insurance. Instead of paying for short-term disability insurance, he recommends saving enough money so you can self-insure for at least six months, or until the long-term disability takes effect. Typically, long-term disability will insure up to 60 percent of your income –tax-free.

2. Errors and omissions insurance

If a client holds you responsible for business errors or claims that you failed to perform as promised in a contract, this coverage protects you and pays for legal expenses if a lawsuit is filed.

3. Key man insurance

This can be life insurance, disability insurance or a combination of the two for a “key” person at the company – someone whose death or disability could financially strain your business. Essentially, the insurance payout would “replace” the monetary value of that person’s contributions to the company.

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