Whetting an appetite for business risk
Would-be entrepreneurs, how is your appetite for risk? For a look at coverages – and circumstances under which entrepreneurs would have the exposure but elect to transfer that risk to an insurance company – IB spoke to two local agencies.
"Every start up needs some of these coverages, and has a limited budget," said Tim Hausmann, chairman of Hausmann-Johnson Insurance, "so you need to prioritize risk. You want to transfer some risk and figure out what risk you're willing to assume."
Liable to be insured
There are a variety of coverages and exposures that come into play, depending on the nature of the business. According to Hausmann, when someone says they are opening a business and they are interested in talking about insurance, that happens at a lot of different levels. "If they really haven't thought about this and they are just operating by the seat of their pants without a business plan, obviously we'd want them to share a business plan with one of us," Hausmann said. "Depending on what the industry is, what kind of competitive advantage they can bring to the market, we just try to see, as someone who may underwrite a loan, what their thoughts are. Part of it is giving them business advice."
Having a business plan is helpful for underwriting, particularly because the plan typically identifies payroll projections (the more revenue you project, the larger the liability premium is going to be), profitability, and other elements.
Doug Dittmann, president of Neckerman Insurance Services, noted, "The insurance companies now are looking at a lot of different tangibles as far as what it takes to get business insurance and a better rate, and they are looking at history in that industry, management experience in that business, pertinent college degree and work experience, and ownership of some type in that world. That certainly is going to help when we take the application to the company."
Generally speaking, there are both optional and statutory coverage options. If you're a sole proprietor in the state of Wisconsin, you are not required by statute to purchase workers' compensation, but no matter what the statutes say, "someone is going to want a workers' compensation policy in place if you're going to perform services and work for them," Hausmann noted.
A general liability policy will be essential because whether the entrepreneur is a food vendor or starting a sole proprietor plumbing contract, whoever they engage in a business transaction is going to want liability insurance in place. A general liability policy is basically a first layer of liability insurance. Depending on the size of the company and the aspirations of the owner, they will buy an umbrella liability policy that increases the limits of liability for the business.
"If you are manufacturing a product, you've got to make sure you have coverage for the specific product you are making if something goes wrong," Dittmann said. "If it's a food item and it isn't made right and somebody gets sick, or if it's just a widget and a kid puts that widget in his mouth and swallows it, is that supposed to happen? It's a very litigious world out there right now."
If the entrepreneur is going to buy a building or if they are going to have any type of significant personal property, they will want to transfer the risk of losing those assets to an insurance company.
Rates depend on risk and other factors. If constructing a building, does it have fire protection (a sprinkler system and alarms)? How far is it from the nearest fire protection service or fire department? These considerations all play a role in underwriting and costing the risk. "To be frank, for a small business, the property insurance is probably a smaller risk to them, but certainly, that's part of the diagnostic work in terms of identifying the risk this particular new business would face," Hausmann said.
In addition, start-up business owners interested in protecting their revenue stream can purchase business income coverage. If they own a restaurant, they would have business income exposure in the event they can't serve food and the revenue stream stops. There are a lot of variations in the scope of coverage and the period of restoration for business income.
"If you have a restaurant and you had a situation like we had up on the Square, where we had demonstrations taking place and, because of those demonstrations, your business basically stopped, people stopped coming, that's just business risk," Hausmann said. "That's not necessarily covered by an insurance policy."
Some assume that directors and officers coverage is not a start-up coverage, but it's circumstantial. A for-profit company that has outside directors on its board, and expects to attract top talent to its board, will need to have a "D&O" policy in place because in its corporate by-laws, there will likely be an indemnification clause that states the corporation will secure directors and officers against loss for decisions they make.
Employment practices liability (EPL) and third-party discrimination coverages go hand-in-hand. EPL insurance covers negligent hiring and firing on the basis of race; religious, ethnic, and gender discrimination; and sexual harassment claims. While employee practices liability covers an employer-employee relationship, third-party discrimination comes into play not between an employer and an employee, but in dealing with the public in any business transaction or in any fashion.
Cyber liability insurance is a new coverage to protect against the loss or theft of laptops with sensitive or proprietary information, especially if customers are impacted.
If the company owns vehicles, it needs an auto policy; even when it doesn't have auto coverage, it will carry a basic auto policy that covers the business. Another coverage, non-owned car liability insurance, protects against driving accidents in which employees are driving their own cars on company errands and cause personal injury, especially if there are issues with the employee's personal auto coverage. "Those things happen," Dittmann said. "People are asked to use their own vehicle to run to the bank or get lunch, and they are told to hurry up."
Most agencies make sure businesses have certain basic coverages. "Some are very risk averse and they will buy everything offered," Hausmann said. "Others are willing to assume a lot of risk. It's not about who's right or wrong, but what's best in a given circumstance."
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