Quick Guide to Insurance:

Insurance is a waste of money, you say? You may not need it all, but you sure need something.

By Robert McGarvey
Entrepreneur Magazine, October 1999

Buying insurance is no joy - it costs too much and the money could be put to better use building your business. Or so you think. Except, that is, when you have a loss, and insurance is there to keep your business humming.

If you have insurance in the first place. The surprising fact is, many entrepreneurs don't even carry the basics. A recent Entrepreneur subscriber survey indicated that only 55 percent of you believe you have "adequate" insurance for property damage, fire, theft or liability-the essentials.

That statistic comes as no surprise to insurance experts. "[Entrepreneurs] are much more interested in building wealth than in protecting against loss," says Beverly Brooks, partner of Dallas-based insurance agency Brooks Bittner. "It's often terribly difficult to get entrepreneurs to focus on risk."

Think you're too busy to think about insurance? We'll put it bluntly: If you're not adequately insured, you risk losing your business. Can you afford to fight a sexual harassment lawsuit when even a case without merit can cost you upwards of $50,000? Do you realize that if you send an employee out to pick up a pizza for the crew and he or she gets in an auto accident, your business is likely to get sued even if the vehicle isn't company-owned? "That happens frequently," affirms Cathy Jones, president of Integrated Risk Solutions, a risk-management and insurance consulting firm in Dallas.

Coverage against those risks would cost just a few pennies a day, but most entrepreneurs have scant coverage, haven't updated their insurance since they first opened their doors years ago, and don't know the new types of coverage designed to protect their businesses.

But updating your insurance won't necessarily break your budget. Add it up, and adequate coverage should cost a typical office firm 1 percent or less of its gross revenues, estimates Jeff Olmstead, a product manager specializing in small business with The Hartford Financial Service Group Inc., an insurance company in Hartford, Connecticut. What's more, he says, small businesses now have many new insurance products to choose from - and more insurers are competing for the market. Add to that the new efficiencies resulting from more widespread automation and you've got falling prices. The upshot: It's a good time to go shopping for small-business coverage.

This month's "Quick Guide" will clue you in to new types of insurance and help you determine whether the coverage you have is adequate.

Just the Basics
There are a few types of insurance every business needs. You probably bought policies that covered those areas when you first opened your doors-but have you kept up with your business's changing needs? Let's take a look:

Business Property Coverage. This insures your office equipment, inventory, and the building you own or tenant improvements you've made to space you rent against a range of perils, from fire to windstorms and some water damage-roof leaks are usually covered; floods aren't.

How much coverage do you need? The simple answer: What would it cost to get your business afloat again in the event a fire burned everything you own to cinders? "Determine how much your property is worth. That's how much coverage you need," says Madelyn Flannagan, director of research and information for The Independent Insurance Agents of America.

Take note: This isn't a static number. You'll want to continually update your limits. "Many business owners neglect doing this," says Flannagan.

Liability. This is what covers lawsuits from accidents that cause bodily injury (a delivery person slips on your steps), accidents that cause property damage (you sell a defective lubricant that burns out a customer's car engine), and a grab-bag of miscellaneous claims (like libel, slander and false advertising). "Don't buy less than $1 million in liability coverage," says Flannagan.

Buy just liability and property protection, and that's a start. But there are many more kinds of coverage you need, some of which are even required, either by law or by insurers. Below, we've assembled a grab-bag of policies. You probably don't need them all. But we'll bet you need more than you have.

Disasters. Many natural disasters-earthquakes and floods, for instance-aren't covered under standard property insurance policies. Coverage is available, sometimes from government agencies, sometimes from private insurers, and costs vary wildly. Earthquake insurance in California is pricey; in Texas, it's very cheap. If disaster insurance is inexpensive for your area, that's probably because insurers know it will rarely be needed. "[But] business owners ought to think hard about buying it," says Jones. "I had one client whose business was in a 500-year flood plain [meaning the best scientific guess is that it would flood only once every 500 years], and he got flooded out last year." Ask your agent how much disaster insurance would cost you. If it's expensive, that's all the more reason to buy it-the proof you need it is that insurers label your area "high risk."

Umbrellas. What happens when a lawsuit someone files against you brings in a verdict that exceeds the limits of your liability protection? It's bad news for you, unless you have umbrella protection, which provides, usually affordably, for "super limits" on protection, says David Sterling, president and CEO of Sterling & Sterling, a Great Neck, New York, insurance brokerage firm. An umbrella kicks in only when the ceiling of the basic, underlying policy is reached; that's why it's cheap. The umbrella issuer is betting you'll never exceed your basic policy limits. Buy an umbrella policy, and you can dramatically extend your coverage for a small amount of cash. How much coverage do you need? That's your call, and your answer will hinge on the size of your business and the size of jury awards in your state. A local insurance agent should be able to guide you in picking an amount of coverage that will bring you peace of mind.

Employment Practices Insurance. "Ten years ago, this coverage was non-existent; now it's widely available," says Olmstead. And it's also widely needed. If an employee sues your company for sexual harassment, wrongful termination, job discrimination, or any of the other increasingly popular claims alleging failures in your employment practices, this coverage kicks in with money so you can mount a legal defense and, if necessary, pay a settlement or damages. "There should not be a business without this coverage. Get it," says Sterling. He pegs the typical cost for a business with less than 100 employees at about $5,000 per year.

Wheels. "An automobile owned by a business must have a commercial liability policy [covering it]," says Flannagan. Think you can get by simply tacking company cars onto existing personal policies? Don't. In the event of a claim, an insurance carrier might be able to void the policy for misrepresentation. "A commercial policy will cost at least 25 percent more than a personal policy, but you need it," says Flannagan.

However, there's a bonus that comes with commercial coverage. A nominal sum-often just $25 per year, says Flannagan-will let you add on hired and nonowned auto coverage. This is insurance industry jargon that translates into coverage for employees who use their own cars for work-related tasks (remember that pizza pick-up that could have wiped out your business?) and may also cover rental cars when you travel on business (read the fine print or ask your agent to be sure). "Hired and nonowned coverage is a real bargain. And almost every business needs it," says Flannagan.

Professional Liability. "Service businesses need this coverage, but a majority don't have it," says Sharon Emek, CEO of Metro Partners, a New York City company that manages insurance agencies. Professional liability covers cases in which a client experiences disastrous results after following your advice-and sues for damages. General liability policies don't cover these risks, but professional liability coverage does, and it's inexpensive. The peace of mind is worth the few dollars it costs.

Workers' Comp. Most states require this coverage, which offers financial protection against medical payments and disability income for employees injured on the job. Charges are set on a per-worker basis and depend heavily on your industry. Charges for an advertising agency will be nominal (probably less than 25 cents per $100 of payroll), while a roofing company will be charged much more (maybe $20 per each $100 of payroll), says Flannagan.

And if your work force is expanding, you should update your worker's comp coverage as you go along to avoid being hit with a large charge at the end of the year, advises Jones.

Business Interruption Insurance. Picture this: You're insured against fire, so when your business burns down, you'll have the cash to reopen-but it will take you many months to rebuild. Can you afford that delay? About 40 percent of businesses that have their operations interrupted never recover, says Jones. Business interruption insurance is a cure because it provides you with the cash you need for rent, payroll and taxes, and may also cover lost profits. "This is often a neglected but very valuable protection," says Jones.

It's even more valuable, she says, if you buy a low-cost add-on called "extra expense." This coverage makes up the difference between "before loss" business income and the income that comes in after you reopen. It will also cover such "extra" costs as installing new phone lines. This coverage is taken out by only a handful of small-business owners because few know it exists, says Jones.

Electronic Data Processing. Are your computers covered? What about laptops that are off premises? With some property policies-only some-the answers are "yes." In other cases, specialized electronic data processing (EDP) policies cover theft, loss and, possibly, costs incurred when computers break down, says Flannagan. She adds that often, even when policies do cover computer gear, the limits aren't high enough, especially if you or your employees travel with computer equipment. Ask your agent whether you're covered. If you're not, ask about special EDP policies.