Understanding Your Business Insurance Policy
You’ve worked hard to build your business. And whether you are the only employee or have a staff of 10 or more, you want to make sure your business is protected. It is important that you have a basic understanding of your business owner’s policy, or BOP. You don’t have to be an expert, but a little bit of knowledge may come in handy if you have to file a claim. In this module, we will take a look at some of the basic components of your BOP and what to look for as a business owner.
Understanding the BOP’s Declarations and Conditions
The first page of your BOP is known as the Declarations Page, which includes the following information:
- Your policy number
- The name of the insurance company
- The name and address of the name insured (probably you or your business)
- The period the policy is in force
- A brief description of your business
- The location of the insured premises
- The name and order of your mortgage holder (if applicable)
- Limits of insurance for you buildings and business personal property
- Liability coverages for your business
- Any optional coverages that apply to your business
There are many conditions that may apply to your BOP, most of which are standard for any BOP. Some of these conditions specify your obligations under the policy, while others describe the insurance company’s rights. It is important that you read this section of your BOP carefully to familiarize yourself with the various conditions of your policy. It is important to note that additional conditions may apply to other parts of your policy even if they are not listed on the Declarations Page.
Understanding Your Buildings and Business Personal Property Coverage
There are two types of major coverage in BOPs: 1) Buildings (Coverage A), and 2) Business Personal Property (Coverage B). Let’s take a look at the different coverages with more detail.
Coverage A (Buildings)
Coverage A of a BOP typically includes the buildings and structures described in the declarations section. This coverage also protects the following:
- Completed additions
- Indoor and outdoor fixtures
- Any personal property furnished by you as landlord
- Personal property used for service or maintenance of the buildings or premises
- Additions under construction (optional)
- Costs associated with building alterations or repairs (optional)
It is important to point out that you don’t need this coverage if you are a tenant in someone else’s building.
Coverage B (Business Personal Property)
Coverage B of a BOP includes property owned by you and used in your business operations. Generally, your property is covered if it is in or on the described buildings or within 100 feet of your business premises, while in a business vehicle, or out in the open. Additionally, your business is covered for the property of others while it is in your care, custody or control (up to your legal liability).
The Declarations Page will spell out the coverage limits for both types of property. Or, in other words, what your insurer will pay for your losses or damages when you file a claim. These limits are the most that your insurer will pay for your losses or damages when you file an insurance claim. Your BOP will most likely increase your building coverage limit due to inflation. Additionally, there may be seasonal variations as well as specific lists outlining the “property not covered” by your BOP. Be sure you understand your coverage limits and ask questions you may not understand.
Understand Your Liability Coverages
Liability coverage protects your business from claims against your business. The liability coverage portion of your BOP will usually provide the following types of protection: 1) Business Liability Coverage; and 2) Medical Expense Coverage. Let’s take a look at each:
Business Liability Coverage
Under this type of liability coverage, you are generally covered on a “per claim” basis when you or your business is legally liable for the bodily injury, property damage, personal injury or advertising injury of another person or entity.
Medical Expense Coverage
This type of liability coverage covers medical expenses for bodily injury caused by an accident on the premises that you own or rent, or by an accident that results from your business’ operations. In most instances, medical expenses incurred within one year of the accident date are coverage and payments are made without regard to fault or negligence. Additionally, you may also be covered for legal defense and other related expenses (e.g., settlement expenses). There are exclusions to this type of coverage, which may include the following:
- Bodily injury or property damage expected or intended by you.
- Bodily injury to any employee that results from (or is in the course of) employment by you.
- Medical expenses for bodily injury to any person if the injury is covered by workers' compensation, a disability benefits law, or similar law.
- Liquor liability, which only applies if your business manufactures, distributes, sells or serves alcoholic beverages.
In each of these cases, there are “riders or endorsements,” or additional coverage options necessary to make sure you are covered in these areas. Or, you may have to purchase an entirely different type of policy to cover your business in these areas (e.g., Worker’s Compensation Insurance). To make sure that you understand all of the exclusions that apply, you should go over your policy's liability section carefully. It's best to do this with the help of an insurance agent or other professional, since many of the exclusions are complex and very detailed.
Other Insurance Options to Consider for the Mid-Sized and Small Business Owner
Mid-sized and small business owners should consider the following insurance options in addition to a BOP:
- General Liability Insurance. Even if you own a home-based business, you should consider obtaining liability insurance. This type of insurance provides both defense and damages if you, your employees or your products/services cause or are “alleged” to have caused bodily injury or property damage to a third party.
- Property Insurance. You should consider this type of insurance if you own your building or have business personal property, such as office equipment, computers, inventory, tools, etc. This type of policy will protect you in the case of a fire, vandalism, theft, smoke damage, etc.
- Commercial Auto Insurance. Commercial auto insurance protects any vehicles owned by your business. Additionally, you can protect vehicles that carry employees, products or equipment. If you do not have company vehicles, but employees drive their own cars on company business, you should consider non-owned auto liability to protect your business in case your employees do not own their own insurance or have adequate coverage. Most times, “non-owned” insurance can be added to your BOP policy.
- Worker’s Compensation. If you have employees working for your business, you should carry worker’s compensation insurance. This type of insurance covers your business should an employee get injured while on the job. It is important to have this insurance because it protects you from legal complications. In most states, if you provide employees with a W-2, you are required to have worker’s compensation insurance.
- Professional Liability Insurance. Also known as “Errors and Omissions Insurance,” this policy provides defense and damages for failure to or improperly rendering professional services. Your general liability policy does not provide this protection, so it is important to understand the difference. Professional liability insurance is applicable for any professional firm, such as: attorneys, accountants, consultants, notaries, real estate agents, insurance agents, hair salons, technology providers, etc.
- Directors and Officers Insurance. This type of insurance protects the directors and officers of a business against their actions that affect the profitability or operations of the company.
- Data Breach Insurance: If your business stores sensitive or non-public information about employees or customers on its computers, servers or in paper files, you are responsible for protecting that information. This type of insurance provides protection against loss should any breach occur at your business.
- Homeowner’s Insurance: Homeowner’s insurance is one of the most important kinds of insurance you need as it can protect against damage to your home as well as against damage to items inside your home. Additionally, this type of insurance may protect you from accidents that happen at home or may have occurred due to actions of your own.
- Renter’s Insurance: Renter’s insurance protects against damage to the physical property, contents of the property, and personal injury within your home.
- Life Insurance: If you have life insurance, the insurer pays a certain amount of money to a beneficiary upon your death. This type of insurance is very important because it allows for peace of mind in knowing your loved ones will not be burdened financially upon your death.
- Umbrella Insurance: An umbrella policy was created to provide additional coverage when a lawsuit brought over injuries and/or property damage that your business causes exceeds the liability limits on your car insurance, home insurance, boat insurance, etc. This type of insurance has three advantages: 1) it provides additional lawsuit coverage of $1 million or more; 2) it provides added coverage for defense costs, which can easily amount to $100,000 or more; and 3) it provides liability coverage for some lawsuits not covered by your underlying auto or home insurance.
It is important that you speak with a trusted insurance advisor about the specific needs of your business to ensure you are covered properly.
Whether you own a small business, or you own or manage a mid-sized business, it is critical that you have the insurance coverage necessary to keep your business out of harm’s way. Every business is unique so it is important that you speak with a trusted insurance advisor about your specific needs. Check with your financial institution about insurance options available through them, or the insurance company where you have your personal insurance policies. Whatever the case may be, do not delay getting the coverage you need for your business.