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Are you getting the best deal on your business insurance? Whether you’re just starting your business or are established and profitable, it's crucial that you have the right policy at a good price.

At a Glance


Business interruption insurance can be as vital to your survival as a business as fire insurance. Most people would never consider opening a business without buying insurance to cover damage due to fire and windstorms. But too many small businessowners fail to think about how they would manage if a fire or other disaster damaged their business premises so that they were temporarily unusable.

A business that has to close down completely while the premises are being repaired may lose out to competitors. A quick resumption of business after a disaster is essential.

Business interruption coverage is not sold separately. It is added to a property insurance policy or included in a package policy.

 

Do I Need It?


First, discuss with your insurance representative what is covered under your existing business insurance and how much coverage you have. It is not uncommon for business owners to underestimate how much coverage they need.

You and your representative need to thoroughly explore how long you would be shut down because of loss, and how long it would take to rebuild or relocate.
 

More Information


Business interruption insurance reimburses your income that is lost for as long as your business is shut down because of a disaster. It also pays continuing expenses, such as utility bills, that remain in force even if your business temporarily cannot operate. Most policies include a 48-hour waiting period.

Generally there is no limit to this coverage, which frequently is part of a Business Owner Plan (BOP) or your property insurance.

Based on your package, business interruption insurance also may include:

 

  • Contingent Business Interruption — Losses that prevent a vendor from supplying you or customers from accepting your goods or services. This also may cover you if a key supplier suffers a loss even if you do not.
  • Extra Expense — Pays for expenses that would not have been incurred if there had been no property loss or damage such as operating costs for a temporary location.
  • Civil Authority — You may be covered if you suffer a loss at a property you do not own and the civil authorities deny you access. Unlike general business interruption insurance, this coverage typically lasts only a few days.
  • Services Interruption — Covers you if you have to shut down because of other circumstances such as the power company suffering an outage.
  • Ingress/Egress — If customers can’t get into and out of your business because of a loss such as an auto accident that results in emergency street repairs.
  • Civil or Military Authority — If police make your business off-limits because of a crime scene investigation, for example.

Managing Risk and Protecting Your Business

Some days, your business is like the proverbial perpetual-motion machine, seemingly running on its own. Other times, it’s like a crowded schoolyard at recess—so much to keep track of, and so much that can get out of hand.

But it’s rare that one can prevent every mishap in a crowded schoolyard. And no business owner—not even the most vigilant and insightful—can prevent those occurrences that may result in costly legal fees or negative public relations, which have the potential to slow down, hamper, or fully disrupt your business.

The following is just a sampling of events that can occur in almost any business—along with a list of the types of insurance that can help protect your business against the consequences of those events.

Please note that all insurance coverage is subject to the terms, conditions, and exclusions of the applicable individual policies. Marsh cannot provide any assurance that insurance can be obtained for any particular client or for any particular risk.

Occurrence

Business Consequences

How to
Protect Yourself

Slip and fall by customer Company sued for negligence

Legal expenses
Liability Insurance

Pays legal expenses

Assists in legal action

Pays amounts for which you are found liable
Slip and fall by employee Company sued for negligence

Legal expenses
Employers Liability Insurance

Pays legal expenses

Assists in legal action

Pays amounts for which you are found liable
Customer injured/ dies using your product/service Bad public relations

Company sued for negligence

Legal expenses
Product Liability Insurance

Pays legal expenses

Assists in legal action

Pays amounts for which you are found liable
Property/inventory damage due to natural disaster Loss of use of facilities

Loss of income

Loss of buildings and business property
Property Insurance
Business Interruption Insurance

Pay some/all repair and replacement costs

Covers loss of income
Accused of pollution Bad public relations

Legal costs
Pollution Liability Insurance

Pays legal expenses

Assists in legal action

Pays amounts for which you are found liable
Employee injured/killed on the job Company sued for negligence

Legal expenses
Workers Compensation Insurance
(Mandatory in most states)

Compensates employee based on existing statute, which often precludes legal action by employee
Employee on the job causes accident resulting in injury/death or damage Company sued for negligence

Employee is sued for negligence
Liability Insurance

Pays legal expenses

Assists in legal action

Pays employee defense costs

Pays amounts for which you are found liable
Employee steals from your business Loss of stolen items Employee Dishonesty Insurance

Pays the cost of replacing stolen items
Non-employee intentionally damages your business property Property loss

Possible business interruption
Property Insurance

Pays for property loss

Pays for business interruption
Allegations of sexual harassment by employee Bad public relations

Legal expenses
Employment Practices Liability Insurance

Pays legal expenses
Ongoing business expenses during recovery period after an insured loss Must cover expenses despite no revenue Business Interruption Insurance

Pays these expenses

What’s the Next Step?

No one insurance plan can cover all the eventualities that may significantly impair or even destroy your business. It may take a lot of legwork to find the insurers that meet all your needs. You should be sure to:

ASSESS your most critical needs and decide which general insurance category they fall into (property, liability, etc.).

DETERMINE which companies provide the types of insurance you need. Some specialize in certain types of insurance but may not provide others. A number of companies claim to be business insurance specialists, but remember: Your business is different, and it has unique requirements.

  Advantages Disadvantages
One Company Minimum or one contact

One place to file a claim

One person familiar with all your needs
May not provide all the insurance you need

Can arbitrarily set rates

Beholden to its rules
Many Companies Specialists for insurance you need

Competition
Too many contacts

Different procedures

COMPARISON SHOP: Which company provides the insurance your business needs at a price you can afford? Every company’s offerings are different, so be prepared to ask a lot of questions and deal with a number of different agents.

About Insurance Participants

Insurance Providers

An insurer contracts with you to provide you the cash (after stated deductible) to make up for losses that threaten your business. This service is provided in exchange for a fee called a premium. The policy provides the details of what the insurer covers and any exclusions to that coverage. As your business conditions dictate, elements of coverage may change. These changes are reflected in endorsements to your policy.

To do business in your state, an insurer must be licensed by that state. Generally, companies that insure businesses are licensed to operate in most, if not all, states. No insurer can sell a policy in a state in which it is not licensed. In addition, not all services an insurer offers are available in every state.

Insurers may specialize in types of insurance, such as business or commercial insurance or homeowners insurance, or may be large enough to provide them all. Generally, you will want to do business with a provider that has a good track record in insuring your type of business.

While most providers insure most standard business perils, new risks associated with new types of businesses (hi-tech, for example) may not have become mainstream enough for those providers. Other providers might insure a certain peril for a large business, but may not insure the same peril for a smaller business. If they do, it may cost you more.

Your business may have particular coverage needs, but it’s likely that some needs are common to owners of similar businesses. A customized insurance package called program business can identify perils common to a particular industry, such as bed-and-breakfasts or bicycle shops, and be offered to owners of those businesses. In this way, the business owners can be grouped into a risk pool, which can lower their costs of being insured. This type of coverage may not be available from every type of insurance provider.

Because such program business frequently involves products and services from more than one insurer, a program administrator usually is called upon to manage it. Generally, this licensed entity performs the administrative details an insurance provider would handle, including providing insurance quotes, taking care of premium billing and collection, and advocating on behalf of the insured, as well as other functions. Experienced program administrators may be large companies that have worked with many insurance providers over the years.

Insurance Representatives

Insurance representatives are licensed to sell you coverage on behalf of an insurance provider. They must be licensed in the states in which they do business. Most states and most insurers require representatives to undergo a certification process before they are allowed to operate. This process and its requirements vary by state. Don’t be afraid to ask your prospective representative about his or her particular certification.

Agents

An insurance agent represents an insurance provider. He or she may be directly employed by a particular company, or may work alone and be able to procure insurance from a number of companies. There are several different types of agents.

Captive agents: These agents (also known as direct writers) work exclusively for a single insurance provider and receive either a salary or wage from that provider, a commission from that provider for each policy sold, or both. Buying from this type of representative has been compared to buying from a manufacturer’s outlet store, since you are purchasing directly from the company that originated the plan.

Main Advantage: The cost may be lower, since you’re eliminating the middleman.

Main Disadvantage: You as a business owner must do the legwork, including shopping around for the right insurer and fit for your unique needs.

Independent Agents: These representatives often work with a limited number of insurers based on which insurers “appoint” them. In turn, they represent those insurers and are usually compensated by those insurers via commissions and contingent income, which is based on their business volume or profitability. Some agents deal with a variety of coverages, both residential and business. Others specialize only in business coverage.

Main Advantage: Generally offer a variety of plans from a variety of insurers and can compare them for you.

Main Disadvantage: While independent agents have more coverage and insurer options than a direct writer, their options are still limited.

Brokers

Brokers represent the business entity or individual in the insurance transaction and, for the most part, are not “appointed” by the companies with which they work. However, brokers are not tied to the insurers. Their income is derived through fees they charge their clients, or commissions from the insurer, and sometimes a combination of the two. A well-established broker, like a well-established financial advisor, should be able to have access to a network of representatives in the insurance industry as well as other business support services.

Main Advantage: The flexibility in insurer options is substantially greater.

Main Disadvantage: Access by brokers and their firms to companies and brokers’ knowledge of the business is dependent upon the companies’ and brokers’ experience, size, and institutional resources.

Finding the Right Representative

In today’s world, you can enjoy access to an insurance agent from any location—via phone, Internet, fax, or videoconferencing, as well as the traditional Main Street location.

However you interface with your insurance representative, above all, you should be confident this person can enable your business to continue in the event of a catastrophe. You should be sure this person has a firm grasp on the nature of your business and its insurance needs.

A good representative may ask you to fill out a questionnaire specifying your business property, inventory, employees, and financial situation. The more thorough this questionnaire, the better. Before an insurance representative can serve you, he or she must understand your business needs.

After a representative has had a chance to learn about your business, you should schedule a follow-up discussion. Make sure that he or she speaks in plain language with a minimum of jargon. You and your prospective insurance representative should be prepared to discuss these questions:

What types of insurance do you provide?

The best agents or brokers will provide an array of plans and services. Beware of a candidate who keeps coming back with options from a single source.

What is my cost?

Seldom will you be able to secure the perfect insurance package. You and your agent or broker should strive to put together the insurance package that meets your needs at a competitive price.

What are my payment options?

Your business insurance may well be one of your largest expenses. A good representative will work with you to develop payment arrangements that are matched to your cash flow. Flexibility is one key you should look for in seeking out an insurance representative.

Does your insurance expressly cover _______________?

Only you know what can uniquely go wrong with your business, no matter how bizarre. Don’t be afraid to broach these concerns.

What can I expect from you after I place my order?

A good representative will be proactive in monitoring your coverage continuously throughout the term of your policy. This includes making sure the insurer you have been placed with maintains the market security standards as defined by A.M. Best ratings of A- or above. Should your insurer fall below these standards, your coverage should be moved to another provider so that your assets are covered by a financially solvent insurer.

What will you earn from my business with you?

Insurance representatives are generally paid on commissions by the insurer or by fees built into your quote. You may be surprised to learn that many representatives do not disclose their earnings to their clients. You should expect and demand full disclosure (or transparency) of the earnings from your representative. This helps you to know we have obtained the appropriate coverage at a competitive price.

What do I do if I need to file a claim?

A good candidate will understand and be able to describe the claims process for your policy as well as have the resources available to support you in the event of a difficult claim. This isn’t as easy as it sounds. The claims process varies with each type of insurance product and the insurance provider who carries it. Rest assured. Brokers and agents work closely with claims departments and can provide you with the direction and assistance you’ll need should you have a claim.

What knowledge do you have about my type of business or industry that will help you advise me on what kind of insurance I need?

Remember your hiring interviews? This is no different. The insurance representative who can display a particular level of understanding about your industry is going to have insights not only on protecting your business but also on lowering your risk.

How can you help me with risk management to reduce my chances of incurring a loss?

A good representative will have the skills and experience to assist you in properly assessing risk and will provide insurance alternatives to address those risks. In some cases, insurers will inspect your operations and provide recommendations to further mitigate loss.

Now That You Know More

We hope you have found this guide useful, and that it has helped you to realize how important the right insurance plan is for your business’ success.

How can we be of further assistance?

We invite you to contact us to learn more about your business insurance options. You are under no obligation whatsoever.

What is Commercial Auto Insurance?


As a businessowner, you need some of the same insurance coverages for the cars, trucks, vans or other vehicles you use in your business as you do for vehicles used for personal travel.

Your businessowners policy (BOP) does not provide any coverage for vehicles, so you must have a separate policy.

Most states require you to purchase liability insurance for bodily injury and property damage that may result from a vehicle accident occurring while you or someone from your organization is driving on business. Many states also require you to have uninsured/underinsured motorists coverage and/or medical payments coverage (known as personal injury protection (PIP) in some states). At your option, you can purchase physical damage coverage for vehicles your business owns, leases or hires.

The business auto coverage form (BACF) is the most commonly used contract for providing business auto liability insurance. Although the form refers only to “autos,” autos are defined to include cars, trucks, trailers, van, or other vehicles designed for use on public roads.

Each vehicle you use in your business can be separately “scheduled,” or listed on your policy along with corresponding coverages. In other words, you can choose different coverage for your various vehicles, depending on the vehicle’s characteristics and the coverage you need for it.

Do I Need a Business Auto Policy?


Your insurance agent will ask in detail how you use vehicles in your business; who will be driving them; whether you own, rent or lease; and whether you and your employees are likely to be driving their own cars for your business. The answers to these questions will indicate the types of coverage you need.

In general, only a BACF can provide the level of liability protection—the recommended minimum is $500,000—that even a small business needs to cover the potential damages in a serious accident.Will My Personal Auto Policy Cover Business Use?

Your personal auto policy provides coverage for some business use of your vehicle. Similarly, your employees’ personal auto policies cover some business use of their vehicles too.

A personal auto policy is unlikely to provide coverage, however, if the vehicle in question is used primarily in business. It will not provide coverage for any vehicle owned by a business.

The personal auto policy, whether yours or your employee’s, may not have enough coverage to protect your business.

For example, imagine you are driving your car to a business meeting while having an intense conversation on your cell phone with one of your sales reps. By the time you notice a van ahead of you has stopped to make a left turn, it’s too late to avoid a collision. The driver and five passengers are injured in the accident. They sue you and your company.

If you have only a personal auto policy (PAP), your PAP insurer will probably defend you personally and pay the claim—up to the policy limit. Your PAP insurer will not defend or pay damages on behalf of your business, however.

For a very serious accident or one with a number of injured people, your PAP may not be enough to cover the damages. In that event, the injured parties would likely be able to collect damages from your business.

If you or your employees are driving personal vehicles on business and relying on your personal auto policies, be sure you and they have sufficient liability coverage to protect your business in the event of a serious auto accident.

Do not expect to rely on a personal umbrella policy for any claims that arise from business use of a vehicle. Typically, the personal umbrella excludes all claims occurring in the course of a business endeavor.

The scope of coverage in the business auto policy can be either broad or narrow, depending on your choice of options. It could, for example, be written to apply only to one specifically described auto. Or, as an example of very broad coverage, the policy could be written to apply to the named insured's liability exposures arising out of the use of any auto.

In general, you have three options for which vehicles you choose to cover:

  1. autos your business owns

  2. all autos your business owns, hires or leases

  3. all autos including those that your business does not own, hire or lease

Most businesses should buy the third type, since that is the only coverage that protects the business from liability when an employee or owner is driving a personal vehicle on business.

Be Sure the Right Insured Is on the Policy


An insurance contract usually requires that the owner of a vehicle be named in the policy declarations as the “principal insured.” If you drive any of the same vehicles for both business and pleasure, make sure you tell your insurance agent who holds the vehicle’s title, you personally or your company. This will avoid problems if you need to file a claim or a claim is filed against you.

Physical Damage Coverage


The three types of physical damage coverage for motor vehicles are collision, comprehensive and specified perils.

  1. Collision coverage

    is for losses that result from the collision of a covered vehicle with any object or from the vehicle overturning.

  2. Comprehensive coverage

    is the broadest form of auto physical damage coverage, because it provides for losses from any cause except collision and overturn (insured under collision coverage) and a few policy exclusions, such as wear and tear, mechanical breakdown and acts of war. Among the causes of loss covered under comprehensive are flood, fire, theft, glass breakage, falling objects, explosion, earthquake or colliding with a wild bird or animal.

  3. Specified perils coverage

    covers many of the same perils as comprehensive, but because it covers only “named” perils—those specifically named in the policy—it has a lower premium. It is sometimes referred to as “fire, theft and combined additional coverage” (CAC)

If your business has a large fleet of vehicles, over time, it may be more costly to insure the fleet for physical damage than it is to retain the risk, that is, pay for any physical damage directly rather than by insurance.

Regardless of how many vehicles your business has, it may be cost effective to carry physical damage coverage only on the newer or more valuable vehicles.

What the Insurer Will Pay for Physical Damage


The amount an insurer will pay on an auto physical damage or theft claim depends on the market value, known as actual cash value (ACV), of the vehicle at the time of the loss. The most that will be paid is the lesser of the ACV or the cost to repair or replace the vehicle with one of like kind and quality. In the event of a total loss, the ACV is adjusted for depreciation and the vehicle’s physical condition. Thus, the older the vehicle and the worse its condition, the more its value has depreciated and the less the insurer will pay.

The insurance company may pay you the value of the loss in money or, at its choice, it may repair or replace the damaged or stolen vehicle. In case of a theft, it may return the stolen vehicle to you with payment for any damage caused by the theft.

Liability Coverage


The liability portion of the BACF obligates the insurer to pay all damages the business is legally obligated to pay because of bodily injury or property damage caused by a covered vehicle—up to the policy limits.

When there is an auto liability lawsuit against the insured business, where the loss is covered by the policy, the insurer is obligated to defend the business or settle the lawsuit. The decision whether to contest or settle the case is entirely at the insurer’s discretion.

The insurer’s duty to defend or settle ends when the insurance policy limits are exhausted. By way of example, consider that three people are injured in an accident in which you or one of your employees is at fault. The policy limit is exhausted in judgments or settlements for the first two claimants. That leaves your business liable to pay the cost directly should there be a judgment in favor of the third person.

Punitive damages may be awarded in cases of gross negligence, such as drunk or reckless driving. By law in a number of states, a BACF cannot cover any punitive damages for which you may be liable. Even in states where coverage for punitive damages is allowed, your policy may exclude them.

How Much Liability Coverage Does My Business Need?


Many insurers recommend $1,000,000 as the standard business auto coverage limit, and $500,000 as the minimum that is sufficient. The higher limit does not add a great deal to the premium considering the amount of additional protection it provides.

What is a “Combined Single Limit”?


Unlike personal auto policies that have separate limits for bodily injury and property damage liability (split limits), the BACF commonly has a combined single limit (CSL) for the limit of insurance. This creates higher limits for both bodily injury and property damage coverages, including per occurrence limits. Although you can purchase other limits, the most common commercial automobile CSLs for a small business are $500,000 and $1,000,000.

Does a Business Umbrella Cover Autos?


If you have a business umbrella policy, it would provide protection for owned, hired and non-owned autos, if the umbrella shows the auto as an underlying policy for which it provides coverage.

What Coverage Do I Need if My Employees Use Our Company Vehicles for Personal Business?


Some businesses let employees drive company vehicles home and use them for personal purposes in the evenings or on weekends. So long as these vehicles are scheduled on your business auto policy and the appropriate “coverage auto symbols” are shown on the declarations page, you have coverage for owned autos taken home by employees.

Employees’ own personal auto policies will not cover their use of a company car unless the car has been specifically borrowed as a temporary replacement for the employee’s own car while it is unavailable. In addition, employees who lease, hire, rent or borrow autos for their personal use are not covered by their employer’s business auto policy.

When Your Business Vehicle Is Also Your Personal Vehicle


Sometimes employees or executives of a company or other persons who are supplied with a vehicle owned by the company have only that vehicle. They do not own a personal vehicle nor do they obtain personal automobile coverage. The BACF does not cover personal use of the vehicle in this situation. To close this coverage gap, you need to add the Drive Other Car Coverage Endorsement to your BACF. This provides insurance while the named individual or a member of his or her family is driving a car borrowed from a third party.

What Coverage Do I Need if Employees Drive Their Personal Vehicles on Business


If your employees drive their own cars for business purposes—to visit clients, for example—your business could wind up liable for property damage and bodily injuries resulting from a traffic accident for which an employee was at fault.

Sometimes business owners don’t notice they have this exposure. Consider these scenarios:

  • your office manager stops by the office supply store to pick up some items for work on her way back from lunch

  • on the way home, a supervisor stops by a client’s office to leave a product sample

  • while on vacation, a salesperson driving his personal vehicle makes a brief stop to visit a customer

These are all situations where a business can find itself liable for an auto accident with damages higher than the policy limit of the employee’s personal auto policy.

To protect your business from these liability risks, you can add the Non-owned Auto Liability Endorsement to your BACF. It provides coverage when employees drive their own vehicles on business. This BACF coverage is excess over the limits provided by the employee’s personal auto coverage. If the employee’s limits are low—such as only to satisfy state financial responsibility limits—then it is critically important for the business to have this non-owned auto protection.

You Are Liable if You Allow a Bad Driver on the Road


You are legally liable when you allow someone to drive one of your vehicles. If you fail to take reasonable steps to determine that the driver is qualified to drive or, if you allow someone to drive whom you know has a poor driving record and that person causes an accident, you could be liable for negligent entrustment. Any damages awarded for negligent entrustment would be on top of liability for the accident itself.

A case of negligent entrustment arises when someone allows another person to use a vehicle knowing or having reason to know that the use of the vehicle by that person creates a risk of harm to others.

Your organization is responsible for verifying a driver’s qualifications before entrusting him or her with a vehicle. Do not entrust a bad driver with a vehicle—not even for a quick errand.

Keeping Premiums Down


The best way to keep your BACF premiums down is to avoid claims. Driving safety should be emphasized. Drivers should not be so pressured to produce that they feel compelled to drive unsafely. All vehicles should be well maintained. Ask your agent whether your insurance company has business auto safety resources that you can use to help your organization be accident free.

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Why do I Need Liability Insurance?

Good liability risk management can reduce the chances that your business will be sued, but it can never eliminate the risk entirely. You or a member of your organization can make a mistake that injures someone or damages property. Your mistake could harm the reputation or interfere with the privacy of a customer, client, competitor or member of the general public. When such injuries occur, you may be legally liable to pay damages to someone who suffers a loss due to your actions or inaction.

Depending on the degree of harm and the number of people injured and/or value of property damaged, a lawsuit could bankrupt your business. Even if your organization is ultimately cleared of any wrongdoing, a determined plaintiff can keep you tied up in legal proceedings for a long time, at significant cost to defend yourself. Liability insurance pays the cost of your defense and protects your assets.

How are Liability and Damages Determined?

Everyone in society has a duty to take reasonable care that his or her actions do not injure others. The same rule applies to business entities. Not repairing a pot hole in a parking lot, not lighting a dark stairway, failing to train workers how to do their jobs safely and legally or failing to provide directions for the safe use of a product can constitute negligence if a client, customer or member of the general public is injured as a result. The legal meaning of negligence is failure to exercise reasonable care.

If the parties do not agree to settle a liability lawsuit, there will be a trial. Or the parties may agree to use some alternative means of dispute resolution, such as arbitration, and be bound by the arbitrator’s ruling.

The law of the state where the lawsuit is filed sets the rules for the determination of liability and damages. The amount of damages imposed in any particular case is, of course, in part a function of the economic losses the plaintiff can prove he or she has endured due to the defendant’s negligence. In some states, plaintiffs may also be awarded damages for pain and suffering and other noneconomic losses.

What Kind of Liability Policy Should I Get?

For small businesses, the most efficient and least expensive way to purchase liability insurance is usually as part of the businessowner policy (BOP), which combines property and liability insurance in one contract. Alternatively, a business may purchase a commercial general liability (CGL) policy. You should discuss with your agent which policy is best for you.

What Types of Damages are Covered by the BOP?

Your liability insurer will pay damages that you are legally obligated to pay as a result of “bodily injury,” “property damage” or “personal and advertising injury” up to the policy limits and subject to your deductible. Punitive damages are generally not covered, although there may be some exceptions.

Bodily injury means injury, sickness, disease or death; it may include injuries that are emotional or mental, such as post traumatic stress syndrome or humiliation.

Personal and advertising injury includes libel, slander or any defamatory or disparaging material or a publication or utterance in violation of an individual's right of privacy; infringing the privacy or copyright rights of another in your advertisement; wrongful entry or eviction or other invasion of the right of private occupancy; and false arrest or wrongful detention.

What is Covered by "Medical Expenses?"

For the most part, your BOP liability coverage is for situations where a third party claims you were negligent and sues for damages. The medical payments coverage is an exception, as it pays medical expenses for bodily injury to third parties that occurs on premises you own or rent or as a result of your operations regardless of fault.

People are less likely to sue you if they receive prompt medical payments to cover the costs of any injuries they have sustained for which they could claim your business or organization is liable. Medical payments coverage gets the payments to them without their having to file a lawsuit or go to court and engage in a protracted claims process. This coverage also allows your insurer to pay small nuisance claims without the need for costly legal expenses.

People who commit insurance fraud usually know that for claims below a certain amount, your insurer prefers to pay the claim or settle rather than incur the legal costs to defend against the claim. If you have a relatively high limit for medical payments, your insurer can more readily dispose of a lot of smaller claims. However, submitting multiple medical expense claims could negatively impact your insurance claims history. If you are in a business with significant traffic from the public, such as a retail store, be sure to discuss the possible consequences of your medical payments limit on your claims history with your agent.

Who is Insured?

BOP liability coverage insures parties, such as a sole proprietor or partners, named in the policy Declarations, but only with respect to their duties on behalf of the business. The spouses of sole proprietors or partners are also covered. If your organization has officers and directors, they are insured, as are your stockholders, but, again, for all parties, only with respect to their duties or liabilities in connection with the business. Employees and volunteer workers are insured for acts committed within the scope of their employment in your business.

The Insurer's Rights and Duties

  • The insurer may investigate any event that has led to a liability claim.

  • The insurer has a duty to defend the insured in any lawsuit seeking damages for a covered type of injury or damage.

  • At its discretion, the insurer may settle any claim or lawsuit.

  • The insurer’s right and duty to defend and pay claims ends when the applicable limits of insurance as specified in your policy Declarations are used up in the payment of judgments, settlements or medical expenses.

  • The insurer bears the cost of providing a defense; this cost is not part of your policy’s coverage limits.

What is an "Occurrence?"

Your liability policy often refers to an “occurrence.” The ISO BOP (1) defines an “occurrence” as “an accident, including continuous or repeated exposure to substantially the same harmful conditions.” An accident is an event that causes injury to the body, property, person or reputation of a third party whom you did not intend to injure. (The designation “third party” means a party other than you or the insurer. It is a third party who claims or sues for damages as a result of an occurrence. You are the first party and the insurer is the second.) An explosion or a car accident are each examples of an occurrence that could result in bodily injury and/or property damage.

The phrase “continuous or repeated exposure to substantially the same harmful conditions” in the definition of occurrence makes clear that the insurer covers situations where harm was done because of an ongoing situation. For example, a person who lived near a commercial chicken farm might claim to have developed allergic asthma as a result of breathing dust from the chicken farm over many months.

When is an Occurrence Covered?

Property damage or bodily injury is covered when it meets these three conditions:

  • It is caused by an “occurrence”

  • It is in the coverage territory

  • It is during the policy period

Coverage territory

is for the most part confined to the United States, including its territories and possessions and Puerto Rico and Canada. It extends to international waters or airspace only when the travel is between destinations in the U.S., including territories and possessions, and Puerto Rico and Canada.

There are three situations, however, when the coverage territory extends to injuries or damage anywhere in the world, so long as the lawsuit is brought in the U.S. and it involves:

  1. goods or products you made or sold in the United States, including its territories and possessions and Puerto Rico and Canada.

  2. the activities of someone from your business in another part of the world who is away from his or her home in the United States (including its territories and possessions) and Puerto Rico or Canada only for a short time.

  3. personal or advertising offenses facilitated through the Internet or similar electronic communications.

Policy Period

Policy comprises the dates on which the coverage begins and ends. The standard form of liability policy covers only injuries and damages that you (or an authorized employee) come to know about within the policy period.The policy covers personal and advertising injury only when the offense was committed during the policy period.

If there are further developments regarding an incidence of bodily injury or property damage that first becomes known to you and about which you give notice to your insurer during the policy period, that insurer continues on that claim beyond the policy period.

For example, Mae Hoover, a customer, sues you after she slips on ice in your parking lot and breaks a wrist. You turn the suit over to your insurer, ABC Insurance. A few months later, you change your liability policy to XYZ Insurance. A month after you go with XYZ, Mae amends her original lawsuit. She now contends that her wrist has not healed properly and seeks additional medical payments for the cost of surgery and higher damages for her lost income, expenses to her family because of her injury and for pain and suffering. Even though ABC is no longer your liability insurer, Mae’s claim and the new developments continue to be handled by ABC, the insurer who handled the claim at the time it originally occurred.

How are Policy Limits Applied?

The limits of your coverage are set forth in your policy’s Declarations.

The policy describes how the limits will be applied. These sums are the most the insurer will pay regardless of the number of persons or organizations making claims or bringing suits against you.

The most the insurer will pay:

  • for all damages because of all bodily injuries, property damage and medical expenses arising out of any one “occurrence” or

  • for personal and advertising injury sustained by any one person or organization is the liability and medical expenses limit shown in the Declarations.

Depending on the circumstances, a single occurrence can produce many costly liability claims. If a fire due to your negligence spread from your building to destroy several neighboring structures and caused a death, the value of all the claims against you could be significant even though there was only one occurrence.

In addition to these limits for one occurrence, the policy has aggregate limits. These apply when you have more than one occurrence that results in bodily injury and/or property damage during the policy period. Aggregate limits are divided into two sections:

  • The most the insurer will pay for all bodily injury and property damages that result from the products-completed operations hazard is twice the liability and medical expenses limit.

  • The most the insurer will pay for all bodily injury and property damages that result from occurrences other than those included under the products—completed operations hazard plus medical expenses plus all covered personal and advertising injury is twice the liability and medical expenses limit.

For higher coverage limits, you will need an umbrella policy.

What is the Products-Completed Operations Hazard?

If you manufacture, sell or distribute any product(s), there is the possibility that the product could cause bodily injury or property damage for which you would be legally liable. Even if you only sell or distribute the product, you could still be liable depending on the circumstances.

If you provide a tangible service, such as installing heating systems, there is the risk that negligence could result in damage caused by your work after your work is done (a “completed operation”). For example, a contractor installs a roof and three months later it leaks and causes property damage.

The products-completed operations hazard covers each of the above risks under certain conditions.

When a product is involved, to be covered, the injury or damage must occur away from your own premises—unless your business includes the selling, handling or distribution of your product for consumption on premises you own or rent.

With respect to property damage as the result of completed operations, “property damage” means physical damage to tangible property, including loss of use of that property. Intangible property, such as digital data, would not be covered.

Damage to Premises You Rent

If you rent or lease a building or part of a building, you could have a fire liability risk. Should a fire caused by your negligence burn your rented premises and other property owned by your landlord, you could be liable for the damage. If you rent or lease business premises, be sure to discuss with your agent how much insurance you need to cover your fire liability exposure.

What is Not Covered?

A number of situations, people and circumstances are excluded from the standard BOP liability coverage. There are various reasons. Injuries to employees are excluded because employees are usually covered for work-related injuries by workers compensation insurance. Liability for pollution or in connection with professional services is excluded because only some businesses need that coverage and it can be purchased separately. Auto liability is excluded because it is covered by a businessowners auto policy. Damage to your own property is excluded because it is covered by your property insurance.

The standard policy form does not provide coverage for a recall of products, work or impaired property due to a suspected defect, deficiency, inadequacy or dangerous condition. You may purchase a Product Withdrawal Expense Endorsement to cover some of this risk.

Your Duties Regarding any Claim

By acting quickly, your insurer can often settle a liability claim and head off a costly lawsuit. For this reason, insurers require that you inform them as soon as practicable when you are aware of an occurrence that may result in a claim even if no lawsuit has been filed. As part of your insurance contract, you are required to give this notice and to provide information about the occurrence, including names and addresses of anyone injured and any witnesses, as well as the nature of any injuries or damage.

You agree to cooperate fully in the investigation of the incident.

Other than for first aid, you will not have insurance coverage for any payments or expenses you make or agree to make without the insurer’s consent.

Endorsement to BOP Liability Coverage

Endorsements are additions to insurance contracts that change the coverage. Endorsements can add liability coverage for specific circumstances to the BOP. Among those most commonly added are:

  • Employment Practices Liability
  • Liquor Liability
  • Employee Benefits Liability

Employment Practices Liability Endorsement

If your business has even a few employees, you cannot entirely avoid the risk of a lawsuit charging you with some type of employment discrimination, whether based on sex, race, age or any one of a number of other characteristics. This is typically one of those exposures—much like the exposure to theft by trusted insiders—that employers tend to think “won’t happen here.”

Unfortunately, even if you have an excellent risk management program, an employment practices lawsuit can happen in any business. For example, you may have to fire a worker for poor job performance only to find he or she files a lawsuit charging that the real reason for the termination was race, religion, age or some other protected characteristic. Regardless of whether the employee can ultimately prove the charges, you may be tied up in a legal defense for a long time. Even if you think you’ve done nothing wrong, you could be found liable for discrimination and responsible for the payment of a large damage award.

The Employment Practices Liability Endorsement provides coverage up to the policy’s supplemental limit (subject to the deductible) for violations of seven different federal antidiscrimination statutes named in the endorsement, as well as for violations of similar state and local statutes.

You choose a supplemental limit and deductible for this coverage that is separate from any of your other policy limits. As part of the contract, you give the insurer the right to defend against any claim. The insurer may offer to settle a claim. If you do not consent to the settlement, the most the insurer will pay on the claim is the amount it offered in settlement. Liquor Liability Endorsement

People who are intoxicated can harm others. If your business involves serving liquor for a charge or if a license is required for you to serve liquor (even if you do not charge for it), your BOP liability coverage does not cover your liability exposure—the possibility that someone you served could cause a car accident, for example. The Liquor Liability Endorsement provides coverage for bodily injury or property damage for which an insured may be held liable by reason of any of the following:

  • Causing or contributing to the intoxication of any person

  • Furnishing alcoholic beverages to a person under the legal drinking age or under the influence of alcohol

  • Violating any statute, ordinance or regulation relating to the sale, gift, distribution or use of alcoholic beverages

Employee Benefits Liability Endorsement

If you have employee benefits programs, there is a risk you will be sued by employees or retirees charging there was negligent administration and management of the benefit plan. Even though you may use a professional benefits administrator, the personal assets of your in-house plan fiduciaries may be at risk if they are responsible for errors, omissions or breach of their fiduciary duties. The Employee Benefits Liability Endorsement covers this liability exposure.

Special Coverages

Depending on the nature of your business and its risk exposures you may need one or more of the following types of liability coverages:

  • Umbrella Liability Insurance
  • Errors and Omissions Liability Coverage/Professional Liability Insurance
  • Directors and Officers (D&O) Liability Insurance

Umbrella Liability Insurance

A big difference between property and liability risks is that you can put a value on the property you have at risk, but there is no way to predict the amount of damages you could be required to pay as the result of a catastrophic accident. If, for example, you were found liable in a school bus accident that harmed or killed many children, the damages could be in the millions of dollars.

Umbrella liability—also known as excess liability—insurance provides extra protection for catastrophic events. The primary policies are called “underlying” policies and are specifically listed, along with their limits, on the umbrella policy. Typically, the underlying policies are your primary general liability, auto liability and employer’s liability policies. The umbrella coverage starts to pay when a covered loss exhausts the primary policy’s per occurrence limit.

Most umbrella policies exclude employment practices liability, professional liability, product recall coverage, workers compensation, and coverage for asbestos-related claims, pollution, war and terrorism.

Errors and Omissions Liability Coverage/Professional Liability Insurance

If you provide any type of advice, expertise or professional service, you risk being sued by a customer, client or other party who claims he or she was injured due to your negligent act, error or omission. This type of negligence is sometimes referred to as “malpractice.” Professional liability insurance, also called errors and omissions liability insurance, pays the cost of your defense and any damages awarded (up to policy limits). Insurance companies have developed many specialized policy forms that respond to the individual risks characteristic of particular professions and services.

Directors and Officers Liability Insurance (D&O)

Directors and officers liability insurance protects past, present and future directors and officers of a for-profit or nonprofit corporation from damages arising out of alleged or actual wrongful acts committed in their capacity as directors and officers. Some policies extend the same coverage to employees. The policies provide protection in the event of any actual or alleged error, omission, misstatement, misleading statement or breach of duty.

Many policies will also cover the corporate entity for claims involving the sale or purchase of the company's securities. A D&O policy does not cover exposures properly covered under other policies, such as bodily injury or property damage, that are covered under general liability.

How Much Liability Coverage Do I Need?

The amount of liability coverage a business needs depends on perceived risk. You should first consider the amount of risk inherently associated with your business. For example, a business that manufactures or distributes power tools is at a greater risk of being sued than one that distributes towels and would therefore need more liability insurance. You can usually get a good sense of lawsuits involving your type of business through your trade association. Ask your agent for help assessing your liability risk.

Keeping Premiums Down

As with other types of insurance, the general rule for liability insurance, from an insurer’s perspective, is that your past claims history is a good predictor of your future claims. The greater the risk of future claims, the higher the premium. Good liability risk management is critical both to keeping premiums under control and avoiding losses.

Higher deductibles are another means of lowering premiums. Make sure that in the event of a loss, you can afford to pay the deductible you select.

There are two types of liability coverages: occurrence and claims made. Most liability insurance is written on what insurers call an “occurrence” basis. With this type of coverage, you are contractually obligated to notify the insurer as soon as you become aware that an event—that is, an “occurrence”—has caused, or seems likely to result in, bodily injury or property damage for which you may be legally liable. That insurer stays with the claim until it is resolved, however long that may be. Even if you later buy liability coverage from a different insurer, the insurer to whom you originally reported the occurrence stays with the claim.

With “claims made” liability coverage, your current insurer covers all the claims you make during the policy’s coverage period, even those claims due to injury or damage that is the result of an occurrence prior to the current policy period. This type of policy is most prevalent in areas such as professional liability insurance, where there can be many years between an occurrence and the recognition of damage or bodily injury. It may, for example, be years after an architect designs a building before part of the building collapses and the owner sues the architect claiming that the collapse was the result of errors in the design. With a claims made policy, the insurer that insures the architect for professional liability at the time the claim is made covers the claim.

(1) Includes copyrighted material of Insurance Services Office, Inc. with its permission. Copyright, Insurance Services Office, Inc., 2004.

© Insurance Information Institute, Inc. - ALL RIGHTS RESERVED -

Role of Property Insurance


Insurers are in the unique position of having encyclopedic information about the many different ways your business property could be damaged or destroyed, from fire and flooding to embezzlement. Property is also vulnerable as a result of a variety of other events, such as electrical surges, accidental activation of a chemical sprinkler system or a computer virus.

Because insurers know so much about what can go wrong, they can provide your business with the insurance coverages your particular type of enterprise requires. Without appropriate insurance, property losses can easily cause the entire enterprise to fail.

The purpose of property insurance for the small business is to provide critical financial assistance in the event of a loss so that the enterprise can continue to operate with as little disruption as possible.

Property insurance alone is seldom enough, however. It should be but one part of an overall risk management and disaster recovery plan. On average, businesses that devote resources to risk reduction and risk control have fewer insurance claims. These firms generally have more insurers competing for their business, so that they are able to find coverage more easily and often at a lower price than enterprises which have more losses.

We cover here, in a general way, many of the more common types of property coverage. You can obtain full information about your particular policy by reading the policy itself and discussing your coverage needs with your agent or insurance company.

Property Insurance Policies


Insurers offer small business owners a huge variety of property insurance policies. There are policies that cover only a single peril or cause of loss, such as a fire insurance policy, a crime policy or an electronic equipment policy. The particulars of the policies vary from insurer to insurer.

And there are policies that include several different coverages in a single “package.” The majority of small business owners find it more convenient and economical to purchase a package policy which provides protection against many types of loss in a single policy. Insurers may create their own insurance policies. Many rely in part on a policy format from ISO. This policy is generally referred to in the insurance industry as the businessowners policy (BOP), The discussion here is based on provisions of the 2004 revision to the BOP.

Property Coverage in the BOP


The BOP covers any buildings the business owns and much of the property needed to run the business.

Specifically, the policy covers:

  • Buildings as named in the policy Declarations, generally the first pages of the policy. Structures are covered as well as permanently installed fixtures, machinery and equipment; outdoor fixtures; items you use to maintain or service the building, such as appliances; and additions under construction. To keep up with the increasing cost of rebuilding, the policy’s limit of insurance for covered buildings will automatically rise by a set percentage each year. Alternatively, you can choose to insure buildings for their full replacement cost. Be sure to discuss with your agent whether you should purchase the standard building coverage or replacement cost coverage.
  • Building Contents, although there are a few exceptions. The policy covers most property on or near the business premises that is used in the business. This would include such things as machinery, computers, raw materials or inventory. You also have coverage for any leased property, which you are contractually obligated to insure.
  • Property of others that is in your care, custody and control to the extent you are legally liable for that property. This coverage is particularly important to a business, such as a computer repair shop, that earns revenue from servicing property of others.

What About a Business That Leases or Rents its Premises?


If your business rents or leases its premises, your lease should describe your obligations with respect to insurance. If you are the sole tenant, you may be responsible for insuring the building. You may be responsible for continuing to pay rent even if the building is destroyed. Should a fire destroy the building, will the landlord or the tenant be responsible for debris removal? You may want to review your lease with your insurance agent to be sure your property insurance covers your obligations.

For those who rent, the BOP provides coverage for tenant’s improvements and betterments. These are fixtures, alterations, installations or additions that you have put into the space that cannot legally be removed from the landlord’s premises.

Covered Causes of Loss


Insurance contracts always describe in some way the perils being insured against. One way of writing the BOP is to name the covered causes of loss. Another is to use what insurers may call the “special form,” which states that all causes of loss are covered except those that are excluded by name.

In the BOP format that names covered causes of loss, those included are fire, lightning, most explosions, windstorm or hail, smoke from accidental fire, aircraft or vehicles (not including those owned or operated by the business itself), riot or civil commotion, vandalism, automatic sprinkler leakage, sinkhole collapse, building collapse, volcanic action and certain types of damage from water or other liquids.

Causes of Loss that Aren't Covered


A number of events that can cause property loss are not covered by the basic BOP.

There are a variety of reasons. Some causes of loss, such as employee dishonesty or breakdown of a steam boiler, are excluded from the basic BOP, but you can add coverage to it by payment of an additional premium. Some events, such as wear and tear, aren’t covered because they don’t meet the basic criteria for insurance of being accidental and unpredictable. (Regular maintenance of property is your responsibility.) Coverage for other events, such as flood and earthquake, aren’t needed by all businesses. Separate policies are available. Nuclear reaction and war are considered to be uninsurable, since insurers cannot predict with any degree of accuracy the frequency of such events or amount of damage likely to occur.

The following are some of the other events that can cause damage that are usually excluded from the basic BOP: power failure (except when it causes loss or damage to computers and electronic data); failure of computer hardware or software; robbery and burglary; most instances of pollution; and changes in humidity or temperature. Also excluded is coverage for missing property where there is no physical evidence to show what happened to the property, such as with a shortage discovered after taking inventory.

Be sure you understand what causes of loss are and aren’t covered by your policy. Discuss with your agent the extent to which your business risks a loss from any of these events and whether you should purchase coverage for these particular risks if it is available.

Property that isn't Covered


The basic BOP excludes some types of property from its coverage. For many of these items, such as money and securities or outdoor signs, insurance is available as an addition to the BOP by paying an additional premium. For items such as motor vehicles or boats, however, you will need to purchase a separate policy. Excluded property usually includes:

  • any vehicles subject to motor vehicle registration, including aircraft, autos and trucks
  • bullion, money or securities
  • land, water, growing crops, lawns, trees, shrubs or plants
  • outdoor fences and signs not attached to the building

You should discuss with your agent what property is and isn’t covered by your policy, as well as whether you may need to purchase additional coverage for some types of property excluded from the basic coverage. Since most businesses, for example, own or use vehicles, they should consider business automobile insurance.

Is there any Coverage for Pollution?


Coverage for pollution is limited to cleaning up pollution that was caused by a covered cause of loss occurring during the policy period. For example, if vandals opened drums of a toxic chemical and poured it on the ground, the insurer would cover the cost of the clean up (up to the policy limit), since vandalism is a covered cause of loss. On the other hand, if the toxic chemical slowly leaked into the ground because the drum was defective and had a tiny hole in it, you would not have coverage under the BOP. A defect in the drum is not a covered cause of loss under your property policy. (For help with cleanup costs in this hypothetical situation, you might find compensation from the liability insurance of the drum manufacturer or seller of the chemical.)

Business Income and Extra Expense Coverage


If your main business premises are destroyed along with much of the property you used to operate, this loss, though devastating, may be only just one part of the total.

Every day you are unable to operate is a day of lost income, for you personally and for the business and of lost business opportunity. If the property damage or loss prevents you from providing products or services to your customers or clients, they may go elsewhere and many of them may never return. If you are to keep your employees, you must continue to pay their wages even when the business is generating much less than normal income. It is little wonder that most businesses which lack insurance to cover these potential ongoing economic effects of a serious destructive event are unable to survive. Research by the Institute for Business & Home Safety shows that at least 25 percent of those businesses that close following property loss events never reopen.

Prudent businesses have disaster recovery plans that include insurance to cover lost income and extra expenses that result from a covered loss.

Because coverage for lost income and extra expenses is so important to continued business survival, it is part of the standard BOP. The policy covers actual loss of net business income that would have been earned had it not been necessary to suspend operations due to a covered cause of loss. The policy also covers continuing normal operating expenses, such as utility payments and payroll.

The insurer will pay, as well, extra expenses that you incur to avoid or minimize suspension of operations. Such extra expenses often include costs to relocate, to equip and to operate a replacement premises, as well as expenses to repair or to replace property and to restore lost information on damaged valuable papers and records.

Generally, these coverages are triggered only when you have a direct loss from a covered cause of loss. If the cause of loss is an earthquake, there will be no coverage. If your business must be closed due to someone else’s loss, there is no coverage. For example, your business could be an accounting firm located on the third floor of a large building. If there is a fire on the ground floor of the building, which does no damage in your office but causes the building to be shut down for repairs for a month, your BOP would not provide coverage for lost business income and extra expenses, since you did not have a direct loss yourself.

Seasonal Variations in Value


Your business may be one of the many that experiences seasonal variations in the value of inventory, raw materials and other items. A complete loss at the height of the summer if you sell ice cream or during the winter holiday season if you have a retail operation may be several times larger than during the rest of the year. To protect against a loss in the busy season, the BOP provides for an automatic 25 percent increase in your policy limit for business personal property. The seasonal escalator applies only if you have insured your business personal property to at least 100 percent of your average monthly values during either the 12 months preceding the loss or the period of time you have been in business as of the date of the loss, whichever is less.

Other Losses and Expenses Covered by the BOP


The BOP includes numerous other coverages to protect your business from a variety of accidental events that could wreck havoc on your financial well being. These include:

    Actions of Civil Authorities – Sometimes physical damage to property other than your own leads the police or other civil authorities to prevent you from having access to your own premises. If the loss at the other property is due to a cause covered by your policy, then the insurer will pay for your actual loss of business income and any necessary extra expense caused by the action of the civil authorities.

    By way of example, assume you own a hair salon. An explosion has significantly damaged other businesses near you, although your own premises suffered no physical damage. The police close off the whole block for a week, preventing your business from operating from that location. Your insurer will cover your lost income and extra expense caused by this action.

    Bogus Money Orders and Counterfeit Money - Should your business make the good faith mistake of accepting bogus money orders or counterfeit money, the insurer will pay up to $1,000 to cover the loss.

    Business Income from Dependent Properties – This coverage applies when your business is dependent on another operation and the other operation is unable to conduct its usual business because it has been damaged by a cause of loss that is covered by your policy. Should you suffer a loss due to such damage at the premises of a business you depend on (“dependent property”), the insurer will pay for the actual loss of business income you sustain. This coverage may also be called contingent business income (also often referred to as contingent business interruption).

    For example, you’ve designed a new type of folding beach chair and you have many orders to ship it in time for the summer selling season. Your chairs are manufactured at the Contract Furniture Factory (CFF). Due to damage from a fire, CFF is unable to make your chairs. Should neither you nor CFF have a backup manufacturer who can fulfill the contract, you will lose income from the orders you could not ship. Your insurer will pay for the net income loss you suffered as a result. If, however, damage at CFF is due to an earthquake and you don’t have earthquake insurance this coverage will not apply since the damage at the dependent property was not due to a covered cause of loss.

    Computer Operations Interruption – Should computer operations be interrupted due to a covered cause of loss, your insurer will pay (up to $10,000) for business income lost and extra expenses incurred as a result of the computer problem. In addition to other causes of loss, this coverage applies to a loss caused by a computer virus, harmful code or other harmful instructions entered into your computer system or a network to which it is connected. There is no coverage, however, for loss or damage caused by the actions of any employee, including temporary or leased employees or by anyone you hire to work on your computer system.

    Debris Removal – When a building is destroyed or damaged by fire, wind or other peril, debris is left which must be removed before reconstruction can occur. The business policy, within certain conditions, covers the cost of removing debris left behind as a result of a covered cause of loss.

    There is an extra $10,000 of coverage for debris removal should the limit of insurance be reached before debris removal has been factored in.

    Electronic Data Loss – In the event electronic data is destroyed or damaged as the result of a covered cause of loss, the insurer will pay the cost to replace or restore it. Causes of loss that apply to this coverage include a computer virus, harmful code or other harmful instructions entered into your computer system or a network to which it is connected. The coverage applies as well to threats by cyber extortionists who threaten to bring your computer system down with a code or virus if you don’t meet their demands. There is no coverage, however, for loss or damage caused by the actions of any employee, including temporary or leased employees or by anyone you hire to work on your computer system. (Negligent work by third parties should be covered by their liability insurance.)

    Expense to Preserve the Value of Property – To preserve the value of property, it may be necessary to move it from the insured premises to another location. For example, if a major storm is predicted and your building has no basement, you may want to move some of your high-value inventory to a location where there is a basement. The property policy covers such property while it is being transported and for up to 10 days after it is moved to the alternative location.

    Fire Extinguisher Systems Recharge Expense – If your fire extinguishing system is discharged (other than during installation or testing), the insurer will pay to have it recharged or replaced, whichever costs less.

    Forgery or Alteration – The insurer will pay up to $2,500 (unless you buy a higher limit) for losses resulting directly from forgery or alteration of any check, draft, promissory note or similar promise of payment in money that you or your agent issued or that someone impersonating you or your agent issued.

    Fungi, Rot and Bacteria – Your BOP insurer typically limits the situations in which it will pay for loss or damage caused by fungi, wet or dry rot, or bacteria. Usually, the insurer will pay up to $15,000 only when the underlying cause of the damage is a specified cause of loss other than fire or lightning that occurs during the policy period and only if you used all reasonable means to save and preserve the property from further damage at the time of and after that occurrence.

    Window Glass Breakage Expense – Where glass has been broken, the insurer will pay expenses to put up temporary boards if repair or replacement of damaged glass is delayed.

    Additional Coverage You May Need


    The standard businessowners policy recognizes that some types of coverage are important for some customers but not for others. It makes provision for adding coverage through what insurers may refer to as optional coverages, coverage extensions and endorsements—changes in the policy. These are among the coverages you may choose to add to your BOP with the payment of an additional premium:

      Accounts Receivable – As part of your risk management plan, to the extent feasible, you should keep backup copies of your accounts receivable in a separate location. For some businesses, however, it may be in the nature of the business that accounts receivable records are vulnerable to property loss. If needed, you may extend coverage under your BOP. The accounts receivable extension obligates the insurer to pay amounts due from your customers that you are unable to collect. The limit is up to $10,000 per occurrence for records located on the premises described in the policy Declarations or $5,000 for records located elsewhere.

      Adding Additional Insureds – In many situations, a business is required by contract or law to add coverage to its BOP for other parties who usually themselves have property at risk that is in the care of the insured. Such parties typically include managers or lessors of a rented or leased premises and mortgage holders. You can add coverage to your BOP with an Endorsement Adding Additional Insureds.

      Computer Fraud and Funds Transfer Fraud – Your business may run the risk that someone will cause an unauthorized transfer of funds from your bank account, whether through electronic or written instructions. The Endorsement for Computer Fraud and Funds Transfer Fraud covers this risk. The insurer pays for the loss of money and securities resulting directly from a fraudulent instruction instructing a financial institution to transfer, pay or deliver money or securities from your “transfer account.” The endorsement defines a “transfer account” as “an account maintained by you at a financial institution from which you can initiate the transfer, payment or delivery of money and securities.”

      Burglary and Robbery – If your business has high-value goods that are attractive to criminals, loss control will go a long way to reducing the threat of theft or burglary. Optional burglary and robbery coverage, however, may be a wise part of the risk management plan.

      Burglary means taking of property from inside the described premises by a person unlawfully accessing the premises as evidenced by marks of forcible entry or exit. Robbery means unlawfully taking property from a person who has the property in his or her care and custody.

      The insurer covers the property on the business premises, while it is at a bank or savings institution, when it is in the custody of any employee or business owner in his or her living quarters or while it is in transit between any of these places.

      Coverage is limited to $2,500 for furs, watches, jewelry, precious metals, patterns, dies, molds and forms. If additional coverage for such property is needed, it can be purchased separately.

      Earthquake and Volcano Coverage – You may add this endorsement to your BOP to protect your business property from losses due to these perils. A different method of calculating deductibles, as a percentage of the coverage rather than as a flat dollar amount, may apply to this coverage.

      Electronic Commerce – If your business relies on e-commerce—that is, business activity conducted over the Internet—you may want to add the Endorsement for Electronic Commerce to your BOP. The insurer covers your lost income and extra expenses in the event your ability to conduct e-commerce is slowed down or stopped due to the causes of loss covered by the BOP. The endorsement also provides coverage for the cost of reconstructing electronic data if it is lost due to a covered cause of loss or if it is stolen by someone other than an employee, volunteer worker or contractor.

      Employee Dishonesty – Burglary and robbery insurance does not cover losses caused by employees or authorized representatives who commit dishonest acts. Employee Dishonesty Insurance provides this coverage.

      Most experts agree business owners tend to greatly underestimate their vulnerability to theft by their own employees. According to the Association of Certified Fraud Examiners (ACFE), the average business loses 6 percent of its total annual revenue to employee fraud. The ACFE says smaller companies, particularly those with fewer than 500 employees, are most susceptible to these losses. Virtually any business with employees is at risk of losses caused by employee dishonesty. As with other causes of loss, effective loss control measures can go a long way toward reducing this loss exposure.

      Employee Dishonesty Insurance covers losses caused by temporary or leased workers as well as employees.

      Many employee fraud schemes go on for years before they are detected. If you have added this coverage to your BOP, your insurer will pay for covered loss or damage sustained during the policy period and discovered no later than one year from the end of the policy period.

      Food Contamination – If you are involved in a food business, there is always some risk that food you sell could cause food poisoning or transmit a communicable disease from an employee of your business. This risk can, of course, be reduced and controlled by following a good risk management plan, but it can never be totally eliminated.

      The Endorsement for Food Contamination provides coverage for most of the expenses you would incur if food you sold caused food poisoning or disease. Coverage includes the cost of additional advertising to restore your reputation.

      Mechanical Breakdown – This option provides coverage for mechanical or electrical breakdown to your boilers, pressure vessels, refrigeration systems, piping and mechanical and electrical machines or apparatus that generate, transmit or simply use mechanical or electrical power. For many businesses that depend on such equipment a breakdown means the inability to operate and loss of income. If you run a sawmill and the saw breaks down, for example, you’re effectively out of business until the saw is repaired. Mechanical breakdown coverage might be a wise investment to cover this type of risk.

      Money and Securities – You have the option to add coverage for money and securities to your policy. The insurer covers the property on the business premises, while it is at a bank or savings institution, when it is in the custody of any employee or business owner in his or her living quarters or while it is in transit between any of these places.

      More Coverage for Valuable Papers and Records – As part of your loss control plan, to the extent feasible, you should keep backup copies of records in a separate location and valuable papers in a fire proof safe or a bank safety deposit box.

      For some businesses, however, it may be in the nature of the business that certain valuable papers and records are vulnerable to property loss. Should you lose valuable papers and records as the result of a covered cause of loss your basic BOP will pay the expense, up to your policy limit, to reconstruct the records.

      If needed, you may add more coverage to your BOP for the cost to reconstruct valuable papers and records, including those that exist on electronic media. The covered property includes documents, manuscripts and records (including abstracts, books, deeds, drawings, films, maps or mortgages). It also includes electronic data processing, recording or storage media; data stored on such media; and programming records used for electronic data processing or electronically controlled equipment.

      Newly Acquired or Constructed Property – If your policy covers buildings, you may extend the coverage to newly acquired buildings intended for similar use as the insured building or as a warehouse. This coverage also applies to new buildings while being constructed on the premises described in your policy. Any newly acquired business personal property is also covered. This is temporary coverage that provides time to report the new property to your insurer. The coverage expires 30 days after you acquire the property or begin construction.

      Outdoor Property – You may extend your policy’s coverage to apply to outdoor items, including signs, fences, shrubs and plants and satellite dishes. Debris removal of these items is included. The most the insurer will pay under this extension is $2,500 and not more than $500 for any one tree, shrub or plant.

      Outdoor Signs – For some business owners, the only outdoor asset not covered by their basic BOP that they wish to insure is outdoor signs not connected to their building. The BOP provides an option to add just this coverage.

      Personal Effects – You may extend your coverage to apply to personal effects owned by officers, managers and anyone who works at the company. There is a $2,500 limit on this coverage. It does not apply to loss or damage by theft.

      Spoilage Coverage – If you are in a business that involves supplies, inventory or other materials that must be maintained under controlled temperature or humidity conditions for preservation and that is susceptible to loss or damage if the controlled temperature or humidity conditions change, you will probably want to add the Endorsement for Spoilage Coverage to your BOP. The covered causes of loss are mechanical breakdown of your refrigeration or humidity control system and power outages due to conditions beyond your control. The insurer will cover the cost of property that is spoiled by these causes.

      Utility Services—Direct Damage – Loss of water, communication or power service could be costly to many businesses. The Endorsement for Utility Services—Direct Damage will cover the loss caused by interruption of one or more utility services; but only when the interruption is caused by a covered cause of loss to the property supplying water, communication services or power. In other words, if your phone service goes out because of lightning damage to the phone company’s property, that is covered because a BOP covers losses from lightning. If, on the other hand, your phone service goes out because of flood damage to the phone company’s property, that is not covered because a BOP doesn’t cover flood losses.

      Water Back-up and Sump Overflow – Property loss caused by water back-up from a sewer or drain or sump pump overflow are excluded from your BOP. If these are significant risks to your business, you may need to add the Endorsement for Water Back-up and Sump Overflow to your policy.

      © Insurance Information Institute, Inc. - ALL RIGHTS RESERVED -

      At a Glance

      An umbrella policy is like overdraft checking — it allows you to enjoy insurance protection after you exceed the coverage limit of your existing business liability insurance.

      In this way, umbrella coverage can act as a “doomsday policy” by extending protection for the worst-case scenarios, and then some.

      Do I need it?

      The first step is to understand the level of business liability coverage you have through your existing business insurance policy(s).

      Discuss this with your insurance representative to determine whether your existing coverage limits would be sufficient for a worst-case scenario. Explore whether an umbrella plan is a reasonable solution for increasing your coverage, or whether it would cost less to simply increase your coverage level under your existing insurance.

      More Information


      Frequently a business owner can’t obtain high coverage under regular business insurance because of the nature of the business or simply because of affordability issues. If you fall into either of these categories, an umbrella policy can supplement your coverage and keep you from falling short.

      An umbrella policy also may be used to supplement workers’ compensation and commercial auto coverage.

      A key component of umbrella coverage is that your existing business insurance must run concurrently with it and must be in effect.

      You should be able to include other persons under your “umbrella.” These may include anyone you have contractually agreed to insure. Umbrella policies may protect your employees, partners, managers, and investors as well.

      At a Glance

      Directors and Officers liability insurance protects against claims arising from the wrongful acts, errors, or omissions alleged to have been committed by present or former directors or officers of a corporation.

      Do I need it?

      This risk is not covered through most Business Owners Policy packages.

      You should consult with your insurance representative to determine whether, based on your current business requirements, you need D&O coverage. If so, your SBI representative will configure a solution targeted to your company's specific business needs.

      More Information

      Directors' and Officers' insurance (commonly referred to as D&O Insurance) protects you from the misjudgments and fallacies of your managers.

      No longer is D&O considered necessary only for large corporations with boards of directors and numerous executives. As businesses expand and branch managers assume more autonomy and responsibility, owners are beginning to consider D&O insurance.

      If a customer, client, or employee alleges that one of your managers is responsible for wrongdoing in the course of business, D&O can provide that manager with financial protection. Depending on the policy, D&O also can include employment practices liability. This would cover the manager if he or she is sued by an employee alleging sexual harassment, for example. Employment practices suits constitute more than 50 percent of D&O claims.

      If you are a partner in a group that’s starting a business, some venture capitalists may require that your group have D&O insurance. Also, D&O may protect you if one of your partners or investors sues you for Enron-style mismanagement, for instance.

      At a Glance

      Employment Practices Liability Insurance (EPLI) protects against employment-related lawsuits. EPLI provides protection against many kinds of employee lawsuits, including claims of:

      • Sexual harassment
      • Discrimination
      • Wrongful termination
      • Breach of employment contract
      • Negligent evaluation
      • Failure to employ or promote
      • Wrongful discipline
      • Deprivation of career opportunity
      • Wrongful infliction of emotional distress
      • Mismanagement of employee benefit plans

      Do I need it?

      Employment-related risks are generally not covered through a Business Owners Policy. You need to obtain this coverage through a separate policy.

      Contact your Marsh insurance representative for a no-obligation analysis of your EPLI needs. If this assessment indicates that you are at risk for an employment practices claim, you can request your representative to work on your behalf to obtain a premium quotation.

      More Information

      EPLI policies reimburse your company for the legal costs of defending an employee suit plus judgments or settlements. They will not, however, pay for fines or punitive damages. They also do not cover workers’ compensation, bodily injury or property-damage cases, nor do they cover cases specifically covered by other insurance you have.

      History

      In 1991, the United States Congress passed the Civil Rights Amendments, which contained several provisions that have impacted the need for EPLI. One key provision was the requirement of a jury trial for most alleged types of work-related discrimination, if desired by the plaintiff employee. This set the tone for the expansion of Employment Practices Liability Insurance.

      In the 1990s, several insurance companies developed Employment Practices Liability insurance policies as a stand-alone product or by endorsement to a Directors & Officers policy. Adding the EPLI coverage to the D&O policy proved to be not as effective.

      Insurance Considerations

      EPLI is more "claims frequency" oriented while D&O is more "severity" oriented with less claims frequency. Both exposures are subject to the policy limits—so if you have three or four small EPLI claims and a substantial D&O claim in the same policy period, you may not have enough of your original limit of liability available to you.

      Also insurance carriers monitor the EPLI experience and it can jeopardize a D&O renewal offer if they are covered on the same policy. Generally, the deductible on a stand-alone EPLI policy is lower than the deductible carried on a D&O policy which could save your entity thousands of dollars if you sustain more than one claim in a policy period.

      Recognizing that smaller companies now need this kind of protection, some insurers provide EPLI coverage as an endorsement to their Business owners Policy (BOP). Other companies offer EPLI as a stand-alone coverage.

      Claims Examples

      More employers are aware of the importance of Employment Practices Liability Insurance (EPLI) because of high-profile court cases that have awarded millions of dollars to employees. Here are several examples:

      • $157 million awarded to 800 female employees of a large domestic insurance company for "failure to promote" and "opportunity denial"
      • $134 million awarded to customers/patrons of a family restaurant chain for "race discrimination"
      • $107 million awarded to 20,000 female employees of a convenience store chain for "sex discrimination"

      Coverage Summary

      The cost of EPLI coverage depends on your type of business, the number of employees you have and various risk factors such as whether your company has been sued over employment practices in the past. The policies will reimburse your company against the costs of defending a lawsuit in court and for judgments and settlements.

      The policy covers legal costs, whether your company wins or loses the suit. Policies also typically do not pay for punitive damages or civil or criminal fines. Liabilities covered by other insurance policies such as workers compensation are excluded from EPLI policies.

      Risk Management Practices

      To prevent employee lawsuits, educate your managers and employees so that you minimize scenarios that would lead to an employment-related lawsuit. Examples of best practices include:

      • Create effective hiring and screening programs to avoid discrimination in hiring.
      • Post corporate policies throughout the workplace and place them in employee handbooks so policies are clear to everyone.
      • Show employees what steps to take if they are the object of sexual harassment or discrimination by a supervisor. Make sure supervisors know where the company stands on what behaviors are not permissible.
      • Document everything that occurs and the steps your company is taking to prevent and solve employee disputes.

      At a Glance

      The Employee Retirement Income Security Act (ERISA) was enacted in 1974 to regulate most types of employee benefit plans. ERISA requires a fidelity bond covering a fiduciary (those responsible for managing the plan) and any persons who handle funds or other property of such a plan.

      The coverage is intended to protect the plans from dishonesty and fraud committed by individuals who are associated with them.

      Do I need it?

      Do you handle ERISA plan funds or have fiduciary responsibility? If so, you should consult with your insurance representative to confirm that you have the appropriate level of ERISA bonds.

      More Information

      According to ERISA, the amount of coverage necessary for each plan is equal to no less than 10 percent of the amount of plan funds handled, subject to a $500,000 maximum bond amount. However, higher limits can be purchased.ERISA not only broadened the manner in which fiduciaries can be held personally liable for breaches of responsibility, it also made it much easier for Plan participants and beneficiaries to sue successfully.

      The fiduciary should insure that the coverage protects fiduciaries against personal loss resulting from law suits claiming that the fiduciary was negligent in administering their company’s pension or benefit plans.

      This form of crime coverage reimburses a business for employee theft of money or other assets. A business might want to consider a fidelity bond if it deals in a large amount of cash, or has one or more employees, such as accountants, who deal directly with the business’ money or other assets.

      Other businesses that typically secure fidelity bonds are janitorial and locksmith services. (Their ads may note that they are “bonded services.”)

      Fidelity bonds may be included as part of a Business Owner Plan (BOP). Other insurers offer fidelity bonds separately. Several states, such as Michigan and Wisconsin, maintain programs where at-risk individuals can obtain fidelity bonds.

      Many states mandate fidelity bonds for insurance agencies. For businesses that operate under Securities and Exchange Commission regulations, such as financial planners and investment counselors, fidelity bonds are mandatory nationwide.

      A fidelity bond also can insure an employer against a high-risk employee. Such an employee may have been rejected by a commercial bonding company for reasons that range from a criminal record to lack of employment history: a recent graduate, for instance.

      At a Glance

      A fiduciary is a person to whom property is entrusted for the benefit of another. A fiduciary can be a director, officer, employee or other retained person(s).

      Under the Employee Retirement Income Security Act of 1974 (ERISA), fiduciaries can be held personally liable for breach of their responsibilities in the administration or handling of employee benefit plans.

      Fiduciary Liability insurance protects the personal assets of anyone acting in a fiduciary capacity from claims alleging mismanagement of your firm's employee pension and 401(k) plans.

      More Information

      Under the Employee Retirement Income Security Act of 1974 (ERISA), fiduciaries can be held personally liable for breach of their responsibilities in the administration or handling of employee benefit plans. Fiduciary coverage protects against claims alleging breach of fiduciary obligations as outlined under the Employment Retirement Income Security Act of 1974.

      A fiduciary has considerable risk exposure, including:

      • Changes in benefit levels or elimination of existing plans.
      • Offering of "non-qualified benefit plans," many of which are not subject to ERISA. This poses a unique insuring problem since the basis of Fiduciary Liability insurance is "...plans subject to ERISA..."
      • Employer "direction or encouragement" and "coercion" in the selection of health care providers.
      • Merger or acquisition situations involving benefit plans.
      • 401(k) plans. Liability can arise from the number of investment choices offered to employees, the expenses to administer the plan, the long-term investment returns of the plan, the amount of employee input as to plan design and administration, and the use of Third Party Administrators and how frequently these services are competitively bid on.

      Do I need it?

      Do you have fiduciary responsibility for your company's 401(k) or ERISA benefit plan? If so, you could have personal liability for breach of your fiduciary responsibilities.

      To manage this risk, you should consult with your business insurance representative to obtain a premium quotation for Fiduciary Liability insurance.

      Who Is a Key Employee?

      A key employee is someone whose knowledge and skills contribute significantly to your business income. Losing a key employee would most likely cause substantial negative financial consequences for your business.

      What Is Key Employee Insurance?

      Life or disability income insurance can compensate your business when certain key employees die or become disabled. These coverages cushion some of the adverse financial impact that results from losing a key employee’s participation.

      How Much Life Insurance Is Advisable?

      There is no set formula for putting a dollar value on the financial impact of a key employee’s death. Nevertheless, you need to come up with a figure as a guide to how much insurance coverage to buy. Some life insurance companies provide formulas for this which may or may not have a realistic relationship to the employee’s worth to your business.

      In some cases, a look at the employee’s responsibilities can facilitate valuation. If, for example, the employee is responsible for a certain volume of sales, the loss is the profit derived from the person’s sales, less the profit that could be expected from a replacement.

      Also to be included is the expected cost of replacing the employee, including employment agency fees and moving expenses and possibly a higher salary for the replacement.

      Who Owns the Life Insurance Policy?

      Usually, your organization owns the policy, pays the premium and is the beneficiary. Alternatively, your business and a key employee may agree to split the premium payments, cash surrender and death benefit value.

      The employee must agree to the company’s purchase of this insurance. The insurer may also require a resolution from your board of directors stating the policy's purpose.

      What Kind of Life Insurance Should I Buy?

      Businesses usually use term insurance when the only purpose is to compensate for losses caused by the key employee’s death. Policies that accumulate cash value are appropriate in some circumstances. Discuss which is better for your business with your life insurance agent.

      What Is Key Employee Disability Income Insurance?

      Key employee disability income insurance is less well known than key employee life insurance. Nevertheless, the risk of a key employee experiencing partial, total or permanent disability is actually much greater than the risk the person will die. Should a key employee suffer permanent total disability, the loss to your business will be just the same as if the person had died. Key employee disability income insurance protects the business from this loss exposure by paying you anywhere from 40 to 70 percent of the disabled employee’s earned income.

      If the disabled person is a partner or sole proprietor, a business overhead expense disability policy provides some protection. This pays (up to the policy limit) office expenses including rent, utilities, salaries and depreciation that continue when a partner or sole proprietor is disabled.

      © Insurance Information Institute, Inc. - ALL RIGHTS RESERVED -

      At a Glance

      A surety bond is a business’ money-back guarantee to a client: It guarantees that the client will be paid if your company fails to live up to any contracts or goes out of business.

      Many companies involved in the construction business use surety bonds. Other business that use surety bonds include mortgage brokers, motor vehicle dealers, telemarketers, and public warehouses.

      Do I need it?

      The federal government and many states and municipalities require surety bonds for certain types of projects.

      New businesses will want to consult with insurance representatives who are thoroughly knowledgeable about surety bonds. They will be able to connect you with insurers who are willing to take on the risk of a company without a project history. You may expect that the premium will be higher. But in most cases, no direct payment is needed.

      Also, if your company is eligible for assistance from the U.S. Small Business Administration, that federal agency may be able to help secure surety bonds. Consult the
      SBA website for further information.

      More Information

      A surety bond is a business’ money-back guarantee to a client: It guarantees that the client will be paid if your company fails to live up to any contracts or goes out of business.

      Many companies involved in the construction business use surety bonds. Other business that use surety bonds include mortgage brokers, motor vehicle dealers, telemarketers, and public warehouses.

      The most common type of surety bonds for small businesses are contract surety bonds, which provide guarantees for the entity you provide services for (the “obligee”). Your business is known as the “principal,” and the insurance company, which is obligated to pay, is known as the “surety.”

      These bonds include:

        • Bid bonds — guarantee that payments will be made according to contractually approved bids
        • Performance bonds — guarantees the obligee if your business or your subcontractors do not live up to the contract
        • Payment bonds — guarantee that all contracted-for payments will be made
        • Maintenance bonds — guarantee against substandard workmanship or materials

      Because the financial risk is great, sureties perform thorough due diligence before bonding a contractor.

      Premiums generally are exacted from the amount of the contract and can range from .5 percent to 2 percent of the contract.

      What is Workers Compensation Insurance?

      Employers are legally obligated to take reasonable care to assure their workplaces are safe. Nevertheless, accidents happen. When they do, workers compensation insurance provides coverage.

      Workers compensation insurance serves two purposes: It assures that injured workers get medical care and compensation for a portion of the income they lose while they are unable to return to work and it usually protects employers from lawsuits by workers injured while working.

      Workers receive benefits regardless of who was at fault in the accident. If a worker is killed while working, workers comp (as it is often abbreviated) provides death benefits for the worker’s dependents.

      Each State is Different

      Workers compensation systems are established by statutes in each state. State laws and court decisions control the program in that state and no two states have exactly the same laws and regulations.

      States determine such features as the amount of benefits to which an employee is entitled, what impairments and injuries are covered, how impairments are to be evaluated and how medical care is to be delivered. In addition, states dictate whether workers compensation insurance is provided by state-run agencies and by private insurance companies or by the state alone. States also establish how claims are to be handled, how disputes are resolved and they may devise strategies, such as limits on chiropractic care, to control loss costs.

      To learn about the requirements where you live, visit your state’s workers compensation Web site.

      If your business expands to another state, you may have to deal with very different rules in the new state.

      The discussion here covers the general features of workers compensation programs.

      What Injuries are Covered?

      Injuries employees sustain on the workplace premises or anywhere else while the employee is acting in the “course and scope” of employment are covered if their employer has workers comp insurance. For example, the leading cause of workers comp death claims is traffic accidents that occur when the employee is in a vehicle for work purposes, whether the trip is made in the company’s car or the employee’s own vehicle. Accidents driving to and from work would not be covered.

      In addition to injuries from accidents, workers comp covers injuries employees may sustain from other events that may occur while they are working, including workplace violence, terrorist attacks and natural disasters.

      Workers comp insurance also covers certain illnesses and occupational diseases (defined in the state statutes) contracted as a result of employment. For example, employees who work with toxic chemicals can be made ill by exposure to the chemicals.

      What Treatment do Injured Workers Receive?

      Injured workers receive all medically necessary and appropriate treatment. With medical costs soaring, many states have adopted measures designed to rein in expenditures. These include utilization management guidelines, which describe acceptable treatment protocols and diagnostic tests for specific injuries.

      What Benefits do Injured Workers Receive?

      Income replacement benefits are based on whether the disability is total or partial and whether it is permanent or temporary. Impairment is generally defined as a reduction in earnings capacity, sometimes using the American Medical Association’s criteria.

      Most states require that benefits be paid for the duration of the disability, but some specify a maximum number of weeks, particularly for temporary disabilities.

      The benefit amount is a percentage of the worker’s weekly wage (actual or state average).

      Do I have to Buy Workers Compensation Insurance?

      In most states sole proprietors and partnerships aren’t required to purchase workers compensation unless and until they have employees who aren’t owners. Most states will allow sole proprietors and partners to cover themselves for workers comp if they choose to. Some states don’t require employees to be covered if they are paid solely on commission.

      Employees are generally defined as people performing services at the direction of the employer, for hire, including minors and workers who are not citizens.

      Many states exempt employers with only a few employees from mandatory coverage laws. The threshold number of employees that triggers mandatory insurance is either three, four or five, depending on the state. Texas is the only state in which workers comp insurance is truly optional.

      In some states, immediate family members—parents, spouse and children—may not have to be counted as employees for purposes of determining whether you must have workers comp insurance. These exceptions usually do not apply to other family members, such as sisters, brothers or in-laws.

      Under some laws, independent contractors are not considered to be your employees. However, for the purpose of workers comp insurance, most states will treat an uninsured contractor or subcontractor or employees of an uninsured subcontractor as your employee—meaning you may be liable if he or she is injured while working for you. To avoid any unintended liability, larger companies often require any contractors or subcontractors doing work for them to provide proof they have workers comp insurance.

      Regardless of whether insurance is required and regardless of how few employees you have, if an employee protected by the state statute is injured or killed in the course of working for you, you may be legally liable. One claim for a serious employee injury could bankrupt many small businesses. Insurance, through the payment of premiums for workers comp coverage, provides a predictable cost for handling this risk.

      Who Sells Workers Comp Insurance?

      Workers comp insurance is not part of your buisnessowners policy (BOP). It must be purchased as a separate insurance policy.

      Each state has its own rules about where employers may buy workers comp insurance. In a few states all employers must buy their workers comp insurance from a state monopoly insurer, known as a state fund. In a number of other states, insurance may be purchased from the state fund or from private insurers. In the states that have them, state funds may serve as an insurer of last resort for businesses that cannot find coverage from a private insurer.

      How are Premiums Set?

      Premiums are based on the employer’s industry classification code and payroll. Premiums for the most dangerous enterprises, such as trash hauling or logging, may be much higher than premiums for an accounting firm.

      Location has also become a factor in workers comp premiums. Since the terrorist attacks of September 11, 2001, workers compensation insurers have been taking a closer look at their exposures to catastrophes, both natural and man made. For businesses located in an area at high risk of catastrophe, premiums may be higher regardless of the nature of the business itself.

      Employers with an annual premium above a certain amount are usually eligible for experience rating, which adjusts the premium up or down depending on the claims history of the company relative to other companies in that industry category. Businesses with higher than average claims will pay a higher premium and those with lower claims will generally pay less.

      Experience rating is more sensitive to the number of claims (loss frequency) than the dollar value of claims (loss severity). This is because of the insurance industry maxim, “frequency breeds severity.” Insurers know from experience that where more accidents occur, there is a greater likelihood of big losses. A greater number of accidents indicates that overall the working conditions are not as safe as an environment where fewer accidents occur, even if in a given year the few accidents that occurred were more costly.

      What are My Costs for Workers Comp?

      Your costs include insurance premiums, payments made under deductibles and the administrative costs of handling claims and making reports to the state and your insurer.

      Understanding Your Workers Comp Policy

      Usually a workers comp policy has two parts: Part One, Workers Compensation and Part Two, Employers’ Liability.

      Under Part One, the insurer contracts to pay whatever the state-required amounts of compensation may be. Unlike other types of insurance, the workers comp coverage has no ceiling on the policy amount. The insurance company accepts a transfer of the employer’s entire statutory obligation—whatever the employer is legally obligated to pay as a result of the injury.

      Part Two of the policy provides coverage for an employer who is sued by an employee for work-related bodily injury or illness that isn’t subject to state statutory benefits. It has a monetary limit.

      Employers' liability also insures an employer in some other situations. One is so-called “third-party over suits,” where an injured worker files suit against someone other than the employer (a third party) and that third party then seeks to hold the employer responsible. For example, an employee injured while working with a machine might file suit against the manufacturer of the machine. The manufacturer might then sue the employer claiming that the cause of the injury was modifications the employer made to the machine or improper use. Another situation where this liability coverage applies is when the spouse of an injured worker sues the employer for loss of consortium.

      Your Obligations

      In most states you are required to keep records of accidents. You must report work-related accidents to the workers compensation board and to your insurer within a specified number of days.

      Studies suggest that the faster the insurer receives notice of an injury and can initiate medical treatment and benefits, the faster the injured worker recuperates and returns to work. To help get medical treatment to the injured worker faster, some insurers help employers file promptly a "first notice of injury" with the state agency responsible for overseeing the workers compensation system, a step which can trigger the claim process.

      The Importance of Getting an Injured Worker Back to Work

      Long absences from work can have a lasting negative impact on workers’ future employment opportunities and thus on their economic well being. A study of injured workers in Wisconsin by the Workers Compensation Research Institute found that the duration of time off from work and periods of subsequent unemployment are lower for injured workers who return to their pre-injury employer than for those who change employers.

      Effective communication by employers is critical to facilitate the injured worker’s return to work. In the first place, you should explain to workers that they are required to report an accident immediately and get medical attention promptly.

      Your expectations relative to work-related injuries or accidents should be part of the employee handbook (if there is one), conveyed to new employees as part of orientation, posted on bulletin boards and communicated periodically in safety reviews.

      Communicate regularly with employees who are off work due to a work-related injury. Workers who know they are thought about, missed and still part of the workplace team are generally more eager to return.

      Some insurers will keep employers informed of how the employee’s treatment is progressing.

      Another aspect of the return-to-work process is successful reintegration into the workplace. Workers comp insurers help you assess the injured worker's needs and capabilities and encourage you to let workers know, in advance of any injury, that you will try to modify work activities to accommodate those who are disabled.

      Are my Employees Covered when they Work or Travel in Other States?

      Your workers comp policy covers claims made only in the states named in the policy declarations. If an employee is injured while working in another state, and that state has benefits more generous than the state(s) named in your policy, the employee could file a workers comp claim in the other state and it would not be covered by your policy.

      The solution is in the Other States section of the policy, which allows you to list states where employees might work from time to time so there will be coverage for claims filed in those states.

      The Other States portion of the policy cannot be used to cover claims in states where coverage must be obtained from the state workers compensation fund.

      Other States coverage is intended to provide protection only for incidental exposures in states where the employer does not operate as of the effective date of the policy. If you set up an operating entity in another state, notify your insurer, as this state should be added to the workers compensation section of the policy.

      Factors that Affect Your Premiums

      Premiums for workers comp vary among the states. In states where benefits are more generous, premiums for workers comp insurance may be correspondingly greater. In most states, workers comp benefits continue even after the worker begins to collect Social Security and Medicare.

      However, benefits are only one part of the equation. In some states with low benefits and costs, premiums may be high due to the inefficiency of the system for awarding benefits. The generally increasing cost of medical care impacts premiums as well. Although states are working to make changes, for the most part, workers comp doesn’t have the types of cost control measures that have been applied to health insurance. Workers comp claimants do not have to pay deductibles. In many states they may visit as many doctors and specialists as they like. There is no requirement for doctors to prescribe generic rather than brand name drugs.

      Assigned Risk Plans or Pools

      An assigned risk plan or pool is a means of providing insurance for businesses that may not be able to get workers comp insurance in the private market. High-risk businesses, businesses with a history of many claims and businesses in new industries without a previous industry claims history are the most likely to get insurance through the assigned risk plan.

      Typically, the employer or the agent makes application to the plan. The application is then assigned to an insurance company that the state has designated to write the policy. Premiums in assigned risk pools often carry a surcharge over the regular premium rate.

      What is a Second Injury Fund?
       

      About half the states have second injury funds to encourage the hiring of workers who are partly disabled but still able to work. Employers would be reluctant to hire such workers due to the risk they could sustain an injury that would combine with the prior injury or condition to cause a disability. Without second injury funds, the new employer would be liable for the entire cost of the claim. When a partially disabled employee suffers a second injury, part of the cost of the second injury is apportioned to the second injury fund.

      Some states discontinued their second injury funds following passage of the Americans with Disabilities Act (ADA). Although the ADA requires employers to maintain confidentiality about employees’ disabilities, the confidentiality rule does not apply to communications with state workers compensation authorities or second injury funds.

      What can I do to Reduce my Workers Comp Premiums?

      • Manage Your Risks
      • Take Advantage of Saving Opportunities
      • Be Sure Your Premium is Correctly Figured
      • Raise Your Deductibles
      • Try to Avoid Assigned Risk
      • Coordinate Disability Programs

      Manage Your Risks– Most small companies do not believe they can afford to hire a risk manager. Nevertheless, someone in the company should have a continuing responsibility for loss control and the management of workers comp claims. This involves a variety of programs to keep workers safe, the medical management of claims and early return to work for any injured workers.

      In some states, insurers must provide accident prevention services to employers. Even if not required to do so by law, the majority of workers comp insurers can help you improve safety. In some states, employers are required by law to set up safety committees and other programs to deal with unsafe conditions in the workplace. Even when not required by law, safety committees can be very effective at reducing accidents. For example, after UPS set up worker safety committees at each location to identify the most frequent workplace accidents and took measures to reduce them, injuries that caused workers to take time off from work decreased by 59 percent.

      You may also be legally required to have a written injury and illness prevention program. Again, even if not legally required to do so, having and following a written program can help reduce accidents.

      Take Advantage of Savings Available in Your State – Several states allow merit rating credits. Smaller businesses that typically pay $5,000 in premiums or less may be entitled to a credit of 5 to 15 percent if they have not had any lost-work-time claims during a designated period. In some states, there are premium credits for drug- and alcohol-free workplace programs and safety programs. Some insurers may give you a discount if you hire a professional risk management firm to help you with your safety program.

      Be Sure Your Premium is Figured Correctly – Make sure you have been placed in the right industry category. Check that the insurer’s payroll computation adjusts for overtime pay and allocates payroll of different employees correctly.

      Raise Your Deductibles – A majority of states provide for optional medical deductibles in workers comp insurance policies as a cost saving measure. Deductibles tend to encourage greater safety consciousness on the part of the employer who must pay the deductible amount.

      Try to Avoid Assigned Risk – Cutting down on your claims is the best way to stay out of the state’s assigned risk plan, or insurer of last resort, which usually costs more. You may have been put into assigned risk without knowing it. Ask your agent to check on your status.

      If you have been put in assigned risk, find out from your state workers comp agency if rates are higher. If they are, make a concerted effort to get other insurance. Just because one agent was unable to find something better for you doesn’t necessarily mean it doesn’t exist. Talk with other agents, investigate group self insurance programs that may be available in your state, talk with other people in your industry and owners of other businesses of similar size and age and with a similar risk level.

      Coordinate Disability Programs – This options isn’t available everywhere, but in some states businesses are trying to bring costs under control through coordination of workers compensation, health care and disability benefit plans. The integration of workers compensation and other employee benefit programs is a broad concept that ranges from a simple marketing approach that promises savings from using the same insurer for both coverages to programs that offer a managed care approach to the management of all types of disability, regardless of whether they are work-related.

      Besides limiting overlapping programs and streamlining administration, proponents say the change to a broad approach addresses the increasing difficulty of distinguishing between work- and nonwork-related injuries and illnesses, such as injuries due to repetitive motion and mental stress claims. It improves productivity, since nonwork-related disabilities are managed with the same focus of getting the employees back to work as work-related cases.

      Can an Employee who has an Accident Sue Me?

      Prior to the states’ adoption of the workers compensation system in the first half of the twentieth century, injured workers sued their employers after workplace accidents. This was a long, cumbersome and costly process from which the worker might gain nothing if the court failed to find the employer totally responsible for the injury. With so few employers liable for workplace accidents, support for injured workers and the families of deceased workers was a societal problem.

      The workers compensation system was adopted to provide injured workers and their dependents timely compensation regardless of who was at fault for a workplace accident. As part of the compromise that made the employer liable for work-related injury and disease costs regardless of fault, the employee surrendered the right to sue the employer for injuries. For the most part, the system works as intended. Injured workers accept workers comp payments and do not sue. This is why workers comp is referred to as the employee’s “exclusive remedy.”

      Nevertheless, there are certainly instances where “exclusive remedy” may not apply and injured workers may sue their employers. Conditions under which such suits are lawful vary among the states. In Florida, for example, injured employees may sue their employers in the following situations:

      • The employer commits an intentional and deliberate harmful act or engages in conduct that is certain to result in injury or death
      • An employee sexually harasses another employee
      • The employer violates the law prohibiting the firing, coercing or intimidating of an employee due to a workers comp claim
      • The employer has violated federal law regarding housing and transportation of migrant workers
      • The injury is excluded from coverage by workers compensation (such as a claim for psychological stress injury without any physical injury, a type of claim that is not compensable by workers comp in Florida)

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