Recently a small air conditioning company faced a class action lawsuit involving a broken pipe in a unit they installed. Water from the pipe created mold throughout all the air ducts in the client's building, and could have cost the business millions in legal fees. But the firm had products and completed operations liability coverage, which costs them about $1,600 a year.
The company bought its insurance coverage from Miami-based Professional Casualty Insurance. "Without that policy they could have been bankrupted or could even have gone to jail," says Manny Varas, CEO of the agency. "With the policy they were able to make good with the distributor of their products and also with their clients."
It's a common scenario that unfortunately many small businesses don't think about, says Mr. Varas. "The reason they don't think they need this coverage is because they don't realize the tens of thousands of dollars in legal fees they might incur, as opposed to a couple thousand dollars for protection."
To reduce risks, firms must buy the right types of insurance while retaining enough capital for immediate needs. In her book The Small Business Owner's Guide to a Good Night's Sleep, Maryland-based small business expert Debra Koontz Traverso names these types of coverage: property, liability, worker's compensation, business interruption, commercial auto, and employment practices.
"Cover your largest risk exposure first, then move on to secondary risks," Ms. Koontz Traverso advises. "Don't try to save money by ignoring the latter, however. If you think that a risk has a low probability of occurring, then it will probably carry a low premium, too."
Property Insurance: Safety Measures Help
Property insurance covers physical assets such as buildings, equipment, and inventory. To buy enough coverage, a company needs to list these assets and determine their replacement cost – not their depreciated value for tax purposes.
Property insurance often excludes floods, which require a separate policy, Ms. Koontz Traverso says.
The nation's recent hurricanes have caused property insurance costs to jump higher, says Hector Fortun, CEO of Fortun Insurance & Financial Services. But, he warns, this is coverage businesses really can't afford to go without.
To help keep costs down, CEOs can opt to have a higher deductible, as well as put in place safety and loss control measures, such as fire sprinklers, safety training, and burglar alarms, Mr. Fortun says.
"As a business owner, you have to look at many different risks – where you put your company, how you maintain it, how you train your employees," he says. "[CEOs] have to demonstrate to the insurance underwriter their ability to protect the business and why they should have a superior rate program."
Liability Insurance: A Full Menu
Liability insurance protects companies if they are sued or held legally responsible. Small businesses usually buy $300,000 to $2 million in coverage.
• General liability insurance covers injury claims (a common example being if someone trips and falls on the premises), property damages, and problems with advertising claims.
• Professional liability insurance covers damages resulting from the services a company provides,
and protects against malpractice, errors, negligence, and omissions.
•Product liability insurance is a must for businesses that manufacture or sell products, in case a person is injured as a result of using the product.
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