While all entrepreneurs take risks, some risks are best transferred to others. Peter Hedberg, an executive with the Hiscox Insurance Company, discusses with Dennis Zink and Fred Dunayer the kinds of risks that insurance companies cover and what you can expect in terms of services and costs.
Published: Monday, August 1, 2016
While all entrepreneurs take risks, some risks are best transferred to others. Peter Hedberg, an executive with the Hiscox Insurance Co. was a recent guest on my podcast series, “Been There, Done That! with Dennis Zink.” I asked Hedberg what types of risks smallbusiness owners confront and should protect against. Here is an excerpt of this conversation.
Q. Many small businesses operate out of the owner’s home. What type of risks, if any, does a typical homeowners policy cover?
A. Homeowners insurance is really not written or intended to cover a small business, but a vast majority of individuals who have small businesses operate them out of their home. It’s kind of a gap in coverage that people don’t know about. Your homeowners policy is designed to cover events that happen to you because you’re a homeowner, such as property damage, storms, things that damage your roof, water leaks, that sort of thing. If you have a customer who arrives at your home and slips on your stairs, that’s a business-related activity, and the insurance company isn’t intending to pick that up. If you have a friend who came over for a party or just to visit and they slipped, that’s a different story. Generally speaking, most homeowners insurance excludes business activities in the home.
Q. What does a small business owner have to do to cover his business when he operates out of his home?
A. Some people choose to use their homeowners insurance and add an endorsement, which is a document that modifies the policy. This endorsement allows for some business activities to take place in the home. Often, the coverage isn’t necessarily robust or sufficient for their business. Many home-based owners buy commercial insurance for their business. The terms and conditions issued for commercial insurance tend to be better tailored than what you would endorse onto a homeowners policy. The limits tend to be higher. There are also alternatives in the types of insurance that you can buy.
Q. What are some of those alternatives?
A. You can buy a business owner’s policy, or a BOP. I liken it to the Happy Meal of insurance because you get several different lines of coverage in one product. You can get auto liability, general liability, personal property coverage, and the like.
Q. What insurance coverage do small business owners tend to overlook?
A. A big one that gets overlooked is professional liability, or errors and omissions coverage. What is colloquially referred to as E&O. E&O protects you when you cause financial harm to another party. Good examples of this are lawyers and accountants. They’re not going to cause physical damage or bodily injury to somebody, but they could cause financial harm by making a mistake. Graphic designers, interior decorators and hairdressers have this exposure. It will pay a 3rd party if you did in fact do something wrong. More importantly, whether you did something wrong or not, you could be accused of doing something wrong. In which case, you need to pay a defense attorney to defend yourself, and to get to a settlement at some point. That’s one of the big things that that type of insurance pays for.
Q. What type of coverage limits make sense?
A. Some owners purchase a $250,000 or $500,000 limit, but I don’t think that’s sufficient nowadays, based on attorneys’ fees and the way litigation is going. Others buy a million dollar limit, and the additional coverage is not that expensive.
Q. What are some other coverages to consider?
A. A big one is workers’ compensation. A lot of people think because they’re a sole proprietor they don’t need to buy it because they don’t have employees. The state laws may require that they buy it. It’s a good coverage to buy instead of relying on major medical coverage.
Q. What happens when a company adds employees?
A. Depending on how they’ve added workers, the state could view them as employees even if they’re 1099 or independent contractors. If they are considered a statutory employee, because you’re paying a portion of their income, they could be considered an employee and you may need to have workers’ compensation.
Q. What factors go into the underwriting that affect policy costs?
A. There are a lot of factors relative to the underwriting. We call them exposures. There are different measures that we use to calculate a rate, and that gives us a premium. A good measure of exposure would be company revenue. For instance, a $50,000 a year business is a lot different than a $500,000 a year business, which, again, is a lot different than a $5 million a year business.
Q. How much might a small business owner expect to pay annually for basic coverage?
A. It depends on what the business does. I think between $500 and $1,000 a year for a good policy that pays for everything isn’t out of the question. You could buy more options if you want to have more protection. That has to do with your personal risk tolerance philosophy. If you’re somebody that doesn’t like risk, you can transfer a lot of it, but that raises your premium.
Q. When is a loss insurable?
A. Insurable losses include the property you own, the contents in your building, and the liability you have if there is a fold in your rug and somebody trips. On the other hand, if your newly-launched product doesn’t sell well; or, if a key employee leaves and you’ve lost revenue because of that; or, if you’ve opened a new office that isn’t performing well – those are just standard business exposures, which, unfortunately, aren’t insurable risks.